Good day, and welcome to the DuPont Specialty Products USA LLC Third Quarter 2023 Earnings Conference Call. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Chris Mecray to begin the conference. Chris, over to you.

Good morning, and thank you for joining us for DuPont's third quarter 2023 financial results conference call. Joining me today are Ed Breen, Chief Executive Officer; and Lori Koch, 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 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 have been posted to DuPont's Investor Relations website. I'll now turn the call over to Ed.

Good morning, and thank you for joining our third quarter 2023 financial review. This morning, we announced third quarter results, and delivered solid earnings accomplished through strong operating execution by our teams despite ongoing volume headwinds, including channel inventory destocking and continued weak demand in China. We reported sequential operating EBITDA growth of 5% and margin improvement of 140 basis points in the third quarter. We also produced strong cash flow during the quarter, with adjusted free cash flow almost 50% higher than the year ago period, highlighting our efforts to prioritize working capital improvement in a challenging global business environment and normalizing after last year's global supply chain difficulties, compared to third quarter of 2022 organic revenue declined 10% due primarily to the impact of incremental channel inventory destocking, along with lower volumes from semiconductor and construction end markets. Within our electronics portfolio, our Interconnect Solutions business recorded a second straight quarter of sequential sales lift as underlying demand improvement and normal seasonality contributed to an 8% sales increase. We also saw signs of stabilization with the semiconductor markets and expect some sequential sales improvement from semiconductor technologies in the fourth quarter. Third quarter volume was lower than expected, primarily due to incremental channel inventory destocking, including with our distributor customers, which was evident in the Water Solutions and Safety Solutions lines of business. In this environment, we remain focused on controlling discretionary spending and are also planning additional restructuring actions to continue to ensure we can drive sound operational and financial performance, targeting at least $150 million in annualized run rate cost savings, which we expected we would see later in the first quarter of 2024. It's always difficult to precisely time market inflections, but current industry forecast within electronic submarkets going to recovery by 2024. This includes…

Thanks, Ed, and good morning. Our teams continue to execute well in a softer volume backdrop driven by broad-based inventory destocking, demonstrating strong financial discipline and focus on operational excellence. I am most pleased with the sequential margin improvement registered by each of our segments in the third quarter as well as our strong cash performance in the period. Given volume headwinds, the delivery of stronger margins and better cash flow are attributed to execution around lowering our input costs, coordination with the operating teams to rightsize our inventory position, as well as overall progress with productivity via operational excellence initiatives. We are very focused on operating discipline and pleased that site level operating execution is positively positioning us for solid margin upside as volumes recover. We expect to see evidence of this in 2024 given expected recovery in key end markets, including electronics. Turning to our financial highlights on Slide 5. Third quarter net sales of $3.1 billion decreased 8% versus the year ago period, a 10% organic sales decline was slightly offset by a 2% portfolio benefit due primarily to revenue contribution from spectrum acquisition. The organic sales decline reflects a 10% decrease in volume, resulting primarily from semiconductor and construction end markets as well as the impact of channel inventory destocking. E&I and W&P organic sales declined 13% and 8%, respectively, while the retained businesses and corporate reported 1% organic sales growth, including mid-single-digit growth in the adhesives portfolio. From a regional perspective, consolidated DuPont sales decreased on an organic basis globally versus the year ago period with Asia Pacific, North America and Europe down 12%, 10% and 2%, respectively. China sales were down 16% on an organic basis versus the third quarter of 2022, though E&I sales in China increased sequentially in the quarter and saw…

[Operator Instructions] Your first question comes from the line of Jeff Sprague of Vertical Research Partners. Your line is open.

Thank you, good morning, everyone.

Good morning, Jeff.

Good morning, Ed. A lot going on in these channels, obviously. Do you have any kind of sense or how do you measure kind of your sell-in versus sell-through trying to kind of understand kind of what that incremental headwind is from inventory versus just kind of general demand trends? And maybe just a little bit of color on how much more you might have to do on inventory or production to kind of get things where you need them to be balanced out?

