DuPont de Nemours : Investor Update Call Transcript

052324+DD

05 - 23 - 2024

DuPont

Investor Update Call

TOTAL PAGES: 24

DuPont

Investor Update Call

CORPORATE SPEAKERS:

Christopher Mecray

DuPont; Vice President of Investor Relations

Edward Breen

DuPont; Executive Chairman and Chief Executive Officer

Lori Koch

DuPont; Chief Financial Officer

PARTICIPANTS:

Jeffrey Sprague

Vertical Research; Analyst

Stephen Tusa

JPMorgan; Analyst

John Roberts

Mizuho; Analyst

Joshua Spector

UBS; Analyst

Harris Fein

Wolfe Research; Analyst

John McNulty

BMO Capital Markets; Analyst

Frank Mitsch

Fermium Research; Analyst

David Begleiter

Deutsche Bank; Analyst

Michael Leithead

Barclays; Analyst

Daniel Rizzo

Jefferies; Analyst

Aleksey Yefremov

KeyBanc Capital Markets; Analyst

Vincent Andrews

Morgan Stanley; Analyst

Abigail Eberts

Wells Fargo; Analyst

Arun Viswanathan

RBC Capital Markets; Analyst

Steve Byrne

DuPont

Investor Update Call

Bank of America; Analyst

PRESENTATION:

Operator^ Thank you for standing by. (Operator Instructions) At this time, I would like to welcome everyone to the DuPont Investor Update Call. (Operator Instructions) I will now turn the conference over to Chris Mecray Vice President of Investor Relations. Chris, you may begin your conference.

Christopher Mecray^ Good morning. Thank you for joining us on short notice for today's call. Joining me today are Ed Breen, Executive Chairman and Chief Executive Officer; and Lori Koch, Chief Financial Officer.

We will spend about 15 minutes discussing details of yesterday's announcements, which are posted to our website, and we will then conduct a question and answer session.

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 note the cautions regarding forward-looking statements included in yesterday's announcement and our slides.

In summary, statements in the announcements, slides and on this conference call regarding our expectations or predictions for the future are forward-looking statements intended to be covered by the safe harbor provision under federal securities laws.

Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially.

Our Form 10-K, as updated by current and periodic reports, includes detailed discussion of certain risks and uncertainties which may cause such differences.

We also may refer to non-GAAP measures. Reconciliations to the most directly comparable GAAP financial measures are maintained on DuPont's Investor Relations website. I'll now turn the call over to Ed.

Edward Breen^ Thank you. And good morning, everyone. Yesterday we announced our plan to separate DuPont into three independent publicly traded companies.

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Investor Update Call

We intend to accomplish this by executing tax-free separations of our electronics and water businesses, which will create stand-alonepure-play entities in the respective industries with new DuPont continuing as a diversified industrial company.

At separation, all three companies are expected to have attractive financial profiles and compelling opportunities for long-term growth supported by strong secular trends and balance sheets to enable both organic and acquisitive growth.

Turning to Slide 4. After careful consideration, we concluded that operating these businesses as independent companies provides the best path for long-term value creation, and we believe the time to do it is now.

First, we believe these actions will unlock value, given the expected valuation of each stand- alone company relative to market peers. Medium term, we also believe each future company will benefit from increased flexibility and focus on voice of the customer in each distinct market.

From a shareholder view, we believe that each company will offer a distinct and compelling investment profile appealing to different shareholder bases. Tailored capital allocation framework should also maximize growth outcomes while allowing flexibility to pursue portfolio- enhancing M&A. Each company will also have strong differentiated balance sheets as a foundation to execute its growth plans, which will allow prioritization of investment where the most value can be created.

From an employee and management perspective, these actions will create compelling advancement opportunities as each company can provide more tailored career opportunities and incentives as well as attract talent.

Over my career, I have witnessed this approach play out well across multiple prior separations. Finally, each company will have dedicated governance with their own boards with deep domain expertise in their respective industries. Turning to Slide 5.

We also announced yesterday that effective June 1, I will be transitioning to a full-time role as Executive Chairman to oversee the separations and I will remain actively involved in the company.

I am very excited to turn over the CEO role to Lori Koch. Lori has been a key leader within DuPont for many years and her elevation to the CFO role in 2020 was in recognition of her deep skill set and overall strong business acumen, something which has been very well affirmed over time and recognized by me, by the Board and by the broader DuPont leadership team.

I'm confident that Lori will be terrific in the new role. Lori and I are also both thrilled to announce the appointment of Antonella Franzen as our Chief Financial Officer.

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Investor Update Call

Some of you may know Antonella already given her background with Tyco for nearly a decade and subsequently for over five years with Johnson Controls including IR and Communications leadership roles.

She has been our Water & Protection CFO since joining in 2022 and we are confident that she will be excellent in the new role given her extensive experience including with companies undergoing significant transformation.

Lori and Antonella will continue in their respective positions within the new DuPont following completion of the separations. With that, I'll turn it over to Lori to provide more detail on the three future companies.

