DuPont de Nemours Inc (DD) — Q3 2025 Earnings Call Transcript

Good morning, and thank you for joining us for DuPont's Third Quarter 2025 Financial Results Conference Call. Joining me today are Lori Koch, Chief Executive Officer; and Antonella Franzen, Chief Financial Officer. We have 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, as updated by our current and periodic reports includes a detailed discussion of principal risks and uncertainties, which may cause such differences. Unless otherwise specified, all historical financial measures presented today are on a continuing operations basis and 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 has been posted to DuPont's Investor Relations website. As a quick reminder on the basis of presentation for our third quarter financial results, our total company net sales, operating EBITDA and adjusted EPS include segment results for ElectronicsCo and IndustrialsCo, excluding results for the previously announced divestiture of the Aramids business, which is now reported as discontinued operations. I'll now turn the call over to Lori, who will begin on Slide 3.

Good morning, and thanks, everyone, for joining our third quarter call. Earlier today, we reported another solid quarter ahead of our previously communicated guidance. Third quarter sales of $3.1 billion grew 6% on an organic basis. Operating EBITDA of $840 million increased 6% year-over-year, resulting in an operating EBITDA margin of 27.3%. As a result of our strong third quarter financial performance and our expected operational improvement, we are raising our full-year earnings guidance for the new DuPont. Antonella will provide further details shortly. Third quarter saw organic growth across all businesses with continued strong volume growth in healthcare and water coupled with strength in electronics driven by AI technology demand in both interconnect solutions and semi. Today, we also announced capital allocation updates for the new DuPont both in the form of a quarterly dividend and a new share repurchase authorization. We declared our initial quarterly dividend under new DuPont in the amount of $0.20 per share in line with our targeted 35% to 45% payout ratio. The Board of Directors also approved a $2 billion share repurchase authorization under which we expect to quickly launch an ASR in the amount of $500 million. Both of these actions underpin our commitment to a disciplined capital allocation model and are a testament to our financial strength and dedication to delivering value. Earlier this week, we announced the successful completion of the Qnity separation. As a premier pure-play technology solutions partner to the semiconductor value chain, Qnity is well positioned to deliver growth and value creation for its shareholders. Turning to Slide 4. As part of Investor Day, I outlined a clear strategy for the new DuPont to drive value creation for all our stakeholders. Our strategy is focused on driving above-market organic growth, building a robust business system, deploying a balanced capital allocation model, and consistently delivering results. We are already seeing progress against these value creation drivers. We have successfully repositioned ourselves and have a streamlined portfolio of leading businesses, the majority of which are aligned to secular end markets, which will enable strong organic growth. We saw nice growth in the third quarter, and we continue to expect 2% organic growth for the full year. Our innovation engine continues to deliver. We announced the launch of our latest technology in Tyvek Garment branded Tyvek APX. This latest technology for PPE provides enhanced readability while maintaining the same level of protection and durability. The launch clearly demonstrates how we collaborate with customers and deploy our application development expertise to meet their needs. As I noted at Investor Day, we are driving towards building a robust business system starting from a strong jump-off point with a full suite of tools that are being actively deployed. This quarter, we introduced a core set of enhanced KPIs that are focused on driving improvement for our shareholders, customers, and employees. These KPIs were embedded in a refreshed set of management standards, which has added more visibility, rigor, and structure to ensure we achieve our business objectives. On commercial excellence, we have advanced the framework across commercial enablement, sales effectiveness, and strategic marketing. A key priority was focused on pipeline discipline. We have designed a more transparent, data-driven process, which links demand generation, opportunity qualification, and conversion metrics to deliver against our growth target. Specifically, within our water business, we have taken a regional approach to the rollout and have improved pipeline rigor in North America and Europe, leading to sizable improvement in our opportunity funnel. We plan to launch in Asia later this quarter. We also continue to drive enhancements in operational excellence. During the quarter, we rolled out an updated set of KPIs aligned with our focus on safety, quality, delivery, and cost. We also refreshed our toolkit around OEE and reliability which is driving reductions in unplanned downtime and improving our maintenance spend and run time. On capital allocation, I highlighted earlier the dividend and share repurchase authorization that was approved by our Board. In addition, we also announced in late September that we signed an agreement to acquire manufacturing capacity to expand our reverse osmosis footprint in China. This aligns with our local-for-local strategy and increases our capacity to meet growing demand for industrial water purification and reuse in the region. With this backdrop, I remain confident in delivering the medium-term targets for '26 through '28 that we outlined for you at Investor Day. 3% to 4% organic growth, 150 to 200 basis points of margin expansion, 8% to 10% EPS growth, and generating strong free cash flow conversion at greater than 90%. With that, I'll now turn the call over to Antonella to cover the financials and outlook.