Yes, Jeff, so we did a pretty detailed analysis of it. And I think a good way to look at it is, what is our distributor customer's doing versus our direct end customers. So maybe just to give you a couple of numbers on the W&P side of our business, about 50% of our volume goes through distribution and the other 50% we sell direct to customers. And so we did a whole analysis, obviously, because the distributors, you can see quick what's going on with them and almost across the board, the distributor network is destocking pretty broadly. And it's, on a percentage basis, down significantly more than our direct customers. So just one because it hit us this quarter, our water business in China, which is mostly reverse osmosis, was down as 36% of it goes through distribution, the rest we sell direct to customers. But a third of our sales that go through distributors in China, it was down 36%, through distribution was down about 12% direct to the customer base. So, if you do that analysis in our safety business, you get very similar trends going on. So, clearly, the distributors are going through a destock. And I'm sure as we're approaching year-end, everyone is trying to get their inventories kind of where they want them. Now, by the way, having said that, my take is that the destock obviously goes into the first quarter if we just started to see it in some of these W&P businesses. But I would think the distributors work it down fairly quickly after we're kind of exiting the first quarter. But that same trend applies almost across the board when you do that analysis. It's the distributors are way down vis-à-vis the direct customer channel.

And on the absorption question, we're still in the same general ballpark in the second half is where we were in the first half. There's a little bit of a mix and we'll be taking a little less absorption headwinds in E&I and a little more in W&P as we see the destock continue as we head into the fourth quarter, but in total, the number is about equal to the first half.

Great. And I was wondering if you could give us a little color on restructuring also, Ed, I think you mentioned $150 million run rate. I wasn't sure if that was full year 2024. But maybe just give us a sense of how much restructuring tail you have in 2023, the incremental benefit you expect in 2024? And as volumes kind of hopefully improve into 2024, some of that just kind of discretionary temporary stuff that kind of comes back into the P&L?

Yes. So, on an annual basis, Jeff, we'll be about $150 million of savings, kind of spread between plant fixed costs and functional costs or mostly G&A expense, not touching R&D at all. And by the way, just to back up on that. Lori and I have been looking at this kind of how we can do some restructuring for over a year. So, we're not doing it just in response to what's going on. I think I would have said on other earnings calls, we started looking at it actually a summer ago how could we streamline a little bit more. So, we're ready with that. We'll start seeing the benefits on the restructuring in the - towards the tail end of first quarter. We'll get going on it by the middle of December. So, by time it hits, we get things going, and you'll start to see the benefit then. So, you'll kind of get three quarters of the benefit for a big chunk of that in 2024. A little bit of that would potentially come back on the fixed costs - the plant fixed cost side as volumes pick up, but not all of it. So, you'll get a little bit of it coming back in as we see the volumes lift, but that's basically the program.

Great. Thank you.

Thanks.

Your next question comes from the line of Scott Davis of Melius Research. Your line is open.

Hi, good morning everybody, Ed and Lori, Chris.

Hi Scott.

Good morning.

Good morning. A couple of things. I mean, just to follow-up on Jeff's question because it just seems like it's so important and topical for you guys. I mean there's kind of two reasons why people destock inventory, right? I mean one is maybe the lead times come down, and they feel like they can get it fast. And two is they're really worried about their customers not wanting product. And I'm talking at the distribution level, not your direct. What do you think are the main drivers of this kind of incremental, because we've been talking about the inventory destock for several quarters now. And this quarter seem like it almost got a little bit worse, particularly in water and protection.

Yes. Scott, I'd just give you a ballpark in my thinking. I think two-thirds of it, or 75%, something like that is really that the supply chain healed itself. It's pretty darn normal for everybody again. So everyone sat on excess inventory. I mean, look, we're doing the same thing. We had 151% cash conversion. We're lowering our inventory levels because we have built up more than what normally would during COVID, and every other CEO I talk to is doing the same thing. And by the way, I think as the pressure you're getting near the end of your year, you're really trying to get things in line for 2024. So I think a big part of it is that. But there's certainly as a percent of people just more worried is there a recession coming. You got an inverted yield curve for 18 months. People start getting nervous. There’s always been a recession. So I can't say that's not - if that's in there. But I think the bigger part of it is we just all build excess inventory. We got what we can get during COVID. And probably I'll give you one example because we're seeing some destocking on the metal packaging side. A year ago, I had most of the CEOs of the medical device companies personally call me, pleading that we could ship more Tyvek material for packaging so they could shift their products out. And I remember telling them all, in fact, I sent a letter to the trade industry. I said our shipments to you are up 18% so far this year. I mean, I can't do much more. And that was everyone scrambling to get it and then they overshot. And now I probably shouldn't be surprised we're seeing some destocking on the medical packaging side. So I think that's just a great example. That has nothing to do with the recession, that's just everyone had too much.

