DuPont de Nemours Inc (DD) — Q1 2022 Earnings Call Transcript

Good morning, everyone. Thank you for joining us for our review of DuPont's first quarter 2022 financial results. Joining me today are Ed Breen, Chief Executive Officer; and Lori Koch, Chief Financial Officer. We prepared slides to supplement our comments during this review, which are posted on the Investor Relations section of DuPont's website and through the webcast link. Please read the forward-looking statement disclaimer contained in the slides. During this financial review, we'll make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our 2021 Form 10-K as updated by current and periodic reports includes a detailed discussion of principal risks and uncertainties, which may cause differences. Unless otherwise specified, all historical financial measures presented today exclude significant items. We'll 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.

Good morning, and thank you for joining our first quarter financial review. We posted strong results this quarter, but before we discuss that, I would like to thank each of our employees for their continued dedication and strong commitment to our customers. Their perseverance in the face of many obstacles is what made our results possible. I'd especially like to express our appreciation for our China-based colleagues, many of whom have endured weeks of lockdowns, but have continued to operate and get necessary work done. Also, our hearts go out to those affected by the war in Ukraine, and we sincerely hope this conflict can be ended as soon as possible. Our first quarter results from continuing operations included a strong 9% organic sales increase from the prior year or 14% growth, including the Laird acquisition contribution. Organic volume increased 3%, led by an 8% increase in the E&I segment. Overall customer demand remains strong across the vast majority of end markets, led by low double-digit volume growth in both semiconductor and industrial technologies with the E&I segment and mid-single-digit volume growth in water and shelter solutions within the water and protection business. Our top line growth included 6% average pricing increases that we took to offset the continued cost inflation that we are experiencing. We realized price increases in all businesses totaling about 190 million, and a fully offset raw material, logistics, and energy cost deflation. I continue to be impressed by the job our teams are doing as we remain a target to remain price cost neutral for the full year 2022, including the incremental actions taken in March, largely in reaction to the conflict-driven spike in energy and related costs during the period. Turning to Slide 4, I'd like to update you on key focus areas for 2022 stakeholder value creation, including our portfolio transformation, our balanced approach to capital allocation, and our continued focus on growth execution. First, we believe we are on track with what we noted previously regarding the timing associated with the M&M divestiture to Celanese. The M&M transaction is anticipated to be complete around the end of the year, and we are also continuing with the process to divest the Delrin business. For the Rogers acquisition, progress is being made on the required regulatory reviews, while we remain optimistic by closing by the end of the second quarter; the process could extend into early third quarter. We continue to see no issue that would prevent a close of this transaction. I'd like to reiterate that DuPont's financial profile, pro forma for these transactions, will firmly position the company with top quartile revenue growth, operating EBITDA margins, and low cyclicality relative to top tier multi-industrial companies. Greater focus on secular high-growth end markets in electronics, water, industrial technologies, protection, and next-generation automotive will serve as a sound basis for our innovation-led organic growth execution. Regarding the Laird Performance Materials acquisition, we are also on track to achieve cost synergies of $63 million, somewhat ahead of initial expectations. The deal has been a success so far, including overall financial performance ahead of plan for both top and bottom line results, and early progress to achieve commercial synergies on top of the cost synergies noted. As one example, we are starting to see some nice synergies with Laird process and equipment technology, enabling more effective solutions for downstream customers, including auto OEMs, as well as consumer electronics applications. Regarding future capital allocation and namely the net cash we will receive from our planned divestitures, we will continue to pursue a balanced strategy that includes prioritizing the return of excess capital to shareholders as well as strategic M&A. This is consistent with our actions taken over the last year, during which we increased our share repurchase and dividend allocation, as well as completed the Laird acquisition. Once the Rogers and M&M transactions are completed, we'll be poised to continue to improve our portfolio and financial position as well as accelerate capital return options. Given the magnitude of the anticipated deal proceeds, we expect that there will be room to execute substantial incremental share buybacks, while disciplined M&A will also remain a key deployment priority. Regarding our existing $1 billion share repurchase program authorized during Q1, we anticipate completing that authorization during 2022, ahead of the 1-year duration initially guided. Turning to core growth, we continue to focus on execution of our innovation-based organic growth opportunities. We are pleased with 3% volume growth in the quarter given production constraints due to lack of raw material availability and supply chain challenges. We are excited about visible growth drivers enabled by our technical innovation teams and application engineers who are squarely focused on helping customers solve their most complex challenges.

