DuPont de Nemours Inc Aktie

Thank you for standing by, and welcome to the DuPont Third Quarter 2026 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the call over to Ann Giancristoforo, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for DuPont's Third Quarter 2026 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 slide.

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 has been posted to DuPont's Investor Relations website. Consistent with our prior earnings calls, we will provide comments on our results versus the prior year pro forma, which adjusts for our post-separation corporate costs, interest expense and income tax rate. This is consistent with the methodology and financial metrics that we provided at our 2025 Investor Day.

I'll now turn the call over to Lori, who will begin on Slide 3.

Good morning, and thanks, everyone, for joining our call. Earlier today, we reported our third quarter financial results, which again exceeded our previously communicated guidance, demonstrating the strength of our portfolio and the consistent execution of our team. Broad-based sales growth, combined with a continued focus on productivity, enabled organic growth of 5%, 90 basis points of margin expansion, 31% adjusted EPS growth and robust free cash flow conversion in the quarter. As a result of our performance, we are again raising our full year 2026 financial guidance for organic sales growth, operating EBITDA and adjusted EPS, all at or above the high end of our previously communicated range. Antonella will provide further details shortly.

We also continue to execute our capital allocation priorities. We completed the previously announced $250 million ASR and substantially completed an additional $100 million of open market repurchases in the quarter. We also announced our intention to repurchase another $250 million of shares in the fourth quarter. This underscores our confidence in DuPont's long-term growth potential and reinforces our focus on allocating capital where we see compelling return opportunities, including investing in our own shares.

Overall, this was another solid quarter of strong execution. We delivered strong organic growth, expanded margins generate robust free cash flow and return meaningful capital to shareholders, all while continuing to advance our strategic priorities.

Moving to our strategic priorities on Slide 4. We continue to strengthen the operating framework that connects our culture, planning and execution. Our focus remains on accountability, productivity and performance excellence with the objective of building a more consistent and sustainable growth engine. Innovation excellence continues to strengthen DuPont's ability to turn [indiscernible] in technology and application expertise into opportunities for sustainable growth.

We are enhancing the quality of our innovation portfolio through more rigorous portfolio management, stronger visibility to accretive growth opportunities and differential resource allocation. In the past quarter, we substantially increased our front-end innovation pipeline and increased the grow versus renewed ratio of our innovation portfolio by about 5%, ensuring that our vitality mix remains strong in the mid-30% range.

The results are increasingly visible across our growth markets. In Water Technologies, we expanded our bioprocessing portfolio with a new purification technology aimed at the fast-growing peptide therapeutics market, including GLP-1 drug. This product helps pharmaceutical manufacturers achieve the purity, yield and scale needed to meet rising demand for these therapies. In addition, we launched Tyvek with Renewable Attribution in the quarter, which provides customers with a solution that maintains the superior performance they know while supporting progress on sustainable material sourcing and carbon footprint reduction.

Commercially, we continue to see strong order patterns with the total company order book follow the up double digits year-over-year. In addition, we are strengthening the connection across innovation, marketing and sales into a more systemic growth engine, enabling better win rates, faster activation of sales place, stronger launch readiness and more disciplined execution from opportunity creation through conversion.

The focus on this connection is driving key customer wins. Our adhesive business recently secured a customer win with BETATECH, an advanced thermal material that maintains optimal battery temperatures and helps automakers enhance vehicle performance, reliability and circularity. Our Vespel custom engineered seal were recently selected for their exceptional durability, wear resistance and thermal stability, enabling safe, reliable fuel transfer during launch operations and showcasing our ability to solve complex aerospace challenges. In addition, we were recently awarded the largest containerized desalination project in EMEA, where our ultrafiltration modules provide greater efficiencies from a cost and space perspective, increasing the amount of clean drinking water that can be produced in each container.

Operational excellence continues to deliver measurable results. We completed more than 20 Kaizen events during the quarter across our businesses and functions with a continued focus on safety, quality, delivery, inventory and costs. We are seeing the results of this work in our key performance indicators, delivering over 2% net productivity in the quarter, which was also a key component of our margin expansion. Additionally, our OTIF improved by more than 100 basis points, marking the third consecutive quarter of improvement.

More broadly, the adoption of AI tools continues to accelerate as we work to connect our business system framework to AI-enabled tool sets. We are seeing faster and better decision-making from our teams on the factory floor where we are starting to realize material benefits in the areas of planning and quality.

Our 2026 financial performance continues to demonstrate the strength and quality of our portfolio, positioning us above the high end of all of the medium-term targets we established at Investor Day. We have a strong foundation for consistent, profitable growth supported by attractive end market exposure, continued operating leverage and robust cash generation. We will enter 2027 with confidence in our ability to execute and the significant opportunity we have to drive earnings growth and create long-term shareholder value.

With that, I will now turn the call over to Antonella to cover the financials and outlook in more detail.

Thanks, Lori, and good morning, everyone. Strong operational execution and broad-based growth drove another quarter of results ahead of our financial guidance. Organic growth and disciplined productivity translated into strong operating leverage and meaningful margin expansion. Additionally, our businesses continue to convert earnings into cash at a high rate, giving us significant financial flexibility.

Beginning with our third quarter financial highlights on Slide 5. Net sales of $1.9 billion were up 4% versus the year ago period on 5% organic sales growth, partially offset by a 1% headwind from currency. Top line growth was broad-based, led by continued strength in Healthcare and Aerospace as well as year-over-year growth in Building Technologies on gains in North America and Asia.

From a segment view, during the quarter, organic sales grew 4% in Healthcare & Water Technologies and 5% in Diversified Industrial. Third quarter operating EBITDA of $469 million increased 8% versus the year ago period on organic sales growth and productivity. This resulted in operating EBITDA margin of 25.1% in the quarter, an increase of 90 basis points year-over-year.

Turning to cash flow. We delivered transaction-adjusted free cash flow of $341 million and related conversion of 121%, underpinned by earnings growth and net working capital productivity. Based on our year-to-date results, we now expect our full year free cash flow conversion to be approximately 100%, nicely ahead of our 90% target.

Turning to Slide 6. Adjusted EPS for the quarter of $2.09 was up 31% versus the year ago period. Stronger operations benefits from higher cash capital allocation and actions taken to lower the tax rate drove 24% of the increase.

Turning to our segment results on Slide 7. Healthcare & Water Technologies third quarter net sales of $865 million were up 4% versus the year ago period on 4% organic growth. For the third quarter, Healthcare sales were up mid-single digits percent on an organic basis versus the year ago period. Organic growth was led by double-digit gains in personal protection and medical packaging.

Water sales were up low single digits percent on an organic basis on strength in industrial water and double-digit gains in semiconductor and specialty markets, partially offset by continued disruptions in the Middle East. Excluding the Middle East, organic sales increased mid-single digits percent in the quarter. Operating EBITDA for the segment during the quarter of $263 million was up 7% versus the year ago period on organic growth and productivity gains. Strong operating leverage resulted in operating EBITDA margin of 30.4%, an increase of 80 basis points year-over-year.

Turning to Diversified Industrials. Third quarter net sales of $1 billion increased 4% versus the year ago period on 5% organic sales growth, partially offset by a 1% headwind from currency. At the line of business level, organic sales for Building Technologies were up mid-single digits percent on growth in North America and Asia. Growth in North America was broad-based led by share gains and building envelope for residential markets. Industrial Technologies organic sales were up mid-single digits percent on double-digit gains in aerospace and electric vehicle battery applications.

Operating EBITDA for Diversified Industrials of $242 million was up 11% versus the year ago period on organic growth and productivity. This translated to operating EBITDA margin in the quarter of 24.1%, an increase of 140 basis points versus the year ago period.

Turning to Slide 8. We are again raising our full year 2026 financial guidance with all metrics at or above the high end of our previously communicated range. For the full year 2026 our net sales guidance now assumes organic growth to be approximately 4.5%, reflecting our performance to date and continued strength across most of our key end markets. We now expect sales to be about $7.19 billion, an increase of $15 million from the midpoint of our prior guidance and at the top end of our prior guidance range. While we have the orders in hand for our large water projects in the Middle East, given the continued disruptions, our guidance now assumes these projects will be pushed into 2027.

Continued strength in our other markets allowed us to raise our guidance to the high end of our previous range. Operating EBITDA is now expected to be $1.785 billion, an increase of $25 million from the midpoint of our prior guidance, reflecting our stronger third quarter results as well as increased productivity benefits as we exit the year. Our operating EBITDA growth represents about 40% incrementals and translates into margin of 24.8%, an 80 basis point improvement year-over-year. We continue to expect to fully offset higher input costs through pricing actions already taken.

Our adjusted EPS at the midpoint of $7.50 is a $0.25 increase versus our prior guidance and represents a 22% increase compared to the prior year pro forma. Underlying business performance, coupled with the benefits from capital deployment, are driving the year-over-year increase. For the fourth quarter, our estimated net sales of $1.825 billion assumes organic growth of about 8% year-over-year, driven by continued strength in Healthcare, Aerospace and Industrial, Water end markets as well as pricing actions taken to offset higher input costs. As a reminder, our fourth quarter 2025 net sales included a headwind of $30 million or 2% from the order timing shift into the third quarter 2025 due to separation-related activities.

Currency is expected to be neutral in the quarter. Operating EBITDA is expected to be $455 million, resulting in operating EBITDA margin of 24.9%. Adjusted EPS is expected to be in the range of $1.90 to $1.95 per share, representing an increase of 17% to 19% compared to the prior year pro forma.

For the Healthcare & Water segment, we expect fourth quarter organic sales growth in the high single digits percent range, led by strength in personal protection, medical devices and industrial water market. For the Diversified Industrial segment, we expect fourth quarter organic sales growth in the high single-digit percent range on continued strength in aerospace and electric vehicle battery applications.

Before I close, I want to recognize and thank our teams around the world. Our strong performance this year is a direct reflection of their dedication, exceptional execution and commitment to our customers. We have built strong momentum through the first 9 months, and we remain focused on carrying that momentum through the balance of the year. With leading positions in attractive markets, a strong execution mindset, and an exceptional team, I'm confident in our ability to finish the year strong.

With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A.

[Operator Instructions] And our first question comes from the line of Jeff Sprague with Vertical Research Partners.

[indiscernible] see the volume and the internal initiatives all kind of come in to...

Jeff, it's really hard to hear you.

How about that? Any better?

Much better.

Okay. Sorry about that. I wanted to see if we could unpack a little bit just kind of the impact of the internal initiatives on what's going on with margins relative to the volume lift you must be getting? And I'm sure you're -- you view yourself as relatively early in these internal initiatives. But maybe you could just give us a little perspective on the runway you have there.

Yes. Thanks, Jeff. Yes, we are seeing a lot of momentum on the productivity side that was a big piece of the improvement that we saw in overall EBITDA margins in the quarter of about 90 basis points on a pro forma basis. So off to a really great start. We've mentioned that we're targeting a net 3% productivity in the COGS, meaning that we would drive a net 3% reduction there outside, obviously, volume increases. So we're well on our way. In the quarter, we were a little over 2% net productivity, which drove about 100 basis points of the EBITDA margin lift that we saw in the quarter, which was slightly offset by some growth investments that we continue to make within the organization.

So really nice improvement. It's really coming from many different levers, not only improvements in cost support quality and volume variance with being able to get more production off of the fixed asset base, but also on the procurement side, especially in a tough market where obviously there's a lot of oil and gas headwinds, we are driving procurement savings as well.

And then from a top line perspective, really nice improvement in OTIF and defect rates. So we've made steady progress in OTIF. We target -- 95% is our ultimate target on a delivery to request date, not a delivery to promise, so even a higher bar for us, and we're in the low 80s now. So lots of room for improvement, but we've also made a fair band improvement. So we're really happy with the progress.

Great. And then maybe just a more near-term question. Just the water-related projects in the Middle East that were sort of a question mark. So how much revenue was that, that you pushed out of your '26 plan into next year? $25 million or so?

We actually pushed out about $15 million, Jeff.

$15 million. Great.

Our next question comes from the line of Scott Davis with Melius Research.

Congrats on a good couple -- several quarters in a row here of improvement. But look, I wanted to move over a little bit on the innovation side. Jeff took my question on quality and delivery, which I think is really important for you guys. But on the innovation side, it seems like something that's getting some sort of traction. Is it possible to kind of, I don't know measure it, I mean, I guess, when you talk about Vitality Index, sometimes that can mean different things to different people because you could just be adjusting a product a little bit. But are you seeing more of an impact on your growth or your margins on the new product flow? And that sometimes can answer that question a bit.

Yes, I would say it's both. So on the growth side, in our Vitality Index, which last year was about 35%, we're targeting a similar number for this year. The current mix is about 60% replace, 40% growth. So to your point, we need to continue to drive improvement to be able to see more roundly a 50-50 mix between grower and replace. So in the quarter, as we mentioned on the call, we were able to move our R&D investment more into the growth space, ultimately then leading to more growth coming out of the innovation engine. So we're seeing nice progress.

We have a lot of work going on in the front-end space to be able to continue to see that improvement to get to a targeted 50-50. We've used a lot of AI pools. We have AI agents running in 2 of our businesses to be able to speed up the front end. So what used to take us about 3 months to move something from stage 0 into stage 1 is now taking about 5 days because of the improvement that we've driven on using AI and to be able to feed at that front end. So it's both a growth and a margin improvement story.

On the last year's basis, we saw about 150 basis points of margin lift from the investment that we're making in replace. The replace is not only to keep our product relevant and differentiated in the market. It also helps us on the productivity side to be able to input lower raw material costs and be able to get those [indiscernible]. So that's primarily what we see on the replace side.

Okay. That's super helpful. And has that -- have you had to change the entire organization around how you really deliver that kind of product flow, getting closer to the customer or closer to the facilities. I mean, what -- I mean, DuPont, I think, historically, always centralized a lot of its R&D. Have you guys kind of culturally and physically change that?

Yes. So there's no -- there's really no centralized R&D anymore. It all fits within the businesses and under the businesses. P&L and responsibility. So that was one big change that we made several years ago that we've continued to keep in place because they obviously know what the customer wants, which sees our innovation engine. So that's been a nice piece of it.

Another piece is really just around the discipline that we've introduced into the system. So we've got all the data in one place where we can see where we're making our investments and making sure that we're differentially investing. We spend about 2.5% of sales in total on R&D, and that's differentially applied to the different businesses to make sure that we're investing more heavily and those that have higher growth entitlement. So we've been able to look [indiscernible] investing our resources, making sure that we're investing them back to the 80/20 work that applies to R&D investment as well, making sure that the R&D is being invested into the [ AV ] and making sure that we grow the [ AV ] so that we can see overall lift improvement with respect to growth.

Our next question comes from the line of Joe Ritchie with Goldman Sachs.

So I just wanted to first touch on the revenue beat this quarter. I think it was a little over $30 million higher than what the guide was for the quarter. I'm just wondering, how much of that came from additional price that you put through versus just the volume recovery that you're seeing across on the end markets that you highlighted earlier?

Joe, its Antonella. So about -- of the $30 million or so, about $10 million came from incremental price that got put into place in the quarter and the other $20 million was more from volume.

Okay. Got it. That's helpful, Antonella. And then just a quick question. Obviously, nice to see the -- how aggressive you guys are being from a share buyback perspective, as we kind of think out beyond the fourth quarter, I mean, should we start penciling in at $250 million buyback? Just how are you guys thinking about that versus your other M&A priorities because I know you still want to change the mix of your business to be more health care and waterfall focused.

So Joe, I would say we do have a lot of financial flexibility given where we are. We have a nice position of cash on the balance sheet. And our net debt-to-EBITDA is at like 1.1x. So we have a lot of balance sheet flexibility as well. I view the buybacks as us being more opportunistic versus saying that we have an automatic $250 a quarter. So again, we have the flexibility. So given any timing of potential M&A, we'll determine how much we are doing relative to share buybacks. .