Yes. That's great color and makes a lot of sense. I want to ask about price. And I know the two segments are just way different. E&I, you manage price versus cost, and W&P maybe there's a little bit of a different price strategy. But when you think about like this new normal of higher inflation, wages, other costs, not explicitly material costs, but other costs, how do you think about price in a future construct, meaning maybe entering into 2024? It's probably more of a valid question for W&P, but maybe you can address for both segments and give us a little bit of sense of what you think happen there?

Yes. Scott, I don't think 2024 will be what you'd consider a normal year. In a normal environment, a few years in a row just normal things, which we haven't had in four years for anybody, I would - we would always get like 1.5% to 2% price lift in the W&P business. Our goal in 2024 is to hold on to as much pricing as we can. And you, obviously, see us and others were getting benefit from price/cost spread that we saw in the third quarter, which helped us out. We'll obviously see it in the fourth quarter. So our goal is to really manage that well for 2024 because there's still quite a bit there. Now we're not going to get all the costs back by renegotiating contracts. Everyone's trying to hold price of our vendors are trying to hold it too. But we're still up to about $225 million that we've gotten back that we - so I mean, that's pretty significant for us. And so we're hoping to hold that for next year. My gut is we're going to give up some pricing in the shelter business, because we don't want to lose market share. But a lot of the other businesses will really be managing that tightly. But then if we ever get - we get back to normal time, hopefully, 2025, we would look at that 1.5% to 2% price increase. And then electronics, we just try to hold about flat. And usually, we're flat to down 1%, but you get nice volume lift.

Good color. Thank you. I’ll pass it on. Appreciate it.

Yes, Scott. Happy talking to you. Thank you.

Your next question comes from the line of Steve Tusa of JPMorgan. Your line is open.

Hi, good morning.

Good morning.

Can you just update us on what you actually expect for - what was the price/cost spread this quarter and what you expect now for the year?

Yes. So our full year number, we ticked up to $225 million versus the last quarter, we had expected about $140 million. So we're seeing that deflation benefit come through in the back half. So in the third quarter, we saw net about $75 million benefit. We'll see that tick up to around $100 million in the fourth quarter.

And so does some of that carry into next year?

Yes.

Okay. And then I guess…

We will continue into next year with the caveat that we don't place not as an earlier comment what the price is going to do. But we do expect the deflation benefit to continue because it took its time to get through inventory this year.

Got it. And then just kind of a philosophical question on how you think about next year. I mean, your exit rate now on some of these businesses just from a revenue perspective, is more negative, you're taking revenue down. You talked about some of it being destock, which is effectively an easier comp next year in the second half of the year. I mean, do you think with this profile that you guys can still grow revenues next year?

Yes, yes. I think the first quarter, Steve, to your comment, will be light, more similar to the fourth quarter because I don't think the destock will end, but back quick, but the distributors will move very fast. They stop ordering it for a while. They literally - we've talked directly to them and they're like, just don't ship me something for a few months, and then we'll be back on track. So yes, I think the first quarter will be on the light side, but I think after that, we'll see some nice lift. I would certainly by then, the electronics part of our business, which you know is highly profitable, I think will be back to a really nice lift. Just on the semi side, the fabs are running a little below 70% utilization. I think if you do the math on what the industry is thinking, they're going to kind of get up as the year goes more to 80% utilization the following year, more like the 90% where you would run at. So you'll start to see some - on a percentage basis, some pretty nice lift. And then we've had two quarters in a row of ICS lifting. So it's clearly off the bottom. That will, I think, continue to grow as we go through next year. So I think you're kind of through the electronics one, although we're kind of now doing a destock on the W&P side. And remember, we're mostly short cycle, so we'll see it first. And then, I think, by the second quarter, you'll see a lot of that destock over with, and you'll see the volume lift.

