DuPont de Nemours Inc (DD) — Q1 2023 Earnings Call Transcript

Good morning, and thank you for joining us for DuPont's first quarter 2023 financial results conference call. Joining me today are Ed Breen, Chief Executive Officer; and Lori Koch, Chief Financial Officer. We've prepared slides to supplement our remarks, which are posted on DuPont's website under the Investor Relations tab and through the webcast link. Please read the forward-looking statement disclaimer contained in the slides. During this call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our Form 10-K is updated by our current and periodic reports includes detailed discussion of principal risks and uncertainties, which may cause such differences. Unless otherwise specified, all historical financial measures presented today exclude significant items. We will also refer to other non-GAAP measures, a reconciliation to the most directly comparable GAAP financial measure is included in our press release and presentation materials and have been posted to DuPont's Investor Relations website. I'll now turn the call over to Ed.

Good morning and thank you for joining our first quarter 2023 financial review. This morning, we announced quarterly results with operating EBITDA in line and revenue and adjusted EPS slightly better than our previously communicated guidance. This performance reflects our team's continued strong execution, while facing short term volume pressure and select consumer-driven short cycle end markets, including electronics and construction. First quarter organic revenue declined 3% versus the year ago period, despite double-digit declines from our electronics lines of business of Interconnect Solutions and Semiconductor Technologies. Mitigating the weakness in electronics and construction markets was ongoing broad demand strength in areas including water, automotive, aerospace and healthcare, along with the carryover benefit of pricing actions taken last year to offset inflationary pressure. Adjusted EPS was up 2% as we continue to realize benefits from our ongoing capital allocation strategy. As expected, operating EBITDA declined versus the year ago period, driven by lower volumes. Given the near-term slowdown in short cycle end markets, we continue to be proactive in taking actions within our control to minimize volume pressure, while also focusing on optimizing cash flow generation. As a result, we expect to continue to show the resiliency of the new DuPont portfolio and expect that our financial results will generate returns commensurate with top tier multi-industrial assets. In addition to our commitment to generating value through delivery of consistent operating performance, we also continue to focus on accretive and value-added capital deployment. This morning, we announced a definitive agreement to acquire Spectrum, a leading manufacturer of critical components and devices for medical end markets for $1.75 billion or $1.72 billion after certain tax attributes. This deal fits with our strategy to focus on the industrial technologies growth pillar, expanding our offerings into the fast-growing healthcare market. Turning to Slide 4, we have had our eye on Spectrum, which is a current DuPont customer for a long time and our team is extremely excited for this opportunity. Spectrum is a recognized leader in advanced manufacturing of specialty medical devices and components serving 22 of the top 26 medical device OEMs with relationships that date back decades and a strategic focus on fast-growing therapeutic devices and components. Their business is predominantly North American focused and has demonstrated consistent growth over many years. We expect them to generate revenues of about $500 million in 2023. As you can see on Slide 5, DuPont's existing healthcare portfolio is quite strong today. As a reminder, our current healthcare portfolio is comprised of Liveo, medical device and biopharma consumables business, which is a key part of the industrial solutions line of business and our Tyvek healthcare packaging business reported through Safety Solutions. Together, these businesses represent $800 million of total revenue and grow at rates exceeding the company average and well above GDP at solid rates of profitability. The Spectrum business fits nicely with our existing Liveo franchise and will complement our established position in biopharma consumables, bringing world-class manufacturing capabilities and deep OEM customer relationships. On Slide 6, you can see the addition of Spectrum to our portfolio is impactful and the combined presence in healthcare will now represent approximately 10% of DuPont's total sales. The transaction adds higher growth while further reducing cyclicality in the portfolio. Also worth noting, the transaction significantly increases the total addressable market we serve within healthcare devices. These businesses are expected to grow at high single-digit rates over time and even faster in 2023 due to specific business wins in place. This transaction has compelling strategic rationale as you can see on Slide 7. The Spectrum business expands DuPont's growth strategy of customer-centered innovation and strengthens our existing stable position in fast-growing healthcare end markets. We are excited by the complementary fit and specifically our ability to leverage the strengths from each side to generate incremental growth opportunities on top of already growing core markets. As an example of this on the biopharma side, DuPont Liveo has extensive direct relationships with leading OEMs in the biopharma space and has approved a proven design and build co-development model. The added advanced manufacturing capabilities enabled by Spectrum will expand its product and capability set to meet stringent customer specifications, essentially adding a new pipeline for the Spectrum side by adding new customer relationships. On the medical device side, as an example, Spectrum has extensive direct relationships with leading OEMs, including with 22 of the top 26 players. Adding Liveo's silicone offerings and DuPont's material science technology will enhance Spectrum's depth of cooperation with customers and expand its product offerings. Spectrum is expected to accelerate top-line growth for industrial solutions and DuPont as a whole. Regarding deal terms, the net purchase price of $1.72 billion after certain tax adjustments represents a 15.6 EBITDA multiple based on 2023 estimates or 13.2 times after moderate expected cost synergies of $20 million. In line with our return hurdles for capital deployment, the acquisition is expected to deliver a high single-digit ROIC by year five, excluding revenue synergies that we described. We believe the combined growth opportunities I just mentioned can add incremental value to the business combination. We expect this transaction will close by the end of the third quarter this year, and we do not anticipate significant regulatory hurdles. We plan to finance the transaction with cash on hand. Given a lot of moving parts on our capital allocation over the last six months, let's briefly review our status on Slide 8. From closing of the M&M sale in November through today, we have deployment actions and plans in place to account for the full $11 billion of gross cash received from the sale through a disciplined capital allocation process. In the fourth quarter of last year, we announced a $5 billion share repurchase authorization and took action to deleverage our balance sheet by paying down $2.5 billion in senior notes and reducing commercial paper from $1.3 billion to zero at year end and remaining undrawn through the first quarter. Regarding share repurchases, we still expect to complete the $3.25 billion accelerated share repurchase program launched last November in the third quarter of this year, and remain committed to completing the remaining $2 billion of authorization as an ASR shortly thereafter.