Thanks, Ed, and good morning, everyone. As Ed mentioned, we saw continued strong demand during the quarter in key end markets. Global supply chain challenges and cost inflation have persisted and even intensified during the quarter due to the war in Ukraine. In response to inflation, we continued our strategic pricing actions and were able to fully offset higher costs during the quarter related to raw material, logistics, and energy. These factors, along with our team's continued focus on execution, contributed to net sales, operating EBITDA, and adjusted EPS results well above expectations. Focusing on financial highlights on Slide 5 for the quarter. Net sales of $3.3 billion were up 9% on both an as-reported and organic basis versus the first quarter of 2021. The acquisition of Laird, partially offset by non-core divestitures, provided a 2% net tailwind to net sales, while currency was a 2% headwind during the quarter. Organic sales growth included 6% pricing gains and 3% higher volume. Pricing gains reflect the actions taken to offset overall cost inflation, including the spike in energy cost that we are seeing at our site. Volume growth reflected continued strong customer demand with order patterns remaining solid, led by electronics, industrial technologies, water, and construction end markets. These factors resulted in organic sales growth during the quarter of 10% and 9% for W&P and E&I, respectively. On a regional basis, organic sales growth was broad-based globally with W&P driving growth in North America and EMEA and E&I driving growth in Asia Pacific. From an earnings perspective, operating EBITDA of $818 million was up 2% versus the year-ago period and adjusted EPS of $0.82 per share was up 19%. The increase in operating EBITDA was driven by pricing actions, volume gains, and strong earnings from the Laird acquisitions, which more than offset higher inflationary cost pressures, as well as weaker product mix in W&P and the absence of a gain on asset divestiture in E&I last year. Operating EBITDA margin during the quarter was 25%, which was better than our expectations set earlier this quarter, about 160 basis points below the year-ago period, which I'll explain further. Navigating cost inflation was a key focus during the quarter and our success in doing so was a significant driver in our results. While the majority of the raw material inflation that we have discussed in the past relates to the M&M businesses, which are now part of discontinued operations, our Remainco businesses also have inflation exposure, and we saw a spike in energy costs during the quarter, most notably in W&P. We fully offset about $190 million of cost inflation during the quarter, which kept our results hold on a dollar basis. While these pricing actions enabled us to maintain a neutral earnings profile, price cost dynamics resulted in a 150 basis point headwind to operating EBITDA margin during the quarter. Our underlying operating EBITDA margin adjusted to exclude price cost factors was 26.5% or essentially flat compared to the year-ago period. Further, as you adjust margins in the prior period to exclude the one-time gain related to the asset sale in E&I, our underlying margin of 26.5% would have increased about 70 basis points from the last year. Another key metric that we track is incremental margins. On a reported basis, incremental margin for the quarter was 6% from the year-ago period. However, I indicated previously the importance of evaluating the results on an underlying basis. If you remove the impact of price cost, incremental margin was over 20%, and if you also exclude the headwind from the one-time asset sales, on top of that, incremental margin was almost 60%. I mentioned these data points to illustrate the volume strength we are seeing within the portfolio. From a cash perspective, cash flow from operations during the quarter of $209 million and capital expenditures of $251 million resulted in a free cash outflow of $42 million. The cash outflow was the result of variable compensation payments to our employees, which were approximately $100 million more this year than our normal payout and higher working capital trade includes set of actions taken to increase inventory in reaction to continued product supply constraints. We expect significant improvement in free cash flow as we move towards the second half of the year consistent with our typical seasonal pattern. Turning to Slide 6. Adjusted EPS of $0.82 per share was up 19% compared to $0.69 per share in the year-ago period. Higher volumes and strong results from Laird collectively provided a benefit to adjusted EPS in the quarter of $0.11 per share. These gains more than offset other previously disclosed portfolio-related actions, weaker product mix in W&P, and additional tax Kapton bind start-up costs in E&I totaling $0.09 per share in the aggregate. A lower share count and reduced interest expense from deleveraging actions continue to benefit our EPS results. Our base tax rate for the quarter was 21.8%, and we continue to expect our base tax rate for the full year 2022 to be in the range of 21% to 23%.

In E&I, continued top line growth momentum this year is being driven by growth in semiconductor, health care, and displays end markets, by cyclical recovery in aerospace markets, and by new share gains and innovation wins, muted somewhat in auto by supply chain constraints. Key examples of recent new product successes driving growth and strong margin performance include newly launched mechanical planarization pads for semiconductor manufacturing as well as new lithographic photoresist for the high-performance computing market. In W&P, we expect growth in 2022 coming from each of the lines of business. Safety has seen market growth across major segments, including aerospace, electrical infrastructure, oil and gas, and health care, but muted by lower demand for protective garments. Shelter continues to experience growth opportunities from strong construction and remodeling trends. Water is experiencing strong mid- to high single-digit growth globally across all technologies. Examples of new innovation drivers for this segment include several new membrane product families within water to drive growth in desalination and wastewater markets, as well as the launch of a new building insulation product offering increased sustainability solutions for customers. We also have a strong adhesive business that is positioned well to capture growth with its product offerings in next-generation auto and electric vehicles, especially through the commercial synergy opportunities that we expect through the Rogers acquisition. With that, let me turn it to Lori to discuss the details of the quarter, as well as our financial outlook.

