DuPont de Nemours Inc (DD) — Q1 2024 Earnings Call Transcript

Good morning, and thank you for joining our First Quarter 2024 Financial Review. Our results for the period exceeded our expectations, driven by better-than-expected volumes in all segments. Broadly, the first quarter confirmed that we are past the bottom in electronics and on the road to recovery. Our Semiconductor Technologies business reported sequential sales growth of 8% in the first quarter and 10% year-over-year, driven by a pickup in the underlying chip demand and normalization of customer inventory levels, both slightly earlier than expected. In Interconnect Solutions, we saw a second straight quarter of year-over-year volume growth with volumes up 4%. We did, however, continue to see channel inventory destocking, as expected, resulting in year-over-year revenue declines in certain industrial-based businesses, but we believe those conditions have bottomed and our assumed recovery timing is also consistent with our previous expectations. That said, and given first quarter performance, we are raising our full year 2024 guidance for net sales, operating EBITDA, and adjusted EPS. Lori will further detail the outlook shortly. Compared to the year ago period, first quarter reported sales of $2.9 billion declined 3%, operating EBITDA of $682 million declined 4%, and adjusted EPS of $0.79 per share declined 6%. We continue to prioritize working capital and delivered significant year-over-year improvement in cash flow during the quarter. In late April, we completed the $500 million accelerated share repurchase transaction launched in February, retiring a total of 6.9 million shares in this tranche and bringing total share repurchases to over 15% of our outstanding shares since November 2022. Turning to Slide 4, I want to reiterate that we remain excited about the growth potential of our businesses, centered around 5 secular high-growth areas. We are excited about the through-cycle strength of our portfolio as end markets recover from recent destocking headwinds, and our teams continue to focus on operational excellence. Almost 1/3 of sales exposure for our portfolio today is focused on electronics, including leadership positions and strong customer relationships serving semiconductor manufacturing, primarily via consumables used in the chip manufacturing process, as well as serving broader consumer-based electronics markets with films, displays, and printed circuit board materials used in smartphones, PCs, and tablets. We are very pleased to participate in the AI-driven growth acceleration within electronics via our semi-related products geared towards advanced node chips for data centers and other key AI applications, such as mobile products. Electronics end markets have positively inflected, and we expect continued volume pickup in both Semi and ICS over the course of 2024. Our Water business at 12% of our portfolio constitutes a broad range of filtration technologies and operates in markets expected to generate strong growth, driven by evolving wastewater regulation and the global response to concerns around water scarcity and circularity. We believe demand for filtration products, which have been impacted by slower project work in the last year and associated distributor destocking has bottomed and will begin to recover later in the second quarter. We have excellent leadership positions in various end markets within protection and industrial technologies. Within industrial technologies, about 10% of the DuPont portfolio is geared to growing health care markets, including Spectrum medical devices, Tyvek medical packaging and Liveo biopharma consumables. We have seen ongoing solid demand for devices and expect to see recovery in medical packaging beginning later in the second quarter. Biopharma product demand is expected to recover beginning later in the year after bottoming in recent periods. DuPont's next-generation auto market participation constitutes about 10% of total sales and is geared to advanced technologies, enabling secular demand trends for hybrid and electric vehicles within battery, motor and other applications. Demand for our advanced water-related products has remained healthy, and we have a global customer base that includes EV customers in each region. We see excellent longer-term opportunity across our auto-related portfolio. With that, let me turn it over to Lori to review our financial performance and outlook.

