DuPont de Nemours, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Strategy Focus: Focused on driving above-market organic growth, building a robust business system, deploying a balanced capital allocation model, and consistently delivering results.
• Financial Performance: 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%. Raised full-year earnings guidance for the new DuPont.
• Capital Allocation: Declared an initial quarterly dividend of $0.20 per share (35%-45% payout ratio) and approved a $2 billion share repurchase authorization with a $500 million ASR launch.
• Qnity Separation: Successfully completed the Qnity separation, with Qnity well-positioned for growth.
• Innovation: Launched Tyvek APX for PPE, demonstrating collaboration with customers and application development expertise.
• Business System: Introduced enhanced KPIs and management standards, advanced commercial excellence framework, and rolled out updated operational KPIs for safety, quality, delivery, and cost.
• China Acquisition: Signed an agreement to acquire RO manufacturing capacity in China to expand water purification footprint in line with local-for-local strategy.

Segment Performance

• IndustrialsCo: Third quarter net sales were $1.8 billion, up 5% versus the year ago period with 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. Operating EBITDA was $465 million, up 4% versus the year ago period, with an operating EBITDA margin of 25.9% (flat year-over-year, absorbing a margin headwind from currency) and sequentially improving 30 basis points.
• ElectronicsCo: Third quarter net sales were $1.3 billion, increasing 11% versus the year ago period with 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. Operating EBITDA was $403 million, up 6% versus the year ago period, with an operating EBITDA margin of 31.6% (down 140 basis points versus the year ago period primarily due to unfavorable mix and currency headwinds).

Guidance

• Full-Year 2025: Organic sales growth expected to be 2%. Raised operating EBITDA guidance to $1.6 billion. Adjusted EPS expected to be $1.66 per share (an increase of about 16% year-over-year). Fourth quarter net sales estimated at about $1.685 billion, operating EBITDA at about $385 million, and adjusted EPS at $0.43 per share. Revised pro forma 2025 estimates: operating EBITDA $1.63 billion and adjusted EPS $2.02 per share.
• Medium-Term (2026-2028): Targets 3%-4% organic growth, 150-200 basis points of margin expansion, 8%-10% EPS growth, and greater than 90% free cash flow conversion.

Risks

• Market and operational risks related to assumptions and factors affecting forward-looking statements, including uncertainties in macroeconomic conditions, regulatory changes, and competitive landscape.

Question and Answer

Q: 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.

A: 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 like repipe 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. And therefore, we had some orders that were originally set to go out in the October time frame 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.

Q: 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.

A: 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. And then on the diversified side, in the 2% that we'll report for the second half, Shelter is still down. So it's going to be down about 1% in the second half, but full year, it's about 4%. So 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.

Q: I'll echo what Jeff said. Congrats. You guys have done a lot of wood chop in the last few years, particularly last few months. There's kind of a lot of moving parts and my head spinning a little bit. But if we could just start with a little bit of minutia. What's your plan with the balance sheet? I think you're something like 0.8x pro forma leverage, I know you still have some liability issues you got to manage. But what is kind of the plan and target there? And will there be -- I saw the buyback announcement, but will there be other deals like spectrum, things like that, that you guys would be potentially looking at in '26?

A: Yes. So let me start with from a balance sheet perspective. So 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. And then 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. And 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.

Q: 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 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.

A: Yes. So we picked up David Cook from Danaher. So 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. So 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. So 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. And so we've rolled out enhanced management standards, which really 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. So 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, and they will form the basis of our monthly business reviews and allow us to be able to understand performance and understand improvement opportunity. So it's really a cultural change around a continuous improvement mindset, looking for net productivity opportunities year in, year out.