Thanks, Ed, and good morning, everyone. As Ed mentioned, we saw continued strong demand during the quarter in key end markets. Global supply chain challenges and cost inflation have persisted and even intensified during the quarter due to the war in Ukraine. In response to inflation, we continued our strategic pricing actions and were able to fully offset higher costs during the quarter related to raw material, logistics, and energy. These factors, along with our team's continued focus on execution, contributed to net sales, operating EBITDA, and adjusted EPS results well above expectations. Focusing on financial highlights on Slide 5 for the quarter. Net sales of $3.3 billion were up 9% on both an as-reported and organic basis versus the first quarter of 2021. The acquisition of Laird, partially offset by non-core divestitures, provided a 2% net tailwind to net sales, while currency was a 2% headwind during the quarter. Organic sales growth included 6% pricing gains and 3% higher volume. Pricing gains reflect the actions taken to offset overall cost inflation, including the spike in energy cost that we are seeing at our site. Volume growth reflected continued strong customer demand with order patterns remaining solid, led by electronics, industrial technologies, water, and construction end markets. These factors resulted in organic sales growth during the quarter of 10% and 9% for W&P and E&I, respectively. On a regional basis, organic sales growth was broad-based globally with W&P driving growth in North America and EMEA and E&I driving growth in Asia Pacific. From an earnings perspective, operating EBITDA of $818 million was up 2% versus the year-ago period and adjusted EPS of $0.82 per share was up 19%. The increase in operating EBITDA was driven by pricing actions, volume gains, and strong earnings from the Laird acquisitions, which more than offset higher inflationary cost pressures, as well as weaker product mix in W&P and the absence of a gain on asset divestiture in E&I last year. Operating EBITDA margin during the quarter was 25%, which was better than our expectations set earlier this quarter, about 160 basis points below the year-ago period, which I'll explain further. Navigating cost inflation was a key focus during the quarter and our success in doing so was a significant driver in our results. While the majority of the raw material inflation that we have discussed in the past relates to the M&M businesses, which are now part of discontinued operations, our Remainco businesses also have inflation exposure, and we saw a spike in energy costs during the quarter, most notably in W&P. We fully offset about $190 million of cost inflation during the quarter, which kept our results hold on a dollar basis. While these pricing actions enabled us to maintain a neutral earnings profile, price cost dynamics resulted in a 150 basis point headwind to operating EBITDA margin during the quarter. Our underlying operating EBITDA margin adjusted to exclude price cost factors was 26.5% or essentially flat compared to the year-ago period. Further, as you adjust margins in the prior period to exclude the one-time gain related to the asset sale in E&I, our underlying margin of 26.5% would have increased about 70 basis points from the last year. Another key metric that we track is incremental margins. On a reported basis, incremental margin for the quarter was 6% from the year-ago period. However, I indicated previously the importance of evaluating the results on an underlying basis. If you remove the impact of price cost, incremental margin was over 20%, and if you also exclude the headwind from the one-time asset sales, on top of that, incremental margin was almost 60%. I mentioned these data points to illustrate the volume strength we are seeing within the portfolio. From a cash perspective, cash flow from operations during the quarter of $209 million and capital expenditures of $251 million resulted in a free cash outflow of $42 million. The cash outflow was the result of variable compensation payments to our employees, which were approximately $100 million more this year than our normal payout and higher working capital trade includes set of actions taken to increase inventory in reaction to continued product supply constraints. We expect significant improvement in free cash flow as we move towards the second half of the year consistent with our typical seasonal pattern. Turning to Slide 6. Adjusted EPS of $0.82 per share was up 19% compared to $0.69 per share in the year-ago period. Higher volumes and strong results from Laird collectively provided a benefit to adjusted EPS in the quarter of $0.11 per share. These gains more than offset other previously disclosed portfolio-related actions, weaker product mix in W&P and additional tax Kapton bind start-up costs in E&I totaling $0.09 per share in the aggregate. A lower share count and reduced interest expense from deleveraging actions continue to benefit our EPS results. Our base tax rate for the quarter was 21.8%, and we continue to expect our base tax rate for the full year 2022 to be in the range of 21% to 23%.

Turning to segment results, beginning with E&I on Slide 7, E&I delivered net sales growth of 18%, including 9% organic growth and 11% portfolio benefit from Laird and a 2% headwind from currency. Organic growth for E&I includes an 8% increase in volume and a 1% increase in price. For line of business view, organic sales growth was led by semiconductor technologies, which increased mid-teens as robust demand continued, led by the ongoing transition to more advanced nodes, growth in high-performance computing and 5G communications as well as share gains. Within Industrial Solutions, organic sales growth was up low double digits on a continuation of strong volume growth led by OLED materials for new phone and television launches, ongoing strength for Kalrez product offerings, most notably for semi CapEx and strong demand for health care applications such as biopharma and tubing. Interconnect Solutions sales decreased low single digits on an organic basis due to a slight volume decline. Volume gains for films and laminates in certain industrial end markets were more than offset by declines in consumer electronics, primarily related to China. As for the full year, we expect Interconnect Solutions to be up mid-single digits on an organic basis, led by strong demand in the second half and additional capacity coming online later this year from our Kapton expansion. From a regional perspective, E&I delivered sales growth in all regions with high single-digit organic growth in Asia Pacific, noting China was down slightly. Operating EBITDA for E&I of $476 million increased 9% as volume gains, strong earnings from Laird, and pricing actions more than offset the absence of a prior year asset sale gain, higher raw material and logistics costs, and a continuation of start-up costs associated with our Kapton capacity expansion. Operating EBITDA margin of 31% reflects sequential improvement from the fourth quarter of more than 200 basis points. On a year-over-year basis, the primary driver of the decline in operating EBITDA margin was the absence of a prior year gain. Adjusting margins in the prior year to exclude the one-time benefit, operating EBITDA margin was down 70 basis points year-over-year as a result of price cost and Kapton start-up costs more than offsetting volume gains.