Lori Koch^ Thanks, Ed. I am deeply honored to take over as CEO of DuPont to lead this next chapter, and I'm excited to partner with Antonella. Turning to Slide 6.

We believe the portfolio focus that we will achieve through creation of these three independent companies will create compelling value. New DuPont will continue as a premier diversified industrial company consisting of a set of market-leading businesses, which generated net sales of $6.6 billion in 2023 and collectively are expected to grow at above GDP rates.

We expect new DuPont will have solid margins and strong free cash flow conversion.

We are targeting an investment-grade balance sheet and will maintain a balanced financial policy. Electronics will consist of businesses which generated net sales of $4 billion in 2023, and it will be a leading global pure-play provider of advanced semiconductor and electronics products.

The new company will benefit from excellent secular growth opportunities associated with semiconductor markets while leveraging a strong financial profile. Electronics will compete with a set of recognized global semi participants and we expect to attract an investor base commensurate with this profile.

The future water company will consist of businesses which generated net sales of approximately $1.5 billion in 2023 and it will be a global pure-play water technology leader with a comprehensive portfolio of filtration technologies serving an array of end markets.

The business has a strong financial profile reflective of its industry-leading IP and product differentiation, while megatrends in water are expected to drive secular growth well above GDP. The business competes with recognized water industry participants that also attract a unique investor base differentiated from DuPont today. I will provide further detail on each of the three companies, beginning with New DuPont on Slide 7.

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Investor Update Call

Following the separation, New DuPont will be comprised of three focused business lines including healthcare, advanced mobility and safety & protection. The company will remain a premier diversified industrial company with a portfolio of iconic brands and solutions powered by deep material science innovation and customer-centric application engineering expertise.

New DuPont will have a significant exposure to healthcare end markets with a variety of products across different channels.

It will also have a strong and differentiated position in advanced mobility including significant leverage from EV growth and wear and friction applications with global auto markets.

Finally, our Safety & Protection business will continue to leverage the iconic brands such as Tyvek, Kevlar and Nomex.

As I mentioned earlier, New DuPont is expected to maintain its investment-grade credit rating and we'll continue to prioritize cash flow generation and have a balanced financial policy similar to DuPont today.

Turning to Slide 8.

I'd like to highlight some of the key features of the New DuPont portfolio. The healthcare pillar, representing about 25% of net sales, will feature Liveo biopharma consumables our Spectrum Advanced Medical Device business and the industry-leading Tyvek garments and medical packaging franchise, all providing exposure to fast-growing healthcare markets.

This growth area will benefit from a set of mega trends within healthcare and life sciences, which should generate growth above GDP.

Our advanced mobility pillar, which will constitute about 25% of net sales, consists of our adhesives and other technologies and applications that are well positioned to address secular demand tailwinds for hybrid and electric vehicles as well as next-generation engines in aerospace.

The business has an excellent growth track record with the site and business infrastructure well situated to serve a global customer base. Within Safety and Protection, comprising about 50% of net sales, our trusted and iconic brands and deep multi-decade customer relationships serve a wide-ranging set of customer requirements from protecting first responders and military personnel to helping meet ever-changing sustainability and regulatory mandates in the building product space.

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Investor Update Call

The business also includes industrial applications, providing specialized advanced materials for demanding and challenging environments within markets such as electrical infrastructure and commercial aerospace.

Turning to Slide 9. Electronics will be a leading pure-play materials provider comprised of the existing semiconductor technologies and Interconnect Solutions lines of business and including the electronics-related portion of Industrial Solutions. The company will consist of a leading portfolio of differentiated electronics materials and component solutions for leading-edge semiconductor chips, advanced packaging and interconnect and several management solutions.

The company is perfectly positioned to benefit from the long-term drivers inherent in the electronics space including the emerging driver of artificial intelligence.

We have long-term relationships with all key semiconductor and other electronics industry OEMs and a strong history of co-development and application engineering to ensure customer success.

As a company, electronics will be well positioned to pursue innovation-based growth as well as M&A, covering a strong financial profile and a pure-play focus on its attractive end market.

Continuing with Electronics on Slide 10. The new company will be well positioned to capture growth driven by key megatrends such as artificial intelligence and high-performance computing, high-speed connectivity, smart and autonomous vehicles and the Internet of Things.

With about 60% of net sales centered around semiconductors, the electronics business expects to benefit from key leadership positions and strong customer relationships, serving semiconductor OEMs, primarily via consumables used in the chip manufacturing process as well as serving broader consumer-based electronics markets with metallization chemistries, connectivity solutions, displays and printed circuit board materials.

As mentioned, the business is well equipped to participate in the AI-driven growth acceleration via both our semi-related products geared towards advanced node chips for data centers as well as other key AI-enabling applications including advanced interconnect products, assembly and packaging technologies and thermal management solutions.

We believe these leading positions and exposures to advanced and leading-edge technologies will continue to drive industry outperformance for the future electronics company.