One last one for you. I mean, you've been through a few cycles, DuPont having, I guess, high-single-digit to even double-digit organic volume declines. I mean, are we already in a recession here in your mind?

I'm trying to - one foot in, yes. I've been there for a while, by the way. I track a lot of economic indicators, as I said earlier, when you see the yield curve where it's been and all, there's always been a recession. So, I like to manage, I guess, conservatively. So, I've been telling the team for a long time, just prepare for a softer environment. And if we're wrong, great, we'll have done all the right actions to position ourselves. But yes, I think there was this quarter just reading all the results from companies I saw, they were pretty mixed.

Right. Great. Thanks a lot.

And people are mostly missing on the volume not on their EBITDA.

Right. Yes, thanks a lot.

Okay Steve.

Your next question comes from the line of Michael Leithead of Barclays. Your line is open.

Great. Thanks. Good morning guys.

Good morning.

Ed just on the Delrin sale, can you maybe speak to why this monetization structure was sort of the best ultimate outcome? And then relatedly, maybe for Lori, when should we expect the note receivable to accrue? Or I guess, when do you get that $350 million in cash?

Yes. So, we liked it. Look, we sold Delrin in a tougher environment than when we sold the rest of M&M. So, this optimized what we could get for the asset over a few year period. We're getting $1.2 some billion upfront. We're writing 20% equity in it. TJC has a phenomenal track record. So, my gut is we have some nice upside coming from the retained interest that we have in the business, that's to be proved out, but I'm highly confident in that. It is a good business. It should do well over the next few years. So, we think that optimizes our position. So, we sold it at $1.8 billion in value. My gut is we can end up nicely above that with the equity that we have. So, - and by the way, it just goes to our whole capital allocation strategy. It was not a business we wanted to be in long-term, even though it's a good business. We're taking the volatility out of the portfolio and we'll redeploy that cash. And as we said in our prepared remarks, we will actually do more share repurchase after the ASR ends next year because we're in a great balance sheet position and we'll have good free cash flow, and we plan on buying back more shares.

Yes. And Michael, on the debt. So, we gave them a $350 million loan. It's an eight-year loan if the venture were to go that long. So, like normally, they would monetize quicker than that, then we would get the repayment of the loan. So if it went to the longest poll, it would be eight years, but it's most likely not the reality.

Great. That's super helpful. And then second, I was hoping maybe you could give us a bit more color on the moving pieces within the Corporate and Other segment. I assume the retained businesses are doing fairly well in the auto backdrop. So, can you speak to what's kind of the moving pieces there? And should we expect that business to continue to deliver some level of double-digit millions of EBITDA?

Yes. So, the business is just for a refresher that are in corporate or primarily the auto adhesives business, and then we have Tedlar and multi-base, but the largest end market served is Automotive, and there's a large EV exposure there. So, we saw a nice mid-single-digit volume growth again. We expect for a full year from a volume growth perspective the auto adhesives to grow up in the high single-digits and we continue to expect really great things from that business with the EV penetration that we've seen. So, from an earnings perspective, they were up very nicely as well. We saw nice earnings growth and margin appreciation in the third quarter. In the fourth quarter, we have a little bit of a deceleration, just a lot of their exposure is in the U.S. with automotive. So, there's some headwind from the strike that fortunately is now over, but there will be a little bit of a headwind from the October impact. And then the U.S. car build right now from IHS are expected to be down. But overall, the trajectory of this business is really strong. They had a great 2023, and we expect a really strong 2024 again.

Great. Thank you.

Thank you.

Your next question comes from the line of John McNulty of BMO Capital Markets. Your line is open.

Yes, thanks for taking my question. So it looks like the electronics end markets seem like they're starting to stabilize a little bit. You expect semi technologies to be up quarter-over-quarter. Can you add some color on what you expect from the other two subsectors in the E&I division? Do you see normal 4Q seasonality? Is there maybe a little bit of destock in the Industrial Solutions side? I guess, can you help us to think about the trends there?