Turning to Slide 8, W&P delivered net sales growth of 8%, consisting of 10% organic growth and a 2% headwind from currency. Organic growth for W&P reflects broad-based pricing actions across the segment implemented to offset cost inflation. Volumes were flat as gains in shelter and water solutions were offset by declines in safety. From a line of business view, organic sales growth was led by Shelter Solutions, which was up high teens driven by pricing actions and continued robust demand in North American residential construction for products such as Tyvek house wrap, as well as ongoing improvement in commercial construction for quarry and surface products. Sales for Water Solutions were up high single digits on an organic basis on volume and pricing gains. Global demand remains strong for all water technologies and across all regions. Within Safety Solutions, sales were up mid-single digits on an organic basis as pricing actions were partially offset by lower volumes of Tyvek as we shifted production from garments to other end market applications. Volumes were up slightly for aramid fibers on continued improvement in industrial end markets. Operating EBITDA for W&P of $341 million declined 4% versus last year due to a weaker product mix. Operating EBITDA margin was better than our expectations set earlier in the quarter, but the impact of price cost was about a 210 basis point headwind to margin. Excluding the price cost impacts, operating EBITDA margin was about 26%, approaching more normalized levels for W&P. Before I turn it back over to Ed, I'll close with a few comments on our financial outlook on Slide 5. Despite the strong start to the year and solid demand, the macro environment remains volatile with several key uncertain factors. Based on our expectations and in consideration of these uncertainties, our full year guidance ranges for operating EBITDA and adjusted EPS remain unchanged at $3.25 billion to $3.45 billion and $3.20 to $3.50 per share, respectively. These ranges include a $35 million earnings headwind as a result of suspending operations in Russia. We are increasing our guidance range for net sales to be between $13.3 billion and $13.7 billion to reflect price increases needed to offset cost inflation, which we now anticipate at $600 million in year-over-year headwinds. Although underlying demand in key end markets such as electronics, industrial technologies, and water remains strong, we are seeing further supply chain constraints, primarily from additional government-mandated lockdowns in China, which will likely impact volume growth in the second quarter. Based on these anticipated headwinds, as well as an element of previously projected Q2 sales realized in the first quarter, we expect second quarter 2022 sales to be between $3.2 billion and $3.3 billion or up about 5% year-over-year at the midpoint. Based on these same assumptions, we expect second quarter operating EBITDA between $750 million and $800 million, and adjusted EPS decrease $0.70 and $0.80 per share. At the midpoint of our guidance, second quarter operation EBITDA margin is expected to decline just over 100 basis points sequentially as supply chain constraints are assumed to impact production rates. We expect operating EBITDA margin in the back half of 2022 to improve on typical seasonal volume strength and improved plant utilization as we clear COVID-related production challenges impacting the first half of the year. This outlook assumes moderating China lockdown impacts as we get into mid-May, given the positive trajectory in the Shanghai region and our limited exposure around Beijing. However, further outlook risks could be triggered as the lockdown spreads to Shenzhen and the Pearl River Delta region, given the concentration of manufacturing and shipping there for DuPont as well as our suppliers. With that, let me turn the call back to Ed.

Before we take your questions, I'd like to highlight that we published our annual sustainability report this week, and I'm really proud of the progress we made on our 2030 goals. Our sustainability strategy is grounded in 3 pillars: innovation, protecting people and the planet, and empowering employees and customers. I'll just note a few highlights. DuPont is leveraging our innovation focus to help customers meet their sustainability goals. A great example of that is the new formulations within our building installation products that helped increase energy efficiency, as well as new technologies from our Water Solutions business that reduce energy intensity. We're also focusing on renewable energy as part of our integrated climate and energy approach. Last year, we signed a virtual power purchase agreement that will supply about 25% of DuPont's total electricity starting in 2023. Additionally, Apple just announced that DuPont was selected to join their Supplier Clean Energy Program, which is an example of DuPont working with industry partners to drive sustainability progress at scale. We continue to advance our commitments to DE&I. We are excited about the newest female nominee to our Board of Directors, Christina Johnson. Also, the strong gender and ethnic representation of our leadership teams continues despite competitive labor markets. 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.