Our next question comes from the line of John McNulty with BMO Capital Markets.

I had actually 2 for the D&I side. So maybe the first one just on -- on the construction piece, you seem to be doing a lot better than some of the other players in that end market. I guess can you speak to the drivers behind that? It sounds like some of it is around kind of maybe a better approach from a building envelope side. Just curious if that's the heavier weighting or if it's more about the specific end markets that you're maybe having access to, whether it's data centers or fabs or what have you, I guess, maybe just unpack some of the growth that you're seeing in that business for us, that would be great.

Sure. So let me -- there's a couple of things. Let me talk about here. So when you kind of take a look at our Building Technologies business, I would first say the team has done a really good job in what has been a relatively tough market, I would say, over the last 5 years at this point. So we are definitely outperforming the overall market based upon the weightings of where we play would suggest that the overall market is down low single digits, and our business has performed really well. I would bifurcate that between volume and price.

So from a volume perspective, I would say we're expected to be relatively flat, and that's compared to a down market. And then we are getting pricing as well, which is really helping to drive the organic growth up. But where that's coming from the outperformance relative to the market is really in 2 factors. We have some share gains, and we also have some favorable mix as well.

And just to unpack that a little bit more for you, when you think about the national builders and the large regional builders, we do see more conversions to our house wrap to Tyvek, that's clearly benefiting for us. And then also, we've talked before that we do have a nice presence in the multifamily. So within multifamily, increased penetration in that area typically brings, I would say, a broader bundle sale as well. So that's helping to drive the revenue as well.

Got it. No, that's really helpful color on it. And then I guess the second piece would be more on the industrial side. It's -- the last couple of quarters, you've kind of highlighted aerospace as kind of a big kind of crown jewel. I guess, can you help us to sell that business? And maybe think about the backlog that you see and how that may be playing out as we look out, say, into 2027?

Yes. So aerospace has done quite well for us. It's about $300 million or 3% of revenue or so, but really growing in the double-digit range and the backlog that we have is quite sizable as well. So this is one of our businesses across the whole portfolio, where we do have more visibility than others. So we generally can start each quarter with full order book and start each year with a pretty good sign of where we'll land. So we had highlighted on the call that a nice win we had with our Vespel business. We've got really great relationships with all the large OEMs. And on the Tedlar side, the same thing. So kind of Vespel is more within the engine, Tedlar is more within the body of the plane, and both of them are seeing a similar amount of kind of both low double-digit growth, and we continue to see that level of growth for the foreseeable future.

Our next question comes from the line of Chigusa Katoku with JPMorgan.

So my first question on the Diversified Industrial margins, I think they were especially stronger than what I had expected. Understanding you're driving a lot of good productivity. Just curious to know what drove the outperformance? And then I think it's just expected to step down sequentially in the fourth quarter. So what's driving that too?

Yes. We've seen really nice margin improvement within DI every quarter this year. So part of it is a little bit of favorable mix. Obviously, the conversation you just had with the with the low double-digit growth within aerospace that does have a really nice margin portfolio for us to be able to drive improvement. And the other piece is just the focus on productivity in 80/20 that we're feeling within that business. And so we've called out a few times the opportunities that we have from an 80/20 perspective that we've been piloting within best businesses within DI. So we continue to believe that we'll see a few million dollars of benefit this year from the 80/20 work and then kind of a runway to tens of millions on the initial scope that we first put in place, which is about $700 million of revenue.

We've since expanded that 80/20 work the moly coat business, which is about a $200 million business, and we see a few million dollars of opportunity there on the pricing side where we put the 80/20 methodology should work. So just really nice improvement, really nice focus on productivity. We've had some businesses that have had assets that have run sold out and driven cycle improvement within capacity release that have helped the margin profile as well.

Okay. And then as a follow-up on the pricing side, I think you just earlier mentioned about $10 million of incremental price this quarter. So I guess, a few bps was pricing closer to maybe 3% this quarter. Are you offsetting inflation on a dollar per dollar basis or maybe better? And then how should we think about it heading into next quarter?

Yes. So we are offsetting inflation on a dollar basis. I would say, for the full year versus the $90 million of pricing we had previously discussed, that's now closer to $110 million. So you could expect that the fourth quarter pricing will be pretty similar to kind of the third quarter pricing that you're seeing as well. And again, obviously, the team continues and will continue to, if prices continue to move to take action to make sure that we continue to offset any incremental costs.

And our next question comes from the line of Chris Parkinson with Wolfe Research.

Just wanted to drill down a little bit more into Healthcare Tech. You've been consistently citing basically broad-based strength across the portfolio. But for intermediate and long term, do you see any kind of further divergence between kind of the personal protection market versus more of the med packaging? It seems like there's some kind of some newer products in there that could actually affect the growth rate. Just trying to get to the heart of kind of the longer-term growth algo within that business by subsegment?

Yes. So we can -- there is a bit of a bifurcation underneath the Tyvek business in general, which is what you're referring to. So we've got -- and broadly in healthcare, there's 5 [indiscernible] which is about $1 billion and the remaining $800 million or $900 million or so is the med device businesses with Liveo and Spectrum. So on the Tyvek side, the med packaging is about half of the revenue and the garment is about the other half. So garments will generally grow alongside industrial production, give or take, so in the 2% to 3% range and engine med packaging will more be along the surgical procedures, which are in the mid-single-digit range. And so we've got a nice opportunity to continue to drive expansion in both.

So we talked about Tyvek with Renewable Attribution on the call that will give us more profile that is in line with the sustainability initiatives of our customers. And on the garment side, we've talked in previous calls about the Apex garments, which are coming out that provide more comfort and flexibility and breathability that will allow us to be competitive within the garment space. But overall, the net high back should be butting up against 4% from a volume perspective and then we obviously expect to drive above-market growth just based on the investments that we're making in the business but they'll generally be about 2% to 3% alongside industrial production for garments and then in the 5-ish percent range for the med packaging side.

That's very helpful. And just as a follow-up, Lori, we're exactly one year more or less away, following the Qnity [indiscernible]. I think everybody always focuses on the company that's been put out and the opportunities for independents. I'd love to give you the opportunity to say, what have you been doing differently? What are you satisfied with year one in terms of the more nimble industrial portfolio? And what should we be looking forward to for '27 and '28?

Yes. So it has been a year, November 1, and -- both of us [indiscernible] really a great start. So Qnity continues to produce really, really strong top line growth. They're squarely in the AI data center trade, and they have a lot of runway on the multiple side. So they should be up with Entegris in my opinion. So they've got a lot of room for opportunity to drive.

On the DuPont side, I'm super proud about what we've driven out of the gate as well. So we are at the top end or above our medium-term targets that we just put out a year ago on all metrics on growth, on margin expansion, on EPS and on free cash flow generation. So off to a really great start. And what makes me the most proudest is a nice mix of both the top and the bottom line. So if is driving growth. It's really focusing on our innovation excellence and in our growth rooms and our commercial excellence opportunities that you're seeing play out, especially in a pretty choppy market. So you consider that we've got 4.5% organic growth this year. We still have about 40% of our portfolio that's down on the construction side and the automotive side.

So when you look at those 2 markets, low single-digit declines in both. And we're still posting 4.5% growth kind of speaks to the quality of our portfolio on the group side.

And then on the productivity perspective, I would say we're a little ahead of where I would have expected to be. So we said 50 to 70 basis points or so a year of annual lift, and we're sitting at 80 with a headwind of about 40 from price cost. So really nice strong performance out of the gate. So I'm just really proud of the team. I see a lot of momentum going forward. We've got a very energized quite [indiscernible] team to be honest. So I'm really happy with where we're sitting.

Our next question comes from the line of John Roberts with Mizuho.

Nice quarter and nice guidance. How does the bolt-on pipeline look in both the Water and Healthcare areas? Is the increased buyback a sign that it's kind of thin right now and are higher interest rates affecting deal activity?

No. I mean the pipeline remains robust. And so we've got enough cash to be able to do both. So we've -- since we came out of the gate, we've announced the intent to buy back about 7% of our shares. So a nice improvement there, and it still leaves us with about $1.5 billion of firepower to be able to do some accretive growth M&A. So we've just been really diligent about what we're going after. We've got a defined set of financial parameters that we're operating within, and we have assets that can check those boxes. We're just being prudent and playing the process along the way.

So I still -- I still am looking for some M&A opportunities, but we're not going to make a [indiscernible] decision and do a deal just to do a deal, [indiscernible] going to make one that's right down the middle of the fairway. And you can see really good returns on our end. In the meantime, trading below 12% for the high-quality portfolio that we have tells me I should be buying back my shares whenever I can.

Okay. And then back to Building Solutions, have raw materials stabilized in that segment now?

Yes. I mean, overall, like obviously, we continue to look at both where the price of oil is as well as the price of natural gas as we have some production in Europe as well. And as you saw in our results this quarter, as things move, we will act and we will move as well, and we have clearly offset all of our inflationary costs.

Our next question comes from the line of Josh Spector with UBS.

I wanted to follow up on some of the productivity comments. So I think you said 2% net productivity achieved in the quarter that delivered something like 90 basis points margin improvement, maybe more. What does the 3% net productivity mean as it relates to your algo? Does that mean you should be delivered greater than 50 to 70 basis points of margin improvement as you look over the next couple of years? Or are you reinvesting that some place within the business that we should see that offset?

Yes. I think you guys got to make sure you don't double count because we're talking about net productivity within COGS. So we will take those costs out. Some of those costs helped to offset inflationary pressures in other areas of the P&L because that 3% is net in COGS. So it will take care of inflation in that space. But you obviously have some inflation in SG&A. And then to your point, there are some investments as well. So for example, if you look at our third quarter performance and our overall 90 basis points of margin expansion we had, about 120 basis points of that was driven by the combination of growth and productivity benefits, offset by oil and gas inflation, and then we had a little other positives from some FX moves in there that got us to the 90 basis points overall. So just to keep in mind, as Lori mentioned earlier, that net productivity target does include the benefit of volume. So you just got to put that into the equation as well.

Yes. And the oil and gas inflation was just a margin headwind. So we are full on a cost dollar basis. It's just that the math suggests the margins [indiscernible].

Okay. No, I appreciate that. That's very helpful. I do want to follow up quickly just on Water organic. Kind of looking at your reporting this year, the Middle East each quarter has been like a low single-digit headwind. If things stay as they are, is the base business going enough that you could see mid-single-digit growth return next year, assuming the Middle East stays as it is, understanding that's a pretty big assumption?

Yes. So I mean if you look at our full year expectations for water right now, there's about 1% organic growth baked into our guide with the push that we made on the Middle East projects. And if you take out the Middle East from those numbers, we would be up more in the mid-single-digit range alongside where the GWI, the Global Water Index fit.

And so assuming no material improvement or deceleration in the Middle East for next year, then you would expect us to again be in line with where the Global Water Index is, which has generally been in the 4% to 4.5% range. So we've got really nice performance outside the Middle East that's been able to give us overall low single-digit growth. But obviously, we've been impacted by that. But we haven't lost -- I mean the -- it's one business. And though it's just a matter of when the stabilization happens in the region so that we can ship the materials, but the business [indiscernible].

Our next question comes from the line of David Begleiter with Deutsche Bank.

Lori, a little bit more on that question. Looking into 2027, early look, what's in your control? What's not in your control? And what could that mean for EBITDA growth? I see consensus is up 5% year-over-year. I think you can [indiscernible], but any early thoughts on 2027?

Yes. So we'll give full color on 2027 on the next call. But as of right now, if we look at it kind of strictly from an end market perspective, let's leave the Middle East conversation that we just had to decide, we kind of see a similar end market performance with a slight improvement in automotive. So this year, automotive is down 1.5% to 2%. I think the initial expectation for next year is to be up slightly. But every other end market, we're generally thinking would be consistent. So nice mid-single-digit growth in health care markets, nice mid-single-digit growth in Water ex the Middle East situation, kind of a similar environment within the construction space and generally a similar environment in the in the 3% to 4% range for industrial production.

So given that top line algorithm, we should -- and the productivity initiatives that we still have in place, then you would continue to expect to us to be able to compound some margin expansion on top of a top line opportunity that's pretty similar to this year. But we'll give full color as we get into '27.

Very helpful. And just on pricing, how much pricing is being carried over to next year? I know most of this is surcharges, but how much pricing tailwind could you get for benefit from 2027?

Yes. So we started predominantly our pricing actions in May of this year. So it was kind of in the middle of the second quarter. So clearly, you'll have a full carryover effect into Q1 and part of that into the second quarter as well.

Our next question comes from the line of Matthew DeYoe with Bank of America.

Kind of build a little bit on Dave's question. How -- are there any opportunities to move some of these price surcharges to more structural price increases as inflation stays probably stickier for longer than maybe we had been thinking about? And I might have missed this, so I apologize. But on the net productivity benefits of 2%, I think that was consolidated, do you know how much of this went into D&I versus Healthcare & Water?

Yes. So I mean maybe to your first question first on the pricing side. So we'll obviously look to see how the market plays out and that we can remain competitive and kind of favorable. We have a really good track record of maintaining price whenever there's been increases and then we've been able to hold the increases. So we'll look to see what the competitive landscape looks like. As of right now, as Antonella had mentioned that we would expect kind of the flip of the second half price improvement that we saw from the oil and gas perspective to be in the first half of this year. And then we'll see how the remaining half plays out, assuming kind of the Middle East and oil and gas, say, generally where they are today.

To your second question. So related to the productivity and kind of where it went in the quarter, I would say both businesses had net productivity above the 2% mark in the quarter.

Our next question comes from the line of Vincent Andrews with Morgan Stanley.

This is Turner Hinrichs on for Vincent. Do you mind giving us a little early color about how you're thinking about 2027 relative to the algorithm? What might take us to the higher and low end of 3% to 4% organic growth? And any puts or takes on margins in particular?

Yes. So I mean I think if we look at strictly an end market perspective, generally, 2027 feels similar to 2026 with the exception of we're not quite sure, obviously, what the Middle East does. So we're making the assumption that it kind of stays the way it is today from both the pricing stays in place and the water impact kind of doesn't improve. We don't see a big bump coming back next year with respect to the projects that were pushed, but we also don't see the growth segment that existed as well.

So we'll see like -- the only material change we see in end markets is maybe a slight improvement in auto builds from being down 1.5% to 2% this year to being slightly up. But where we see the outperformance this year, we expect to see it next year with the EV battery side within automotive, aerospace continuing to do quite well. Healthcare is continuing to do quite well. And on the productivity side, we still have runway to the targets that we set with respect to that 3%. So we did -- we did a little over 2% this year. So really nice improvement that we've got runway to continue to see improvement in that area.

And our next question comes from the line of Patrick Cunningham with Citigroup.

I was hoping you could provide an update on the water side in terms of what you're seeing in terms of semiconductors? What are you seeing in terms of growth from that business? And what are your expectations for volume and mix lift into 2027?

Yes. So we saw really nice performance on the semiconductor side in the water business. So it's about 20% of the ion exchange, which is about half of the portfolio, and we saw it up in kind of in the 20% range in the quarter. So obviously, driven by the AI data center lift that's going on. So really nice performance there. In general, outside the desalination situation in Middle East, all of our end markets are doing quite well in water. So you've got the wastewater treatment side doing quite well. You've got the specialty side in food and beverage and biopharma filtration, doing quite well. And then obviously, the piece that we mentioned kind of at the top end would be on the microelectronics side.

Great. And you talked a little bit about this on the call, but I was hoping you could elaborate and provide some examples, some of the AI-enabled tool set both in terms of manufacturing productivity and on the commercial side? And where you're already seeing returns? How much do you expect to do in terms of further technology investment there?