Thanks, Lori, and good morning, everyone. We delivered another quarter of year-over-year growth in organic sales and operating EBITDA on volume strength across many key end markets. Operational focus by our teams drove solid financial performance in the quarter, including strong cash conversion beginning with third quarter financial highlights on Slide 5. Net sales of $3.1 billion increased 7% versus the year ago period on 6% organic sales growth and a 1% benefit from currency. Organic sales growth consisted of a 7% increase in volume, partially offset by a 1% decline in price. Organic sales included a $70 million benefit from order timing shifts into the third quarter from the fourth quarter due to system cutover activities in advance of the separation. Excluding this, organic sales growth would have been 4% in the quarter. From a segment view, both segments saw organic sales growth with IndustrialsCo and ElectronicsCo, up 4% and 10%, respectively. All businesses had organic growth during the quarter, led by low teens growth in Interconnect Solutions, high single-digit growth in both Healthcare and Water Technologies in semi and low single-digit growth in Diversified Industrial. We saw organic growth across all regions with North America and Asia Pacific, up 7% and Europe up 6% year-over-year. Third quarter operating EBITDA of $840 million increased 6% versus the year ago period as organic growth and productivity benefits were partially offset by growth investments and unfavorable mix. Operating EBITDA margin during the quarter of 27.3% was down approximately 30 basis points year-over-year due to unfavorable mix in ElectronicsCo. Turning to cash flow. We delivered transaction-adjusted free cash flow of $576 million and related conversion of 126%. This was in line with our expected acceleration this quarter. Turning to Slide 6. Adjusted EPS for the quarter of $1.09 per share was flat with the year ago period. Higher segment earnings of $0.09 was primarily offset by a headwind from a higher tax rate year-over-year. Our base tax rate during the quarter was 24.6%. The prior year base tax rate, which included discrete benefits was 19.5%. Turning to Slide 7. IndustrialsCo third quarter net sales of $1.8 billion were up 5% versus the year ago period on 4% organic growth and a 1% benefit from currency. Organic growth included a benefit of approximately $30 million in order timing shift. Excluding this benefit, organic sales growth was 2% in the quarter, in line with our expectations. For the third quarter, healthcare and water sales were up high single digits on an organic basis versus the year ago period. Organic growth was led by continued strength in medical packaging, biopharma, reverse osmosis, and ion exchange. Diversified Industrial sales were up low single digits on an organic basis as growth in Industrial Technologies was partially offset by continued softness in construction markets. Operating EBITDA for IndustrialsCo during the quarter of $465 million was up 4% versus the year ago period on organic growth and productivity gains, partially offset by growth investments. Operating EBITDA margin during the quarter was 25.9% flat with the prior year, absorbing a margin headwind from currency. Sequentially, operating EBITDA margin improved 30 basis points. Turning to ElectronicsCo on Slide 8. Third quarter net sales of $1.3 billion increased 11% versus the year ago period on 10% organic growth and a 1% benefit from currency. Organic growth included a benefit of approximately $40 million in order timing shifts. Excluding this benefit, organic sales growth was 7% in the quarter. At the line of business level, organic sales for semiconductor technologies were up high single digits on continued strong end market demand driven by advanced