Thanks, Ed, and good morning. Our first quarter financial results reflect our team's ongoing strong focus on execution and operational excellence as we began 2023. In a pressured volume environment within consumer electronics and construction, we are focused on the operational levers within our control to drive solid operating EBITDA and minimize margin impact despite volume decrements in some of our most profitable lines of business. Turning to our financial highlights on Slide 5. First quarter net sales of $3 billion decreased 8% as reported and 3% on an organic basis versus the year ago period. Currency resulted in a 3% headwind from dollar strength against key currencies, most notably the yen, yuan and euro, and we also saw a 2% headwind related to portfolio changes. Breaking down the 3% organic sales decline, 4% pricing gains were more than offset by a 7% volume decline. Pricing reflects the carryover impact of actions taken during 2022 to offset broad-based inflation related to raw materials, logistics, and energy. Volume decline reflects weakness in consumer electronics resulting from decreased consumer spending, channel inventory destocking, and softness in construction. Lower volume in these consumer-driven short cycle end markets was partially mitigated by ongoing strength in water, automotive, aerospace, and healthcare markets. Taken in combination, volume within electronics and construction end markets during the quarter was down high teens in aggregate versus the year ago period, while our remaining businesses were up low single digits. From a regional perspective, Europe and North America sales in the quarter were up 5% and 1%, respectively, on an organic basis, while Asia Pacific was down 10% versus the year ago period. China sales were down nearly 20%, driven principally by the electronics weakness. First quarter operating EBITDA of $714 million decreased 13% versus the year ago period, driven by lower volumes and the impacts of reduced production rates in electronics as we scale that production to better align with demand. Currency was also a headwind. Operating EBITDA margin during the quarter of 23.7% was down 130 basis points, driven by volume pressure and inclusive of mixed headwinds related to lower volumes within the high-margin semi business. Decremental margin the quarter was 41%. Given the high-teen volume declines in our electronics portfolio, our overall decrementals were disproportionately impacted as these businesses are some of the most profitable within the DuPont portfolio. Adjusted EPS in the quarter of $0.84 per share increased 2% versus last year, which I will detail shortly. Looking at cash performance, cash flow from operations during the quarter of $343 million, less cash paid for CapEx of $241 million resulted in adjusted free cash flow of $102 million. Included within free cash flow, our transaction cost headwinds of about $75 million related to both cash payments associated with the M&M deal closing and ongoing Delrin divestiture costs. Turning to Slide 10, adjusted EPS for the quarter of $0.84 per share increased 2% compared to $0.82 in the year ago period. Headwinds related to overall volume declines were more than offset by the below-the-line benefits including an $0.11 benefit related to lower net interest expense and a $0.09 benefit due to share repurchases, including the upfront benefit of our ongoing ASR program initiated last November. Our tax rate for the quarter 23.4% up from 21.8% in the year ago period, resulting in a two cent headwind to adjusted EPS driven primarily by the geographic mix of earnings.