This is actually Sam on for Steve. Can you discuss the sequential trends from the second quarter to the second half of the year? It appears there is a significant increase in EBITDA. Is this due to the recovery in China or another factor? Additionally, could you provide an update on the price cost spread on a quarterly basis? What are your expectations for the second quarter and the second half in comparison to the neutral you reported in the first quarter? Is there anything else we should be aware of?

Thanks, Ashley. Yes, the second half ramp from the first half is really just a reflection of our seasonal volume improvement in the back half within E&I. It's primarily driven by smartphones as we go into the Christmas season and within water, a lot in the construction space as we see a ramp there. So the list on volume is dropping to the bottom line, which is translating to the EBIT improvement and the margin improvement in the second half as we drive leverage through the P&L. On your question around net price, so we'll expect all year to remain neutral on net price cost that we raised, the midpoint of the guidance for the full year to reflect about another $100 million of raw material escalation on a full year basis. So we're now expecting somewhere in the range of $600 million that will fully offset with price. So that won't change coming out of the first quarter for the rest of the year.

Ashley, I would just add to Lori's point, the first half to second half ramp, it is our typical seasonality. If you go back and look at last year, it's about a 7% sequential lift first half, second half, and that's typically what we do because of the items that Lori mentioned. So nothing unusual in the pattern there.

Can we talk in terms of like backlog or book-to-bill? Did backlog actually grow in the quarter? I mean, or any metric, I guess, you can give us to give us a sense of top line pent-up demand?

Yes, Scott. The backlog is looking strong and remains at high levels, which we monitor weekly. All end markets are performing well; however, the auto sector has slightly declined due to production issues, not because of a lack of demand. This is primarily attributed to chip shortages and supply chain challenges. Overall, our order patterns across all markets appear positive this week. The main challenges we face are not related to demand but are tied to supply chain issues, particularly in relation to China and COVID lockdowns, which are factors influencing our second quarter guidance. Without these obstacles, we believe our sales would be significantly higher in the second quarter.

Yes, it makes sense. Is the price still increasing due to ongoing inflation, or have we reached a point where it has stabilized?

It seems like we've plateaued, Scott. All the price increases are implemented when the war broke out, we did a whole another round of price increases, mainly because the natural gas lifting is significantly as it did. And by the way, other constraints in there, but that was the big one. So we did a round of increases again, which we had just finished doing. We did it again in every business. And as we said, we caught all the inflation in the quarter by the roles on logistics and on energy. So we caught everything with $190 million of inflation that we saw. And as Lori just mentioned a minute ago, we think it's plateaued. If it hasn't, we'll do another round of price increases, I feel like we can get it if we have to, but it does appear to have plateaued. So we'll have an incremental $600 million of inflation if things hold where they're at for this year, and we'll have that all covered with price.

Your communication regarding share repurchase has shifted from being significant last quarter to indicating a substantial incremental share repurchase. Can you provide more detail on this change in approach? Additionally, do you need to await the M&M proceeds to carry out more share repurchases, or can you initiate the incremental repurchases you mentioned sooner?

Yes, Jeff, you summarized it well. We are leaning towards a larger share repurchase considering our current valuation. I don’t believe this is where DuPont’s model will remain in the future, especially with the recent softness in stock prices due to external factors. We plan to accelerate the $1 billion share repurchase by about a quarter or four months to complete it sooner. I anticipate discussions with the Board about a significantly larger repurchase program. We don’t necessarily need to wait for the proceeds to come in, but I want to ensure that there aren’t any major external issues. We have a $5.2 billion loan on the Rogers acquisition that we will pay off, which will increase our leverage to above 3. With the proceeds from M&M, we have substantial liquidity. So yes, you might notice a shift in our tone due to our current valuation. The market is challenging for everyone right now, and I have a strong feeling that we will take more significant action soon.

Could you provide insight on how significant China has been for the top line, considering the lockdowns, supply chain issues, and COVID? Additionally, what role does it play in the Q2 outlook?

Yes. There are two main factors affecting the Q2 guidance, both related to China. First, we saw a shift in sales that we expected in Q2, which actually occurred in Q1. This was primarily due to our customers increasing their order volumes because of the situation in China, amounting to around $35 million in sales. Additionally, starting in mid-March, we experienced worsening conditions due to shutdowns, and we anticipate a reopening around mid-May. We estimate that we lost approximately $20 million in sales during this period. Our margins were also impacted due to our plants not operating at full capacity; we had two facilities in China that went into complete lockdown by mid-March, and we expect them to be fully operational by mid-May. Moreover, we faced challenges in sourcing key raw materials for our electronics business from China, which forced us to operate some of our domestic plants at reduced rates, further affecting our margin profile for the second quarter.

Yes. To provide a specific example of what Lori mentioned, in Circleville, Ohio we produce Kapton, which is a high-margin product. We are completely sold out. We receive half of the monomer we need from China, and there have been delays in shipments from there. Therefore, while we had some supply of the monomer, instead of operating at full capacity and then shutting down the facility, we just reduced the run rate a bit. We now have clarity on when we will receive supply from China. This situation affects our rates for about a month to a month and a half. These are isolated instances due to the lockdowns in China, which we hope will ease as we move beyond this quarter.