nodes and AI technology applications. Interconnect Solutions also posted another strong quarter with organic sales up low teens, reflecting continued demand from AI-driven technology ramps and benefits from content and share gains across advanced packaging and thermal management solutions. Operating EBITDA for ElectronicsCo of $403 million was up 6% versus the year ago period as organic growth was partially offset by growth investments to support advanced node transitions and AI technology ramps. Operating EBITDA margin during the quarter was 31.6%, down 140 basis points versus the year ago period primarily due to unfavorable mix and currency headwinds. As a reminder, Qnity management will host a call later today to provide a business update. Earlier this week, we announced the successful completion of the Qnity separation. In connection with this transaction, we received approximately $4.2 billion of cash in the form of a midnight dividend from Qnity, which will be used to reduce DuPont's debt and achieve the targeted capital structure that we outlined at Investor Day. Turning to Slide 9, which outlines our latest view on 2025 financial guidance. As a reminder, we provided an updated view of our full year 2025 expectations, reflecting the separation of Qnity and the presentation of the Aramids business as discontinued operations as part of our Investor Day in mid-September. Also in the fourth quarter, we will be reporting under a new segment structure of Healthcare and Water Technologies and Diversified Industrials. In the appendix to the slide deck, we have included preliminary recasted quarterly segment information for your reference. From a top line perspective, our expectation of organic sales growth for the full year remains in line with the guidance we provided at Investor Day. We expect organic sales to be up 2% year-over-year on strong demand in healthcare and water partially offset by ongoing weakness in construction end markets. Our current full year sales guidance of $6.84 billion reflects slightly lower currency benefits from our prior expectations. We are raising our full year operating EBITDA guidance to $1.6 billion, driven by our stronger third quarter performance, underlying operational improvements across the businesses, and lower corporate costs. We expect full year adjusted EPS to be $1.66 per share, an increase of about 16% year-over-year. Our full year base tax rate is expected to be about 28%, including about 200 basis points of headwind related to total company interest expense that cannot be reflected as discontinued operations. We continue to expect that our go-forward tax rate will be in the 25% to 26% range consistent with the guidance provided at Investor Day. For the fourth quarter, we estimate net sales of about $1.685 billion, operating EBITDA of about $385 million, and adjusted EPS of $0.43 per share. Our fourth quarter guidance assumes about 1% organic growth when normalizing for the third quarter timing shift. On a reported basis, we expect a fourth quarter organic sales decline of about 1% versus prior year. As you will recall, we provided full year 2025 pro forma estimates as part of our Investor Day to serve as a baseline for our medium-term targets. Our stronger underlying performance translates into revised full year 2025 pro forma estimates for operating EBITDA of $1.63 billion and adjusted EPS of $2.02 per share compared to the $1.62 billion and $2 per share. Our lower corporate costs are accelerating our run rate towards our expected $95 million public company corporate cost structure. I want to thank our employees for remaining focused on delivering these results and for driving the successful completion of the Qnity separation. With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A.