Thanks, Lori. Before we take your questions, I'd like to highlight that we published our annual sustainability report yesterday, highlighting the ongoing work of our employees across the globe to meet our commitments across all aspects of ESG. As a reminder, our sustainability strategy is grounded in three pillars: innovation, protecting people and the planet, and empowering employees and customers. I continue to be proud of the progress we are making on our 2030 goals and remain impressed with the speed at which we are advancing. On climate change, we exceeded our 2030 acting on climate goal to reduce Scope 1 and 2 greenhouse gas emissions by 30%, well ahead of schedule. And we have set a new goal that has been validated by SBTi to reach a 50% reduction in emissions by 2030. Regarding innovation, 80% of our top innovation programs deliver sustainability value for customers. Within water, we've helped to enable seawater to be used as a source of potable drinking water with our reverse osmosis technology. We're also helping reduce carbon emissions through building materials innovation and protection. In auto markets, we're making electric vehicle battery safer with our materials for thermal management. And within electronics, we've directly enabled increased performance requirements in semiconductor manufacturing. In our community, we have engaged in over 500 community projects with over 300 nonprofit partners across 30 countries focused on STEM education. From a DE&I standpoint, many aspects of our inclusive culture continue to be recognized. 2022 marked our second year on Forbes Magazine's world's top female-friendly companies list, as one example. There are many great examples and stories in the report of how our teams are delivering on our purpose and driving sustainability. Overall, our teams have done a tremendous job. With that, we are pleased to take your questions and let me turn it back to the operator to open the Q&A.

Hey, guys. Good morning.

Good morning, Steve.

Good morning.

Could you just help level set us on where you stand as far as the amount left that you have left to buy back for the rest of the year and the pace on that? And then when Delrin closes, just remind us of the proceeds you're expecting there and what you'd expect to do with that cash?

Yes, I'll take the share repurchase. So we still have $2 billion left to complete, which we will do on the back of the completion of the current ASR, which is expected sometime in the August-September timeframe. We'll get started on the second program and be able to take 80% of the shares out upfront, and then it usually will take us about six months to complete the full $2 billion authorization. Turn it to Ed for the Delrin comment?

Yes. So Delrin, we're expecting to close by the end of the year. And we've been doing all the carve-out work. So we're very far along on accomplishing all that. I'm not going to talk about what we sell it for, but the EBIT is about $180 million on the business. So you can kind of figure out the zip code on that as we move forward. Again, that cash should be somewhere kind of in the year beginning of next year.

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

Yes, we have not changed that, Steve. We may be taking a conservative approach. As previously mentioned, we've been working hard with our teams on how we plan to manage this. Moving forward, we are starting to see some effects due to lower logistics and shipping rates. However, the majority will impact the raw materials and will be more noticeable on the W&P side. Keep in mind that once we renegotiate contracts, there is a four-month window to process it through our supply chain into a finished product, which makes timing crucial. Our assumption remains that very little of the $800 million we raised will come from pricing adjustments. We will provide updates next quarter as we gain more clarity on this situation.