And I think the other piece, Jeff, too, with our guidance for the second quarter, but it's beyond just China and then the production-related effects with Russia that we noted in our slides that we pulled Russia out. On a full year basis, it's about $35 million of EBIT, probably about $80 million of sales, that's impacting primarily 2Q and beyond.

Jeff, looking at the full year guidance, we exceeded consensus by $90 million in EBIT during the first quarter. In the second quarter, we are down approximately $60 million based on your consensus, mainly due to the factors that Lori mentioned. However, we expect a normal seasonal increase in the second half, which is a 7% growth that I referenced. We anticipate improved unit rates from the factors we've discussed. Overall, we are not seeing any significant changes in our usual order patterns.

I guess just first, thinking about a couple of end markets that you touch, where there's some investor angst, I mean, residential, auto, consumer smartphones. Can you talk about what you're kind of expecting there from volume? And then what you're expecting from price either if you can break it out, what's inflation? And then that price component that you have because of the higher value you're adding to the customers’ offering there?

Yes, I would say as far as demand is concerned in the 3 end markets as you had noted. So we saw strength in residential construction. We expect that to continue to be a point of strength in the second quarter. We did note softness in consumer electronics, but that was primarily in China with respect to the lockdown and also a little bit of an impact of our own viewing of seasonality with respect to when we do our normal smartphone shipments. So we've telegraphed in the past that the first half will be weaker, the second half will be stronger because of a change in seasonal patterns as we sell into the smartphone market. But on a full year basis, we expect that end market to be up mid-single digits. And then in auto, you've seen the revisions downward with respect to IHS auto builds. I think now it's sitting at 4% on a full year basis. So our estimates would probably be a little bit lighter than that with respect to what we think that the market will do. But the underlying demand remains strong. It's just really a matter of supply chain specifically around the chip constraints that are impacting that. But I think the highlight to you there is we do continue to see very strong growth within the EV space. And so for us, a large portion of that comes from our adhesives business. We saw a really nice growth in our EV-related sales in Q1, and we expect to about double those sales in Q2 in line with where the EV market is going in general. And we really look forward to the incoming business from Rogers to pair with our business to really take advantage of the opportunity there. On the price side, I wouldn't say it materially different across those end markets is what we're seeing with respect to inflation by segment. So within E&I, the inflation is not as material as what it is within W&P, and you see that in price. So we got about 1% in E&I and price and about 10% in W&P. So there is a difference there, but nothing more than just around the raw material inflation related items.

I don't anticipate any deals until we reach 2023. While I'm not claiming to know if something will be available then, the current fluctuations in stock prices make the environment challenging. Therefore, I don't expect any significant actions before we enter 2023. We are interested in a couple of opportunities, but I don’t see anything concrete happening in the near future. That said, circumstances could change, so it's hard to say for certain. For now, it appears nothing will materialize until we are well into 2023, if at all, depending on the situation.

There are many factors to consider in the DuPont capital allocation strategy, including net proceeds from transactions, core free cash flow generation, working capital, and your established buyback objectives. Considering your insights on the deal outlook for 2023 and with no new developments in 2022, what do you estimate the baseline range for cash on the balance sheet will be, given the current buyback?

So are you talking after considering the proceeds from the M&M sales?

Yes, if you look at the proceeds from the M&M sales, the cash flow generation in 2022 and 2023, as well as where our leverage targets are at 2.75x, probably where we would expect to be, you quickly get to the $10 billion to $11 billion range of cash to deploy after we pay down the Rogers debt. So as we have mentioned on the call, it's significant. And we'll look to take a balanced approach to driving significant share repurchase, as well as M&A opportunities.

Yes, we are experiencing strong ongoing demand in electronics, resulting in excellent performance in Q1. For the full year, we anticipate a growth rate in the double digits in electronics driven by both pricing and volume, which will increase further once we complete the Rogers transaction later this year. The outlook is positive, and we see numerous opportunities ahead. Our detailed analysis of our performance compared to peers shows that we compare favorably, especially when looking at similar product lines and key benchmarks. For instance, MSI, a vital part of the semiconductor industry, is expected to grow by 7% to 8%, and we aim to exceed that by 200 to 300 basis points. Our Q1 results in semiconductors align with that expectation, which makes us optimistic about our portfolio. We will explore ways to further enhance and expand that portfolio.

Are there any Water treating technologies that are really deficient in your platform? Would you consider acquiring or developing anything you don't have and maybe more broadly in water, would you consider moving downstream to essentially utilize your expertise in the breadth of water treating technologies you have to provide service to customers as a downstream expansion similar to Ecolab?