Just I want to kind of focus more on just sort of the end market trends and there's some color on Page 12 that helps. But first, this timing benefit, is this something you did or kind of pushed on behalf of your customers, so they wouldn't somehow be disrupted? Maybe just give us a little sense of like what was behind that, if you don't mind.

Yes. So Jeff, kind of the way to think about it is as you would expect, the separation that we did really touched every legal entity within the organization. So in essence, we had to reconfigure everything in all of our financial systems to do that. So our customers were notified that we would be in a blackout period in early October as we did this after quarter-end. Therefore, we had some orders that were originally set to go out in the October timeframe that our customers accelerated into the third quarter given we were going to be in a blackout period. So it was completely customer-driven. Again, no changes related to our expectations of what we expected from an organic growth perspective in the second half, but it clearly created a higher organic growth in the third quarter and a lower organic growth in the fourth quarter.

Yes. And then I think you probably intentionally didn't say anything about 2026 today. But maybe give us some initial thoughts on sort of these exit rates that we're looking at here in Q4, again outlined on Page 12, what might be sort of the pluses and minuses as we shift into next year, particularly interested in what you're seeing in the healthcare and water businesses, especially.

So we're exiting the second half at about 2% organic growth in line with where we are for the full year. So from an end-market perspective, we would expect healthcare and water to be right in line with what we gave in our medium-term targets, which is about 5% organic growth on average. On the diversified side, in the 2% that we'll report for the second half, the Shelter is still down. So it's going to be down about 1% in the second half, but full year, it's about 4%. Given that, that's about 25% of our revenues, if that were just even to normalize to flat, that would be a nice lift as we head into 2026. So no material changes. We put the targets out just 6 weeks ago. We mentioned that in order to be able to deliver against expectations, we can't start in a hole. So we would expect our medium-term targets to be something that we would consistently deliver. We'll obviously be paying close attention to the construction market, though, and see how they play out.

I want to reiterate what Jeff mentioned. Congratulations on all the hard work you've put in over the past few years, especially in recent months. It's a lot to take in, and I have a few questions. Can you share your strategy regarding the balance sheet? I believe your pro forma leverage stands at around 0.8x, and I understand you still have some liability issues to address. What are your plans and targets in that area? Additionally, I noticed the buyback announcement, but are there other opportunities, like spectrum deals, that you might be considering for 2026?

Yes. So let me start with from a balance sheet perspective. We would expect our pro forma debt to be around $3.25 billion, and we would expect to have $1 billion of cash on the balance sheet. So our starting point net debt-to-EBITDA leverage is around 1.7x. Our target is to stay below 2x from that perspective in terms of where we expect to be on the balance sheet. As you saw this morning, we did announce the $2 billion share repurchase authorization, and we expect to, I would say, imminently start an ASR in the size of about $500 million that we will do. Clearly, as we progress during the year, as we mentioned at Investor Day, we would have a balanced approach. We would continue to look at share buybacks. We will continue to look at M&A activity. But we're clearly in a very good spot from a balance sheet perspective, quite honestly, Scott, to be able to do both. We have a really strong balance sheet going in. We have the Aramids proceeds that will be coming in, in the first quarter as well. As we talked about at the Investor Day, over the next 3 years, even accounting for dividend payments and share creep, we would have about another $500 million a year that is deployable in free cash flow.

Yes. And on the opportunities you had mentioned spectrum. So we did actually complete a small tuck-in acquisition in the water space recently. We bought RO capacity in China that really helps with our footprint there and enabling us to be local for local given that China is the largest RO footprint for us. So we'll continue to be opportunistic. We're looking in all spaces in healthcare with respect to not only additional spectrum-like assets in the CDMO space but also potentially in Med packaging and other areas that have nice secular growth. We'll also be opportunistic as we can in additional water opportunities. So we've got a really rich pipeline. As Antonella mentioned, the strong balance sheet to be able to be proactive with it. We'll be prudent. We'll have a profile on a return that we want to deliver, targeting ROIC greater than WACC by year 5 and a nice pathway to a net synergy number that is in line with our affordability range.

Okay. That's helpful. And then at Investor Day, you talked a little bit about a renewed focus on lean and operational excellence. I think you made a hire in that regard on chief operation, I think, title, whatever you call it. But can you just talk about what you're trying to achieve on that front? I don't have a great sense of where you are today and as it relates to lean in your current portfolio? Just talk a little bit about the opportunity and what you're planning for here.

Yes. We picked up David Cook from Danaher. He was the ops leader for Paul, and we're fortunate to get him into our organization, and he's made an impact already in just the couple of months that he's been here. We started down the path a few years ago on an OpEx framework that deployed lean tools as well as some six-sigma tools and with a continuous improvement mindset. We're going to take that baseline that we have and kind of put it on steroids and make sure that it influences truly the way that we work. We rolled out enhanced management standards, which will dictate how we monitor the performance in our business and solve problems in our businesses to make sure that we have a continuous improvement mindset. We've identified 8 core KPIs: 4 of them are shareholder or financial related, 2 of them are customer-related, and 2 of them are employee related. They will form the basis of our monthly business reviews and allow us to understand performance and improvement opportunities. It's really a cultural change around a continuous improvement mindset, looking for net productivity opportunities year in and year out.