Yes. So if I think about it in the 3 main buckets of kind of innovation, commercial and productivity, we've got really nice opportunities to drive really strong returns in all 3. So on the innovation side, we talked about the focus right now being on improving the front end. So not only improving the dollar amount that sits in the front end, but also significantly reducing the time to be able to advance projects into stage 1. So we've taken 2 businesses where we piloted AI agents that we've created that have improved what used to be a front-end process of about 3 months, to roundly 5 days. So really nice improvement there and being able to speak to the speed at which we go to market.

On the commercial side, we've been using sales plays that are enabled by AI tools to be able to shorten the development of the sales play opportunity. And we first piloted it in garments, and we saw around $5 million or $6 million of this on the top line within the Tyvek garment space from the AI-enabled sales opportunity. We're also using on the customer service side to be able to create a much broader portfolio of kind of touch list -- touchless order opportunities on the customer service side to driving productivity.

And then finally, kind of at the plant level, we've been investing on the reliability maintenance side and tools that allow us to be able to assign the right level of resources to the different maintenance opportunities that exist so that we can see overall lower maintenance costs. And we've also been implementing some AI tools on the visual management side, especially within the Tyvek business from an inspection perspective. So taking what used to be a visual inspection process done by an operator and moving that to a digital tool so that we can reduce our labor costs.

So nice lift across all 3 phases of kind of our overall business system when you think about the frameworks of operations, commercial and innovation. So I'm really excited about the opportunity every exempt worker within the company has access to copilot and the usage is really, really high. We've been piloting some co-work opportunities within some places in the business, and we've also implemented kind of the copilot for the sales force to be able to drive productivity there.

Our next question comes from the line of Abigail Eberts with Wells Fargo.

Congrats on the quarter. Just a question on your geographic distribution for your auto business. I know you mentioned you expect very modest growth next year. S&P has global builds up less than 1% but that isn't unanimous across regions. They are expecting some declines in certain areas. So just wondering where your exposure lies?

Yes, it's not materially different from kind of the global auto builds. With the one exception that within China, our presence right now is more with the multinational players than it is with the local players from a China perspective. So we're more exposed to North America and the Western OEMs than we are within China to like the BYDs and the Geelys and the others.

But on the EV battery side, which is where a lot of our opportunity is sitting, that is pretty broad-based. And so we've seen about a 60% lift in our EV battery sales this year, which is driving really nice performance for us, and we would expect to continue to see real nice growth there, like sizably outpacing the EV battery car build numbers as well.

Our next question comes from the line of Arun Viswanathan with RBC Capital.

I just wanted to get maybe some initial thoughts on '27, if possible. You got a pretty good '26 on both pricing and volume growth in the mid-single-digit range. I know you've hide a lot of those reasons on the call already and objectives. But just wondering, given kind of the backdrop of uncertainty and recent inflation, do you still see mid-single-digit growth across both verticals likely? Or how should that kind of play out as you move through '27?

So I would say, I think we've talked about the end market expectations into '27 a couple of times on the call. So just to reiterate, we'll give our formal guidance on our Q4 earnings call. When you look at things from a market perspective going into 2027 and you put aside the Middle East, we expect the underlying markets to perform similarly to what we saw this year with the only exception really being auto builds that were down this year that are expected to have a little bit of growth next year. So we will provide explicit commentary by each of the businesses as we get into the next quarter call.

Our final question comes from the line of Alexi Yefremov with Barclays.

I seem to recall you changed your sales incentives to commission-based pay. I wonder how that is going?

Yes. So it's changing in January. So we've been putting the process in place and communicating with the sales organization about the change throughout 2026. And we piloted it a little bit on the variable compensation side so we gave them targets that will determine their individual performance factor on the variable compensation side today, which is kind of the stip that everybody gets within the organization. So we will officially move January 1 with a few exceptions in Europe, where we have to wait a year just given the works council requirements.

But the initial feedback is a lot of excitement around the opportunity for the sales force to be able to have more control over their overall compensation, which ultimately would be to higher growth for us when those 2 kind of pan out together. So we're excited about the change and the opportunity that it will bring.

And a follow-up on Healthcare. Just wonder how your medical device end market is doing relative to packaging and protection?

Yes, they're all nicely growing in the same general facility. So we saw a really nice performance in 2026 across the Healthcare space.

That concludes our question-and-answer session. I will now turn the call back over to Ann for closing remarks.

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.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Hello, and thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the DuPont Second Quarter 2026 Earnings Call. [Operator Instructions]

Thank you. I would now like to turn the call over to Ann Giancristoforo, Investor Relations. Please go ahead.

Good morning, and thank you for joining us for DuPont's Second Quarter 2026 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 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 reminder, on the basis of presentation, our share and per share information has been retroactively adjusted for the reverse stock split that was completed in June 2026.

I'll now turn the call over to Lori, who will begin on Slide 3.

Good morning, and thanks, everyone, for joining our call. Earlier today, we reported our second quarter financial results, which again exceeded our previously communicated guidance. Through our ongoing focus on excellence and productivity, we delivered organic sales growth of 4%, 80 basis points of margin expansion, double-digit adjusted EPS growth and robust free cash flow conversion in the quarter.

As a result of our second quarter performance, we are again raising our full year 2026 financial guidance for organic sales growth operating EBITDA and adjusted EPS. And we expect our free cash flow conversion to be ahead of our 90% target. Antonella will provide further details shortly.

Additionally, we announced that in the third quarter, we expect to launch a $250 million share repurchase, which highlights our continued focus on driving a disciplined capital allocation model. We also completed the previously communicated reverse stock split, which aim to align our key performance metrics with those of our industrial peer set. In addition, effective in July, our GICS code classification has been changed to industrial, an important milestone that recognizes the significant transformation of DuPont over the past several years.

This new classification better reflects our industrial portfolio and the long-term value creation opportunities we see ahead.

Moving to Slide 4. We continue to make strong progress advancing our strategic priorities through a more robust and disciplined business system with a clear focus on organic growth, accountability, execution and continuous improvement across the company.

The objective is straightforward: reinforce the operating culture required to deliver sustainable performance while building repeatable capabilities that drive growth, margin expansion and shareholder value over time. What is important is that these are not isolated initiatives, innovation, commercial excellence, operational excellence and 80/20 are increasingly connected through one operating system that helps us prioritize the highest value opportunities, execute with greater rigor and scale what works across the organization.

Innovation excellence remains central to our value prop for both customers and shareholders. Our pipeline continues to deliver new wins across high-growth and emerging applications through differentiated products and application development. We are using the business system to sharpen the focus of our innovation pipeline, improve how we manage differentiated opportunities and support the continued expansion of our AI-ready labs initiative, leading to faster development cycles and a more robust front-end pipeline.

You can see that in the quality and relevance of launches coming through the pipeline. In Water, we launched an integrated end-to-end solution for direct lithium extraction including membranes and ion exchange resins, designed to improve lithium recovery and purity. In Healthcare, we continued the expansion of our [ Olivia ] portfolio to better serve the high-growth biopharma market. And in Diversified Industrials, we are bringing forward new solutions for electric vehicles and battery energy storage systems.

Commercially, we are putting more rigor and scale behind growth. We have continued to see improvement in overall order trends, and we are rapidly scaling sales place using AI to accelerate our impact. Here, we are moving from process deployment to operating discipline and the early demand generation momentum is encouraging. We have won about 150 opportunities, which represents a nearly 30% win rate.

This sits firmly ahead of our historical percentage as well as above industry benchmarks. Overall, we are building a more systemic commercial engine, clear targeting stronger data quality, accelerate demand generation and more disciplined execution from opportunity creation through conversion, leading to a strong pipeline.

OpEx continues to be a key driver of value creation at DuPont. We are building a more disciplined operating culture that is translating into measurable improvements across productivity, quality, customer delivery and costs. In the quarter, we delivered a more than 100 basis point improvement in OTIF and net productivity with a continued reduction in cost support quality.

Looking ahead, we see additional opportunities through both AI and automation, where early pilots in reliability, maintenance and quality are identifying significant improvement potential. Ultimately, OpEx is not simply a cost initiative. It's a growth enabler that improves customer experience, strengthens margins and enhances our competitive position over time.

Lastly, our 80/20 work is increasing focus and simplifying complexity across the organization. We are developing a much clear understanding of where value is created, concentrating resources behind those opportunities and simplifying activities that consume resources without generating comparable returns. I noted earlier that we began by piloting the approach in 4 of our diversified industrials businesses.

This work has identified meaningful opportunities to create value, which we have already begun to execute. The examples are clear. The team identified an opportunity to reallocate commercial, tech service and marketing resources towards geographies and market segments with the greatest growth potential, while simplifying the approach to smaller markets through stronger channel partnerships.

Additionally, the team identified productivity initiatives to reduce manufacturing complexity, better sequence production and focus on the highest value product families to improve yields, asset utilization and capacity within the existing footprint. The comments read across all of this work is focused, disciplined and repeatability.

We are advancing innovation in the markets where application expertise is most differentiated, strengthening commercial execution with data, AI and more targeted [ sales leads ], improving operational performance through Kaizen, productivity, quality and OTIF and using 80/20 to simplify and concentrate resources where they create the most value.

With that, I'll now turn the call over to Antonella to cover the financials and outlook in more detail.

Thanks, Lori, and good morning, everyone. Strong execution and market-driven growth in the second quarter delivered results ahead of our financial guidance. Organic growth and a continued focus on productivity drove solid operating EBITDA leverage, meaningful margin expansion and robust free cash flow generation in the quarter.

Consistent with our first quarter call, I will provide comments on our results versus the prior year pro forma, which adjusts for our post-separation corporate costs, interest expense and income tax rate. This is consistent with the methodology and financial metrics that we provided at our 2025 Investor Day.

In addition, all share and per share amounts have been retroactively adjusted as a result of the reverse stock split. Beginning with our second quarter financial highlights on Slide 5. Net sales of $1.8 billion were up 4% versus the year ago period on 4% organic sales growth. Top line growth was broad-based, led by continued strength in health care, aerospace and industrial water and semiconductor markets.

In addition, we saw year-over-year growth in our Building Technologies business on strength in residential and nonresidential end markets. From a segment view, during the quarter, organic sales grew 4% in Healthcare & Water Technologies and 3% in Diversified Industrials. Second quarter operating EBITDA of $448 million increased 8% versus the year ago period on organic sales growth and productivity. This resulted in operating EBITDA margin of 24.6% in the quarter, an increase of 80 basis points year-over-year, including a 30 basis point headwind from price cost dynamics.

Turning to cash flow. We delivered transaction-adjusted free cash flow of $326 million and related conversion of 127%, underpinned by earnings growth and net working capital productivity. Given our strength in the quarter, we expect our full year free cash flow conversion to be ahead of our 90% target.

Turning to Slide 6. Adjusted EPS for the quarter of $1.88 was up 21% versus the year ago period. The increase was driven by stronger operations of $0.17 and a $0.15 benefit from below the line items.

Turning to our segment results on Slide 7. Healthcare & Water Technologies second quarter net sales of $856 million were up 5% versus the year ago period on 4% organic growth and a 1% benefit from currency. For the second quarter, Healthcare sales were up mid-single digits percent on an organic basis versus the year ago period. Organic growth was broad-based led by double-digit gains in personal protection and biopharma markets.

Water sales were up low single-digits percent on an organic basis on double-digit gains in industrial water and semiconductor markets partially offset by weakness in the Middle East. Outside of the Middle East, organic sales increased mid-single digits percent in the quarter. Operating EBITDA for the segment during the quarter of $258 million was up 4% versus the year ago period on organic growth and productivity gains, partially offset by growth investments.

Operating EBITDA margin of 30.1% decreased 30 basis points year-over-year as organic growth and productivity were more than offset by less favorable mix and growth investments.

Turning to Diversified Industrials. Second quarter net sales of $963 million increased 3% versus the year ago period on 3% organic sales growth. At the line of business level, organic sales for Building Technologies were up low single-digits percent on growth in residential and nonresidential construction markets, led by Asia Pacific.

Industrial Technologies organic sales were up mid-single digits percent on double-digit gains in aerospace and electric vehicle battery applications as well as mid-single-digit growth in printing applications. Operating EBITDA for Diversified Industrials of $213 million was up 7% versus the year ago period on organic growth, favorable mix and productivity. This translated to operating EBITDA margin in the quarter of 22.1%, an increase of 70 basis points versus the year ago period.

Turning to Slide 8. We are again raising our full year 2026 financial guidance given our outperformance in the quarter as well as benefits from capital deployment. For the full year 2026, our net sales guidance now assumes organic growth to be slightly ahead of 4% on continued strength across most of our key end markets. We have adjusted our midpoint to $7.175 billion due to a lower expected currency benefit as the U.S. dollar continues to strengthen.

Operating EBITDA at the midpoint has now increased to $1.760 billion, reflecting our stronger second quarter results and more than offsetting headwinds from currency. Operating EBITDA margins of 24.5% includes a 30 basis point headwind from oil and gas inflation. Our adjusted EPS at the midpoint of $7.24 is a $0.15 increase versus our prior guidance and represents an 18% increase compared to the prior year pro forma.

For the second half, at the midpoint, our estimated net sales of $3.675 billion assumes organic growth of about 6% year-over-year, driven by continued strength in healthcare, industrial water and aerospace end markets as well as carry forward pricing from actions already taken.

Operating EBITDA is expected to be $900 million, resulting in operating EBITDA margin of 24.5%, including a 50 basis point headwind from oil and gas inflation. Adjusted EPS at the midpoint is expected to be $3.73 per share.

As a reminder, our third quarter 2025 benefited from a timing shift of approximately $30 million of sales due to system cutover activity in advance of the Qnity separation which was a 2% organic growth shift from the fourth quarter to the third quarter. Our third quarter expectations include a sequential $50 million sales lift from Q2 related to pricing actions already taken and operating EBITDA at the same level as the second quarter.

Therefore, for the third quarter 2026, we estimate net sales of $1.835 billion, operating EBITDA of $448 million and operating EBITDA margins of 24.4% including a 50 basis point headwind from oil and gas inflation.

Adjusted EPS is expected to be in the range of $1.80 to $1.90 per share. Our third quarter net sales guidance assumes about 5% organic growth year-over-year when adjusted for the prior year timing shift and about 3% organic growth year-over-year as reported. Currency is expected to be about a 1% headwind in the quarter.

For the Healthcare & Water segment, we expect third quarter organic sales growth in the mid-single digits percent range led by strength in medical device, biopharma and industrial water markets. For the Diversified Industrials segment, we expect third quarter organic sales growth in the low single-digit percent range, on continued strength in aerospace and electric vehicle battery applications.

Before I close, I want to take a moment to thank our teams around the world. The strong results we've delivered to date are a direct reflection of their hard work, dedication and focus on serving our customers every day. We're proud of what we've accomplished together and even more excited about the momentum we're carrying into the second half of the year.

With strong positions in attractive markets, a continued focus on execution and the talent of our people, we have a lot to look forward to as we finish the year strong.

With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A.

[Operator Instructions] Your first question comes from the line of Jeff Sprout with Vertical Research Partners.

Two unrelated questions for me. First, Lori, where you kind of began today with the innovation and commercial and the like. Can you just give us something to anchor on in terms of thinking about contribution to sales or product vitality? And on the cost of poor quality and OTIF also, I'm just wondering if you could kind of anchor us on kind of your start point there where you're at on that progression.

Yes. Of course, I can. So on all of the fronts across the business system, I'm really happy with the results that we've driven so far across all the different frameworks, whether it's innovation, commercial or operational excellence. But to your question on the innovation, we have a really strong foundation that we're starting from with a vitality index of about 35%, and we'll continue to build on that. And our focus is on maintaining that strong balance as well as shifting the mix more towards growth versus [indiscernible] that could comprise that 35% fatality index.