Yes. And on the pricing side. So we saw 4% total in Q1. It was 6% in W&P. We see that decelerating as we lap the 2022 benefits. And so in the second quarter, we expect an overall about 1% price lift, really 2% in W&P and flat B&I.

Thanks, Steve.

Thank you. Good morning, everyone.

Good morning, Jeff.

Ed, maybe a little color on how active you are on the buy side of M&A. What the pipeline looks like? I don't think you responded to the potential use of Delrin proceeds when that happens, should we expect kind of more M&A like this or some combination of even additional repo plus M&A?

Yes, Jeff. Right now, we don't have anything else planned in terms of mergers and acquisitions for the next year. Our focus is on completing the Spectrum deal. The Laird acquisition from last year is performing excellently. We're not particularly excited about any new opportunities we see at the moment. We've had our sights set on Spectrum for quite a while, and as mentioned earlier, they are our customer. This has been our main focus for the past year or so. If we do have any surplus funds, we would likely consider additional share repurchases. However, as Lori mentioned, our priority for the next year is still to reduce the number of shares in the market through our existing accelerated share repurchase program. Once we complete this, we will initiate a new $2 billion ASR, which should last until the end of Q1 2024. We will evaluate any excess cash at that time, depending on the market conditions. If the current environment continues, we would prefer to repurchase shares.

Thanks for that. Can you discuss the contingency planning? Regarding the electronic aspects, it seems you've been trying to align your insights with information from third parties and customer feedback, but it appears some customers are struggling to keep up with certain developments. While there are uncontrollable factors, I'm interested in what controllable actions, particularly related to costs, you might be considering. Additionally, could you address the opportunity to free up extra cash from working capital as we navigate the downturn in the electronics markets?

Overall, it's interesting to note that when examining past downturns in the semiconductor industry, which is expected to grow significantly in the coming decades, there are often periods of destocking and softness. Our sales rates indicate that the semiconductor market began to decline at the start of the fourth quarter, and we are now two full quarters into this downturn. We believe the current quarter represents the bottom, with only a slight decrease compared to the first quarter. Typically, destocking periods last about three to four quarters and are influenced by some consumer softness. As we navigate this situation, we have additional cost control measures we are considering to protect ourselves. Additionally, as mentioned in our earlier discussion, we are focusing on managing the price-cost dynamic, although we have not made significant adjustments at this point. These will be our two main strategies moving forward.

Yes. I think on the inventory piece too. So we did take action in the first quarter that was a headwind to E&I margins of about $40 million to $45 million to be able to better align inventory and production rates. And so we saw a headwind there. We'll continue to see that headwind in the second quarter as well as we try to get inventory more in line with where the demand signal is. But to Ed’s point, to just reiterate on the discretionary side, we are doing a fair amount of actions you can see on the face of our P&L that we took about 10% out of our total SAR. That was really a function of the restructuring that we did in the tail end of 2022 as well as really tensioning back sales and travel and expense and we'll continue in that mode as we go into 2Q as we said in 2Q as well.

Great. Thank you.

Thanks, Jeff.

Thank you, operator. Good morning, Ed, Lori, and Chris.

Good morning, Scott.

Good morning.

Can you discuss Spectrum? I know it's not massive, but it could make a difference if managed correctly. You mentioned it's more focused on North America. Is there a chance to expand it globally? What actions can you take? The synergies appear to be relatively modest, possibly reflecting a conservative approach. Is there anything you can do with that asset to potentially increase those returns beyond what the deal model suggests?