This is Jeffrey Zekauskas on for Steve. Just following up on the 80/20 initiatives you talked about at Investor Day on the flip side, there's probably some opportunity to prune the portfolio on the edges, but if you can talk about any opportunities you're seeing there would be great.

Yes. Thanks. We had mentioned at Investor Day, as part of the team refresh we brought in Beth Ferreira, who had a background at ITW who was well-versed within the 80/20 framework. She's actively deploying that toolkit across the diversified industrials businesses to see opportunities for us to improve margins across that side of the portfolio. As for pruning, we had mentioned that we have a goal to continue to work the portfolio towards more secular-based end markets. Today, we're about 50-50 with respect to healthcare and water in the diversified businesses, and ideally, we would be more like 2/3, 1/3. So I don't want to comment on which businesses those would entail, but the goal is to continue to get more into the secular base, mid-single-digit growth.

Maybe just a quick one on the pro forma EBITDA forecast, inched up a little bit, not a huge amount, but it's a pretty brief amount of time. I think you attributed it to stronger underlying business performance. I guess where is the area that you're being surprised on? Is it on the volume front? Or is it more on the cost and efficiency side, would you say?

I would say it's more on the margin side. What you see us kind of putting through in the pro formas is really how we exceeded or how we raised our guidance this year related to the segment performance that we had. You see that kind of flowing through the pro forma. It's from the margin perspective and better operational performance that we had.

Got it. Okay. And then with regard to M&A, I mean, you made the reverse osmosis asset acquisition. Clearly, some things are on your radar that you're opportunistically going after. Can you give us a little bit more color as to what you see in the pipeline? Are there a lot of targets out there at this point, or is it a little bit scarce? How are you thinking about that?

Yes. We have a robust pipeline. I would say it is deeper on the healthcare side than it on the water side, just given the fragmentation that exists in healthcare and the consolidation that exists in water. In water, there are still opportunities probably to go beyond the water filtration assets that we have today and potentially other areas within the water value chain. On the healthcare side, it is pretty deep, just given, as I mentioned, the fragmentation that exists on the CDMO side. There are a lot of players; the majority of them on both sides actually are owned by private equity. This gives us the opportunity to be able to transact at some point versus having to try to take something loose from a strategic. We're actively pursuing opportunities and reviewing opportunities with our strategy in M&A team.

Great. So when you take a step back as an independent company and you look at your strategy and margins and market performance, whether it's this quarter or what you are forecasting on a preliminary basis for '26. What do you think the Street is missing the most about the independent company's outlook? What are you the most enthusiastic about now that you have full independence?

I think if I speak in that today, the Street is confused on our number, just given where the free market trading is. There was a lot of noise, obviously, around the numbers with Aramids coming out as a discontinued operation, and maybe consensus not getting fully reset. But we had a beat and raise. We beat our Q3 numbers and new DuPont raised our side of the numbers as well. I think that's one kind of short-term confusion. Longer-term, it's just a view on who we are. There's still a view that potentially we're a chemical company versus we have significantly transformed the portfolio to a multi-industrial. We've got the financial performance that is right in line with the multi-industrial. We would expect that we would continue to re-rate up towards more of that multi-industrial multiple. I think that's one of the biggest confusing points is that we have a much more streamlined, simplified portfolio and a refreshed team to be able to continue to deliver.

Got it. And just very quickly as a follow-up. On the water portfolio, you have a pretty well-rounded enhanced lineup of everything from Ultra to RO and everything else within the filtration side. Do you have the willingness or desire to get further into metering or anything else tangentially as a growth theme in terms of how that market is evolving over the next 3, 5, 10 years? I'd love to hear about your strategy broader than it's been over the last, let's say, 5 or so.

Yes. We do have a strategy to go beyond just the water filtration. We're the largest player in all the key technologies. Getting larger there via acquisition could be tricky from a regulatory perspective. I would say metering is not one that we're actively looking at just given the valuations are quite high. But we are looking at opportunities more potentially in systems plays or other areas of filtration beyond just generally water. We have some water filtration around food and beverage, microelectronics, and dairy in our ion exchange resins business. There are potentially some opportunities there that take us beyond traditional industrial wastewater purification and desalination.