Thanks, Ed, and good morning. Our first quarter results were clearly encouraging with further signs of electronics recovery matched with bottoming across our industrial-based end markets. Additionally, our commitment to drive productivity and operational excellence has minimized decremental margins and has helped to produce significant cash flow improvement in recent quarters. Our results have and will continue to benefit from the restructuring actions announced last November. Turning to Slide 5, I'll cover our first quarter financial highlights. Net sales of $2.9 billion decreased 3% versus the year ago period, as a 6% organic sales decline and a 1% currency headwind were partially offset by favorable portfolio benefits of 4%, primarily from the Spectrum acquisition. The organic sales decline reflects a 5% decrease in volume and a 1% decrease in price. Lower volume was driven by the impact of continued channel inventory destocking in Water Solutions, mainly in China, and Safety Solutions, most notably for Tyvek medical packaging, and Industrial Solutions for Tyvek's parts and Liveo biopharma products. These declines were partially offset by strong growth in electronics where Semi and Interconnect Solutions volumes increased 8% in aggregate versus the prior year period. On a segment view, W&P and E&I organic sales declined 10% and 2%, respectively, while organic sales and corporate increased 1%. From a regional perspective, sales decreased on an organic basis globally versus the year ago period, with Europe, North America and Asia Pacific down 8%, 7%, and 4%, respectively. In China, sales volumes were up 3% year-over-year as growth in E&I more than offset declines in W&P due to continued pressure in water markets. First quarter operating EBITDA of $682 million decreased 4% as volume declines were partially offset by the impact of lower product costs and Spectrum earnings contribution. Operating EBITDA during the quarter of 23.3% was down 40 basis points versus the year ago period. I am pleased with our cash flow improvement as we focus our efforts on optimizing working capital performance. On a continuing operations basis, cash flow from operations of $493 million, less capital expenditures of $207 million resulted in adjusted free cash flow of $286 million in the first quarter, a significant increase versus $173 million in the year ago period. Adjusted free cash flow conversion during the quarter was 86%, significantly ahead of last year. Turning to Slide 6. Adjusted EPS for the quarter of $0.79 per share decreased from $0.84 in the year ago period. Lower segment earnings, higher net interest expense and higher depreciation more than offset a $0.06 benefit from a lower share count. Our tax rate for the quarter was 24.6%, up from 23.4% in the year ago period, driven by geographic mix and earnings. Our full year 2024 base tax rate outlook of 23% to 24% remains unchanged. Turning to segment results, beginning with E&I on Slide 7. E&I's first quarter net sales of $1.4 billion increased 5% as a Spectrum sales contribution of 8% was partially offset by an organic sales decline of 2% and a 1% currency headwind. The organic sales decline reflects a 1% decrease in volume and a 1% decrease in price due to the pass-through of lower metal prices. Effective with our first quarter reporting, I will highlight that we realigned certain product lines within our 3 E&I lines of business. The changes streamline our cost structure, while also optimizing certain product offerings to better focus on our customers. Additional detail has been provided on Slide 15 in the appendix. For the first quarter of 2024, organic sales for Semiconductor Technologies were up 10% versus the year ago period due to the start of overall semiconductor market demand recovery, along with normalization of customer inventory levels and continued strong demand for OLED display materials. We expect underlying semi demand to continue to improve throughout the year, and note that our forecasts continue to call for semi fab utilization rates to increase from the low 70s percent that we saw in the first quarter to a fourth quarter exit rate in the low 80s. Within Interconnect Solutions, organic sales were up slightly as mid-single-digit volume gains were mostly offset by the impact of lower metals prices. This was the second consecutive quarter of year-over-year volume growth for ICS as broad electronic markets continue to recover. Organic sales for Industrial Solutions were down about 20% due primarily to ongoing channel inventory destocking for Kalrez O-rings and our Liveo product lines within biopharma markets. We continue to expect to see order improvement over the next several quarters in our Kalrez business, and our Liveo biopharma business is also still expected to recover later in the second half. Operating EBITDA from E&I of $374 million was up 3% versus the year ago period, driven by strength in Semi and Interconnect Solutions and the earnings contribution from Spectrum, partially offset by the impact of lower volumes in Industrial Solutions. Turning to Slide 8. W&P first quarter net sales of $1.3 billion declined 11% versus the year ago period due to a 10% decrease in volume and a 1% currency headwind. Within Safety Solutions, organic sales were down low teens on lower volumes, driven mainly by channel inventory destocking, most notably for Tyvek medical packaging products. We believe our customers' inventory is close to normal at this point for Tyvek medical packaging. Within Water, organic sales were down mid-teens, driven by distributor inventory destocking and lower industrial demand in China. We continue to have active communication with our distributors and believe orders will pick up towards the end of the second quarter. Shelter Solutions were flat on an organic basis compared to the year ago period, and we expect sequential lift in the second quarter. Operating EBITDA for W&P during the quarter of $295 million decreased 14% due to lower volumes, partially offset by the impact of lower product costs. Turning to Slide 9, I'll provide an update on our full year 2024 guidance as well as our expectations for the second quarter. We are raising our full year guidance for net sales, operating EBITDA, and adjusted EPS. At the midpoint of the revised ranges provided, we now expect full year net sales of about $12.25 billion, operating EBITDA of about $2.975 billion, and adjusted EPS of $3.60 a share, which now indicates expected year-over-year earnings growth. For the second quarter of 2024, we expect net sales of about $3.025 billion, operating EBITDA of about $710 million and adjusted EPS of $0.84 per share. The sequential sales and earnings lift in the second quarter assumes volume improvement driven by favorable seasonality in both ICS and Shelter, continued electronics recovery, and reduced destocking impacts in water and medical packaging. Year-over-year sales and earnings growth in the second half, embedded within our full year guidance, is expected to be driven by further electronics market recovery, including continued improvement in semiconductor fab and PCB utilization rates along with a return to volume growth in W&P. Second half earnings drivers include both volume improvement as well as expected mix benefit. With that, I'll turn it back to Ed.