Yes. Well, Scott, we did not factor in any revenue synergies. Let me briefly address the cost aspect. We only included $20 million in cost synergies, which represents only 3% to 4% of revenue, a relatively low figure compared to typical deal synergies. Therefore, I believe our net multiple of 13.2 times is quite conservative, based solely on that $20 million. The real opportunity lies in growth. Our relationships at DuPont, particularly with biopharma OEMs, are very strong. In contrast, Spectrum primarily deals with medical device OEMs, but much of our technology flows through companies like Spectrum into that sector. When we consider the potential for DuPont to leverage its technology and materials science in the medical device market alongside Spectrum, and vice versa with Spectrum in the biopharma space, we see significant potential for joint growth. We have been exploring this opportunity for quite some time. This is the main advantage. While we might find additional cost synergies, we have not accounted for them yet, but growth is crucial. This business has been growing at around 10% over the last four years and is expected to accelerate this year due to several major wins from OEM customers. Also, we can expand our global reach thanks to our presence in the Liveo sector. It's important to note that many medical device companies are based in the U.S. but operate globally. Another significant opportunity, Scott, is that we can increase Spectrum's margins by approximately 300 basis points. Recently, they invested in new production capacity that is quickly being utilized because of their growth rate. With four consecutive years of 10% growth, we still have a significant amount of factory expansion underway. As we optimize these assets, we expect margin growth of another 300 basis points, which I believe could be an even greater lever for us than cost synergies, driven more by margin expansion and revenue opportunities.

Okay, that's interesting. Just as a quick follow-up, Lori, regarding the comments you made about the price and the sequential decline, is that mainly due to tougher comparisons from last year's price increases, or is there no sequential weakness?

There's no sequential price declines of any magnitude baked in. It's more just lapping. Last year, the bulk of the raise was in, like, February-March time frame.

That's what I figured. Okay, great. Best of luck. Thanks. Appreciate it.

Thanks, Scott.

Great. Thank you so much. Your performance in W&P, specifically on the water and the safety side has been pretty solid. Depending on, obviously, where the macro takes us, which is natural out of your control. Can you just speak to the potential resiliency of those two businesses in terms of your expectations for the second half embedded in guidance? Thank you.

Yeah. So we still expect continued strength in water. So we had a nice organic growth in the first quarter on both the price and volume basis and we expect that to continue as we head into the rest of the year. There's a lot of secular trends favoring our water portfolio right now. And on the safety side, we're seeing strength as well in most areas, especially what we highlighted with respect to the Spectrum acquisition on our healthcare portfolio. So we've got about a $500 million medical packaging business in Tyvek that's performing very nicely. So we see those secular trends continuing throughout the rest of 2023. One other area too that we can highlight of growth within the safety portfolio is the EV piece. So there's a nice application for Nomex paper within the e-motor that we're seeing nice growth in the first quarter and we'll look for that to continue as well.

That's very helpful. And just given the results on the margin front, Lori, for the first quarter. Can you just give us a real quick update on your expectation for the intermediate to long-term outlook to near 27%, 28%. Is that still roughly in line with your expectations in terms of your progression back to those levels? Thank you.

Yes. I mean that's still our expectation with three big tailwinds between now and then. One is obviously the volume recover in E&I and getting those margins back into the low 30s. So we dipped in Q1. That was really a reflection of the volume and the actions we took to align production with demand. So that $40 million to $45 million created a headwind in the first quarter. So that is not permanent, that will resolve itself. Another tailwind is the price cost piece. So as we can see a potential future benefit there that will be margin accretive for us. And so, those are the two biggest levers. And then obviously, the final piece is the mix component. So as you get E&I back on its growth trajectory, obviously, it’s the highest margin piece of our portfolio. So there's a favorable mix lift there as that market starts to recover.

Helpful as always. Thank you so much.

Great. Thanks. Good morning, guys.

Good morning.

First question, just on Spectrum. Apologies if I missed this in the materials, but is it possible to provide the 2022 revenue and EBITDA for the business?

Yes. So 2022 revenue was about $450 million and EBITDA was about $95 million.

Great. Thank you. And then secondly, can you just talk about the lower leverage target now about kind of 2.0 instead of 2.75. Is this just more conservatism in the current rate environment? Or just kind of help frame the pivot there?

Yes, you're correct. We are currently in a higher interest rate environment, and it seems wise to adopt that perspective. Another factor to consider is that leading multi-industrial companies tend to operate around 2 times leverage, while we were aiming for 2.75. Given the current interest rate landscape, this appears to be a responsible position for us, so we're likely to end the year near that level, potentially slightly below 2 times depending on the Delrin proceeds. We always aim to maintain our strategic flexibility, but this is the target we see for the future. Ultimately, the interest rate environment is the primary factor driving this decision.