First, I just wanted to try to ask on the cash and the balance sheet comments. I think some of our math was that your upcoming cash might be closer to $1.5 billion to $2 billion before buybacks just given where cash sits today in fourth quarter free cash flow. I don't know if that's wrong from the math or if the $1 billion in cash is a target. So just curious, can you help bridge us for the moving pieces between 3Q and year-end, please?

Yes. So you have to keep in mind a couple of things. One, the cash on the balance sheet at the end of Q3 is the cash position for both the new DuPont as well as Qnity. Some cash will go over to Qnity as part of the separation. So, again, on a pro forma basis, we expect to be at around $1 billion as the cash position of the new DuPont, which, quite honestly, is a pretty healthy spot to be in as we move forward given the size of the organization.

And is that before or after the ASR?

That would be before the ASR. That is our pro forma cash that we expect to keep. The other thing to keep in mind is as we get toward the end of the year, between the timing of when certain separation costs would be paid. We're obviously going to move pretty imminently on the ASR. There will be some cash out the door related to that before year-end. There's also timing of separation costs. There is the potential that we may have a little bit of commercial paper that's on hand by the end of the year. But as we mentioned before, we have a nice amount of proceeds coming in the door in Q1 of '26 related to the Aramids divestiture.

If I could just follow up quickly on margins. I mean, you reiterated your improvement plan over the next few years. I guess, assuming that the macro demand is a bit softer next year, do you see a bigger opportunity to pull forward some productivity and get more margin expansion? Or is that more of a volume-dependent type profile where you need to get a stronger macro to achieve that?

I mean, as we did our walk that we talked about on Investor Day, we did have a portion of the margin expansion that would be coming from our revenue growth. As Lori mentioned earlier, when you look at our healthcare and water business, as we exit this year and go into next year, we are still in a good position to grow at mid-single-digit growth. You really only need a little bit of growth, I would say, on the diversified industrial side to kind of get to the low end of our organic revenue growth CAGR moving forward. We feel really good that we're positioned to do that. In addition, we had about 40 basis points of margin expansion over the 3-year period coming from the removal of our stranded costs. Clearly, that's 100% in our control. The plan would be to get that out by the end of year 2. You'd have that margin improvement in the first 2 years of the plan. As Lori talked a little bit earlier about our lean initiatives and how we're operating as a new company going forward, we do have another up to 50 basis points coming from productivity, greater than inflation. The teams are doing a really good job relative to that. We even saw underlying margin improvement this quarter, and we expect to continue seeing that as we go forward.

Where are we on the discussions with MSCI on reclassification? Will we get a pro forma balance sheet at some point? Or just wait until we get the year-end balance sheet for new DuPont?

Yes. So a couple of things. Let me take the good old classification question first, because it's one of my favorite topics. We are continuing to make progress towards an industry classification change. Qnity got their semiconductor classification, which we positioned for. That has worked out well. The way S&P and MSCI work, they do kind of wait for your publicly filed information. They'll see clearly the new DuPont as we get to this upcoming 10-K filing. But we will continue to push on that. The one thing I would always recall is that the fact that really our valuation is going to depend more so on our consistent performance rather than any classification, but I'm on a personal mission related to our GICS code to ultimately reflect the DuPont portfolio that we have today. In terms of pro forma, on this past Monday, we filed an 8-K that showed pro forma information. Some of that is already out today. As we get to the end of the year, all of our financials will show both Electronics and Aramids as discontinued operations. You'll have a nice 10-K with historical periods, all recasted for the new DuPont as we move forward.

This is Ryan on for Aleksey. I just want to echo some of the earlier comments, my congratulations on getting everything done. The earlier part of the call focused a lot on maybe where you could go with the portfolio, but I was hoping to kind of focus on what you currently have and especially in the healthcare business, there's a lot of talk in the slide deck about medical packaging and biopharma this year. But maybe we could get some additional color on what's going on in the medical device space.

