DuPont de Nemours Inc (DD) — Q2 2022 Earnings Call Transcript

Good morning. Thank you for joining our second quarter financial review. We posted strong quarterly results above expectations in a difficult environment. Our top line revenue growth of 7% versus the year-ago period included solid organic growth of 9%. Overall, customer demand remained strong across our key end markets as E&I delivered a 6% volume increase, driven by ongoing strength in Semiconductor Technologies and Industrial Solutions. In terms of inflation, our pricing actions continue to fully offset higher costs associated with raw materials, logistics and energy. Early in the quarter, our expectation for full year 2022 was about $600 million of increased costs, and that number has now risen to over $700 million, mainly due to higher energy and logistics costs. We still expect to remain price/cost-neutral in the second half and for the full year based on pricing actions we have taken. Overall, our second quarter results reflect year-over-year and sequential earnings growth. These results highlight the strength of our end markets and our team's efforts to successfully navigate a challenging macro environment, which was further complicated by China's COVID lockdowns during the quarter. We were very pleased with the lockdowns alleviated by mid-June and that our China-based colleagues who operated diligently under difficult circumstances have been able to return to some form of normalcy. More broadly, our focus on execution continues to drive results as we increase our use of digital tools and other plant site investments to drive additional productivity and capacity release. Finally, with regards to sustainability, I am pleased to highlight that last month, we announced our commitment to setting targets to reduce greenhouse gas emissions, in line with the Paris Accord Science-Based Targets initiative, or SBTi. This is an important step toward reducing our overall climate impact, and it builds on our existing commitment to protect the planet by reducing the carbon footprint across our value chain in partnership with customers and suppliers. Turning to Slide 4. I'd like to update you on key initiatives for 2022 stakeholder value creation, namely our portfolio transformation and our balanced approach to capital allocation. In addition, I will highlight our continued focus on growth execution on the following slide. First, as it relates to the Rogers acquisition, the progress is being made on the required regulatory reviews, with China being the last jurisdiction outstanding. We expect the deal to close during the third quarter. Regarding Rogers' first quarter 2022 performance, we were satisfied with top line progress for the business, with growth in the high single digits, and we're especially pleased to see new wins and ongoing growth in the electric vehicle space. Rogers' business in the period was impacted by a price/cost gap and several operational challenges that held back full earnings potential, but we remain confident in the actions that the Rogers team is taking, and we expect improvement as we move forward. For the M&M transactions, we are on track regarding timing associated with the M&M divestiture to Celanese, with a completion anticipated around year-end. We continue to make the necessary progress to separate the business, and we were pleased to see Celanese secure permanent financing in the last few weeks. We also continue to move forward with plans to divest the Delrin business and affirm our expectation for completion around midyear 2023. This past July 1 marked the 1-year anniversary of our acquisition of Laird Performance Materials. I've commented previously on how successful this acquisition has been for us, including overall financial performance ahead of plan on both the top and bottom lines. We also continue to advance commercial synergy opportunities on top of cost synergies previously noted. Finally, we completed the sale of the Biomaterials business at the end of May, which was the last of our previously announced non-core business divestitures. Since 2019, we generated gross proceeds of over $2.2 billion by divesting 8 non-core businesses, which collectively produced lower growth, lower margins and overall higher volatility in earnings. We received solid value for these divestitures, selling them at a low double-digit EBITDA multiple. Shifting to capital allocation. We continue to pursue a balanced strategy that includes prioritizing the return of excess capital to shareholders as well as bolt-on M&A. During the second quarter, we repurchased $500 million of shares, bringing our year-to-date total to $875 million, which represents 2.5% of total shares outstanding. We anticipate completing the $500 million of authorization remaining on our existing share repurchase program during the remainder of this year. As I noted during our last earnings call, given the magnitude of anticipated proceeds from the M&M divestitures, we expect there will be room to execute substantial, incremental share buybacks while disciplined M&A will also remain a key deployment priority over time as we continue to seek accretive and opportunistic transactions that can leverage our existing growth even further. Finally, our balance sheet remains strong. And this remains a key priority, particularly in uncertain, volatile macro environment. Turning to Slide 5. Another key value driver for us is innovation-led growth. Greater focus on secular high-growth end markets in electronics, water, protection, industrial technologies and next-generation automotive will serve as a sound basis for our organic growth execution. We continue to invest actively in both advancing the technology within our existing product portfolio and also introducing new products around the pillars highlighted here, with an overall R&D investment rate of around 4% of total sales, in line with best-in-class peers. This investment is coupled with substantial application engineering focus where our technical personnel have a seat at our customers' table in the design phases of their products. This past quarter, we had a number of highlights, which we note on the slide, but I'd emphasize that we are proud to have won 4 Edison Awards across different technology platforms, and we continue to make progress in introducing new technologies, such as applications and EV batteries, which have strong growth potential. 