Great. Thank you.

Thanks, Mike.

Thank you. Good morning, everyone. Ed, I wanted to follow up on your 300 basis point margin expansion opportunity for Spectrum to clarify. Is this opportunity in your high single-digit ROIC number or it could push the number higher?

No, it's in there. Considering their current growth rate, they are likely going to exceed 10% growth this year. Adding that leverage into the system significantly impacts us, especially since they have new capacity in place and are in the process of hiring and ramping up. As mentioned earlier, the revenues this year are expected to be around $500 million, indicating a solid growth trajectory that will translate through the system.

And even if you back into the numbers that I have mentioned for 2022, that's about a 21% EBITDA margin. 2023 is expected to be 22%, so already 100 basis points of improvement. And they had a really nice first quarter ahead of their management plan actually. So they're on a very nice trajectory to achieve that average $110 million of EBITDA in 2023.

Thanks. And as a follow-up, in semis and interconnect, clearly, it's a challenging market. Can you discuss your outgrowth? Are you continuing to gain content in these markets this year?

Yeah. We would expect to see that. And we actually are seeing some share gains in the interconnect in the packaging space still underneath the numbers that we're reporting. So what is clouding our performance versus the MSI is the destock piece. So the destock is pretty significant that's going on in the first half that would be another headwind on top of the MSI numbers that we had presented in the deck. And so, that's what's crowding the story a little bit, but we still expect that content and exposure to advances to be able to give us that performance in total.

Thanks a lot.

Thank you and good morning everyone. Ed, point taken on the historical electronic cycle, the three to four quarter downturn. Just curious if there's any sensitivity to that? And what I mean by that is, you're looking for the recovery in the third quarter. If for some reason it doesn't come in the third quarter, can it still come in the fourth quarter or is there some seasonal reason why it might get kicked into the first quarter if that would play out?

No, there's no seasonal reason, Vincent. It's hard to tell exactly what month it is in there. But we've modeled all the other downturns. Remember, this downturn is pretty significant now, 13% down is correct. You're hitting it pretty quick on the destocking. And then, by the way, there's one other factor here that kind of pushed it out a little bit. One of the very large semiconductor players kept running hard on their fab utilization through the first quarter and that's public knowledge. I'm not going to mention the name, but one of the big players. So that is creating also the fact that they got to take their utilization down pretty rapidly here. And I think they just talked publicly about that a week or so ago. So that was one of the other reasons that gets kind of pushed it out a little and they got to go through destock also.

And can I just ask on Spectrum, I don't know if you mentioned this before, I didn't see it. But what polymers and materials are critical to their products? And are there any particular folks that they tend to compete against?

They compete against TE, Nordson, and Integer, which are some of their larger competitors. On the input side, they utilize their specialty polymers and design expertise to create highly complex materials for major medical device players. This is where we see a great opportunity to combine our two portfolios. They have strong positions with medical device companies, while we excel with biopharma companies. By merging our expertise in material science with our broader portfolio, we see significant potential ahead.

Thanks very much.

Yeah. Hi. Thanks for taking my question. Just when I look at your E&I guidance for 2Q. I mean, you're basically flat to slightly up sequentially in the sales line. I mean, pretty clear how you're guiding towards semis and utilization rates come down, some interconnect is kind of a push as well. So is industrials doing better sequentially? And is there anything you note there that's maybe different than what you expected?

No. You had walked through the pieces. So industrial, we still expect continued strength overall within industrial. There's a little bit of split between interconnect and semi sequentially. So you'll start to see a little bit of the seasonal build that happens normally in interconnect, primarily within this smartphone space. And then we actually see a little bit of sequential deceleration in semi from Q1 to Q2 really a function of what Ed had mentioned earlier on one of the larger customers overbuilding in Q1 and then pulling back in Q2. But net-net, there's not a material change in revenue for the total company or E&I from Q1 to Q2.