Yes. So semi will lift a little bit. So I would still say bounce along the bottom, but getting through the destock. And when I say a little bit, a few percentage points sequentially up in the business. The ICS business will be down some, but that's all seasonality. If you look at it just the normal drop you see in seasonality, it's less. So the business continues maybe a few more points to improve after the last two quarters of improvement. So kind of less seasonality because the business is recovering. And then on the industrial part of E&I, we'll definitely see a little bit of destocking there. The biopharma destocking, which is in that business picked up some during the quarter. So I expect that to continue into the fourth quarter and hopefully be kind of done by them with that. And there's just a little bit of other destocking going along with some of our distributors in that business. So nothing significant, but I think that will see a little bit of softness.

Got it. Okay. Thanks. And then maybe just as a follow-up. I think as we get to kind of mid-December, the opt-out period should be kind of done on the PFAS side. I guess, can you give us any update on the water district settlement? Is there anything that you can speak to at this point? It seems like that should put a lot of lot of kind of the pressures behind you, but I guess any update there would be helpful.

Yes. So we - the date that's coming up here is the deadline for the opt-outs is December 4. And then we will see a list of who the opt-outs are on December 6. And then there's a final fairness hearing in South Carolina on December 14. So it's all kind of happening that first two weeks of December. And I really can't add any other color. I just don't have any other facts in front of me. We're feeling obviously very good about it, and highly confident that this will get signed off and get done. And I'd just add, obviously, people are talking to the key water districts around the country. So we're feeling good, and hopefully, we're close to getting that cemented.

Great. Thanks very much for the color.

Yes, thanks.

Your next question comes from the line of David Begleiter of Deutsche Bank. Your line is open.

Thank you. Good morning.

Good morning.

Ed or Lori, just on the restructuring, do you have any more color you can provide some more concrete examples of where that $150 million is going to come from?

Yes. So we had mentioned that it will primarily come from plant fixed costs and then the G&A or the functional cost to the overhead structure of the company. So the plant fixed cost is really a function of the destocking and what we can do from a volume perspective. So looking hard at contractors, looking part of the plant fixed costs spends, looking hard at making sure that we can temporarily adjust our cost structure to the line with the volume environment that we're seeing. And then on the kind of the SAR side or the functional costs, general and administrative, that's just continued cleaning out. So as Ed had mentioned, we're constantly looking to make sure that we're running to lead in an efficient organization as possible. So that's where the focus will be. We really won't be touching R&D and marketing and sales. So we believe this - this destocking period is temporary, and so we really need to be prepared when it comes back on the other side to be able to take advantage of the upside. So that really won't be the focus to be more on the plant costs and the functional spend.

Understood. And then just on interconnects and semis, did you gain any share this year? Or is there any new technology products in the pipeline that you think can grow share this year or next year?

Yes. So there's examples in both. So within semi, really around the packaging side, we've seen some nice share gains. And also just in general, we've seen an uptick on the advanced new components. And so if you actually look at our performance in the quarter, we had nice growth with TSMC as they continue to expand their advanced nodes and take advantage of the AI revolution. So we saw nice growth on the semi side. And then within ICS, we had a new application with 1 of the large smartphone producers, which took advantage of a material that crossed over our metallization business to be able to have a key win there. So that was part of the sequential growth that we saw in the quarter will we continue to be. It's on every single model of the phone, but with a one producer, so it's a nice vendors.

Thank you.

Your next question comes from the line of Aleksey Yefremov of KeyBanc Capital Markets. Your line is open.

Thanks and good morning, everyone. This is Rob in for Aleksey. My first question comes around the Shelter Solutions business. Just in terms of where do you think we are in the destocking cycle there in demand? And then how good is your visibility into 2024 here?

Yes. So we saw less of a year-over-year headwind in Shelter in the third quarter versus what we saw in the first half that we feel like things are starting to normalize a little bit and then our expectations for the fourth quarter are to see less volume declines, less we're seeing year-to-date. So it feels like things are normalizing a little bit. Obviously, there's a little bit of disparity from a market perspective between the resi and the commercial side. A lot of the growth that was on the commercial side is more in commercial applications where we don't have a big footprint like, for example, around the data centers. Our exposure in commercial is more around education and healthcare and government, where there hasn't been that step change growth, it's really been more on the data center side. But in general, it feels like we're nearing the end of the significant downturns. We expect the volumes in the fourth quarter to be more down in the mid-single digits versus the double-digits that we've seen all year. So it feels like it's starting to normalize, and we do believe that destock is now behind us. So now it's just a function of when the demand returned.