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, with volumes higher than our expectations coming into the quarter. Cost inflation intensified further compared to previous estimates, but additional pricing actions are anticipated to fully offset these higher costs. These factors, along with our team's continued strong execution focus, contributed to both top and bottom line results well above expectations for the quarter. We also delivered a consistent operating EBITDA margin on both a year-over-year and sequential basis. Focusing on financial highlights for the quarter on Slide 6. Net sales of $3.3 billion increased 7% as reported versus the second quarter of 2021 and increased 9% on an organic basis. The acquisition of Laird, partially offset by non-core divestitures, provided a 1% net tailwind in net sales, while currency was a 3% headwind during the quarter as the U.S. dollar strengthened against key currencies, including the euro and the yen. Organic sales growth included 8% pricing gains and 1% higher volume. Volume growth reflects continued strong demand in key end markets, namely semiconductor, general industrial, water and construction, muted primarily by lower volumes for protective garments within Safety Solutions. These factors resulted in organic sales growth during the quarter, up 9% for W&P, 8% for E&I, and 15% for the retained businesses of the former M&M segment they report in corporate, which predominantly reflects our adhesive portfolio tied to next-generation automotive. On a regional basis, we delivered organic sales growth in all four regions globally, including volume increases in Asia Pacific, North America and Latin America. In China, organic sales growth was up slightly versus the year-ago period, and volumes in China were up low single digits sequentially from the first quarter despite government-mandated lockdowns in parts of the country into early June. From an earnings perspective, operating EBITDA of $829 million was up 6% versus the year-ago period, and adjusted EPS of $0.88 per share increased 11%. The increase in operating EBITDA was driven by pricing actions, stronger earnings contribution from the Laird acquisition and volume gains, which more than offset higher inflationary cost pressures. Operating EBITDA margin of 25% was slightly better than our expectations set earlier this quarter and flat on both a year-over-year and sequential basis. Our pricing actions have fully offset cost inflation on a dollar basis but have impacted EBITDA margins. Our operating EBITDA margin adjusted to exclude price/cost with 26.6% or 150 basis points higher than the year-ago, driven by productivity and higher volume. Our incremental margin was 22% on an as-reported basis. Excluding the impact of price/cost, incremental margin for our core businesses was almost 60%, demonstrating strong cost discipline and operational productivity. From a cash perspective, cash flow from operations during the quarter of $86 million and capital expenditures of $135 million resulted in a free cash outflow of $49 million. Working capital was an additional headwind during the quarter as we continue to secure inventory given tight supply chains and incur higher inventory costs related to inflation. We expect improvement in free cash flow during the second half of the year, consistent with our typical pattern and factoring in a reduction of working capital level. As we separate the M&M business, we continue to incur transaction-related expenses, with over $100 million of transaction costs incurred during the second quarter and about $700 million in costs related to the M&M separations expected in full year 2022. These costs, combined with higher working capital related to the M&M business that we are divesting, are significant headwinds to our 2022 cash flow. Turning to Slide 7. Adjusted EPS of $0.88 per share increased 11% compared to $0.79 per share in the year-ago period. Higher volumes and earnings from Laird provided a benefit to adjusted EPS in the quarter of $0.11 per share. These gains were partially offset by weaker mix in W&P related to lower garment production and Kapton's plant start-up costs totaling $0.03 per share. A lower share count from ongoing share repurchases provided a $0.04 benefit to adjusted EPS, while other below-the-line items, including a higher tax rate and exchange gains, netted to a $0.03 headwind. Our base tax rate for the quarter was 22.6%, up slightly from 21.8% in the first quarter and up notably from the year-ago period given certain discrete tax benefits recorded in the prior year, resulting from tax law changes. We are maintaining an expected base tax rate range for the full year 2022 of 21% to 23%. Turning to segment results, beginning with E&I on Slide 8. E&I delivered net sales growth of 16%, including 8% organic growth, an 11% portfolio benefit from Laird and a 3% headwind from currency. Organic growth for E&I included a 6% increase in volume and a 2% increase in pricing. The line of business view, organic sales growth was led by Semiconductor Technologies, which increased mid-teens as strong demand continued, led by the ongoing transition to more advanced node technologies