Yes, I would say 2 things, Steve. Our portfolio, we feel very good about. And it's a fairly broad portfolio, so we touch most of the water filtration type markets out there, wastewater home, home applications, which are big for us in China, desalination, as we mentioned in our prepared remarks. So we feel good about the breadth of what we have in the technology we have behind it, and we continue to bring new products out to market. The one area that we would look at and by that, it doesn't mean it's an acquisition that could be organically done as we need to expand our manufacturing footprint and we need a bigger presence with the manufacturing in the Asia market, which is a very fast-growing market for us. So we've been studying very hard a project there to bring up a facility in the next couple of years in that area. So that's a high priority for us. And then this kind of goes to the second part of your question there, the one opportunity we have or potentially have and our R&D team and application teams are looking at is digitizing the water business. So we know when replacement components are needed ahead of time, and it's kind of systematized, and that could be a real opportunity for us to kind of satisfy our customers by doing it that way. And that opportunity, we've been studying hard for the last year. Yes. Nothing new has changed on the landscape except I'll just say we continue to be in conversations with the plaintiffs down in the MDL. I feel like we will make progress this year on that. By the way, the judge has continued to encourage us, the judge down there in charge of these MDL cases has actually encouraged us and the plaintiffs we talk in and coming up with a settlement. And so I'll just leave it at that for now, but nothing new besides that.

Rogers’ EBITDA is aligning with your previous expectations based on Q1 and Q4, and I anticipate the EBITDA projection for this year to be $270 million.

Yes, so in the first quarter, they were under the impact of the same things that we were with respect to the China COVID situation. We're really looking forward to the second half when we will own them, and they have a pretty sizable expected ramp as those end markets really open up coming out of the China recovery, and they continue to see a nice growth opportunity within the EV space. And so I think if you look at the second half trajectory, that's being planned by Rogers, it would be more in line with where our expectations were on a full year basis for that portfolio.

They have the backlog. A lot of it is in the EV space. We've looked at it. So it's just a matter of, A, getting over the lockdown issue in China and then actually accomplishing the ramp in their production rates. But we think second half of the year, they'll be right around the ZIP code of where we would expect it.

Yes, so that will come out Friday in the Q. So in the Q, we'll deconstruct the discontinued operation summary that we've reported today. I can give you a high level that they were impacted, obviously, by the China COVID situation as well and the auto end markets obviously being the largest factor, but they did continue to do a really nice job of getting priced.

Can you provide an update on the Delrin sale process?

Yes. So Delrin, by the way, we've been putting the data room together and all that. We're just getting ready to launch on that, and we would expect that Delrin will take about a year, just like the other part of M&M to actually close the deal. So we'll get a deal done in a 4-, 5-month window and then regulatory approvals that will kind of take like a year. So the data room is getting finished up. And obviously, we've had inbound phone calls about it, but we haven't really gone into deep engagement, yet. We're just getting ready to do that kind of in the next couple of weeks.

And Ed, you provided initially some expectations for valuation during the sale of mobility business, would you care to do the same about Delrin maybe in broad terms? What are your expectations for the multiple?

No, I am not going to do that. We sold 90% of that at 14.1x. So I think what we said more than happened. And I will say Delrin is a very good business. It's a very high EBITDA business, so we're looking forward to a nice sale there.

This is Josh Spector. I have a question regarding W&P and its pricing and margins. In the past, that segment has seen margins in the mid to upper 20% range, but now it appears to be more in the low to mid-20% range. It's clear that you're obtaining pricing to counteract inflation, but do you foresee being able to achieve pricing increases above inflation over the next 18 months to 2 years? Should we anticipate margin expansion in your future outlook?

Yes. So the underlying margin as we look at it, excluding pricing cost, so it’s close to 26% in the quarter as we know it’s on the cost. So starting to get back on the more normalized margin that we would expect for this segment in the upper 20s. So in a normal time to outsize the inflation we would expect to get 1% to 2% of price out of that portfolio that just dropped to the bottom line with respect to semi product innovations and favourable mix. And as we knew, into the more higher margin segment. So we’ll continue to see headwinds on as reported margin as we go out the year just because of price costs and we’ll continue to let you know what that adjustment looks like so you can get to know the underlying margin basis opportunity for the W&P segment.

I think what would occur is hopefully commodity prices come down and we hold obviously some of the price, because of the products that we have. I would think that’s the more rational way things could play out here. And you're not incorrect. This business can run at like 28% EBITDA margin. So we're certainly not pleased at 26%, but 26%, we don't feel bad about in this environment, but we would certainly strive to be more in that 28% range, and we have been there before. So as Lori said, part of it, you'll just get by. If you just take all of this price cost out for a second because it's not normal times, we'll get a couple of points of pricing every year with our new product introductions. We don't get paid like you do in electronics and we truly can get incremental net pricing in the business, which will help. But our biggest opportunity as we highlighted in the past, is continue to get capacity released from these bigger assets like Tyvek and Nomex. We got a lot of programs around that. And that will drive the throughput through those facilities which really has an impact on the numbers. So we do think this business should run a couple of hundred basis points higher we can get there.