Thanks, Lori. I'd like to note that we published our annual sustainability report earlier this week, highlighting the work of our global team to meet our commitments across all aspects of ESG, and I'm pleased with the progress and speed with which we are advancing our 2030 goals. There are 3 dimensions to our sustainability strategy: innovation; protecting people and the planet; and empowering employees and communities. I'd like to mention just a few recent accomplishments. More than 80% of our innovation portfolio is expected to advance our customer sustainability roadmap. This is a critical metric that aligns our product development with customers' expectations for both performance and sustainability. We were pleased to be recognized for this commitment by Samsung Electronics, which awarded us as a Best ESG Partner this past year. On climate, we delivered another year of strong performance, surpassing our 2030 goals, which are aligned with the ambition of the Paris Accord. This past year, we achieved a 58% reduction in Scope 1 and Scope 2 greenhouse gas emissions from a 2019 baseline, exceeding our 2030 goal of 50%. And we achieved a 39% reduction from the 2020 baseline in Scope 3 emissions, also ahead of our 2030 goal. This past year, we made strong progress in the continued deployment of a company-wide operational excellence framework designed to drive continuous improvement in productivity, including deployment of standardized tools, best-in-class technologies, and practices that enhance workflows, reduce errors, minimize waste, and improve safety. Related to this, 2023 was our safest year on record for employees and contractors. Finally, our strong governance practices underpin our sustainability strategy as we remain committed to transparent reporting on our policies and performance with oversight from our Board. A key focus in 2023 was strengthening the DuPont Supplier Code of Conduct with our new Responsible Supplier program. These are just a few of the many great examples in the report of how our teams are delivering on our purpose in driving sustainability. With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A.

Ed, good to see the bottom is apparently in here. And really, the nature of my question is you did a lot of hard work trying to protect margins and minimize decrementals through this protracted period of volume declines. Now that we're heading the other way, I just wonder if you could give us any perspective on, I don't know, costs that need to come back or how you feel about structural costs. And maybe the punchline is just a little bit of guidance on your incrementals as we think about volumes going the other way in E&I.

Yes, Jeff. Most of the cost actions we implemented will remain in effect. From the $150 million we announced in November, we expect to realize about $100 million in cost savings this year. However, as we move into 2025 and our markets improve, we may reinstate around $30 million to $40 million in costs, particularly related to our factory footprint. Furthermore, there may be some minor impacts on compensation because we didn't fully meet our bonus plans, and while it might reach 100% this year, year-over-year compensation may not vary much, unlike in 2023, where we faced some headwinds. In the second half of the year, we anticipate some incremental improvements as our sales begin to recover; we will benefit from sales absorption. Our plan is to achieve approximately 56% incrementals in the latter half of the year. I believe we have reduced risks for the second half with our current baseline. We only need to increase sales by $340 million from the first half to the second half, which is a 6% rise, while our EBITDA is projected to grow by about 14%. This leads to the 56% incremental target, so we are in a significantly improved position compared to where we were before.