and ongoing high semiconductor fab utilization, along with growth in 5G communications and data centers. Within Industrial Solutions, organic sales growth was up high single digits, led by continued demand for OLED materials for displays, ongoing strength for Kalrez semi CapEx-related product offerings, Vespel products serving recovering aerospace markets and for health care applications such as biopharma tubing. Interconnect Solutions sales decreased low single digits on an organic basis as expected due to a slight volume decline. Volume gains for films and laminates in certain industrial end markets were more than offset by lower smartphone volumes due to the anticipated return to a more normal seasonal order pattern compared to last year and the including softness in China smartphones. The business was also impacted somewhat by lower global PC and tablet demand and continued constraints in automotive production. Looking forward, we expect similar growth patterns for Semiconductor Technologies and Industrial Solutions to continue into the second half of 2022. Within interconnect, we expect to return to positive organic growth in the second half given seasonal strength and added capacity from our Kapton expansion. For the full year, we expect Interconnect Solutions to be up low to mid-single digits on an organic basis. This reflects a slight decline from our previous expectations as supply chain constraints and softer consumer demand are expected to mute volumes for smartphones, PCs and tablets. Operating EBITDA for E&I of $480 million increased 13% as strong earnings from Laird, volume gains and pricing actions were partially offset by higher raw material and logistics costs. Operating EBITDA margin of 31.4% reflects sequential improvement of 40 basis points. On a year-over-year basis, operating EBITDA margin was down 70 basis points due primarily to a 100-basis-point headwind from price/cost. Turning to Slide 9. W&P delivered net sales growth of 6% as organic sales growth of 9% was partially offset by a 3% headwind from currency. Organic growth for W&P reflects a 12% increase in price and a 3% volume headwind. Pricing gains reflect broad-based actions across the segment, most notably in Shelter and Safety Solutions. Volume declines were driven by Safety Solutions. From a line of business view, organic sales growth was led by Shelter Solutions, which increased high teens, driven by pricing actions and continued robust demand in North America residential construction as well as ongoing growth in commercial construction and strength in repair- and remodel-related demand during the quarter. Within Safety Solutions, sales were up mid-single digits on an organic basis as pricing actions were partially offset by lower Tyvek volumes, given the shift from garments to other end market applications and the resulting negative impact of increased manufacturing line changeovers on overall production. Sales for Water Solutions were up mid-single digits on an organic basis on pricing gains and continued steady demand for water filtration technologies, muted by supply chain constraints in Asia Pacific due to COVID lockdowns in China and an earthquake in Japan impacting our production. Operating EBITDA for W&P of $348 million declined 1% versus last year as pricing actions taken to offset higher costs were more than offset by volume declines. Operating EBITDA margin of 23.2% was 170 basis points below the year-ago period as the impact of price/cost was an approximate 200-basis-point headwind to margins. Excluding the price/cost impact, operating EBITDA margin was over 25%. I'll close with a few comments on our financial outlook on Slide 10. We are still seeing solid demand, and our order book is sound in most of our end markets. However, future uncertainties continue to exist in the macro environment driven by inflationary pressure, challenging supply chain and U.S. dollar strength. Our teams remain focused keenly on execution, and we are concentrated on a leverage within our control in order to continue to drive value for our shareholders. For the full year 2022, we are narrowing our adjusted EPS range while maintaining the midpoint of our previous range. We now expect full year adjusted EPS in the range of $3.27 to $3.43 per share versus our previous range of $3.20 to $3.50 per share. We are updating our full year '22 net sales guidance range to be between $13 billion and $13.4 billion reflecting a $200 million of incremental foreign currency headwinds, along with the removal of about $120 million in net sales related to the Biomaterials business, given its divestiture at the end of May. We continue to expect organic sales growth for the year to be up high single digits. After adjusting the high end of our operating EBITDA guidance primarily for incremental currency headwinds and the removal of the Biomaterials business, we now expect full year 2022 operating EBITDA to be between $3.25 billion and $3.35 billion. For third quarter 2022, we expect net sales to be between $3.17 billion and $3.37 billion and operating EBITDA to be about $810 million. We expect third quarter net sales and operating EBITDA to be slightly weaker than the second quarter as sequential volume increases are expected to be offset by further foreign currency headwinds and the absence of the Biomaterials business. We are also expecting an impact during the third quarter on operating EBITDA of approximately $15 million from unplanned downtime at our W&P screw-in site in Virginia associated with an unforeseen utility disruption from a third-party supplier. On a year-over-year basis, we expect third quarter net sales to be up 2% at the midpoint and up high single digits on an organic basis. We expect third quarter 2022 adjusted EPS of approximately $0.81 per share.