Thanks for your input. I'd like to follow up on an earlier question regarding the recovery in semiconductors. If the recovery is delayed again, considering the previous $200 million reduction in sales and the $100 million decrease in EBITDA you mentioned, along with some production adjustments, should we expect a different impact on the bottom line? Would there be any variations in the decrement we should anticipate, possibly due to pricing changes or other factors that might be considered?

Yes. Currently, we anticipate a headwind of approximately $90 million in the first half due to reduced production in E&I, which won't be an issue in Q3 and Q4. If the recovery continues into the fourth quarter, you would expect that $45 million to happen again in the third quarter. However, it's important to note that we haven't accounted for any potential offset to weaknesses if the recovery is delayed, particularly related to pricing and costs. At this moment, we do not have any significant factors included that could positively impact the second half, based on our current outlook.

Okay. Thank you.

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

Yes, John, it's something we have been considering how to report. It's interesting. Healthcare will now account for 10% of the portfolio. Additionally, the water business has also developed into 10% of the portfolio. Both represent strong secular end markets for us moving forward with higher growth rates. We will assess this as we approach 2024 to determine if any actions will be taken, but no decisions have been made yet.

Okay. And then on the delay in electronics. Do you have any long lead time orders that actually show an inflection in demand yet?

No, because it's a short cycle business, so we can't really expect significant changes. As Lori mentioned, we might see a slight increase in the ICS business, which is typical for us as we approach the holiday season later in the year. Our shipments start then, and as shown in one of our charts, the smartphone segment particularly picks up in the third and fourth quarters. We begin shipments during that time. However, beyond that, it's still a short cycle business, and we'll see the demand and ship products fairly quickly.

Okay, thank you.

Yes, I wanted to ask about your water treatment growth, would you say that it's being driven more by the treatment of water for consumption or for wastewater discharge? And are you seeing any increased demand for both of those buckets due to fluorinated compounds, either from EPA's drinking water standards that are underway or EPA scrutiny on any company that's using a fluorinated material?

No. I mean, so the growth we have seen would be more on the industrial side, the business is about 70% favor towards industrial wastewater treatment. So that's what's driving the growth. There's nothing material that we're seeing with respect to any groundwater remediation is coming out from the EPA.

And remember, Steve, 70% of that business is recurring. We're replacing membranes and all at these industrial sites. And it's just a secular trend that should continue because including DuPont, we're all working on that for our ESG targets. And it's besides greenhouse gas emissions, it's the other big one.

And then one on shelter. Clearly, it's going through a cyclical downturn, but just curious about your longer term view on Shelter solutions? Is it likely to remain a core business for you?

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

Okay. Thank you.

Thanks.

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

Yeah. So we saw around the $800 million of escalation last year. It was about 60% raws and the rest roughly split between logistics and energy. We are seeing deceleration on the logistics and energy side. So obviously, you can look at European and U.S. natural gas and see there's been a sizable pullback there and the ocean freight rates we're seeing tailwinds as well. And so that's where we're seeing most of the deceleration. I wouldn't say we've seen a material amount thus far on the raw material side. Either on both the bulk buy or on the tail spend. So that's the upside as we head into the rest of the year is when we start to see an inflection in the raw material volume.

Okay. So you're not currently buying them at a lower price. That will happen later, and it still needs to be reflected in the P&L, correct?

Yes. Correct.

I think John, it's important to note that there are individual raw materials where we would be buying at lower prices, but there are others that have maintained an inflation curve. And there are a lot of things that we buy that are very supply-driven in terms of the dynamics and it could take quite a while to kind of unlock any kind of relief there. Even if you take a really basic benchmark price and suggest that that could be down already today. So there are puts and takes within the portfolio, but I think yes, the punch line here is that there's well less than $100 million of net benefit in the model that we have today and that's inclusive of some of the savings that Lori referenced from logistics and energy, but netting out as we go through the year later some potential give back that could be necessary. So there really isn't that much in there. And yes, I suppose that could present an opportunity as we look forward, but we haven't seen a lot of benefit come through today.