Yes, and the 56% is first half, second half. If you look at our margin profile in the second half versus the first half in the implied guide, it is up almost 200 basis points in the low 25% range, which is a nice tailwind as we head into 2025.

Yes. And Jeff, maybe just one other because the electronics is bouncing back nice. We've always consistently, quarter in, quarter out, branded that business at like 31% to 32% EBITDA margins. Going forward, with Spectrum in there, we'd pressed the EBITDA margins just because it's a great business but they're a little bit lower than the average. So it brings it down like 100 basis points. But having said that, we should be able to run that business as we're cranking back at like 32% EBITDA margin as we get into 2025.

Great. The follow-up question that will also factor into the margin calculation revolves around electronics over time, which experiences a natural price decline due to the nature of the business. Considering some of the more advanced developments in the Semiconductor sector and potentially other areas in the Electronics and Industrial portfolio, how confident are you in your ability to maintain pricing or prevent price declines in these businesses over time?

Yes. Well, Jeff, usually, the price down is at 1%. That's kind of what we've averaged so it's not really significant. Having said that, more and more of this portfolio over the next set of years is going to be advanced nodes with all the AI coming, and by the way, the AI then moving down into mobile devices. And as you know, we're advantaged there. That's how we always outgrow MSI by 200 to 300 basis points. So as more of the business skews there, that helps our margins just from a mix perspective, but we also get price on the more advanced platforms that we have in electronics. So ICS will probably still lose price. That's more our PCB stuff that are the laminates and displays and all that, we'll lose a little bit of price, but I got to think we'll do a little better on the chip side.

I think you mentioned expecting a 10% sequential increase from the first quarter. However, the EBITDA quarter-over-quarter is lower than that, around 4% to 5%, based on your guidance. Was there anything that led to this change in expectation? Did anything from the first quarter get pushed forward, affecting the second quarter, or is this just a more conservative outlook?

Yes. No, I think it was more a reflection of the overdelivery of Q1. So originally, when we said a 10% sequential lift, we were guiding to Q1 of $610 million so would have got you roughly to $670 million. So delivering the $682 million mutes the ramp a little bit, but we still are now at $710 million versus the original $670 million, so no, actually some upside to the expectations that we had back in February when we gave that number.

Okay, that makes sense. And is there anything that is a little worse than you would have expected? It seems like obviously, electronics is coming along really nicely. The other stuff may be a little more sticky on the Industrial side. And anything that is kind of standing out as just not coming along as you would have expected on the Industrial businesses recovery?

Steve, it's similar to what we mentioned last quarter. Shelter is expected to increase from the first to the second quarter, primarily due to seasonality, but we have already seen the lowest point reached. Recently, our Water business manager was in China and indicated that more orders are anticipated towards the end of this quarter. This trend appears consistent. The healthcare medical packaging business is also expected to see activity increase at the end of this quarter and into the next. The only two areas experiencing delays, which have stabilized but not yet recovered, are our Biopharma business—anticipated to improve in the latter half of the calendar year—and our Kalrez business, which is likely to recover in the second half. Overall, this aligns with our previous statements. Additionally, a positive highlight is that we had previously been pessimistic about growth in China, but we’ve now recorded a 3% increase in that market, driven primarily by our electronics business, which saw a 15% growth in E&I in China during the first quarter. Our semiconductor customers in China are ordering at a similar growth rate of about 15%, including local companies, not just multinationals. This is encouraging.

Okay. And then just last quickly, any updates on price raws spread for you guys? I know it's less important these days but any update there?

Yes, we did have a little more favorability than what we saw in Q1 that we believe will hold for the year that contributed partially to the Q1 beat. So if you look at the Q1 beat, it was about $110 million or so on revenue and then about $70 million on earnings. So obviously, we got some upside there outside of volume, and that was primarily better price/cost spread.