Okay. Very helpful. Thank you. And then just a question for me on - you mentioned China trade restrictions and the impact it had on the semiconductor technologies business. Wondering if you might be able to quantify that impact there. And then just any updated view on the recently announced restrictions there? Thank you.

Yes. So no change to our current view of about $60 million of a revenue headwind from the exposure. So a lot of our…

For the year.

For the year, yes. So it's about $15 million of order. So a lot of the restrictions have more been in the advanced node spaces that we don't have a huge footprint with the Chinese players from that perspective. So it's only about $60 million for us.

Your next question comes from the line of Josh Spector of UBS. Your line is open.

Yes, hi. Thanks for taking my question. So I just wanted to ask on fourth quarter. I mean it kind of seems like the puck is moving around in different areas in terms of destocking. But if I heard you right, your sales guidance is kind of flattish in the different segments sequentially. Semis is picking up, which has the highest drop-through, and you're expecting some higher raw material benefits. So what would drive EBITDA down sequentially $20 million, $25 million versus flat to up?

Yes. So we see the underlying revenue down about $100 million once you - on an organic basis. So we will get another quarter of the Spectrum business first third quarter. But if you take that out, we see underlying organic revenue down about $100. So it's about split between seasonality and currency being about half of the headwind with the seasonality being within the - primarily the smartphone and consumer electronics business in ICS and Shelter as they strength throughout the summer months. And then currency, we do see as a bit of a headwind sequentially. And then the other half of it is from the medical packaging piece that Ed had mentioned earlier. So we do see some medical packaging pullback in the fourth quarter as those device makers destock from the overbuy that happened over the recent quarters. So it's really just and then the EBITDA, you have a net benefit from additional spreads. We have mentioned there's about $25 million of additional benefit from spread, but that $100 million impact from the volume decline kind of net you out to the surrounding the $50 million that we guided to for the fourth quarter versus the $775 million that we posted in the third quarter.

Okay. Thanks. I appreciate that. And I mean, just if you kind of come back to electronics and semis. I think Ed, you said utilization rates in the mid-70s. I think we've maybe troughed in the high 60s, but you guys haven't really felt as much of that pickup. I guess, as you look at things improving, how much is semi reconnecting your business year-on-year just from a reconnection to where the rate is now? I mean, is that mid-single digits or higher, just on where we’re resonating now perhaps inventory or it would be a different math to get to a different level? Thanks.

Well, the fabs have been - to your point, have been running kind of if you lump them all together. I think you would average out in the high 60s. And I think if you go through all the projections out there and also talking to our customers, that high 60s is going to ramp through 2024, up to - by the time you get maybe in the third quarter, beginning the fourth quarter up to maybe a little over 80%. So you still won't be back according to projections to kind of over 90% till you enter into 2025. But again, going from high 60s to 80% is a nice lift during the year. And then more of that production will be advanced nodes, which back to Lori's point a minute ago, plays to our strength that's usually why we outgrow 200- to 300-basis-point what the market is doing. But it's also - by the way, you also got to look customer by customer on the semi side because some are still - we're shipping out of inventory. But all the signs I saw from all their reporting publicly, they've seen their bottom, it looks like, pretty much across the board. But I don't think the lift will be dramatic in the - at the beginning of the year. But I think as the year sequences, we'll see nice lift occurring in that business.

Okay. Thank you.

Yes, thanks.

Your next question comes from the line of Vincent Andrews of Morgan Stanley. Your line is open.

Thank you. A couple of questions here. First on the distributor part of the supply chain, not just for you, but for pretty much everybody seems to have taken it more on the chain with the overstocking and then the destocking. Do you have a sense of whether that was just - they’re little too over jealous with principle risk loading up and then on the way back down is the issue just that they don’t have the same access to credit or just the higher rates. And I guess, what I'm getting at is, do you think, over time, your terms with distribution and maybe some of your other customers are going to need to change in a way that might require you to hold more working capital or to give them incentives to move it along? And I guess I'm just sort of asking what's going to ultimately break the log jam of the game of hot potato of nobody wanting to hold inventory?