Yes. We're really excited about all aspects of the portfolio, but the healthcare and water with mid-single-digit growth are areas that we'll continue to invest in. We saw nice growth across the broader healthcare business. We kind of said mid- to high single-digit growth on a full year basis for healthcare and water combined. The healthcare business would be north of that average. It was really a combination of nice performance across Liveo, which is our biopharma business. As you've seen across many of the peers that have exposure in biopharma, this was a nice year with the completion of the destock and a return to a really nice growth. We saw really nice growth in Med packaging and then to your question specifically on healthcare and the medical device space, we're seeing nice growth, too, as we exit the year. We actually just announced that we are bringing in a new leader for the Healthcare business to lead the spectrum and Liveo businesses. He joins us from a long history of running other types of CDMO. He starts Monday, and we're really excited to have him join the portfolio as well. We look for nice growth from that business and ideally being able to be opportunistic and add to it as we go forward.

Great. That's helpful. And then just on the construction market, you and a number of players in the space have been talking about softer market conditions. So just wondering your outlook? I know it's still early getting into '26, but just maybe if you can give some high-level commentary about how you're thinking about it.

Yes. A little bit of reminders of where we've been related to our Shelter business that is what's tied to the construction market. When we look at 2024, I would say we were in a relatively good position. We actually held flat with the market. Over the last four years, we've all been in that second half of the year recovery and then it gets pumped into the next year. Those were the early thoughts, but as you start to read different reports out there related to the construction market, the second half of next year would start to get better. We expect the Shelter business to be down around 4% organically this year. We feel we're at a relatively low level at this point. We aren't expecting significant growth next year. Even getting to flat actually has a nice impact on our overall organic growth. We expect a little bit of growth in Shelter next year, again, off a low bottom here.

Congratulations on the formal separations, but it's been a long journey. If we examine the new pro forma IndustrialsCo, organic sales were up 4% excluding certain factors, and then 2% excluding the pull forward. Could you break that down a bit on a segment basis? I'm trying to understand the volume and pricing in healthcare and water compared to diversified IndustrialsCo. I would like a bit more detail on what the pro forma business is achieving.

Yes. On a reported basis, healthcare and water were up high single digits. If you adjust for the pull forward impact, we were at mid-single digits. Diversified industrials was up on a reported basis organically in the low single digits. If you adjust for the pull forward, it would have been flat.

You mentioned that Shelter was down 4% for the year. As we move from the third quarter to the fourth quarter, can you provide more information on how the construction business is performing? Is it down 2% or 3% in the third quarter, or is there more detail you can share?

Yes. I would say in the third quarter, relative to the pull forward we had, it was down around 2%. We expect, as we get into the fourth quarter, we're down more in that 3% to 4% range. When you look at the overall 4% for the year, we were down more in the first half of the year than we are in the second half.

Congrats. This is Turner Hinrichs on for Vincent. I was just wondering if you could provide some color on your confidence in the 3% to 4% top line algorithm for 2026.

Yes. As we mentioned, we don't expect to start in a hole to be able to achieve our medium-term targets of 3% to 4% over the '26 to '28 time frame. If we look at our performance in the second half of 2025, which can be an indicator of what you might be looking into beginning 2026, our Healthcare and Water business is performing in line with our medium-term targets. With that being around the 5%, about half our company gives you 2.5% organic growth straight from that. The Shelter business, which is about 25% of the portfolio in the second half is down about 2.5%. We don't expect it to continue to be down next year, but we're not really expecting any material growth. Just the absence of a negative brings an opportunity incrementally from the second half. Looking at the rest of the industrial tech portfolio, which makes up about 30%, we would expect to see at least low single-digit growth. We mentioned the whole portfolio should be at average 2% for the Industrial Technologies side. You can generally roundly get to your medium-term targets at the midpoint range with just a big inflection point being cooperation of the Shelter market no longer being a drag on the total organic growth.