So we've seen benefits with respect to an improved front-end pipeline on the innovation front, also a reduction in the cycle speed with respect to getting new products to market and generating in the front-end pipeline. So will not quite sizing what the upside is with respect to innovation. We're firmly committed to the minimum 3% or 4% organic sales growth that we had put out at Investor Day where, in fact, if you look at our full year numbers running either in line or ahead on all of the metrics, whether it's organic gross margin expansion or EPS growth with respect to those targets. So really nice lift and a lot of that's really coming from the implementation of the business system.

On the -- one quick comment on the 80/20 work as well. So we've been engaged on a study with 4 of our businesses in the Diversified Industrials with respect to implementation of 80/20, we're through that initial exercise with respect to framing the opportunities and we're actually executing those opportunities now, and we have a few million of benefit in the second half from an EBITDA perspective around just simplifying the portfolios, driving yield, optimizing mix, making sure that the resources are targeted the highest growth opportunity. So nice performance there.

On the cost of quality to your question about the improvement that we're seeing, we're below benchmark. I think benchmarks were at around 5% of sales. We're at about 4% of sales with respect to cost of poor quality, and we look to drive that lower as we implement the OpEx [indiscernible] mark.

Great. And then maybe just for Antonella. On the oil and gas margin-related headwinds you shared with us for the quarter, the outlook in the year. Do those all roughly reflect price cost dollar neutrality? Or are you kind of above -- ahead or behind on an actual dollar versus cost basis? .

It's price/cost to dollar neutrality. So as we said on the last call as well, there's about $90 million of pricing that's in there on a full year basis. We have a little bit of that in Q2. As you would expect, the majority of that is sitting in the second half of the year, and that keeps us price/cost neutral from a dollar basis.

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

I wanted to follow up a little bit on Jeff's question and there's a lot of changes going on at DuPont and net productivity goals is not something that we talked about in the old days. But can you talk about where you are today, kind of where you want to be and kind of a realistic time frame of where you can get to kind of best-in-class levels?

Yes. So our target for net productivity is 3%. So 3% of COGS annual reduction on a net basis. So that's a sizable improvement from where we've been in the past where the number was kind of fought at best. So we're making nice progress in the quarter. We saw about 200 basis points of a reduction on a COGS basis that contribute about 100 basis points of margin expansion as a percent of revenue. So a nice improvement. I think to get to like the 3% net productivity kind of for curriculum that we're driving across the organization that's probably within the next 18 months to be able to get to that 3% run rate across the organization.

Okay. That's helpful. And then when you're making these kind of operational changes and obviously trying to drive cultural change, there's a certain component that you probably need to change compensation plans and such to re-center around these new targets and goals. Are you -- have you done that already? Or is that in process? Kind of where do we stand in that perspective? .

Yes. So on our compensation, we've changed this year with respect to the level at which we compensate for the short-term incentive or the cash bonus for every year. So in the past, it was done at the segment level, so it would have been Healthcare & Water or Diversified. This year, we're doing it at the line of business level. So there are 6 lines of businesses, 3 under each segment and we're using that as the center point for the business performance to really drive enhanced accountability at that level.

As we look into 2027, we are changing the compensation method for our sales force. And so we're in the midst of that right now of moving them to commission based. So today, we've got pockets of commission-based sales across the organization. But in general, the sales force is paid on the same bonus structures what the rest of the organization is. So in order to be able to really drive that growth and drive that hunter mindset and business development experts across the organization is really important to then incent the sales force to drive growth. So that change will be happening in 2027 for those individuals.

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

So I wanted to start with the Middle East. I think last quarter, you guys were calling out some logistics constraints and then and delayed shipments also in project timing that was supposed to come through in the second half of the year. Can you just give us an update on where those projects stand and like whether you've seen any type of alleviation on the constraints that you saw last quarter? .

Yes. So the $10 million shift that went from Q1 to Q2 happened. So that happened in April -- here kind of been behind us by the time we get the Q1 call. We're still in the same bucket with respect to expectations for Middle East in the second half. So we see improved performance in the Middle East in the second half versus the first half, really driven by projects that are already on the books. And so we've got a few large projects in the Middle East and kind of in line with the expectations that we see for more global large projects second half versus first half.

So we still got visibility to those. They're still on our books. We have continued to expect that most of that revenue hits in the fourth quarter versus the third quarter. So if you look at kind of the trajectory of organic growth that Antonella called out 3Q, 4Q and you take out the timing shift with respect to last year, we'll see about 5% organic growth in Q3 and then 7% in Q4. Really that step-up is really around these projects, across the globe beyond just the Middle East in the Water business.

Got it. That's helpful, Lori. And I guess, just maybe on margins for a second. Your Healthcare & Water Technologies segment saw 30 basis points of margin contraction despite the solid growth. I know that you guys were expecting some type of mix normalization. I think you also called out growth investments. Can you just maybe unpack the specific mix dynamics as well as the investments that you're making in these segments? .

Joe, it's Antonella. Yes, so what we talked about in our first quarter, we had a much heavier component related to our health care sales in Q1 relative to the second quarter. So that was the mix shift that we had talked about last quarter. So we're just seeing the opposite side of that now. Overall, underlying margins in the Healthcare & Water business are very strong. We are making investments there. We're seeing the impact of those investments in our top line growth.

Yes. One of the areas that we'll highlight with respect to the return on the investments. We've invested in additional sales resources within our Tyvek business to be able to continue to fill up to fill up the assets. One of the large opportunities that we've seen is around sales plays in the garment space. So we introduced sales plays in the garment space towards the tail end of last year. Called out nice performance in the prepared remarks with respect to building a robust pipeline, and we actually see about $5 million or $6 million of incremental garment sales in the full year 2026 expectation. So really already seeing nice contributions from those additional resources that we added.

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

Maybe the first one on the Diversified side. So I guess when I look at the second half outlook for growth versus the second quarter, it looks like things accelerate a bit. I guess, can you help unpack that, what may be driving that? And then also thoughts on the incremental operating leverage that you have, especially with some of the 80/20 starting to kick in, how should we be thinking about that in the back half?

So overall, when you take a look at things from the growth side, I would say when you look at the first half versus the second half, what you're really seeing, if you kind of take Q2 as your starting point, it's really just the incremental pricing that's in the second half of the year. So as I noted earlier, we do have a majority of the pricing related to the oil and gas headwinds in the second half of the year. That adds about 2 points of pricing in the second half.

So again, if you look where we landed in Q2 of around 4% organic growth, we have the extra 2 points of pricing that kind of gets you to the 6% organic growth that we see in the second half of the year. So no significant uplift needed there to achieve that target.

When you look at the incrementals in the second half of the year, if you're kind of looking at things on a year-over-year basis and you adjust for the price/cost dynamic, our incrementals are around 40%.

Got it. Okay. And then on the 80/20 program, I know it's a little bit on the early side. But I think the idea, at least when you set out was to significantly improve the profitability, but there might be a bit of a drag on the top line over time. I guess, is that still how you're thinking about it? Or are you starting to see any potential positive offsets that may help that top line to maybe come in a little more robust than where you originally expected. .

Yes. So we do see opportunities on both fronts. So the initial kind of few million dollars that I had mentioned that we expect in 2026 from the 80/20 work is really going to be more around the margin side. So kind of relooking at our ore design and our op model and driving some yield improvement and making sure that we've got the resources focused on the 80% and moving away from 20% to be able to drive margin [indiscernible].

With respect to growth, there's also opportunities that we see around upgrading our market expertise, driving enhanced commercial excellence as well as further business development work that should drive growth. And so that will be a little bit longer in realization versus profitability work, but we don't see a material headwind to the top line. In fact, over time, ideally [indiscernible] top line with respect to being able to really focus our researches on the value creation opportunity that resides in the 80s and doubling down on that. But right now, we don't see a material on that to the top line. It's more of an improvement on the bottom line from the 80/20 work.

Your next question comes from the line of ShigusoKatoka with JPMorgan.

I just wanted to follow up a little bit on the water business. I think it came in at plus low single digit this quarter. Just curious specifically in water, how you expect it to phase in the third and fourth quarter? And do you still expect high single digit in the back half and mid-single for the full year in Water?

Yes. So we've -- our expectations now for the full year are more in the low to mid-single-digit range, really with the slight revision being driven just by what's going on in the Middle East, nothing structurally changing in the business in the long term. So we still do expect to ramp first half, second half. So for the second half, we do see on average, kind of that high single-digit growth leading to that low to mid-single digit for the year.

I think it's important to note while we tempered down the Water expectations, we tempered up the Healthcare expectations, and we still see the same growth profile for the overall Healthcare & Water segment. We actually slightly raised the organic growth for the full year for the company from -- we were at 4% heading into the quarter and now we're slightly above 4%, really just dropping that outperformance that we saw in Q2 to the year.

Okay. That's really helpful. And then just looking at the margins, I think historically, your margins ramp in the second half versus the first half. Understanding this year, you have the oil inflation impact. But is there anything else that's going into the deceleration in margins in the second half mix or anything of that sort?

Yes. Actually, if you kind of take a look at our margin profile and you put the price cost aside, if you look at our business segment margins, they're actually increasing an incremental like 50 basis points in the second half of the year versus the first half of the year. So we still have very nice margin momentum going into the year. And quite honestly, we had really strong margins last year second half as well. So I think that, that shows the continued margin expansion profile that we have team is continuing to do a really good job related to that and to some of the points that Lori made, it's really being driven by our productivity as well as nice leverage on the growth.

Your next question comes from the line of Christopher Parkinson with Wolfe Research.

This is Harris Fein on for Chris. My first one, can you just give us an update on the M&A pipeline? It seems like you have capacity for both buybacks and midsized M&A. I guess what are you seeing out there in terms of CDMO opportunities?

Yes. So we continue to have a nice M&A pipeline, and we're also taking a nice balanced approach to capital allocation. So to your point, we announced the $250 million share repurchase that we executed in the quarter, we still have sizable proceeds to be able to do M&A as well. So we still have well over $1 billion to be able to go out and do some M&A.

So we continue to see a robust pipeline on both the Water side and the Healthcare side. on the Healthcare side, the opportunity to span both the packaging front as well as the CDMO front, to your point. So we continue to do the work. We're going to be diligent about the returns that we expect with respect to the valuation. So we'll look to say kind of on a gross basis in a mid-teen valuation giving that down into a lower teens on a net basis post synergies.

So we've got an expectation as well that whatever asset that we acquire would be incremental to our overall growth algorithm as well. So I'm optimistic we're doing a lot of work, but we'll be prudent with respect to the returns that we expect on a deal.

Got it. And for my second one, just on pricing. With the ramp that you're seeing in the second half, just any thoughts on how sticky that might be depending, obviously, on how the situation in the Middle East plays out as we look ahead to '27.

Yes. I mean we'll always look at our pricing opportunities and the elasticity within each 1 of the lines of businesses as we move forward. For this year, as we noted, pricing in totality related to oil and gas is about 1 point for the full year. It's about 2 percentage points in the second half of the year. There is some other pricing that we also have that's in the top line as well. That's outside of oil and gas, and we'll clearly continue to look at that as we move forward going into '27 and beyond.

Your next question comes from the line of John Roberts with Mizuho.

Congrats on the reclassification. Could you talk a little bit about the Middle East reverse osmosis headwinds? Is that primarily logistic constraints or has something structurally changed there?

No, there's no structural in it's primarily just the conflict that tackling in the Middle East. And so a lot of the desalination volumes that are a big chunk of roar obviously in the Middle East in those projects. are moving around a bit. They're not getting pulled. They're just moving around a bit with respect to when we expect those to hit. So structurally no change in our expectations for nice mid-single-digit growth out of the Water business. There's just a little noise this year, ideally some resolution coming with respect to what's going on in the Middle East so that we can return to a more normal growth profile.

I think it's important to note, though, that the water business continues to perform very well outside the Middle East conflict. And so we -- we've seen really nice robust growth. The ex the Middle East in the second quarter, our organic growth was up in the mid-single digits. So the rest of the world is performing quite well. In the Middle East, coming about 10% also.

And then the new lithium water opportunity, does that require incremental CapEx here to build out that business? Or are these existing products and services that you can actually just grow in your within your existing footprint?

Yes, no capital required. We introduced a new suite of products recently that we announced. And so we had to do some application development enhancement within an existing product portfolio across both RO and on exchange. So a nice opportunity for us. We saw the DOE market around $200 million, and we're well positioned to be able to take advantage of the growth in that space.

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

I just wanted to ask on the updated organic growth outlook. I mean it's a small tweak up, but it's still a tweak up. Your comments on pricing sound exactly the same as last quarter. So does that mean volumes are coming in a little bit better overall? And just curious where you'd attribute that to? It sounds like health care, but I don't know if Diversified Industrials is playing a role in that at all or not?

Yes. As Lori mentioned earlier, health care is driving that, and you did see really nice growth in Diversified industrials as well, which we've also added that to the full year as well. So both of those 2 areas are helping to offset the little bit of weakness that we're seeing in Water related to the Middle East.

Yes. I mean in DI, we have a very strong order book on the industrial side within DI. So we cited that kind of all year and it continues to drive kind of low double-digit order gains across that portfolio. And we're seeing nice positions within shelter as well. So while shelters still continued to be about net neutral on a full year basis from an end market perspective to see outperformance in the space on the resi side. So even though it's a little tempered, we're seeing outperformance there. And so incrementally, optimistic on the shelter business.

And maybe just one more comment on the Diversified side, optimistic on the EV battery space. And so we saw a really nice growth in the EV battery space in 2Q, especially in the European markets, we're really seeing that pipeline come to fruition there and driving nice results for us.

Let me follow up on that specifically then. And just -- I mean, how big is that EV battery? And is that primarily adhesives? Are there other separator or thermal materials that you guys are selling? .

Yes, it's primarily adhesives. So the EV battery space alone today is around $70 million of revenue. We see it going nicely into the triple digit in '26 and '27. And broadly, the whole EV opportunity for us is a few hundred million. So of our whole $900 million automotive portfolio that EV portion is nicely butting up to almost 50% of it. And so we had a lot of wins in the pipeline on the battery space across all the regions, and we're seeing those come to realization as those automotive OEMs start to introduce the newer models.

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

Lori, just on construction, you noted some improvement in those markets. Is that mainly data centers or other areas or expanding as well?

No, not data centers. It's more on the HHEP, so kind of the health care education, retail market. And so there's a lot of growth in the health care space with respect to new hospital builds. I think in the education space, there's a lot of investments still going on at the university level that's driving our optimism there. So we've got a tiny little bit in data centers that we're looking hard to be able to see how we can continue to grow that. But a lot of our growth is outside data centers in the nonres space.

Very good. And just back on pricing of the $90 million you're targeting for this year, if we do see raws go back to pre-conflict levels. How much of that should you or credo retain? .

So obviously, we'll take a look at that if and when it happens. I know there was a period of time like earlier in the quarter where everybody saw kind of that was behind us, but it quickly all came back. So obviously, we're watching it closely day-by-day and week-by-week basis, and we'll stay close with our customers relative to that. As I mentioned earlier, that $90 million of pricing is related to the oil and gas headwinds.

We clearly do have pricing in other areas of our portfolio as well. That's really related to the value of our products, which clearly we will continue to look at and continue to have the ability to have pricing to be part of our growth as we move forward.

Your next question comes from the line of Matthew DeYoe with Bank of America.

R&D expense continues to be managed lower. Like where is the right landing zone? And how have you shifted the framework for R&D spend and hurdle rates maybe, I don't know, Lori, if you want to tap on your experience here at the pump or maybe comparing where you are now to the [indiscernible].

Yes. So we target R&D expense at about 2.5% of sales. I think we're still generally in that pull park. So anything that you're seeing with respect to moves are really more around changes in how we allocate the space, the R&D labs operate in versus any kind of fundamental change in our level of investments in R&D and application development across the organization.