This may be hard to define explicitly, Ed, but you've mentioned a couple of quarters in a row the AI chip and data center benefit in E&I. Help us understand materiality when you think about new chip designs and such and the content of your product that's going to be needed. Does it structurally raise the growth rate, do you think, over, call it, a 5-year period? Or is there enough stuff get cannibalized and it kind of nets out to a slight positive? But perhaps, I don't know, I just have no idea so I'll ask you.

The data center segment accounts for approximately $700 million of our revenue, with around $250 million coming specifically from AI. This segment is currently experiencing growth of over 20%. I believe we are entering a significant phase of growth in the semiconductor industry driven by AI advancements. AI will be integrated into devices, leading to widespread market expansion. While I won't provide a precise forecast for 2025, I anticipate that our E&I business will likely see high single-digit growth that year. We expect fab utilization to start in the low 70s and finish in the low 80s, potentially reaching the low 90s by mid-next year, contributing to our growth projections. Additionally, AI chips are beneficial as they carry higher margins compared to our average, setting us up for a strong 2025. This market is expected to continue growing at a rate of over 20% as we move forward.

Okay, so that's definitely significant. To provide some context on Water Solutions in China, was there a prebuy or a similar situation that led to this customer having an excess of inventory? Is it simply that the macroeconomic conditions took a downturn and as a result, they ended up with surplus inventory?

Yes, to clarify, it wasn't just one customer. We have many distributors, with four key ones in China that handle most of our business, which isn't direct. We also have a significant amount of direct business. Recently, our team met with them, and they indicated that industrial production has slowed down. They had been ordering at a higher pace and are now going through a process of destocking. This destocking period is not as lengthy as others we've seen; it appears to be about five to six months of reducing their inventories. We believe we are in a good position as we approach the third quarter and expect orders to begin increasing around June. The situation seems to be more influenced by macroeconomic factors.

Just one for me. Maybe Lori, you could give us an update on adhesives multi-base in Tedlar. I would have thought they'd be down like your Industrial segment and they've got some auto exposure there, which was probably weak. But actually, corporate sales were up 1% year-over-year. What's going on there?

Yes. So we continue to see strength on the EV side of auto. So as you had mentioned, overall auto builds are weaker right now, but there's still a lot of upside within the EV side. So that was up double digits in the quarter and we expect that to stay for the year. A lot of the upside in the volume in the quarter came from Tedlar, which is in the photovoltaic space, so we had really nice volumes within Tedlar that gave us the 1% organic for the quarter.

Just want to turn on the ICS side. You've seen a bit of a market share shift between Chinese OEs versus the Americans and the Northeast Asians. And I know you have exposure everywhere. And at the same time, you've also seen an increase in the sophistication of Chinese handsets. So can you just kind of parse through that in terms of where the market is right here, right now and how the Street should be thinking about your relative content exposures and how we should think about that business recovering throughout '24 and perhaps '25?

I can give you an overview, Chris. If we look back to the middle of last year, PCB utilization rates were around the mid-40s. In the first quarter, they have risen to the mid-50s. We expect to finish the year in the low 60s, and for the second half of the year, we'll likely be in the low 60s. Typically, PCB utilization rates are in the low 70s. They do not reach the 90s like semiconductors do. This shows the planned progression over the next year.

Yes. We continue to see wins within the metallization space more on the circuitry side, so we've seen a nice volume lift in the first quarter, and we expect that to be maintained for the rest of the year. And we have had some share gains outside of that in the premium smartphone space on both the fulfillment side and then the other device side as well with PCs and others.

Got it. Lori, you know my favorite question as a follow-up is on W&P margins. I mean, obviously, over the last few quarters, there have been a bunch of put and takes, inclusive of the destocking. But with that progressively improving throughout '24, can you help us just give us the latest and greatest on how you're thinking about the long-term margin optionality in terms of op efficiencies, leverage, mix, so on and so forth?