Yes. I don't think it's - I really think it's just - we all overbuild inventory. Direct vendors and distributors through the COVID period, I mean we all talked about it. And I go back to my example on the medical packaging side. The customers were just yelling for us to get more to them. And usually, when that happens, you see an overshoot happen, and some of them probably even double order. I've been through that before in my career, and then you get the snap back. So I think that's what we're going through is that they're adjusting their inventory back to appropriate levels. They don't have to worry about carrying excess inventory because supply chains are normalized again. And again, we're doing the same thing. We're feeling confident about being able to get supply of all our different components. And so we're working our inventory levels down from what were elevated levels because of the COVID stuff. So I don't think that you'll have to worry about different terms or anything with our distributors.

Okay. Good to hear. Lori, can I just ask you what's updated thoughts on minimum cash levels that you want to keep just as we think about next year and your free cash flow generation versus what you might do from a share repurchase perspective?

Yes. So we'll still target about $1.5 billion of minimum cash levels. As we had mentioned on the call, we'll look to return a significant portion of our cash flow to shareholders next year through share repurchases. So will be done with the existing ASR at some point later in the first quarter, and then that will give us the ability to get back into the market underneath the new program. As I had mentioned, we have the Delrin proceeds coming in at some point today. So we'll have that cash come in the door. And then when we're in an open window, again, we'll be able to do more share repurchase.

Okay. Great. Thanks so much.

Your next question comes from the line of Frank Mitsch of Fermium Research. Your line is open.

Good morning. I wanted to - wanted to follow up on…

Good morning, Frank.

Hi, Ed. How are you doing?

Good, good.

Wanted to follow-up on Spectrum. You indicated that financially, it was performing in line with your projections. So I was just curious, I think you indicated that you expected like something like $45 million of EBITDA for the balance of $23 million since you closed on August 1. And also I think you guys indicated you get about $20 million of synergies. So are those numbers still accurate? What's your take on Spectrum so far?

Yes. So Spectrum is performing according to plan. They've got nice growth on a year-over-year basis, especially within the medical device side. The majority of the business is medical device. There is a piece that goes into industrial. And it's really based on some nice key wins that they've had with some of the large medical device producers. So we're pleased with the performance that we've seen as the numbers that you had cited earlier are still on track. And then the synergy delivery is $60 million in total, it's over a couple of year timeframe for us to realize the synergies, but that continues to remain on track as well. Obviously, the initial synergy delivery will come from some overhead consolidation that we get after the procurement-related synergies and maybe some of the site-related synergies over time.

Very helpful. Thank you, Lori. And if I could follow up on semiconductor technologies. You indicated that AI growth is going to help this business in the future. Can you give us an idea of the size that you anticipate AI to grow to over 2024, 2025 in terms of your semiconductor business?

Well, I will go, Frank, more high level. I think a lot of the growth we'll get will allow the semiconductor business - again, once we get through the downturn here and all that, that this business can grow kind of mid- to high-single-digit, which, by the way, it was doing before all the destock hit. Again, if the market grows 5 to 6 to 7 points, we'll grow 200 to 300 basis points above that. And that 200 to 300 basis points is mostly because of that high-end ship, because of AI enablement and all that and that plays to our sweet spot. So that's how we get that outsized growth usually over the market and AI plays right into that.

Maybe just to help to size it for you, too. So within our semi portfolio, we have about a $700 million business in data centers overall and about a little more than one-third of that is direct to AI. So that's the nice portion of growth that we continue to see above the overall MFI projections.

Very helpful. Thanks so much.

Thanks, Frank.

Your next question comes from the line of Steve Byrne of Bank of America. Your line is open.

Hi. [Rob Hoffman] on for Steve Byrne. Just going back to the Spectrum business. Now that you've had the business for a couple of months, - do you see any opportunities for cross-selling to these medical device companies?