My focus now is making sure that, that 2.5% is spread in a differential manner across the businesses. And so we've got opportunity to better do differential management with respect to R&D and making sure that we're getting more of the R&D into the areas that drive the outsized growth. And so that's where we're focused now with respect to the portfolio, making sure that we're driving a really robust front-end work to be able to speed up the development cycle and get those new introductions to market more quickly.

I would say with respect to the DuPont of the past, we're materially different with respect to where we're placing our bets. And so all of our bets are primarily within the application development space. They are working with our customers, understanding their key technological challenges and making sure that we're addressing those. They're not kind of presupposing large opportunities that don't exist today and doubling down on that. So all of the investment is really aimed at customer pipeline and working side-by-side with our customers to be able to solve their challenges.

And then just quickly for the second quarter, can you give us a quick breakdown on where price versus volumes fell across the 2 segments?

So overall, I would say, of our corporate set organic growth, there was about 1 point of price. And I would say that was pretty equally split between the 2 segments.

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

I wanted to ask on the cash flow. Obviously, very strong performance looked across all the buckets of working capital, it looked like it was very well done. So just curious how you're thinking about that into the back half of the year. Is there any reversal of that? Or where you think overall conversion might be for the full year? .

Yes. So starting with the second part of your question first. So I would clearly expect that on a full year basis, we're much closer to 100% than we are to the 90% in terms of conversion. To your point, a lot of that is working capital. We have a large focus on that in the organization, whether that's in our DSO or DPO or our inventory days that's what helped drive the Q2 free cash flow conversion.

I mean, typically, when you look at our free cash flow, the first quarter is usually the lowest quarter. Things typically get better in the second quarter. We also have our interest payment in the second quarter. And typically, the second half is better than the first half. Sometimes there's some timing of certain tax payments and things like that, that [indiscernible] it, but that's the overall kind of, I would call it, seasonality of our cash flow. So we expect to have a really strong cash flow year.

Certainly looks like as a follow-up, on Slide 4 in the commercial bucket there, with the AI initiatives, you talked about the 50 sales plays, 150 opportunities and the 30% win rate. I guess my question would just be, is AI making that win rate? I mean, clearly, you were going out on commercial exercises in the past. But is the win rate now higher with AI? Or is it about the same? Or what are you seeing there? .

So the win rate of the 30% that we mentioned on the AI sales place, those were primarily in the garment business. Our typical win rates were in the high teens. So you can see kind of the outperformance. I wouldn't say the win rate was serving by the AI work. It was -- the AI work really just helped our speed to market. And so in the past, when we would have run a sales play to say, a couple of months to be able to get ready to launch. Now we did it in 4 weeks. And so the AI is really helping on the pace. I would say the win rate piece is enabled by the enhanced commercial organization are putting in place across the garment business. So really more of the mindset of a hunter mentality and being able to go out and get a better sales performance.

I had mentioned we got about $5 million or $6 million in incremental garment sales alone from the sales plays that we launched.

Your next question comes from the line of Patrick Cunningham with Citi.

This is Rachel on for Patrick. On the Industrial Technology side, can you just expand maybe on which parts of the portfolio is maybe accelerating higher than others? And what sort of order book to bill you have there?

Yes, I'd say we saw a really nice performance from an organic growth perspective on both the building technology side as well as the industrial technology side. So in building technologies, we were up low single digits. That's our construction-type business. We did see growth across residential and nonresidential is really what drove it to one of the points that Lori had mentioned earlier, I would say we're clearly outperforming in the residential space, given the market, I would say, would be down, and we had some growth in that area. We're a bit more in line, I would say, on the nonresidential as well as the repair and remodel side of the house.

And then when you look at industrial technologies had a really nice quarter, organic growth in the mid-single digits. The order book is doing well. We're seeing the nice inflection there. We're starting to see that short cycle come back. And we do expect to see -- to continue to see the growth that we saw in the second quarter kind of progress into the second half of the year.

Got it. That's very helpful. And could you just talk about the level of spending driven demand in water and just expand on whether that growth profile has changed over the last year given the acceleration in AI and events nodes.

Yes. So on the water side, it's really providing ultra-pure water to the chip manufacturer. So that's where we saw the nice growth. I would say it was kind of up in the 20%-plus range where we've kind of seen the past several quarters, and we expect it to continue to grow. So as you know, obviously, the AI revolution continues to take hold. We've got participation in the water business with respect to the ultra-pure water opportunity.

Your final question comes from the line of Abigail Evertz with Wells Fargo.

One more on residential construction. Can you just speak to what drove that above market growth there?

Yes. For us, it was predominantly in the multifamily space that we're -- we have a nice position in. We saw some nice growth there within the quarter. I would say single-family homes continues to be, I would say, very soft in the space, but we did see some really good activity in the multifamily that was driving our residential space.

That will conclude our question-and-answer session. I will now turn the call back over to Ann Giancristoforo for closing remarks.

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

Ladies and gentlemen, thank you all for joining. You may now disconnect.

Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the DuPont First Quarter 2026 Earnings Call. [Operator Instructions]

I would now like to turn the call over to Ann Giancristoforo, VP of Investor Relations. You may begin.

Good morning, and thank you for joining us for DuPont's First Quarter 2026 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 detailed discussions 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.

I'll now turn the call over to Lori, who will begin on Slide 3.

Good morning, and thanks, everyone, for joining our call. Earlier today, we reported our first quarter financial results, which exceeded our previously communicated guidance. Through disciplined commercial and operational execution, we delivered organic sales growth of 2%, 130 basis points of pro forma margin expansion and double-digit adjusted EPS growth. Free cash flow generation and conversion were solid in the quarter.

As a result of our first quarter performance, along with price increases due to the Middle East conflict, we are raising our full year 2026 financial guidance. Antonella will provide further details shortly. We also announced that we expect to launch a $275 million accelerated share repurchase under our existing program. A clear example of how we continue to advance our strategic priority of driving disciplined capital allocation by returning cash to shareholders.

On the next slide, I will cover the progress we are making on driving growth and continuous improvement. We completed the previously announced divestiture of the Aramids business on April 1. We are confident in [indiscernible] ability to continue to drive growth and opportunity for the employees and customers of the combined businesses. We also recently issued our 2026 sustainability report and announced our new 2035 sustainability goals. The progress we made in 2025 highlights the power of our innovation engine, creating sustainably advanced solutions that help our customers succeed. We continue to reduce our environmental footprint and increase the use of renewable energy sources across our operations while maintaining a strong focus on execution and discipline.

Safety and culture continue to differentiate DuPont with record safety performance and high employee engagement reinforcing the connection between what we do every day and the value we create for our customers. Our 2035 goals reinforce our commitment to delivering value by embedding sustainability directly into our business strategy. These goals focus on 3 impact areas. Sustainable innovation, resilient operations and people, partners and communities. They are designed to drive growth through innovation, operational excellence and accountability across our value chain while also advancing progress in areas such as climate action, circularity, safety and responsible sourcing.

Moving to Slide 4. We continue to advance our strategic priorities and are seeing direct impacts from the implementation of our business system. We strengthened our performance-based culture with a clear emphasis on growth and continuous improvement, reinforced by the launch of our refreshed core value. This is enabling greater consistency across the businesses as we drive excellence in innovation, commercial execution and operations.

Starting with innovation. It remains at the core of our value proposition. Our 2025 [ Vitality ] Index was 35% above the benchmark we previously outlined reflecting the strength and relevance of our product portfolio. During the quarter, we delivered a steady cadence of new product introductions and customer wins across health care, water and diversified industrial end markets. Recent launches include upgraded FILMTEC nanofiltration elements designed to help municipalities and drinking water utilities produce high-quality water with lower energy consumption and reduced operating costs. These innovations are being enabled not only by strong R&D execution but also by continuing investments in digital and AI capabilities.

Last week, we announced that we are collaborating with [indiscernible] an AI-driven platform for end-to-end product and application development, focused on accelerating development, improving cycle times and sharpening how we translate ideas into differentiated solutions for customers. This collaboration streamlines and accelerates the work we have been doing on connected lab infrastructure and digital innovation.

From a commercial standpoint, we are making steady progress in demand generation and pipeline discipline. Across the businesses, we are advancing targeted sales leads that bring together our technologies and application expertise to address specific end markets where we see attractive growth and differentiated value. We continue to standardize how opportunities are identified, reviewed and advanced, supported by a clear cadence, better data quality and stronger collaboration between commercial, technical and operations team. These efforts are driving better visibility, improved conversion and stronger alignment between our commercial team and customers' highest value needs, improving the quality and durability of our pipeline.

On operational excellence, our teams remain intensely focused on the fundamentals. Safety, quality, delivery, inventory and productivity. During the quarter, we delivered meaningful improvements in asset reliability and equipment effectiveness across our key facilities, which supported better on-time delivery and stronger operational throughput. At the same time, we continue to drive productivity through focused maintenance and reliability initiatives, main execution and Kaizen activity across our sites. I am personally excited as we recently kicked off our annual CEO Kaizen event, in which myself and the executive leadership team will each participate in events focus on strengthening our value creation processes across the company.

We are also advancing how we operate by pairing process discipline with digital and AI capabilities. Over the last several quarters, we have expanded the use of data-enabled tools to improve maintenance, planning, accelerate defect detection and optimize asset performance. These capabilities are allowing our teams to convert operational data into actionable insights faster, improving reliability, reducing variability and reinforcing safe operations, all while delivering cost and productivity benefits.

Importantly, this operational rigor positions us well as we navigate a dynamic external environment. While we are mindful of potential macro and geopolitical headwinds, our focus on productivity, automation, and structural improvement is creating resilience in the businesses. We are building a strong pipeline of Kaizen events and improvement projects for the balance of the year aimed at sustaining momentum in growth and productivity.

Our first quarter results demonstrate that we are off to a great start. Our April sales were in line with our expectations, and we continue to see strong order growth trends across the majority of our businesses. Our teams continue to focus on driving growth and operational discipline and our strategic priorities position us well for long-term value creation.

With that, I'll now turn the call over to Antonella to cover the financials and outlook in more detail.

Thanks, Lori, and good morning, everyone. The first quarter marked a strong operational start to the year, with results exceeding our financial guidance. Favorable top line mix and effective productivity actions drove strong operating EBITDA performance and meaningful margin expansion in the quarter. Throughout today's call, I will provide comments on our results against our prior year reported financials, as well as on a pro forma basis, which adjusts for our post-separation corporate costs, interest expense and income tax rate. This is consistent with the methodology and financial metrics that we provided at our 2025 Investor Day.

Beginning with our first quarter financial highlights on Slide 5. Net sales of $1.7 billion were up 4% versus the year ago period on 2% organic sales growth and a 2% benefit from currency. Organic sales growth was led by strength in health care and aerospace, partially offset by continued softness in construction markets and logistics disruptions due to the conflict in the Middle East. These disruptions primarily impacted sales in our water business in the quarter.

From a segment view, during the quarter, organic sales grew 3% in Health Care & Water Technologies with organic sales growth about flat in Diversified Industrials. First quarter operating EBITDA of $414 million increased 15% versus the year ago period on organic sales growth, favorable mix and productivity. This resulted in operating EBITDA margin of 24.6% in the quarter, an increase of 230 basis points year-over-year. On a pro forma basis, operating EBITDA increased 10%, with margins expanding 130 basis points year-over-year.

Turning to cash flow. We delivered transaction-adjusted free cash flow of $147 million and related conversion of 65%, a solid start to the year.

Turning to Slide 6. On a reported basis, adjusted EPS for the quarter of $0.55 increased 53% year-over-year. On a pro forma basis, adjusted EPS for the quarter was up 20% versus the year ago period. The increase was primarily driven by higher segment earnings of $0.06 with an additional $0.03 benefit coming from a lower tax rate, share count and exchange gains and losses.

Turning to Slide 7. Healthcare & Water Technologies first quarter net sales of $806 million were up 6% versus the year ago period on 3% organic growth and a 3% benefit from currency. For the first quarter, health care sales were up high single digits percent on an organic basis versus the year ago period. Organic growth was broad-based, led by continued strength in medical packaging and biopharma. Broader sales were down low to mid-single digits percent on an organic basis as strength in industrial water and microelectronics markets were more than offset by logistics disruptions in the Middle East.

Operating EBITDA for the segment during the quarter of $244 million was up 9% versus the year ago period on organic growth, favorable mix and productivity gains. This resulted in operating EBITDA margin of 30.3% in the quarter, an increase of 110 basis points year-over-year.

Turning to Diversified Industrials on Slide 8. First quarter net sales of $875 million increased 3% versus the year ago period on a 3% benefit from currency. Organic sales growth was about flat in the quarter. At the line of business level, organic sales for building technologies were down low single digits percent on continued weakness in construction markets. Industrial technologies organic sales were up low single-digits percent as continued strength in aerospace and growth in automotive were partially offset by declines in the printing and packaging businesses.

Operating EBITDA for Diversified Industrials of $200 million was up 8% versus the year ago period on favorable mix and productivity. Operating EBITDA margin during the quarter was 22.9%, expanding 110 basis points versus the year ago period.

Turning to Slide 9. We are raising our full year 2026 financial guidance, given our strong start to the year as well as now including the interest income benefit from the Aramids transaction. For the second quarter, we estimate net sales of about $1.8 billion, operating EBITDA of about $430 million and adjusted EPS of $0.59 per share. Our second quarter net sales guidance assumes about 3% organic growth year-over-year. Currency is expected to be a slight tailwind in the quarter.

For the Healthcare & Water segment, we expect second quarter organic sales growth in the mid-single digits percent range, led by strength in medical device, biopharma and industrial water markets. For the Diversified Industrial segment, we expect second quarter organic sales growth in the low single digits percent range on continued strength in aerospace and growth in printing and packaging, partially offset by continued softness in construction markets.

For the first half, our estimated net sales of about $3.5 billion assumes growth of about 4% year-over-year. This translates into operating EBITDA of about $844 million, a year-over-year increase of about 8% on a reported basis and 7% on a pro forma basis, resulting in strong operating leverage and an incremental margin greater than 40%. Our first half net sales and operating EBITDA guidance, both represent approximately 48% of our total expected full year results at the midpoint. This is in line with our historical sales and earnings cadence.

For the full year 2026 at the midpoint, we now expect net sales of about $7.185 billion, a net increase of $80 million versus our prior guide. Our full year net sales guidance now assumes about 4% organic growth, including about 1% from pricing actions taken to fully offset higher input costs due to the Middle East conflict. A stronger U.S. dollar has also reduced our expected full year currency benefit to less than 1%.

Operating EBITDA at the midpoint is now expected to be about $1.745 billion, primarily reflecting our stronger first quarter results partially offset by currency headwinds. Our adjusted EPS range is now expected to be $2.35 to $2.40 per share, a $0.10 increase versus our prior guidance. Our EPS guidance now includes benefits from higher interest income due to the Aramids transaction as well as a lower tax rate which we now expect to be in the 24% to 25% range. At the midpoint, our adjusted EPS is about a 40% increase on a reported basis, and a 15% increase on a pro forma basis.

With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A.

[Operator Instructions] Your first question comes from the line of Scott Davis with Melius Research.

Congrats on second kind of clean quarter in a row, numbers look pretty good overall. But a couple of kind of big picture questions. I mean you guys have been implementing 80/20. Where are we in that process? And what kind of impact has that had on your top line?

Yes. So we are well into the process within the Diversified Industrials portfolio. So we selected 4 businesses to start, and we're about 2/3 through the initial study. We didn't have any impact in the full year guide on either top line or margin with respect to any implementation, but we would expect over time to see nice margin appreciation with minimal top line impact as we look to improve the margin profile of the businesses and scope.

Okay. Fair enough. And then -- well, I'm going to move on to stranded costs. Where are we with stranded costs in the quarter and for the year. I can't recall what you expected? .

Yes. So Scott, we had estimated overall. There's about $30 million of stranded costs, which we committed to taking out within the first 2 years. So this year, we'll have a nice start on that. So for the full year, we'll have approximately like $10 million out from a run rate basis, we'll be actually halfway there. So I would tell you, we're right on cadence with where we expect to be. And again, we expect to have that out in the first 2 years.