Yes. We still see the entitlement for W&P margins in that 27% range. And so as you know, they've been challenged in the first quarter, really a function of the lower volumes. There's a lot of heavy assets in that business that take a hit when the volumes are down. We've done a nice job controlling costs to minimize the decrementals to low levels, but that is impacting it. And then the larger impact comes from just the mix side. So the Tyvek business is down primarily because of the medical packaging destock that's going on, that we expect to start to see resolution here at the end of this quarter and then improvement as we head into the back half. And so when you start to see those 2 items wane, we do see nice margin improvement first half, second half. So the first half margins will probably stay at that 23% level. And then we see them ticking up about 100 basis points as we get to the back half of the year.

Ed, you only raised the full year guidance by the amount of the Q1 beat. Is that because it's still early in the year or are you a little more cautious on the back half demand environment?

Yes, David, no change on our thinking on the back half. It's just as I said earlier, I feel good we've derisked the ramp in the year. So no, I don't feel any different about it. And hopefully, it ends up being a little bit conservative.

Very good. And can you just provide us another update on PFAS right now?

Yes, there’s nothing significantly new to share, David. The next item we would like to address is the Stade AG cases. I don’t expect that to happen in 2024; it’s more likely to be a 2025 event. Additionally, there are a few states where we will settle separately from the class action, as we had locations set there. You might see one or two of those get settled possibly during this calendar year. Regarding the settlement, the other settlement is now complete and has been signed off by the judge. The positive outcome in relation to the firefighting foam litigation is that it has become clear that the liability for the consortium of Corteva, DuPont, and Chemours represents only 3% to 7% of the total exposure, with DuPont accounting for one-third of that percentage. This clarity will help define what the numbers will look like as we proceed with settling the other cases.

First question I wanted to ask on W&P, I wanted to ask about price. It seems like it's holding in, I'd say, fairly well despite double-digit volume declines in the past few quarters. So what's your expectation for price? Should we expect this to stay relatively flat as we move through the year?

Yes. So yes, we delivered flat price, overall, in W&P in the quarter. We still have some expectation to give back 1% or 2%, primarily in the Shelter business as we go throughout the year, but we have done a really nice job, as you had mentioned, holding on to price.

Got it. That's helpful. And then bigger picture, Ed, how is Spectrum performing relative to your initial expectations?

We have shared our outlook with our Board, and it's reassuring to see that we are not experiencing a destock situation. The business is growing well, and there is a significant ramp happening with a key medical device company, which we have been closely monitoring. This ramp is crucial for us, and we are pleased to see that it is progressing nicely. It's primarily a major manufacturing ramp that we have navigated, and it is on track. We are optimistic about this development. The Tyvek medical packaging, Spectrum business, and Liveo business now represent a substantial portion of our portfolio, as we indicated in our prepared remarks. They comprise 10% of the company and are part of a stable market with a solid growth rate, which is very favorable for us.

I was wondering if you could talk about your expectation on buybacks versus M&A. I know you talked about no M&A in 2024 kind of through the September period. Can you extend that through the rest of this year and maybe think about '25 in terms of your total capital allocation?

Yes, we are not planning any acquisitions this year. When we do consider one, it will likely be a smaller tuck-in acquisition rather than a major deal. We would like to expand our healthcare platform, as there are several smaller opportunities available there. While it’s possible we might pursue an acquisition this year, it’s not currently in our plans. Our focus has been operational, particularly with the destocking efforts, which our team is fully engaged in. We recently completed a $500 million ASR and have one more to complete this year. Following that, we expect to explore some tuck-in acquisitions. Additionally, depending on our stock price, I tend to repurchase shares when I believe our stock is undervalued, so I don’t foresee any changes to that strategy.

This is Richard on for Mike. So I just wanted to ask in terms of the guidance for the full year and what you're seeing in terms of demand and destocking coming to an end, should we expect year-over-year volume growth starting in the third quarter? Or how are you looking at volumes in the second half of the year?

Yes. In the guide that we gave, we do see a return to volume growth in the second half. It ramps as you go from 3Q to 4Q, really just a comp because 4Q was our weakest quarter last year. But yes, we will be returning to growth from both a volume and earnings perspective in the second half.

Okay, great. And then just in terms of your comments on China recovery, was that more specific to E&I? Or maybe if you can talk about what you're seeing on the Water Solutions side because you do find that industrial demand remains weak in China, but I guess you're saying it's recovering better than you thought?