Ed or Lori, could you just comment on kind of the visibility on the top line in the back half kind of around some of the economic worry points, right, the U.S. residential, some of the consumer electronics, cell phone and the like? Just what you're seeing from your customer and channel partners there and your comfort level that that's all dialed now properly relative to the guidance.

Yes, Jeff. So we looked over the weekend at our order rates as of the end of last week, and across the board, our order rates are hanging right in there where we would expect them to be. The only softness that we've seen, which we've mentioned before, is smartphones in China. Demand is down, and I don't know how much of that is because of the lockdowns versus just true demand down. And we're seeing some lightness on the PCB board side, which is really for PCs, tablets, things like that, not significant but a little bit of a downdraft there. And besides that, everything, at least in our order rate, is holding in. And now remember, we have a really solid look, I would say, on our orders out about 30 days in the bulk of the businesses, some of them longer than that. Like, the water business is actually some months. So we're a little bit shorter cycle on the order rate. But as we sit today, it looks like things are hanging in there. We have seen no downdraft to your specific point on the construction side. Both the residential order rates are good in the last week. The commercial was good, and the do-it-yourself piece of that business was still good. By having said that, Jeff, we're not naive. We see data points out there. And obviously, we're doing recession planning, just to be ready if things do soften up. But at this point in time, I'm not seeing it.

Great. And then just wondering back to the ultimate deployment of cash, particularly as it comes to the M&M proceeds. Is it still your bias to wait until that cash is in the door? Or now that Celanese has secured funding and maybe we're a little bit further down the kind of regulatory path, perhaps there's some comfort to get a running start on some of that.

Yes, Jeff. We are discussing this with the Board, and to reiterate our earlier comments, we are definitely considering a share repurchase given the amount of cash available. However, I wouldn't say we need the cash to be fully in place. I want to see some clear indications that the timing aligns with our expectation to be ready by November 1, based on the internal work both we and Celanese are doing. My intuition suggests that by the time we navigate through regulatory processes, it could be around the end of this year or the beginning of 2023. But you never know how regulatory matters will unfold, especially with potential COVID lockdowns. So, I want to move closer to that point before we make a final decision.

Ed, you mentioned in your remarks, Rogers is having a kind of a challenging price/cost, I think you said, gap. Is it off the deal model then for '22? Is it materially off or does it impact kind of your '23 look at it?

Yes. There are both positive and negative aspects to discuss. On the positive side, our revenue aligns with our planning assumptions, and our win rate is quite strong. However, the EBITDA does not match our planning model. Excluding pricing and cost factors, which we can address, there are four or five operational challenges impacting our EBITDA percentage. All of these issues are fixable and within our team's control, so we anticipate improvements. For instance, one factor outside of our control is the shortage of silicon affecting the entire industry, which is crucial for our high-margin applications. We are actively working to secure more silicon supply, and we expect that situation to stabilize. Additionally, we have been relying on contract manufacturing due to the need to bring a facility that experienced a fire back online. This reliance on contract manufacturing is currently affecting our margins, but we are addressing this and preparing to relaunch the facility and bring production back in-house. These are just a couple of examples, and there are more issues being tackled. We believe that, as we resolve these operational challenges, we will be in a strong position as we move into 2023.

Yes, I think to Ed's point too just on the top line, one of the areas that we're really impressed with is their penetration in EV. And so they've seen really nice growth there. We'll continue to take advantage of the opportunity, especially the combined opportunity in DuPont when we put it together with our EV applications. I think we've mentioned, in the past, the 2 portfolios generate about $400 million of revenue today. So we're excited to get those 2 together and see what we can do.

Right. And then just on Laird, I assume based on what I see in the slides here that Laird is a little ahead of its steel model?