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

So I wanted to dig into the water business a little bit more. And especially just given some of the headwinds that you're seeing around the Middle East logistics. I guess a couple of things on it. Can you help us to think about the cost of navigating around some of these issues. Can you speak to also the customer base? And if there's been any -- I know there's been some [indiscernible] impact in the region. I guess any of your customers that may not be coming up, say, when things resume or the strait reopens, et cetera. Can you just help us to think about that?

Yes, thank you. So in the quarter, we had about $10 million of sales that weren't able to ship out of the Middle East. And so if you look at the results for water, we were down kind of low to mid-single digits. If you isolate out that impact of $10 million, we would have been about flat to slightly down. Those materials have already shipped in April, and so we continue to be on track with respect to our Q2 expectations.

We didn't bake in a ton of disruption in Q2 with respect to the Middle East for the water business. We will, on a full year basis, continue to expect to be up mid-single digits for water. It's about flat in the first half and then up in the second half, really driven by the timing of some large projects. And so large projects last year were the reverse of this year where they were stronger in the first half in the second half. But the underlying kind of consumables or recurring revenue business is growing nicely each quarter.

With respect to the impact from our customer base, nothing as of this point. So there have been a little bit of disruption in our site in Saudi Arabia, but nothing that we can't navigate around. We do have some large projects in the second half in the Middle East around the [indiscernible] as you had mentioned. Right now, we continue to expect them to be on track, but we'll have to watch as the broader situation evolves.

Got it. Okay. No great results in a really tough, tough environment. I guess our second question would just be around the operational side. So the margin is clearly coming in really strong at this point. I guess how much of that is mix versus some of the operational improvements you were speaking to? And if it's more leaning toward the latter? It seems like you're -- if anything, you're solidly ahead of kind of the 150 to 200 basis point target that you had set for the next 3 years, I guess any thoughts or comments around that?

Yes. So first quarter margins were very strong, as you mentioned. And I would say we got a benefit of both actually. So mix was quite positive in the quarter. That added about 50 basis points of margin. But I would also say net productivity was about another 70 basis points of margin. So again, really strong performance as we move forward.

When you take a look at our full year guidance that we have, margins continue to be strong. And even when you go to the first half to the second half, there's another incremental 40 basis points of margin expansion. So to your point, I would say we are well on our way to our 3-year targets that we laid out at our Investor Day.

Your next question comes from the line of Christopher Parkinson with Wolfe Research.

Just as it relates to your health care exposure, obviously, it seems like you're building a decent amount of momentum there. You addressed this at your Analyst Day, but I'd love to hear your updated thoughts. Just in terms of your balance between [ PB, ] biopharma, med device, and some of the larger secular trends that's going on. And do you feel you're underexposed to anything within that spectrum non pun intended? And is there anything that you think you'd like to add to the portfolio to really round it out?

So our overall health care segment is about $2 billion in sales. So it's about $1.2 billion of Tyvek sales and the remainder being the [indiscernible] sales and underneath Tyvek about half of that is health care packaging and the rest primarily are the [ garment. ] So we like our exposure as we sit today, we're nicely positioned in the med device profile between both spectrum on the CDMO side and then also on the Tyvek health care side with packaging needs.

So we've got an intent to continue to add to that piece of the portfolio. We've got a nice robust pipeline of assets that are both accretive to growth and also affordable. So there are assets that we would like to add, whether it's around the packaging side to have a broader net packaging offering or whether on the CDMO side, they continue to round out our sales into that space.

With respect to our appetite for M&A, we obviously closed the Aramids transaction on April 1. So we got about $1.2 billion of gross proceeds, about $1.1 billion net proceeds. We will continue to be balanced. We announced the $275 million ASR this morning. And we also continue to be prudent. So we're not going to lever up to do a deal. We targeted 2x leverage. We're a little below that today. So between the dry powder we have on the balance sheet as well as the remaining proceeds from the Aramids divestitures, it puts us in good position to also take advantage of potentially an accretive growth deal for us.

And just as a quick follow-up, just kind of a broader question on pricing in terms of the second quarter and also the second half environment. Just how are you thinking about this by segment in terms of what you're seeing in your inputs, transportation, logistics cost. Just obviously, a lot of moving parts. I'd love to just hear your thoughts on strategy and how quickly you believe the organization can pivot?

Yes. So I would say the organization has done a great job pivoting as all this has started. So we already have surcharges as well as certain price increases in place to cover these incremental costs. So overall, our expectation is around incremental cost of around $90 million, which we expect to fully cover from a top line perspective related to price and surcharges. As you would expect, it's starting in Q2, so we don't have a full run rate in the second quarter, but the second half will have a full run rate. Just to put a little bit of numbers around it, the second quarter is around $25 million or so of price on the top line to cover those costs.

Your next question comes from the line of Chigusa Katoku with JPMorgan.

Congrats on a great quarter and a challenging operating environment. So I just wanted to follow up on the price cost. So margins were really strong this quarter. If my math is correct, it looks like it's going to step down to around 24% in the second quarter. So if you could just help me understand the puts and takes around this. I think that you plan to institute price increases on April 1, you had inventory. So I think meaningful raw material inflation as opposed to come be felt around maybe late 2Q, but any moving pieces here? And what's impacting the doctor margins in the second quarter?

Yes. So when you go from the first quarter to the second quarter, 2 things to keep in mind, price cost, to your point, we have pricing actions we'll have costs in the P&L. That's about a 30 basis point margin headwind. And there's about 40 basis points of a margin headwind from Q1 to Q2 related to mix. So that's your Q1 to kind of Q2 walk relative to where we're at, but underlying performance continues to remain very strong.

When we talk about kind of what's embedded in terms of the full year, and the timing of that. So we did have some that started in April, I'll tell you, a majority of increases related to surcharges and price increases started on May 1 because there is some customer notification time that's needed relative to that. Obviously, every product that we have in inventory has different terms associated with it. So keep in mind that these increased costs started at the latter end of the first quarter. So we definitely have some impact related to that in the second quarter. And as I mentioned, when you take the difference between price on the top line and costs on the bottom line, it's about 30 basis points of the headwind in the quarter.

Okay. Great. So is my understanding correct that the majority of increases started in May versus April. So you haven't been seeing the order trends. I guess, maybe put it differently, after you started some price increases in April, how have order trends been compared to March?

Yes. So as Lori mentioned, I would say our order trends in April were actually -- we have very similar demand as we have been seeing and nice increases overall on a year-over-year basis. So order trends are doing well.

Your next question comes from the line of John Roberts with Mizuho.

I think you noted strength in automotive during the quarter. Maybe you could comment a little bit on where that came from and how sustainable that might be since I think the auto outlook is not that rosy right now.

Yes. So we've got automotive. It's primarily within the industrial technologies line of business within Diversified. So we've got the predominant exposure within [indiscernible] we also have physicians in [indiscernible]. So our outperformance amid a tough market, as you had mentioned, is really based on the battery adhesive volumes that we have.

So we've got about roundly $300 million of sales that go into EVs. A piece of that is battery, which is all incremental growth for us, and it's growing nicely in the year, well above kind of where the 20-ish percent EV growth expectations are because it's new volume for us and new wins. So we continue to be positioned nicely and realize the pipeline has been building over the last couple of years, frankly, as we got qualifications with the large OEMs.

And then just a clarification. When you talk about desalination, is that municipal to you? Or is that industrial to you?

It's primarily industrial. Primarily RO as well. It's the reverse osmosis component of water.

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

I wanted to follow up on just the Middle East impacts around water. I think on some of the pre-closed conversations, there was messaging that there were maybe $25 million a month in sales into and out of the Middle East. And there is an inability to get material out, I guess, while the strait is closed. Just based on your comments about not really baking in much in terms of the outlook, have you found alternative routes for those materials? I guess it sounds like you've mitigated that, but I'm not 100% clear. So can you expand on that a bit more? .

Sure. So let me size up our total exposure related to the Middle East. So in total, it's around $300 million, about 4% of our top line. Half of that is related to sales into the Middle East and the other half is related to things that are sourced from the Middle East. So when you kind of do the math around that and 1 month of the strait being closed, that's kind of where the $25 million came from. As we mentioned earlier, there was about a $10 million impact to the top line in the first quarter related to products that we weren't able to get out. So that clearly tells you we have been able to mitigate quite a bit of that and obviously have taken that into consideration relative to our Q2 guidance.

But I guess if I take that then in those comments, it seems like half of it is still impacting, maybe a little bit less. So is there something to the tune of $30 million to $40 million in sales and maybe 1/3 of that in terms of EBITDA impact in 2Q to assume that the impacts linger or does that lessen through the quarter and therefore, this whole map becomes somewhat not necessary?

All that math is not necessary. I would say that the teams have done a great job to find alternative routes in order to get some products out and to make sure that we have the necessary raw materials in order to be able to produce at the site as well. So again, the teams have stepped in very quickly to find alternatives related to that. We were able to have minimal disruption as in first occurred and clearly have plans in place as we move forward.

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

Lori, just on construction, can you talk about the weakness in those markets? And how much is it down for you guys in Q1 and your expectations for the first half of the year?

Yes. So we continue to expect overall construction markets to be about flat on a full year basis. We do have about 1% price in that space that will give us some slight organic growth but it's really kind of slightly down in the first half and then slightly up in the second half.

So in the first quarter, we were down low single digits. Our performance was in line with the market where the resi, primarily North America resi continues to be weak and then you're seeing about flattish in the commercial and do-it-yourself base once you back out the data center volume that happened in commercial, our commercial is more on the health care, education, retail side.

Very good. And just on the Middle East conflict, are there any opportunities longer term from you being a more U.S. supplier, reliable supplier at lower cost overall down the road?

Yes. I mean I think there's always opportunities that we're looking for to be able to continue to expand both our share and our TAM. Not only are we well positioned from a share perspective, we're also well positioned with where our asset base sits, which has enabled us to navigate quite a few disruptions over the past couple of years. So starting back with tariffs, we were able to move product around our supply chain to mitigate the headwind there. And then now with the Middle East tariffs, we've been able to move volume around to be able to mitigate the impact that was felt initially within our KSA plant in Saudi Arabia. .

Your next question comes from the line of Matthew DeYoe with Bank of America.

So health care sales seem to be like accelerating quite a bit. I wanted to just dig in a little bit more on comps versus market versus owned portfolio position for 1Q. And as we look, I guess, to the guidance a bit, you're looking for 4% on the year, 1% from price. I think 1Q is probably closer to 1.5%. And so I kind of bridge this like 1.5%-ish from 1Q to 3% for the back half. It seems like maybe normalization of water, but can you fill in the gaps and maybe how that also relates to how health care should trend from here?

Yes. So we had a very strong quarter with health care in Q1, where our results were up high single digits organically. That was really nice volume and some nice price as well. And we continue to expect health care to be up mid-single digits as the year progresses and land at maybe mid- to high single digits on a full year basis.

So we have really nice positions I had mentioned on the health care packaging side and see nice growth in procedures that influenced both the med packaging as well as the spectrum side. [ Livio, ] which is our biopharma business, a really, really nice results in Q1. So there's a nice recovery in demand there that will continue to see nice results. And then maybe just quick on water. I had mentioned that it was down in the first quarter that was really more around the $10 million of volume that didn't ship as well as the timing of large projects. So we'll be will be about flat overall in water in the first half and then we think up kind of high single digits in the second half really around the project timing volume to land at mid-single digits for the full year.

The only thing I would add to that is just around the water business, although it's relatively flat first half, high single digits in the second half, if you adjust for the timing of the projects and normalize that, you're more going from like a 4% growth to a 5% growth.

Okay. And then quickly, so Tyvek's been able to absorb a fair amount of raw material pressure in the short time. And I'm looking at obviously, some of your suppliers talking about another $0.20 per pound for May. And I don't know we'll see if they can get it, right? But I'm wondering, is there kind of an ongoing propensity to be able to push surcharges in a world where this gets increasingly sketchy. I'm thinking almost maybe a little bit more on the building products side because I feel like health care would probably be less plastic, but maybe that's not the case.

Yes. I mean we had nice success with both mix of prices and surcharges that we already put in place, whether it was April 1 or May 1. And so I think if you can provide the documentation to your customers around what we're seeing with respect to input costs, as we had mentioned, are most felt on the [ HDPE ] side, as you had mentioned within TYVEK and then with the [indiscernible] side in water and [indiscernible]. But there's other pieces that we've seen as well.

So I think there's -- we haven't received an abnormal amount of pushback. Obviously, there's always a discussion that needs to be had, but we're not looking to profit. We're looking to just cover it, and the conversation has been constructive.

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

You called out some weakness in packaging. We've been hearing sort of mixed things about the packaging arena. So maybe you could just talk about what you're seeing there what the outlook is for the remainder of the year? And I would assume there's also some inflation there that you need to push through.

Yes. So our impact in the packaging business weakness in the first quarter was really more around the [indiscernible] business in scope. It's really around home and office shrinking. It was a tough comp from a strong first quarter of last year. I think on a full year basis, we see the overall printing and packaging businesses normalizing being up kind of low single digits.

Okay. And I think the answer to this is there's nothing. But is there -- is there any at all update to [ PFAS ] or anything that's going on with the personal injury litigation?

Happily, no.

Your next question comes from the line of Patrick Cunningham with Citi.

You previously noted, I think, free cash flow greater than 90% for 2026. Is that still the case? And how should we think about working capital dynamics given the higher input costs potentially impacting cash generation cadence for the year. .

Yes. So first off, yes, free cash flow generation is still expected to be greater than 90% for the year. As I mentioned in our prepared remarks, our first quarter conversion was around 65%. So we did have a good start to the year. As you would expect, we tend to have a stronger free cash flow conversion in the second half of the year than the first half of the year, predominantly in the third quarter as we have our interest payments twice a year in Q2 and in Q4. Clearly, the increased cost in materials will increase your inventory dollar value, but the teams, I would say, are doing a good job relative to our inventory days outstanding and kind of taking those numbers down on a year-over-year basis.

So we do have that embedded within our free cash flow conversion. So I would say we are managing working capital very well, and the teams are also focused not only on inventory but as well as DSO in terms of collections, which will put us in a good spot to achieve our free cash flow conversion for the year.

Great. And then I think this is the first time you kind of explicitly called out microelectronics within water. So can you help us size the business there? What sort of growth rates we should expect? And any color on market penetration, new technology, new wins?

Yes. So microelectronics is primarily within ion exchange. So it's about 20% of ion exchange. We saw nice volume in the first quarter, as you would expect, just around the broader data center trend. So we continue to expect to perform nicely there with that business. .

Your next question comes from the line of Mike Sison with Wells Fargo.

This is [ Avi ] on for Mike. I wanted to confirm your assumptions underpinning your full year '26 guidance. So when are you assuming the conflict in the Middle East resolved, if at all? And if it stretches to the end of the year, does that mean you're going to have to raise prices of more than 1%, offset incremental raw material inflation do you think you'd see any demand destruction if it stretches that long? Any color you can give would be helpful. .

Yes. So I would say our overall full year guidance anticipates that the current situation continues through the remainder of the year. So current oil prices, current natural gas prices, our assumption is that continues all year long. That is covered by the pricing actions that we have already put in place. Clearly, if this were to escalate or get even worse from where we are today, that would obviously have some impact on the assumptions that we've made, but we're not planning on it going away. Also, I would tell you if things were to escalate from where we are today, the teams would obviously see what other actions that we could take in order to mitigate any disruptions.

Got it. And then just pivoting back to health care, can you just talk about some of the underlying demand trends that are driving growth across the medical packaging and devices spaces. .

