Fitch Ratings has affirmed DuPont de Nemours, Inc.'s Short-Term Issuer Default Rating (IDR) at 'F2'.
Fitch has also affirmed DuPont's senior unsecured revolving credit facility and notes at 'BBB+', and the company's CP program at 'F2'.
Fitch has additionally placed DuPont's 'BBB+' Long-Term IDR on Rating Watch Negative.
The Rating Watch Negative reflects uncertainty surrounding DuPont's future capital structure after the company announced its plan to separate into three independent, publicly traded companies. Fitch believes that the existing noteholders will be made whole. Fitch will continue to monitor the separation, future capital structures, and capital deployment policies at post-transaction 'New DuPont' and the two newly created companies. A more conservatively capitalized New DuPont may lead to the removal of the rating watch with a maintenance of the 'BBB+' IDR, while a less conservatively capitalized balance sheet may lead to a negative rating action.
Key Rating Drivers
Ongoing Product Portfolio Transformation: On May 23, 2024, DuPont announced plans to separate into three separate, publicly traded companies through separations of its Electronics and Water businesses, which account for just under half of the company's sales and EBITDA, in a tax-free manner. The process is expected to take 18 months-24 months. Although the ultimate ratings impact is unclear in the absence of a concrete plan for a post-transaction capital structure, management has articulated a desire to maintain investment grade ratings at New DuPont and to maintain its dividend payout ratio at about 35%-45%.
Fitch believes that the existing noteholders will be made whole, and that new debt structures will be put in place at each of the independent companies. Ultimately, Fitch will weigh the lower degree of product diversification in assessing New DuPont's credit quality.
Improving Balance Sheet: Overall, the company's portfolio and balance sheet have undergone a credit-positive evolution since its 2021 divestiture of its Nutrition & Biosciences (N&B) business and the later sale of its Mobility & Materials business. This was followed by the $1.75 billion acquisition of Spectrum Plastics Group, a manufacturer of specialty medical devices and components, and the sale of an 80.1% ownership interest in the Delrin acetal homopolymer business for about $1.6 billion.
Geographical, End-Market Diversity: Fitch believes diverse products offerings and an expansive geographical footprint helped insulate cash flow against volatility in any one market. DuPont has accordingly maintained healthy cash flow and liquidity through the cycle. The company sells its highly specialized products/solutions to end-markets ranging from electronics and transportation to construction and health and wellness.
It has a significant presence in North America, EMEA and Asia Pacific, and emphasizes a local approach to selling its product offerings, utilizing regional manufacturing facilities with close proximity to its end-customers and raw material needs. Fitch believes this local approach lessens foreign-currency and political risk and provides access to key end-markets. This operational flexibility and emphasis on local production nevertheless moderates economies of scale, leading to somewhat lower margins for DuPont than would otherwise be possible.
Steady Leverage Expectations: Fitch projects consolidated EBITDA leverage to fall from around 2.7x in 2023 to around or below 2.5x, following a mild recovery in EBITDA as destocking cycles are completed in the Healthcare and Electronics end-markets. The capital structure and associated credit metrics of each of the post-separation companies remains to be seen - however, management's desire to maintain investment grade ratings at New DuPont after the separation of the water and electronics businesses suggests that leverage is unlikely to climb well above 2.5x. Fitch will evaluate any proposed capital structure of the company as more information becomes available.
Leading Market Positions: DuPont is a leader in nearly all of its segments and firmly entrenched in its customers' production processes, leading to high switching costs. It also has the No. 1 or No. 2 market position for nearly 95% of its net sales, and offers products/solutions that are critical to the overall performance of its customers' products. Fitch understands there is usually a complex qualification process that DuPont's products/solutions must go through before they are accepted for use by their customers, further limiting competitive market pressures.
Strong FCF Generation, Balanced Deployment: Fitch anticipates DuPont generating consistently strong FCF - given resilient EBITDA margins, limited working-capital risk in the majority of its segments, and relatively low capital intensity, with capital spending averaging around 5% of sales in a normalized environment.
Focus on Innovation: Fitch expects DuPont will continue to focus on R&D and product, process, and application innovation to protect its market share and expand its margin profile. It boasts a substantial new product pipeline and global R&D facilities, and is projected to spend around 4% of its net sales on R&D annually.
DuPont's end-markets are highly competitive, and management estimates around 50% of new product sales will renew existing product lines. The company mitigates this risk through its size, scale and strong reputation through its legacy entity, DowDuPont, which enables it to continue to offer innovative products and solutions that bolster both its top and bottom lines.
Derivation Summary
DuPont's size, product mix and cash flow/leverage profile compares favorably with high investment-grade peers in both the chemicals and diversified manufacturing space. DuPont is similar in size to Ecolab (A-/Stable), and is considerably more specialized than peers such as Honeywell (A/Stable), LyondellBasell (BBB/Stable) and Dow (BBB+/Stable) despite being smaller - however, Fitch notes that the company's Water and Electronics businesses account for just under 50% of the company's sales and EBITDA. With midcycle EBITDA margins projected to be around 25%, DuPont boasts the highest-margin profile of the peer group, and the consolidated legacy entity generates FCF of around $1 billion per year after dividends in a normalized environment.
DuPont's midcycle EBITDA leverage profile of around or below 2.5x is consistent with the 'A' category metrics of Ecolab and Honeywell, both of which generally operate around or within the same leverage range - however, the company's post-transaction capital structure remains to be seen. Additionally, the company's cash flow is relatively more volatile versus the more resilient and predictable cash flow profiles of both Ecolab and Honeywell, due primarily to DuPont's exposure to certain hydrocarbon feedstocks and the potential cyclicality of end-markets such as construction and automobiles. As a result, Fitch views DuPont's cash flow profile leverage metrics as consistent with a 'BBB+' rating, while Ecolab's and Honeywell's leverage metrics are viewed as consistent with an 'A' category rating.
Key Assumptions
Organic revenue growth at roughly 3%-4%;
Legacy EBITDA margins around 25%, New DuPont EBITDA margins around 24%;
Capital expenditures at roughly 6% of sales;
Dividend payout ratio maintained at 35%-45% to maintain ample liquidity.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
EBITDA leverage sustained below 2.0x;
Measured, successful near- to medium-term M&A activity, leading to a less cyclical operating profile and reducing risk of the cash flow profile.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
EBITDA leverage sustained above 2.5x;
Failure to compete in core end-markets, resulting in an erosion of the company's leading market positions and/or EBITDA margins trending closer to 20% on a consolidated basis.
Increased clarity on the degree to which New DuPont's balance sheet is conservatively capitalized at the time of the separation may lead to a resolution of the Rating Watch.
Liquidity and Debt Structure
Ample Liquidity: As of March 31, 2024, DuPont had approximately $1.9 billion in cash and cash equivalents, along with full availability under its $2.5 billion CP program. Fitch expects DuPont to maintain considerable financial flexibility throughout the forecast period, with drawings under the CP program projected to be nominal and backstopped by a $2.5 billion revolving credit facility that matures in April 2027.
Issuer Profile
DuPont de Nemours, Inc. engages in the development of specialty materials, chemicals, and agricultural products. The company has subsidiaries in about 60 countries worldwide and manufacturing operations in about 50 countries. It operates through the following segments: Electronics & Industrial; Water & Protection and Non-Core.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
DUPONT DE NEMOURS, INC. 