If I can just ask, in Safety Solutions, where you are sort of on, I guess, what would be considered hard COVID comps with Tyvek into health care, and was that part of what was driving sort of the weaker product mix in the overall segment?

Last year, we were fully focused on producing Tyvek garments, which meant we limited changeovers on our production lines since we weren't creating products for other markets like medical uses. Now, as we enter a more normalized environment, we have more changeovers, resulting in slightly lower production. This change is affecting the weaker mix within the W&P segment. Yes, so there are 3 buckets, as you had mentioned. And so the retained pieces, the margins, I would say, are in the midteens once you get on an upward trajectory as we get outside of the COVID lockdown. So the largest piece of the retained business is the adhesives business, and it did see an impact in the quarter with respect to the China situation. So that's the biggest season. And we will disclose the revenue of the retained businesses in the Q1 Friday when you get back. You'll be able to calculate kind of what the margin profile was for that space. With respect to normal corporate expenses, those will be on the range of 135 on a full year basis as we have in our supplemental guidance. And so you would expect around 25, 26 million for the quarter. And then the third piece are the net stranded costs, and we continue to be in the range of about a net $50 million on a full year basis, and that's our target to get after as we look to eliminate those going forward.

I have a quick follow-up on Rogers. If they are impacted by China in the second quarter, it's likely that EBITDA won't see much improvement sequentially. If we look at the run rate you mentioned for the second half, we are probably looking at an EBITDA in the low 200s. I understand you do not own the business yet, but why do you think conditions will improve in the second half? Also, do you have any updates on the synergies that could be accelerated, considering that it appears Rogers will come in a bit short for this year?

Rogers is expected to generate around $200 million in the second half of the year. The demand is present, although the business has been notably impacted by COVID-19 in China. A significant portion of their business is auto-related, which is not performing as well as it could be despite the existing market demand. Assuming the COVID situation improves and lockdowns are lifted, they are likely to operate at a much higher capacity in the third quarter, and we anticipate being able to discuss our synergy initiatives related to cost savings of $115 million. We are very confident about this figure as it aligns with our life business, which is not at the high end in terms of percentage. Similar to previous estimates, we have identified specific details for the upcoming plans. We are actively working to implement these quickly. Additionally, one immediate impact of the Rogers synergies will be the reduction of significant corporate expenses due to its status as a public company, which we plan to address promptly before moving on to other synergy opportunities. Overall, operations will be significantly different in the latter half of the year.

I guess I just had a longer-term question, so several years ago, your electronics business faced a lot of pressure in China around innovation and with the Solamet Paste product. I know that's been disposed of, but do you see that kind of issues cropping up in any of your markets in the future? That would be my first question.

No, I don't see that at all. There's nothing in the portfolio actually; 95% of it features cutting-edge technology. If you haven't had the chance, we recently shared insights on the electronics business. I believe we're in a very strong technological position, and we are constantly innovating. The pace of innovation in electronics is rapid; we are literally launching new products in the marketplace every month. We are always at the forefront of technology. So, I don't see any issues arising. What you mentioned about Solamet paste was more related to a commoditized business that is behind us, but that's not the direction the portfolio is headed. Furthermore, the acquisitions of Laird and Rogers are key positions in great technology sectors for us.

Okay. Could you provide any updates on the PFAS situation? Do you expect any settlements with the water districts by year-end, and what efforts are underway in that regard?

Yes. No, we've been, as we've mentioned before, we've been talking about settlement with the plaintiffs and mostly, obviously, around the water cases. And as I have mentioned a few minutes ago, the judge has even encouraged both parties to be talking to each other, I think that was made public, I don't know, a month or 6 weeks ago. So hopefully, good progress this year.

I guess a question about your degree of visibility. In terms of how customers are sharing development schedules and order books and the shift in DuPont's portfolio, how many quarters out do you feel you have good visibility at this point?

Yes. When we do look at that, its to see how our order patterns are. I would on average, we have about 60 days visibility orders that come in, in combination between E&I and W&P. It's a little bit longer in W&P than what it is in E&I, but as we had mentioned earlier in the call, we look at a 20-day order pattern every week, and it has not changed in any significance for the past several months. And so we continue to see very strong underlying demand. Some of our backlog within the water space and within the adhesive space has started to build with the dynamics that we're navigating within the China COVID situation, but overall demand remains very, very strong.

I want to highlight another perspective that we closely examine. We've been working closely with our customers on design wins, particularly with Laird and Rogers, which are vital to our business. While we can anticipate overall demand for the next six months, we can also identify developing trends that indicate where we are likely to experience a boost in business. As Lori mentioned, our adhesives division is actively engaged in bidding and collaborating on various applications in the battery and next-generation automotive markets. We are aware of the wins we are achieving or are close to achieving, and we monitor these trends rigorously, including in the semiconductor and water sectors. This analysis is of significant importance to us.

All right. Thanks, everybody, for joining the call. And just for your reference, a copy of the transcript will be posted on our IR website shortly. This concludes our call. Thanks again.