Got it. Okay. Fair enough. And then just one question on the acquisition. So the growth rate from 2019 to 2023 of 12% is a pretty chunky number. But at the same time, if memory recalls, like during the COVID period, medical device demand was actually pretty soft. You didn't have a whole lot of access to surgical suites. So is that 12% understated in your mind or is that kind of a fair run rate and it's just based on the specific products they make maybe it didn't have that pressure that maybe some others in medical devices did. How should we be thinking about that?

Yes, I mean it wouldn't have had the same magnitude of pressure some of the other providers into the elective surgery. So it's selling into the non-elective type, so kind of more the essential surgery. So wouldn't have seen that as significant of a COVID headwind. So I would say the 12% CAGR that we saw from 2019 to 2023 would be too materially awesome where we see it going forward. We kept seeing it a little bit decelerating to the high single-digit range, but still a really nice growth for us and then obviously really nice growth in 2023 on the back of already underlying strong volume as well as they had some sizable new customer wins that are in the process of ramping and really get to a nice clip as we head into the back half of 2023 as well.

Got it. Thanks very much for the color. Appreciate it.

Thank you. Ed, do you have an update on PFAS and the MDL ahead of the upcoming trial in Florida?

Yes. So the trial comes up in about a month out now, David. And I'll just say we've been talking pretty regularly with the plaintiffs. As I've mentioned last quarter, the judge did appoint a mediator who, by the way, is very actively involved with these regular conversations we're having. So we're feeling positive, but I'll leave it at that right now.

Got it. And can you provide a little more color on the weakness you're seeing in North American construction, resi versus non-resi and any destocking that's still ongoing in that space? Thank you.

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

Great. Thanks for taking my question. Hope you're doing well. So just looking at the full-year guidance of $3.05 billion of EBITDA at the midpoint and your Q2 of $715 million, that would imply that your second half is around $1.62 billion and your first half is around $143 million. So that $190 million uplift or $200 million almost uplift when you look at first half to second half, is that mainly the comps getting easier on the volume side for E&I? Are there any other special items we should kind of consider when we think about that cadence?

Yes, I mean, it's mostly within E&I that lift and it's going to be more favored to Q4 versus Q3. As you look at slides that we presented on both the smartphones and the semi MSI side. So most of it is that anticipated second half recovery. There is a little bit of seasonality that would play into a first half versus second half comp. But most of it is that is that electronics recovery. And as I had mentioned a little bit more favor to Q4 versus Q3.

Okay. Thanks. And just one quick one on M&A. So you guys have now reentered the market with the Spectrum acquisition. Would you say that the portfolio transformation is now kind of complete and/or are you still considering other opportunities within the five markets that you've been looking at?

You're never, I guess, complete, but I would summarize it, yes, we feel like we're complete for a period of time here. We like where we're at. This was the last piece we were looking at. And so, I don't see anything over the next like year just against state of time period. I think we like where the portfolio is at. We just want to operationally run it well.

Perfect. Thanks.

Great. Thanks.

Hey. Good morning. In terms of Spectrum, is there a pretty big runway in terms of other acquisitions there? You sort of exited plastics, you're back into plastics. And I get it. Healthcare is a much better end market. But is this an opportunity to build a pretty big plastics healthcare unit over time?

There's definitely more you could add to it. And again, we like it secularly. So that's why we've kind of doubled down in this area. But remember, we have a lot of opportunity between what we already had and they had. So we really like it because of that. So yes, there's other opportunities down the road, but it's just like the layer, we want to get this in, we want to get it synergized, we want to get it really humming with our business. So over the next year, that's what we'll be focused on.

Then just a quick follow-up when I take a look at Slide 14. Does inventory destocking end in 2Q and even if the third quarter isn't that much of an improvement sequentially, E&I results could improve if the destocking is sort of done.

Yeah. We do see the destocking moderating in Q2. Yes. So it peaked kind of in the 1Q, 2Q timeframe and then we see it pulling off a bit in Q3, Q4.

Thanks.

Yes, thank you everyone for joining our call. And for your reference, a copy of our transcript will be posted on our website. And this concludes the call. Thank you.