Great. Appreciate the color. I wanted to circle back on the building and construction discussion, specifically on P&C margins. How much are they holding the segment margin back at this point given the weakened demand environment? How much lift could there be if conditions begin to improve? Would this be in addition to the 150 to 200 basis point improvement that you're targeting for 2028 overall?

I would say, I believe you mentioned the construction markets of the Shelter business. Overall, the business has actually been doing pretty well from a margin perspective. Kudos to the team that despite the fact that volume has been down, they've been significantly driving productivity, watching costs, ensuring that we are positioned for the current market environment. That should set us up nicely for when we get back to being in growth mode in construction.

Can you expand more on the strategic rationale for the RO acquisition in China? Understand it enables you to be more local for local, but can you touch more on the technology value-add perspective? Specifically, what you're seeing in terms of water market growth in China.

Yes. The acquisition was more of a capacity add. On the ion exchange side, we've got different 5 plants across the globe, so we're able to be local for local. On the RO side, prior to this acquisition, we really had membrane capacity at one spot for the most part in the U.S. and nothing outside the U.S. of any materiality. We have started to build fabrication capabilities outside the U.S. through contract manufacturers, and we established capabilities within the Asia Pacific region. It was important to get membrane capacity in Asia, given that it's about 1/3 of our sales, and there's growing local for local preferences in the region. It gives us more local production capabilities for membrane within the China region.

That's very helpful. And then going to diversified industrial side, it seems like organic sales grew better than expectations due to Industrial Technologies. Can you touch more on how auto, aerospace or other businesses performed better than prior expectations?

Yes. On the diversified side, we had better performance than expected. A lot of that was related to the timing shift. From a full year perspective on an organic basis, we continue to expect 2%, and it really hasn't materially changed across any of the lines of business or reporting units. We did see improvement in the next-gen mobility space, which includes both the automotive and aerospace side. We mentioned at Investor Day, we are starting to feel some momentum building in the auto space, and we saw that play out in Q3. The revisions that have been happening in the last few months have been improving regarding auto builds. We're cautiously optimistic that we keep on pace there. The improvement we've been seeing more importantly has been in the U.S. and North America markets, where our outsized exposure is versus China. We'll remain optimistic on the automotive piece as the EV piece that we've talked about continues to perform well. We've got share gains realized and more opportunities in the pipeline with opportunities in the EV battery space.

Just curious, I think the case to change the GICS code is pretty straightforward. If it doesn't change and stays in chemicals, why do you think that is? If you are stuck with us, who do you think would be good comps relative to your performance for investors to look at? Is it like an Ecolab, Linde, or Sherwin just curious if that sort of scenario unfolds.

Yes. It's not a straightforward process. One might think it should be, but it's not in terms of the classification change. As I mentioned earlier, we will continue down that path. Ultimately, our performance will drive our valuation, and that's what we're focused on. As an organization, nothing will change in our strategy, how we expect to perform and what we would do relative to peers. None of the chemical peers would be our peers. We have very different portfolios. There are no comparisons to the others listed within specialty chemicals. We will continue to say for anyone following us and reporting on us, you need to look at the multi-industrial peers to kind of compare our performance.

You commented on some details on your healthcare portfolio. Could you also comment on the water side? You recently completed that acquisition in China. What else are you looking at? How are you prioritizing capital allocation towards this business?

Yes. On the water space, we'll look to see if we can be opportunistic to add to our water filtration capabilities. As mentioned, they might be a little more minimal because of the consolidation that exists in the space as well as our market leadership across the core technology. We'll look more broadly into potentially systems plays or some services plays. I had mentioned before that steering probably would be off the table just given the high valuations that come along with those assets, and we'll continue to be prudent to ensure we can get a return that's in line with our expectations. The pipeline is rich on both sides, the healthcare and water will differentially invest in those businesses, both from an R&D and capital perspective to ensure we're getting outsized returns and will bias our M&A activity towards those businesses as well.

Great. Thank you, everyone, for joining our call. For your reference, a copy of our transcript will be posted on DuPont's website. This concludes today's call.