Yes, both revenue and earnings are performing well, and we've achieved significant synergies from that. We are approximately 80% done with this process and have identified solid synergies totaling $63 million. However, what excites me more about Laird, and I believe the same will happen with Rogers, are the revenue opportunities between the two. Recently, we had another success with a European automotive customer who Laird had a direct relationship with. We leveraged some of our existing DuPont technology to address an issue for them, resulting in a promising new revenue stream with that customer. This toolkit approach is quite exciting.

On the price and cost side, what is your current estimate for the year? Previously, you mentioned a $350 million headwind from raw materials. This quarter, inflation is challenging, and the costs seemed a bit higher than I anticipated. Are logistics included in that figure? If not, I recall you indicated a $225 million headwind previously. Could you provide an update on both of these?

Yes. We now anticipate that raw materials, logistics, and increased energy costs will amount to around $700 million, which represents an increase of about $100 million from our previous earnings call. However, we still expect to offset this entirely with price increases, keeping our bottom line neutral. This scenario does create some pressure on our margin profile, as we indicated. This quarter, it impacted margins by approximately 150 basis points. Overall, we maintained flat margins year-over-year. Yet, if we exclude that difference, our margins were actually up by about 140 to 150 basis points, indicating good leverage throughout the income statement.

Steve, I'll break down for you because you were just using raws. The breakdown of the inflation is about 60% is raws, 20% is logistics, and 20% is energy. Just to give you kind of a feel for it. And about 70% of our inflation is in the W&P segment, where you can see we got phenomenal pricing.

Yes. That energy cost, was that previously recorded through the raw materials line? I don't recall you guys kind of breaking that out explicitly. Had that been running through that raw materials number in prior quarters? Or is that new line item?

It would not have been included in the raw materials, but it would have contributed to the total of $600 million. Therefore, it's not a new total. The increase from the previous $600 million to the current $700 million is mainly due to the rise in energy costs and the subsequent impact on logistics as fuel prices escalate.

Yes, that makes a lot of sense. Lastly, regarding the W&P business, how do you anticipate its performance during a potential consumer recession where the housing market might decline? Can that business still grow in terms of volume, or is there too much cyclical risk involved? What is your perspective on that business in the context of such a recession?

Well, it really depends on the depth of the recession, which makes it difficult to provide a clear answer. It's important to note that the Tyvek product line, being one of our largest segments, is a sold-out asset. This allows us to redirect products to different end markets. Currently, we are facing some challenges in the medical packaging sector and are actively working through the backlog. However, we have alternative applications for the sold-out asset. Moreover, I believe the water business would perform relatively well during a recession. While we may see some decline in Nomex and Kevlar, I think we can manage the situation fairly well.

The residential segment of construction accounts for about 40%, with commercial also at 40% and repair and remodel making up around 20%. Within the commercial sector, the largest markets are in healthcare and restaurants, which constitute the majority of our commercial opportunities.

Just following up to Steve's question there, maybe we could talk a little bit on the pricing side. You highlighted strong pricing there in W&P. But as you look forward, where do you think you have the most structural pricing? And then where might you have to give back as potentially we see some material deflation in the future?

Yes, John, that's an excellent question. We frequently discuss it. We made a strategic choice to incorporate all price increases directly into the product price, avoiding surcharges linked to any index. I'm confident in the approach we've taken. If a recession occurs and commodity prices fall, our goal would be to maintain a pricing gap so that we're retaining more price than the decline in commodity costs. We've been analyzing scenarios with our teams over the past month to assess our positions and how much we can sustain in each of our end markets. Clearly, our objective is to maintain that gap to support our EBITDA margin percentage, which has been impacted due to the price/cost relationship but where we aim to benefit. While I won't discuss each end market, I believe we have the potential to achieve what I've outlined. The extent to which this will happen remains to be seen. This situation is particularly interesting, as it presents a significant dynamic for companies like ours and others. In previous recessions, the typical response was to cut costs, but now we are dealing with a different scenario that has positively affected financial performance for us and many global companies.

No, that's a very interesting perspective. And then the $15 million headwind that you're going to see in W&P in Q3, does that fully reverse out in Q4? And kind of what's the confidence level that that third party can get beyond their disruption?