Yes, a lot of it is around the aging population and health care access. So that's one of the key global mega trend drivers for both med packaging and the health care needs. A lot of our exposure on the Med packaging side to the higher-end Class 3 devices and on the med device side with spectrum, it's really around cardiovascular and higher-end growth not elective surgery type application. So really, with the aging population and the access to health care is what's driving that megatrend.

And the last question will come from Arun Viswanathan with RBC Capital Markets.

Sorry, I was on mute. Apologies for that. I guess just 1 final question for me was given that you've had many years of portfolio transformation here, would you expect -- and maybe you can just provide us an update on the 80/20 strategy within Diversified Industrials and so -- there's any further portfolio reconfiguration that we can expect?

Yes. So the 80/20 work within Diversified is really to look at enhancing margin profile. So we had targeted 4 businesses to start and have been working through a really robust process on making sure that we're looking at the [ tailspin, ] looking we're investing, making sure that we're investing for growth in pockets of where there's opportunity across those businesses. I would say more broadly with respect to the portfolio, we're excited about the portfolio that we have. It's nicely balanced between Health Care & Water and Diversified Industrials. We're about 50-50 today. We've mentioned that over the medium term, we would like to get to more 2/3, 1/3 with respect to growth above market. So moving more of the company more towards that Health Care & Water space. But as of now, we're happy with the portfolio. But we'll always be looking, as I had mentioned, due to some M&A, we've got dry powder and cash from Aramids to be able to potentially take advantage of some good opportunities.

Okay. And sorry, just 1 more. Given the $275 million ASR, is that really the last kind of accelerated repurchase activity that we should expect? Or maybe you can just comment on your outlook for further buybacks or yes, capital return. .

Yes. I would say, overall, we're always looking to see what's going to bring the best return to our shareholders. So we already had completed, as we announced in the last quarter, the $500 million ASR. We now announced this morning an additional $275 million ASR. As Lori mentioned, we do have a lot of flexibility relative to the cash in the door related to the Aramids transaction as well as the balance sheet we have. So we will continue to evaluate. As a reminder, we do have a $2 billion program, of which we've used the $500 million and now the $275 million. So we'll continue to evaluate our opportunities, and we'll act on what brings our shareholders the most amount of value.

I will now hand the call back over to Ann Giancristoforo for closing remarks.

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.

Thank you. This concludes today's conference call. You may [ now disconnect. ]

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome you to DuPont's Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ann Giancristoforo, Vice President, Investor Relations. Ann, please go ahead.

Good morning, and thank you for joining us for DuPont's Fourth Quarter and Full Year 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 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 has been posted to DuPont's Investor Relations website.

As a quick reminder on the basis of presentation for our fourth quarter and full year financial results, our total company net sales, operating EBITDA and adjusted EPS reflect the separation of Qnity and the previously announced divestiture of the Aramids business 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 fourth quarter call. Earlier today, we reported our fourth quarter and full year financial results, which were ahead of our previously communicated guidance. We finished the year strong, delivering full year organic sales growth of 2%, operating EBITDA growth of 6% and 100 basis points of margin expansion. Operational discipline and a focus on productivity were key to our earnings growth and margin improvement.

These results led to an adjusted EPS of $1.68 per share, up 16% year-over-year. Free cash flow generation was strong in the year. While delivering on our financial metrics, we also executed significant operational and portfolio transformation during the year. We successfully completed the separation of Qnity Electronics, up a premier pure-play technology solutions partner to the semiconductor value chain.

We also completed the build-out of my executive leadership team, adding external talent from well-run companies as well as promoting within the organization. We set the strategic direction of New DuPont, starting with enhancing our core values to drive a culture focused on growth and continuous improvement. This includes building a robust business system and continuing the progress on both our commercial and operational excellence framework.

Finally, we set clear and robust medium-term financial targets aligned with our performance-based culture. I want to thank our employees for remaining focused on delivering these results and driving the transformation during the year. The momentum and progress we made in 2025 is carrying forward to our 2026 strategic priorities, which I will cover on Slide 4.

Consistent with what we outlined at Investor Day, our strategic priorities for 2026 are clear: Drive above-market organic growth, continue to build out a robust business system, deploy a balanced capital allocation model, all while consistently delivering financial results. 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 2% organic growth for full year 2025 and expect it to accelerate to about 3% in 2026. We are well positioned in secular end markets and our top line growth will continue to be bolstered by our innovation engine, which launched more than 125 new products in 2025. Our new products generated greater than $2 billion in sales this past year, and our vitality index remained strong at about 30%.

We are advancing the build-out of our business system and made significant progress last year. We introduced a core set of enhanced KPIs focused on driving improvement for our shareholders, customers and employees. These KPIs are embedded in our refresh set of management standards, which has added more visibility, rigor and structure to our business processes. In addition, we will continue to expand the use of Kaizen events across the businesses and functions to identify areas to drive productivity, improve end-to-end processes and accelerate commercial development.

On commercial excellence, we continue to advance the framework across commercial enablement, sales effectiveness and strategic marketing. We have completed a maturity assessment resulting in the identification of key initiatives in 2026 that are primarily on demand generation and pipeline discipline. Operational excellence enhancements will continue in 2026.

Last year, we rolled out an updated set of KPIs aligned with our focus on safety, quality, delivery and cost and refreshed our excellence toolkit with a stronger focus on lean methodologies. In addition, we invested in people and process capabilities across our supply chain and quality functions in order to enhance the customer experience. These improvements and investments will drive overall productivity in 2026.

Across these disciplines, we are also actively deploying digital capabilities and AI to accelerate our progress. Within innovation, we are making investments in our lab to enable streamlined workflows and accelerate our product Within operations, we are utilizing tools in the reliability and maintenance base to improve uptime and reduce costs. And on the commercial side, we are focusing on investments in workflow and process automation to improve the customer experience.

On capital allocation, we have a proven model that enables both consistent investments and high-return organic opportunities as well as bolting on to existing businesses with M&A to enable even greater returns. A strong balance sheet is a priority for us. We will continue to return cash to shareholders through a quarterly dividend, in line with our targeted payout ratio as well as utilizing share repurchases.

We previously announced a $2 billion share repurchase authorization, and we executed a $500 million ASR in the fourth quarter of 2025. With these priorities, let's move to our 2026 outlook on Slide 5.

Our financial guidance for 2026 is in line with the medium-term targets that we outlined at our September Investor Day. On a reported basis, we expect organic sales to grow about 3% year-over-year, operating margins to expand 60 to 80 basis points and adjusted EPS of $2.25 to $2.30 per share. On a pro forma basis, our EPS will grow 10% to 12% year-over-year. Free cash flow generation will be solid with an expected conversion of greater than 90%.

Underpinning our organic growth is a mixed macro environment. Market indicators for health care and water technologies continue to expect mid-single-digit growth in both spaces on increasing medical procedures to support an aging and growing population and strong global wire demand. Overall automotive demand is about flat in 2026 with weakness in the U.S. and Europe. However, we continue to expect EV builds to significantly outpace overall build.

In construction, after years of decline, market stabilization is expected with flattish demand year-over-year. We are off to a good start to the year. Our January sales were in line with expectations, and overall, we are seeing improving order trends in our Industrial Technologies business, which we view as an indication that these markets, which were down last year, are beginning to stabilize and recover.

Overall, our teams are executing with a focus on driving growth and operational discipline, and our strategic priorities position us well for long-term value creation.

With that, I'll now turn the call over to Antonella to cover the financials and outlook in more detail.

Thanks, Lori, and good morning, everyone. The fourth quarter marked a strong operational finish to the year. We exceeded our financial guidance on better-than-expected top line mix and productivity, resulting in strong EBITDA and margin improvement in the quarter.

Beginning with fourth quarter financial highlights on Slide 6. Net sales of $1.7 billion were about flat versus the year ago period as a 1% organic sales decline was offset by a 1% benefit from currency. Organic sales consisted of a 1% decrease in volume, which included a $30 million or 2% headwind from order timing shifts into the third quarter from the fourth quarter due to system cutover activities in advance of the electronic separation.

Adjusting for the timing shift, organic sales would have grown 1% in the quarter. Looking at the second half, organic sales increased 2% versus the year ago period. From a segment view, during the quarter, organic sales grew 3% in Healthcare & Water Technologies, offset by a 4% decline in Diversified Industrials. From a second half perspective, Healthcare & Water Technologies grew 5% on an organic basis, partially offset by a 1% decline in Diversified Industrials.

From a regional perspective, in the quarter, we saw organic growth in Europe, up 2% year-over-year, with Asia Pacific down 2%. North America was about flat year-over-year. Fourth quarter operating EBITDA of $409 million increased 4% versus the year ago period on favorable mix and cost productivity. Operating EBITDA margin during the quarter of 24.2% increased 80 basis points year-over-year.

Turning to Slide 7. Adjusted EPS for the quarter of $0.46 was up 18% versus the year ago period. The increase was driven by higher segment earnings of $0.02, lower interest expense of $0.04 and a $0.02 benefit from exchange gains and losses. This was partially offset by a $0.01 headwind from a higher tax rate.

Turning to Slide 8. Healthcare & Water Technologies fourth quarter net sales of $821 million were up 4% versus the year ago period, on a 3% organic growth and a 1% benefit from currency. Organic growth included a headwind of approximately $15 million or 2% in order timing shifts into the third quarter. Adjusting for this headwind, organic sales growth was 5% in the quarter.

For the fourth quarter, Healthcare sales were up mid-single digits on an organic basis versus the year ago period. Organic growth was broad-based led by continued strength in medical packaging and medical devices. Water sales were up low single digits on an organic basis, primarily due to strength in Industrial Water markets.

A majority of the headwinds from the order timing shift was within Water. Operating EBITDA for the segment during the quarter of $255 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 31.1%, flat with the prior year.

Turning to Diversified Industrials on Slide 9. Fourth quarter net sales of $872 million decreased 3% versus the year ago period on a 4% organic decline partially offset by a 1% benefit from currency. The organic decline included a headwind of approximately $15 million in order timing shifts into the third quarter. Adjusting for this headwind, organic sales declined 2% in the quarter.

At the line-of-business level, organic sales for Building Technologies were down high single digits on continued weakness in construction markets. Industrial Technologies organic sales were down low single digits as strength in aerospace was more than offset by weakness in printing and packaging markets. A majority of the headwind from the order timing shift was within Industrial Technologies.

Operating EBITDA for Diversified Industrials of $197 million was up 2% versus the year ago period, unfavorable mix and cost productivity. Operating EBITDA margin during the quarter was 22.6%, up 110 basis points versus the year ago period.

Turning to Slide 10, which outlines our first quarter and full year 2026 financial guidance. For the first quarter, we estimate net sales of about $1.67 billion, operating EBITDA of about $395 million and adjusted EPS of $0.48 per share. Our first quarter net sales guidance assumes about 2% organic growth and about a 2% benefit from currency. Our operating EBITDA assumes a 10% increase year-over-year and margin expansion driven by business improvement and lower corporate costs.

For the full year 2026, as Lori noted, our guidance is in line with our medium-term targets. We expect net sales of about $7.1 billion, operating EBITDA of about $1.74 billion and adjusted EPS of $2.25 to $2.30 per share. Our full year net sales guidance assumes about 3% organic growth and a currency benefit of about 1%. Our operating EBITDA assumes a 6% to 8% increase year-over-year with 60 to 80 basis points of margin expansion. Our adjusted EPS guidance at the midpoint assumes about a 35% increase on a reported basis and an 11% increase on a pro forma basis.

For the Healthcare & Water segment, we expect full year 2026 organic sales growth in the mid-single-digits percent range. This assumed growth is expected to be driven by broad-based strength within health care, primarily due to demand in medical packaging applications and medical devices.

In Water, we expect continued growth, primarily driven by demand for reverse osmosis and ion exchange within industrial and municipal water market.

For the Diversified Industrial segment, we expect full year 2026 organic sales growth in the low single-digit percent range.

Within Building Technologies, after a year of market declines, we are expecting 2026 to be about flat, primarily driven by stabilization within U.S. construction markets.

In Industrial Technologies, we expect low single-digit growth year-over-year driven by strength in aerospace and demand recovery within markets served by our industrial-based product lines.

With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A.

[Operator Instructions] And your first question comes from the line of Jeff Sprague with Vertical Research Partners.

Nice to see a solid, clean quarter and also Lori, your opening remarks there, all the focus on internal KPIs and growth and you were working on that along the way, but the shift to execution from portfolio moves is welcome, on my behalf anyhow.

Thank you.

Yes. Good luck with all that. I wanted to shift to a little bit to the external, if I could. Can you just put a little bit finer point on the industrial side of the equation, sort of the soft U.S. industrial production in your guide that you mentioned, but then seems a little bit countered by your comments about industrial orders picking up. So maybe just a little bit more color what you're seeing really in the core industrial parts of the portfolio, how orders are trending and what do you think is going on in the channel inventories?

Yes. Thanks, Jeff. So on the industrial side, so like talking ex the shelter business, which we had mentioned, we think will be about flat this year. So moderating from down mid-single digits in 2025 and the flat on the shelter side is general kind of low single-digit growth expectations for the full year on nonres and repair and remodel and then down low to mid-single digit on both on the resi side.

But on the industrial side, it's primarily coming from the Advanced Mobility businesses, which comprise automotive and aerospace and on the consumer packaged goods side that some of our packaging goods is So we've seen nice order pickup as we exited the year and went into Q1, a lot of it is being driven by aerospace. We're seeing nice low double-digit improvement in order in aerospace. It's about 3% or 4% of our revenue, so it's in that range. But all the businesses kind of in that industrial technology space are doing nicely and seeing kind of a short cycle recovery that other

Great. And then just on price cost, obviously, a lot of attention on metals cost, which is maybe less of an issue for you than some of the metal vendors I cover. But what's going on, on the inflation side of the equation? What sort of kind of price is embedded in the outlook for 2026?

So Jeff, when our organic growth of 3% is predominantly related to volume for 2026. I would tell you, we're not really expecting any significant headwinds from any of the logistics and kind of utilities kind of going into next year. We expect that to be relatively flat. And given our productivity initiatives, we expect to see a nice improvement in our gross margins on a year-over-year basis.

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

I echo what Jeff said. Nice to see a more normalized quarter here. I wanted to follow up a little bit on Jeff's question, but on the shelter side. Going from kind of a negative high single digits to something that's more flattish. How do we cadence that into 2026? Is it more back-end loaded or do you see real green shoots here in -- early in the year that you've already seen to be able to call a recovery?

Yes. So let me start on that one. So when you look at our overall shelter business, we mentioned that it was down around mid-single digits in 2025. So when we start off 2026, I would tell you that we expect it to be slightly down as we start the year. So part of it is going to be the comps on a year-over-year basis. So just keep in mind that in Q1 of 2025, we were down around 6% in that business. So on a year-over-year basis, when you look at the 2-year stack, it's not really changing significantly from kind of the second half of the year where we're exiting kind of going into the beginning of the year. So we do expect a slight improvement as we go through the course of the year, if we start out slightly negative, getting a little bit better, that gets you to the overall flat for the year.

Okay. That's helpful. And I don't recall hearing Vitality Index on these calls in the past, maybe you do it, and I just haven't heard it. But 30% seems like a pretty robust number, but I don't really have any context to what that's been historically. And perhaps just some color on how helpful is this as it relates to mix or price or volume? Are these iterative, slight improvements or are there real meaningful product changes? Just a little color would be helpful, I think.

Sure. Yes, we had first talked about at Investor Day where we mentioned that the 2024 number was about 30%, and we expect that same performance in 2025. So it is helpful on both the top line side as well as the margin side. So there's work that goes into not only releasing new products where we can get enhanced price and get some incremental share, there's also work that goes on, on the kind of the value engineering side to take cost out and deliver margin improvement.