Yes. That was one of the large theses for the revenue synergy upside was that they are very strong and have great relationships on the medical device side, and we're very strong and have great relationships on the biopharma side, and how can we bring those two pieces together to generate revenue synergies? So it's been a couple of months and that the theses as we've initially seen it continues to play out, and we'll - and we don't have the revenue synergies on the hand right now, but we see nice opportunities as we continue to integrate these two businesses together.

I see. That's great. And then which of your businesses do you see the most potential for share gains and new product introduction versus volumes that are driven primarily by cyclical recoveries?

Yes. I mean I think, if we see - if we take it by segment within E&I, we've mentioned that - we should see 200 to 300 basis points of outsized market growth within semi, and that's a combination of share gain and just where our exposure is in advanced nodes in the areas that are growing faster than others. We also see a step-change opportunity within the general consumer electronics space. We have seen some nice share gain on the metallization side. It will continue to show in the top line as the PCB providers start to ramp up their utilization rates to more normal levels, but we have seen we have seen our performance versus some of the peers in the metallization space, be better. And then within the W&P portfolio, we continue to expect nice growth within water. Obviously, we're in a destock right now, but we'll see nice growth more from a secular basis. So just that water industry is generally growing in mid-single digits, which is a nice market for us. And on the safety side, it's really going to be we've added capacity now, and we have to - we'll get step-change growth from utilizing that capacity. So we're nearing the completion of an additional line for Tyvek. We've constrained in the Tyvek market for years. And so we'll - we'll see some nice lift there as we fill up that asset, and we've recently expanded some capacity within the new technology in the Kevlar space. So it's a new opportunity for us to bring a lighter weight Kevlar to the market, and we look for good things from that business as well. I mean, and Shelter generally should be more along the GDP-type grower.

Understood. Thank you.

Thanks.

And our final question today comes from the line of Arun Viswanathan of RBC Capital Markets. Your line is open.

Thanks for taking my question. Hey, just wanted to take a quick try it at maybe kind of mid-cycle or longer-term earnings growth. If you think about volumes kind of maybe double-digits below normal in electronics and then some leverage on a recovery there, you're exiting the year at around $3 billion of annualized EBITDA. Would that imply something in the 3.3 to 3.6 kind of range as far as when you take a look at longer term or mid-cycle where you want to get to? Thanks.

Yes. I mean longer term, you should get back into the - if we were running the E&I portfolio, I think, is where your focus was in the more of the 32% margin range, and we should see the volume kind of return there over time as the utilization rate at the large PCP guys and the semi guys return. But if we look more near-term as far as headwinds, tailwinds as we head into 2024, there's definitely tailwinds from volume growth from the electronics recovery and normalization of the destock. And there's obviously, incremental tailwinds from the deflation we had mentioned as we go forward, and then the benefit of the restructuring actions that we are now taking and we'll start to see the benefit of at some point later in the first quarter. And then just from an EPS perspective, we do continue to lower our share count. So we'll see lower fourth quarter share count versus the full year, which will carry us into 2024. And then we'll have the incremental benefit of the $2 billion program that we'll complete in the first and then advance shares new share takeout as well. So we see a nice EPS benefit that we've seen as we took shares out throughout 2023. The headwinds, though, are, I think we will continue to see the industrial destock impact the water and safety businesses primarily in the first quarter. So that will be a headwind to the first quarter. We will see most likely some price modernization or get back primarily in the shelter business as I had mentioned. So we'll try and maintain that as long as we can, but we will be cognizant of potential share loss and potentially has to be giving some back there. And then just we have taken some aggressive actions on the compensation side in 2023. So we are paying a below-target variable compensation payout this year, and so we would most likely see normalization of that as we head into 2024. And so those are the big puts and takes with the one extra exception from a below-the-line perspective around interest income. So we did see about $145 million of interest income this year just as we held the proceeds from the Celanese transaction in the first half before we could deploy them to Spectrum and then the full share repurchase program. So we would see a step down in 2024 from interest income from about $145 million this year to probably $20 million next year.

Thanks.

I would like to hand the call back over to Chris Mecray for closing comments.

Okay. Thank you all for joining our call this morning. And for your reference, a copy of our transcript will be posted on our website. This concludes our call. Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.