We are making progress in overcoming the disruption we faced about a week and a half ago. This issue is related to safety, and we need to carefully examine all the lines, as some costs of goods sold were trapped during the downtime. It’s a gradual process, but we started bringing some lines back online recently and plan to reinstate another line later today. We anticipate resolving this issue in the coming days, though we won’t be able to fully compensate for lost time. For example, Tyvek is one of our major products that is currently sold out, limiting our production capacity. However, we expect a slight increase in volume from the third to the fourth quarter, which reflects some unique circumstances rather than a seasonal trend. Since the Spruance facility has remained operational, we won’t face the usual challenges associated with the transition between the third and fourth quarters. Additionally, we have a new water line being added at our Edina location that will provide added volume, along with our reverse osmosis product line. We also have the Kapton line being activated at our electronics facility in Circleville, all of which will contribute incremental volume in the fourth quarter. Notably, the Kapton line is also sold out, so we do not foresee any major changes in marketplace demand as we begin production.

I believe about 20% of your sales come from the EMEA region. Can you give us a little bit of color as to your exposure to Germany and any precautions that you're taking or any levers that you can pull if there are any issues with regard to gas and power as we kind of progress through the rest of the season?

Yes. Right now, we're not expecting any material impact as they start to ration energy in Germany. There's one plant site in our existing go-forward portfolio that doesn't use it, so we don't see an impact there. It's in the businesses that we retained from M&M. M&M does have a plant in Germany so that they could be impacted minimally if there were some rationing going on there. But as we see it right now, we don't see a headwind from a utilization perspective. We'll obviously continue to watch the European natural gas prices, which have an impact on primarily W&P and the Remainco portfolio. They've got a few plant sites in Europe. So they're up again. I think they were EUR 210 or so as of the last couple of days. So we'll continue to keep an eye on those to see where that moves.

Got it. Okay. And then just in the Tyvek garment business, I guess how far back to normal or reversing kind of that big surge would you say we are? And it sounds like you had some incremental headwinds that aren't just on the mix shift but also on the line shifting. I guess can you break that out in terms of how much of a hit that might have been on the margin and how we should be thinking about that going forward through the rest of the year?

In the second quarter, garment volumes decreased by approximately $40 million. We were able to partially offset this decline with increased sales in the medical and other end markets. Overall, garments were down by $40 million, and we anticipate a similar decline in the third quarter compared to last year. However, in the fourth quarter, we expect to overcome that year-over-year comparison challenge. Regarding production, the issue is not so much about shifting demand to other markets, but rather the total product output, which has created a headwind. When we focused solely on garments, we could run those products continuously, minimizing line changeovers. Now that we are moving back to a more varied product mix, we're experiencing more changeovers than last year, resulting in lower production volumes.

Just pretty much a corollary of the last 2.5 questions or so. Can you just give us your updated thoughts on the intermediate- to long-term margin outlook for W&P, just given the question about structural price increases, improving reliability across the asset base, product mix and so on and so forth? Just any updated color there and your confidence in those numbers would be very helpful.

Yes. I'll give you really both of the bigger businesses here. I think E&I, and you've seen us do this ex the price cost, we should be able to run that 32%, 33% EBITDA margin. And this quarter, we weren't far off of that and then a little bit of price/cost there. And I think that's about where that will run and pretty consistently have been there. In the W&P business, we really think we can get that over time to kind of more of a 27%, 28% business. Now by the way, we're planning on getting some of that as commodities at some point here drift down, and we maintain, as I mentioned a minute ago, some incremental pricing above that. But then internally, in our own control is really capacity release at our facilities. And that would be specifically on Tyvek, our water assets, and our Nomex product line would be the big ones for continued capacity release. And in our prepared remarks, Chris, one of the things you see we've been working heavily on is working on a lot of digital tools that we're implementing on our facilities that are helping us on the reliability side. These are big heavy assets on the W&P side, so you get a 1% improvement. You get quite a bit of throughput. So we're really spending our time working on our operational excellence playbook. And that's what will really help us on the W&P to keep incrementing that up.

Yes. I think as we look towards the second half, we don't see any material margin movement in the second half versus the first half. We were around 23%, more like 25%, 26% when you take away the price/cost headwinds in the first half. And so as we look to the second half, we would expect that same 23% roughly underlying and then you have 25-ish, 26% when you take away the price/cost headwind.

I guess within Safety Solutions, can you comment on how the business, excluding Tyvek is running? I guess is there anything materially different there we should be thinking about from a volume perspective that might be better or worse relative to industrial production or any other metrics we should be looking out for?