Turning to Slide 11. Following its planned separation, Water will be a leading pure-play company with excellent alignment to key macro growth drivers. The new company will be comprised of the existing Water Solutions line of business which includes one of the broadest

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Investor Update Call

filtration portfolios globally with leading technologies including reverse osmosis, ion exchange resins and ultra filtration as well as specialized technology offering.

The Water business is well aligned with secular growth trends that combine leading-edge innovation, global scale and deep customer relationships including a strong presence in the emerging markets. The business model also benefits from a significant recurring revenue profile.

On Slide 12, you can see the key mega trends within water are driving growth across its primary market segments. These include industrial water and energy, life sciences and specialties, municipal and desalination and residential and commercial applications. Growth in these areas is driven by a range of global sources including growing demand and critical need for access to clean water, evolving wastewater management regulation and the global response to concerns for water scarcity and circularity.

In addition to leading technology platforms, we believe our water portfolio will benefit from continued focus and investment in emerging and new technology offerings.

We have key technologies to serve customers in multiple channels including large emerging markets such as direct lithium extraction and green hydrogen production.

Regarding the transaction overview on Slide 13, I'll highlight that we expect the separation to be completed within 18 to 24 months.

I would also note that the full leadership team as well as boards at the future electronics and water businesses will be named later, and we do expect to operate and report with these new leadership teams in advance of the separation. With that, I'll turn it back to Ed.

Edward Breen^ Thanks, Lori. In closing on Slide 14, this continued transformation is enabled by the hard work and dedication that our teams have shown over recent years to establish the structure around each business that can allow them to stand alone and thrive.

We are proud that our financial and operational progress over recent years will allow us to take this next step in value creation, which we firmly believe will benefit all stakeholders.

We are excited about the next chapter, and we look forward to updating you on our progress along the way. With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A.

Operator^ (Operator Instructions) Your first question comes from the line of Jeff Sprague from Vertical Research.

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Investor Update Call

Jeffrey Sprague^ Congrats, especially to Lori and Antonella. Yes. A couple of things here.

First, just thinking about the potential for something beyond what you've announced here today the play out.

I have two questions for Ed or Lori.

First, as it relates the kind of the PFAS liabilities. Would there be any issue with the remaining burden of the PFAS liabilities on say two of these three pieces, if you were to somehow kind of execute outright divestiture of a third piece in advance of the spins?

Edward Breen^ Yes. No, Jeff, it's going to be allocated between the three business pro rata based on their EBITDA as we get into the last year before the spin, that's what the side letter says.

Obviously we're going to follow the side letter on that.

Jeffrey Sprague^ Okay.

So there's no way to carve out and kind of keep the PFAS away from a particular piece, okay.

Edward Breen^ No.

But Jeff, I would hope with this being 18 to 24 months down the road, we've made great progress on settling PFAS. And look, you can see by the other settlements, this thing is playing out where our consortium is kind of in that 3% to 7% exposure range, and we're only a third of that.

Obviously I would expect in the next 18 to 24 months to continue to make more progress against that.

So it's going to become -- keep getting diminished what's left over time here and hopefully, good progress in the next two years.

Jeffrey Sprague^ Great.

Then just as a follow-up, 18 to 24 months does sound like a long time. Is there a particular complexity you're working through here as part of this?

And do you have an initial view on what the kind of the dis-synergies are standing up two new public companies?

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Investor Update Call

Edward Breen^ Yes. Jeff, it's -- we'll move as fast as we can, but 18 to 24 -- for something this size 24 months is actually pretty typical. It was pretty typical what I've done in the past.

But the long pole in the tent is the tax work that we have to do.

So we make sure as we go into these three companies, where as tax efficient as we can be.

There are some countries where you have to actually stand up the separate business and run it for a full 12 months to get the tax-free status or the status that you had.

So that -- but we'll move as fast as we can on that. And Lori, you can cover that?

Lori Koch^ Yes.

On the dis-synergies, Jeff, we're looking at roughly $60 million across all three.

So not a huge number. We'll look to maintain the efficiency that we have in corporate costs with that 1% of sales rate.

Operator^ Your next question comes from the line of Steve Tusa with JPMorgan.

Stephen Tusa^ Congrats. I'm just curious as to timing, Ed. I mean when do you actually like leave the building and it just seems a little bit sudden that you'd announce this and then, I guess you're moving into the Executive Chairman role like before you guys actually report the second quarter. Is that right?

Edward Breen^ Yes. Yes. It's effective, I guess in about a week, June 1.

But first of all, the role I'm taking is a full-time role, Steve and Lori, I've known Antonella for, I think 20 years now.

So -- we all have a great working relationship.

But I'll focus more on all the separation work.

We got to hire the new boards, put the right management teams in place of the companies.

So we got a lot of work to do here. By the way I -- we thought with the Board, I said that a board timing is good. We're coming out of the destock cycle.

I clearly wanted to get a part of the PFOA, so people could box in the exposure on that, which I think people can very well do now.