Yes. No change there. So the volume uptick that we saw in China in the first quarter was primarily E&I. As I had mentioned, we are up kind of mid-teens for volumes in China. We still do see industrial weakness that's impacting W&P primarily in the water space. So no change to our expectations that we will get the orders in from the key distributors towards the end of this quarter and be able to ship those to see a ramp sequentially in Water and then a further ramp as you head into the second half.

Lori, if I could follow up on a free cash flow question. What are your expectations? You did 86% free cash flow conversion in 1Q. What is your expectations for 2024?

Yes. I think we'll be at or near our target of greater than 90%. So I was really pleased with the Q1 performance of 86%. That's a sizable improvement from where we were last year, which was around 45%. I do expect to take a little bit of a dip down in Q2, really reflecting the payment of our biannual interest expense. So that's about $200 million. We pay it in May and in November. So we'll see a headwind in Q2. But overall, I expect it to deliver nice free cash flow conversion for the year really around the target.

Terrific. Ed, you mentioned several times the progress you’re seeing in Asia, particularly in China. The year-over-year decline has decreased to a 4% organic decline in the first quarter. Are you expecting it to be flat or improve in the second quarter and beyond in terms of year-over-year comparison?

Yes. We expect overall China to be both price and volume and currency headwinds about flat for the year. So as you had mentioned in the Q1 numbers, we were up in volume. But overall, it was about flat with the currency headwinds. So yes, an improvement in volume that we expect to see and some currency headwinds as the year goes on.

The 3-year trend in volumes within your Water & Protection segment is unchanged. The losses experienced over the past four to five quarters have effectively counterbalanced the gains from 2021, resulting in relatively flat volumes in 2022. I'm curious to know if you interpret this as indicating only modest underlying volume growth, or do you believe there might be losses due to generic products in that segment? Additionally, do you have any insight into the inventory levels that have now been reduced?

Yes. I mean, I think the history has been impacted a lot by COVID. So we saw unwind of the garments that were a sizable benefit during the 2020 timeframe when you saw an unwind, not unlike most of the peers out there that saw a run-up from the garment perspective. And then once we moved through that, then we transitioned into the general industrial destock. So I think we need to look into 2025 to really get a good read on the volumes in that business. And right now, we're expecting low to mid-single-digit volume growth in 2025 off of a more normal macro. So no concerns overall around the efficacy of those products in the market. It's really just getting beyond those chunky one-timers around COVID and then the broader industrial destock to be able to see the true growth profile of that business.

And then Kalrez and Tedlar, these are both fluoropolymer products. Just a question for you on that. Do you have any customers that are saying, I'm going to switch to something else just to avoid the fluoropolymer issue? And how are you managing your own wastewater from the manufacturing of those products?

No. I mean, in fact, in Tedlar, we're actually seeing some questions around. It is a PFAS-free, so there's some opportunity there to maybe pick up some share on the Advanced Materials side or the PV side and be opportunistic. And I know directly back from customers, and obviously, we published our sustainability report earlier this week. There's a lot of examples in there around our commitments to that as well as just overall water key drivers around the sustainability footprint.

Just a quick one on the electronics side. How far do you see the growth trajectory for that business? Or how much can you expand it before you need to do a significant round of CapEx additions?

Yes. The positive aspect regarding the Electronics and Industrial segment, which is quite different from the Water and Protection segment, is that it does not require heavy assets. A significant portion of our capital expenditures in electronics is allocated to our testing equipment. We need advanced testing equipment in the key regions where our customers are located, and that’s where we'll gradually increase our CapEx. Additionally, we can upgrade our electronics manufacturing locations in a modular fashion, meaning the capital expenditure will not be substantial. However, I believe we will consider some expansion as we anticipate a super cycle in the semiconductor sector. To provide perspective, unlike our Tyvek business, where we are launching Lynade in Luxembourg with a project costing $450 million and where we have already completed successful initial product runs, we do not have a similar large-scale expense on the electronics side. This is beneficial, and it is also faster to enhance our manufacturing capacity in electronics. We will monitor this closely as we expect steady growth in the coming years.