Yes. No, those are generally performing well. We had a little bit of a shortfall in the second quarter with access to raw materials within our Nomex. So it really wasn't a structural demand issue or an operational issue. It's we couldn't get access to some of the key inputs to make the Nomex product. But nothing to work through on the aramid side as far as asset utilization like we're seeing on the Tyvek side with the increased changeovers as we ride through the garment change.

I guess just on the demand side as well, anything changing through the quarter? Or are you seeing any weakening with customers maybe pulling back on spending? Or is demand still relatively steady?

No, demand is still steady in different markets.

Nice quarter. In terms of Rogers, can you remind us what type of sales growth you expect in 2022? It sounds like it's coming on plan and looks pretty good. And then if there is a shortfall versus the $270 million in EBITDA, it sounds like, as you head into '23, the bulk of the shortfall will be somewhat within their control to close the gap?

Yes, the items they're having operationally all are in their control, I would say, except for the silicon supply, which obviously we're having the same issues here, so we understand it. But yes, the others are in their control, so they can work through those. As you said, it hopefully tees up well for 2023. The modeling, by the way, for them was for growth in the high single digits in 2022. And they hit that, obviously, in the first quarter. I can't say anything about the second quarter. I'm not allowed to, but we would expect them to perform high single digits this year on top line. So that's nice, and to Lori's point a few minutes ago, they're really seeing nice opportunities as we are on the EV side. So feeling good about that work through the operational issues.

Got it. And as a quick follow-up, at the midpoint for your 2022 guidance would imply that the fourth quarter could be up sequentially versus the third quarter. That's seasonally difficult, I guess, when you look back historically. So any thoughts on why it could be better fourth quarter versus third, if you were to hit the midpoint?

Yes. So the math you're getting to is about a $30 million sequential increase from 3Q at approximately $810 million, and then you back into about $840 million. So it's really coming from 3 primary drivers. One is you don't have the headwind from the outage at Spruance. And so we had sized that at $15 million. So you're able to get that volume back in the fourth quarter. And then the other 2 key drivers are the capacity additions that we have from the water asset that we spoke about earlier and then Kapton getting production off that cap online. So no underlying change in market of those 3 items.

What do you see in terms of semiconductor shortages? And how quickly can automotive production come back? Do you think it's a snapback next year? Or is it more of an extended recovery in '23 and '24?

Yes. I mean, I think the expectations right now are for 86 million cars produced next year. That's off of 80 million this year, so still well below the high 90s where we used to be. So there's still some opportunity. We see continued strength and growth heading into 2024. Obviously, it will all depend on is the semiconductor chip shortage resolving itself. But even beyond that, I mean, the third quarter is expected to be up 22% and 7% sequentially. So it feels like things are getting a little bit better there as we resolve some of the supply chain issues.

P.J., I also wanted to reiterate what Lori mentioned earlier. We are very focused on production in the electric vehicle sector. The new DuPont portfolio is heavily oriented towards electric vehicles rather than internal combustion engines. While we have connections to ICE vehicles through the M&M portfolio, which will also be suitable for EVs, this new portfolio is primarily driven by electric vehicle demand. Therefore, the growth rate of that sector is becoming increasingly important. Although we appreciate the overall growth rate of the automotive industry, it is particularly significant for this segment.

Great. And quickly, another question on China. You talked about the slowdown in smartphones, but what about the property market there, which has been under pressure. And I know the government is trying to revive it. What are you seeing there? And what's your exposure to the property market in China?

Yes, we actually saw sequential improvement in China, Q2 over Q1, and that was on top of that extended lockdown. So we were pleased with the results there. To your specific question on the construction market, we don't really have a construction footprint in China. So it wouldn't impact our overall business. The majority of our construction is in the U.S. and in Japan within Asia.

Just a follow-up on China, actually. You did 6% organic growth in Asia. Obviously, the data on PMI that just came out was somewhat concerning. What are you actually seeing right now in the third quarter as you progress in that part of the world?

Yes. We expect to see improvement in China again into the third quarter. And so while we still year-over-year, probably see the flat, we see sequential improvement as you go from Q2 to Q3.

Great. Overall, do you expect volumes to increase in the third quarter compared to the second quarter? Is Kapton the main contributor to that growth, or are there other businesses experiencing significant volume increases sequentially in the third quarter?

No. I mean, Kapton is a piece of it. It's that the smartphone seasonality as well. So usually, we see very high smartphone sales as we head into the Christmas season within the E&I segment and overall electronics, in general, as they prepare for the holidays.