So if we look at the margin profile of those products that comprise any product sales, it is higher than the overall margin of the company. And so we're seeing nice lift from both sides. Our efforts internally, we did 125 new products last year, we'll expect to continue to do nicely this year. And we'll focus on making sure that the shift is happening from renew versus grow. So you had mentioned the impact to the top line. There is a portion of that 30% vitality index that is replacement and making sure that we take differentiated, and we want to continue to do that, but also shift the mix towards growth so that we can get incremental top line growth out of the innovation engine.

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

This is [indiscernible] on for Steve. So my first question is on -- so you're making great progress on the margin front and I just wanted to go back to the margin bridge that you provided at Analyst Day and you provided like 0 to 50 bps of productivity here, and I was wondering given the execution, is there potential upside here or are you tracking ahead of plan?

Yes. So I'll say let's take it 1 year at a time as we progress through the 3-year plan. But I would say we're clearly starting out of the gates in a nice good spot. And when you look at our guidance for 2026, we have at least 20 basis points of margin expansion coming from productivity. Clearly, the teams are doing a great job. Lori outlined a lot of activities that we have ongoing in the organization. I think you saw some of the benefit of that in our Q4 results. You'll see that continue as we go into 2026, and we'll continue to drive that as we move through the 3-year period.

Okay. That's great. And then on the Aramids divestiture, I think, is expected to close at the end of the first quarter, which is going to bring in about $1.2 billion of pretax proceeds, if I remember correctly, but any initial thoughts on what you're thinking about capital deployment?

Yes. So we're still in that range of closing around the end of the first quarter, and it will be about $1.1 billion on a net tax basis. Keep in mind, we've already deployed about half of that with the $500 million ASR that we announced last quarter and have completed already, which is enabling about 2.5% PS growth for us this year. So we'll continue to be shareholder-friendly with respect to deployment of the proceeds.

We have mentioned that we would like to continue to add to the top line through M&A. So we've got some opportunities that we're looking at primarily in the health care side right now within similar aspects to what we did with Spectrum and Donatelle. We'll continue to be mindful, obviously, about ensuring a really strong return. So we'll look to get up to higher than our cost of capital by year 5 with respect to the IRR on the deal. So we'll continue to be shareholder friendly. We've proven that we've done it in the past significantly, and we'll look to deploy them efficiently.

Your next question comes from the line of John McNulty with BMO.

Maybe I wanted to dig into the diversified margin lift. It was a pretty chunky lift. I guess -- how much of that is around the mix with the benefit of aerospace kind of hanging in as a really strong driver versus -- how much of it is tied to some of that 80-20 kind of work that I know Beth is working on really kind of accelerating as we push over the next 12 to 18 months. Can you help us to think about that?

Yes. So a couple of things that I would mention there. I would say you're not really yet seeing the benefits of 80-20. It's a little too early. As you know, Beth recently arrived. So yes, she is working on that, but the benefits of that, I would say, are to come, as we move forward. When you kind of look at the activity in the fourth quarter, I would point more towards what drove the margin expansion to be a bit of mix related to the businesses that were growing when you look at the line of business level as well as a strong push relative to productivity is what really drove the nice margin expansion in the fourth quarter on a year-over-year basis.

Got it. Okay. And then in terms of innovation, you mentioned the Vitality Index, you kind of spoke to, I think it was $2 billion of of growth that you saw from some of the new products. I guess can you help us to think about some of the more exciting innovations, the ones that are starting to move the needle maybe more than others that we should be looking for as we kind of look through '26 into '27?

Yes. So the $2 billion is the total new product sales that are within around the $7 billion of sales that we reported. So it's a portion of replacement and a portion of growth. So we'll continue to try to shift that mix towards more growth versus replacement in the future. But as far as exciting innovations that are on the come, I think one for this year, we highlighted on the last call, and I'll highlight again just because it was such a sizable improvement where the enhanced

So we announced at a trade show late last year that we came out with a new model that has the best breathability and the best protection in the industry, and we've seen really, really nice customer reaction to that. We announced it first in Europe, and we'll continue to roll it out across the globe.

On the Water side, we continue to advance the latest technology within the reverse osmosis side. So this year, we're expanding capacity at our site to be able to produce Gen 4, which would be the highest-end technology that enabled a significant total cost of ownership to our customers. So we're continuing to advance that and we'll look to commercialize that in 2027. So those are just 2 of the highlights, but obviously, with 125 new products last year, it's happening kind of all across the portfolio.

Your next question comes from the line of John Roberts with Mizuho.

Congrats on a good start here.

Thank you.

Could you provide some margin on the 4 subsegments: Water Health, Building and Industrial? I'm not sure how much detail you want to provide there.

As we typically give color on the revenue side of our segments. But when you do look from a margin perspective, I mean, what I would add is you will see margin improvement, I would say, in both of our reportable segments as we move forward, and we'll also obviously get some margin expansion from a lower corporate cost as well and that's certainly what's going to drive the 60 to 80 basis points of margin expansion in 2026.

And then your Asia Pacific sales were down 2% organic, was that Water supply chain contraction again or is there something else going on there?

No, it wasn't Water. It was primarily within the Diversified side. We had a supply chain change in our shelter business that was the single largest item. So it was really just a change in the distributor joint venture relationships, so nothing permanent. We'll push it into 2026. So nothing material. We expect to return to growth across all the regions, both in the quarter and the full year for 2026.

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

I had 2 questions on Water, maybe one slightly related to the comment earlier on Asia. Is that -- in your forecast, you're talking about mid-single-digit growth in water for '26, China is lower than that. Can you go into some of the details on why and what you're seeing there? I mean you and some other peers are seeing slower growth in China in general. And then secondly, does that help or hurt your mix in the overall segment?

Yes. So we are seeing a slower start in China with respect to overall growth within the Water business, and it's primarily stemming from just the reduced industrial production in the region. So we'll start in the low single digits in China in Water and then we'll ramp into the back half to get over all to that mid-single digit.

And I think -- as you had mentioned, our peers are seeing a similar dynamic. So it's really just a reflection of the industrial production malaise in China. About half of our water is used in the industrial wastewater treatment or industrial utility water space. And so when industrial production is down, obviously, it would have an impact on that. As far as the mix, no material change in the mix depending on where the regional growth is or margins.

Your next question comes from the line of Aleksey Yefremov with KeyBanc.

This is Paul on for Aleksey. Can you discuss what you're currently seeing in auto trends right now and maybe the cadence for your outlook for 2026?

Yes. Overall, the expectation for auto builds from IHS is to be about flat. We would expect to slightly outperform that just based on our EV growth. And so we did see nice EV growth in 2025, and we'll continue to see nice EV growth in 2026. It will vary by quarter, but overall, the full year is about flat and will be slightly up.

Your next question comes from the line of Matthew DeYoe with Bank of America.

So clearly, the portfolio is shaking out a lot, but as we settle here, is there any hope to establish annual pricing initiatives in any of the businesses that could be enough to actually drive structural pricing gains across consolidated DuPont, whether that's 50 bps or 100 bps? Do we have a framework there?

We do. I mean we've had -- obviously, the past 2 years have been the unwind of the sizable price that we took through the inflationary environment coming out of COVID. But going forward, we would expect to see structural price lift. As Antonella mentioned at the beginning, in 2026, our 3% organic is primarily volume, but they're -- underneath that, there is some price in some of the businesses.

We continue to expect to have to give back a little bit on the shelter side primarily as that sizable price raise that we drove in the 2022-2023 time frame starts to unwind. But yes, there is opportunity to drive structural price in most of the businesses in our portfolio.

And as you comment on something like tie back with the new advanced garments, right? How much margin uplift would something like that give versus legacy product? And I guess maybe -- I don't know if you want to comment specifically on that, but is a different one maybe like what is the average margin uplift? If you were to look at the Vitality Index and you're thinking about replacement, is this through the index of 30 basis points or 100 basis points or is it flat? What's the uplift look like as we think about...

Yes, I'd rather not comment on the margin lift that kind of at the product line level. But overall, in the Vitality Index, in the 30%, we have about 145 basis points of margin lift from those products that are introduced in the past 5 years.

Your next question comes from the line of Chris Parkinson with Wolfe Research.

Great. Can we just take a step back and look at your health care portfolio, I know this is a focus of your CMD. But Lori, what are you the most enthusiastic as you go through '26 and perhaps even the longer-term growth algos and on the biopharma side, is that part of solutions, med device like -- if you could just comment on the enthusiasm in terms of your product portfolio, Livio, that would be particularly helpful, then I'll have a follow-up?

Yes. It's really across all 3. So both med packaging, med device and biopharma all are nicely contributing to the kind of mid- to high single-digit range in 2026. They all participate nicely in the higher-end aspects of the med device universe. So if you think about the majority of our applications are more in the cardiovascular space, which has an overall higher growth rate with respect to overall surgical procedures. So all 3 of them are going to contribute nicely. We'll continue to differentially invest in those businesses to ensure that we can continue to grow.

Got it. And just a similar question for the Water business now that all the dust has settled post the split, when you take a look at your water portfolio in filtration in particular across like IFRO U.S., is there -- it's clearly a great business, but do you feel as though you're missing any scale? Do you feel as though there's a piece of your portfolio. Obviously, that is like ion exchange over the years, like what else do you think you need to do, if anything, quite frankly, to further garner investor appreciation for that specific business?

Yes. I think from a technology perspective, we've got the leading technology across all the main components within water filtration, so leading an RO leading in ion exchange, leading in U.S. and nano filtration. So we're nicely positioned there. We've mentioned the desire to start to build around water, so potentially going into spaces beyond filtration just given filtration would be difficult from a regulatory perspective for us, given that we've got the leading position.

So we continue to scout and look for opportunities to expand in the water space. Obviously, we'll be highly in tune to the valuations there. They can be quite pricey. We've seen a few assets with some of our competitors trade in the last few quarters that had a high valuation, it would make it difficult for us, but we'll continue to see.

We recently added just to continue to shore up our supply chain in the water space and asset in China. RO has huge growth in China. We didn't have an established footprint. We bought an asset outside of Shanghai that give us established membrane capacity in the region for us to continue to be competitive and local to our customers there.

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

I wanted to ask on Healthcare. You called out in the deck that surgical procedures, you're expecting to be up mid-single digits this year. Can you just give us a sense, is that sort of the normal growth rate? And is that favorable or about the same versus 25%? And then is your portfolio sort of well represented across that entire cohort or how should we think about it?

Yes. I would say it's a similar growth rate to what we saw in '25 minus the destock that happened in the first quarter that kind of drove up the overall health care growth for the year. So we're nicely positioned, as I mentioned, in the areas that are driving kind of above the average surgical procedure rates. So if you say general surgeries is about 4% where we play, we expect that overall average to be more market weighted to about 5%.

So we're nicely positioned on both the health care side with the tieback packaging as well as on the spectrum divide on the device, our single largest end market there is also within the cardiovascular and vascular space.

Okay. And then just to follow up on the balance sheet and capital allocation. You ended the year with, I think, $750 million in cash, you've got the $1.1 billion coming in. Earlier, you spoke to well, we've kind of spent some of that $1.1 billion already with the $500 million ASR, so can you just refresh us on sort of what the minimum level of cash is that you want to carry?

And then as you move forward through the year and generate more cash, obviously, you're expecting another very strong year of cash conversion, understanding sort of the dual track of pursuing M&A as well as share repurchases. Should we think about that sort of remaining proceeds from the divestiture to be sort of earmarked for M&A, but the sort of free cash flow generation from this year to sort of be ratably allocated to to CapEx to dividends and to repurchases or is that not the right way to think about it?

Yes. So let me start with your first question. So typically, on the balance sheet, we will carry around $1 billion in cash. So we were a little bit below that at the end of the year, given the cash that we spent on the ASR of $500 million. So as you mentioned, we will have a nice cash flow generation year in 2026. So we do expect our free cash flow conversion in '26 to be greater than 90%. In addition to that, we do have the proceeds that are coming in the door related to the Aramids transaction.

As Lori kind of mentioned earlier, I would say in terms of capital allocation, we view that in the eyes of a shareholder in terms of what creates the most amount of value. So I wouldn't say there's a specific amount earmarked towards an M&A deal or a specific amount earmarked towards share repurchases. We'll continue to look at both. We do have a pipeline of some M&A that we are looking at.

Ultimately, you'll see if they come to fruition or not. But clearly, we will continue to deploy capital in the best interest of our shareholders as we move forward.

Your next question comes from the line of Patrick Cunningham with Citi.

This is [indiscernible] on for Patrick. So I think in an earlier response, you mentioned all regions should be up organic sales-wise this year and in 1Q. So with recent PMI is trending more favorably. Can you just provide more color on that response and maybe what you're seeing in terms of organic sales growth versus

You kind of dropped off at the end, I couldn't hear which quarter you were referencing. But to the earlier comment, we do expect to see organic growth across all regions, both in the first quarter and in the full year. The improvement kind of the first quarter being at 2% organic and the full year being at 3%. Most of that improvement is going to be in North America just based on the improvement that we expect to see on the shelter side. So we shelter starting kind of slightly negative and trending. So even on the full year, you'll see that lift given the majority of the end markets in shelter are in North America.

Got it. And can I just ask what sort of level of visibility you have for order books across the Healthcare portfolio in general?

Yes. I'll answer the question broadly for the company because it's a bit about -- we don't have a long lead time, I'll put it that way. So we start each month with about 80% of the orders on the books and we start each quarter with about 50% of the orders on the books and then we build from there. Shelter is definitely the shortest cycle. On the longer cycle, I would say, would be our aerospace businesses and our water business would be on the longer end and everyone else, we kind of fall in between.

Your next question comes from the line of Michael Sison with Wells Fargo.

Nice quarter and outlook. Just a quick one on U.S. construction. Your outlook is flat, any differences between nonres, res and repair and model in that outlook?

Yes. So as we look into 2026, our expectations would be that nonres would be up in the low single-digit range as well as repair remodel, and that would be offset by a low to mid-single-digit decline on the resi side of the business.

Got it. And then a quick follow-up. Your outlook and your results, particularly the organic growth continues to look a lot better than the chemical folks. Are you still looking to -- is it still possible to change your industry designation? And how does that work, given I think your results have been much more steady than my group.

Yes. So when you take a look clearly at the portfolio, our portfolio is not a chemical company portfolio. And to your point, when you look at our performance, our performance is not mirroring that of a specialty chemical company either. So I would tell you, we continue to make some progress in terms of the classification. But what I would tell you is our first priority is just to continue to execute, but we will continue to move forward in terms of trying to get the code changed to more appropriately reflect the portfolio that we have today.

Our last question comes from the line of Arun Viswanathan with RBC Capital Markets.

I just wanted to, I guess, clarify on both Healthcare and Water. So did you see any destocking there? We did see maybe one of your competitors within Healthcare Packaging referenced some of that. And then similarly, on Water, maybe some of the downstream players are also speaking about that in different regions. So I guess you're not seeing that given your robust outlook for Healthcare. Is that correct?

Correct. Yes. I mean we -- the destock was behind us in the first quarter of 2025, so we continue to see normalized inventory levels across both those businesses.

Just given that being the case, sorry if I missed this, but did you also mention maybe M&A across both of those businesses, if there are opportunities and where you are kind of in that trajectory?

Yes, sure. No, we continue to scout opportunities in both spaces. I would say the pipeline is more robust on the health care side, just given the fragmentation that exists as well as the valuations are a little lower in that area. So we continue to look hard at both. We've been busy looking on the med device side similar to the acquisitions that we did with Spectrum and Donatella, as we continue to build out a total fleet of offerings to our customers, really building our relationship with them and then viewing us as a solutions partner and an application development partner, but we continue to look.

Ladies and gentlemen, I will now turn the conference back over to Ann Giancristoforo for closing comments.

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

Ladies and gentlemen, thank you for your participation, and you may now disconnect.

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to DuPont's Third Quarter 2025 Earnings Call. [Operator Instructions]

I would now like to turn the call over to Ann Giancristoforo. Please go ahead.

Good morning, and thank you for joining us for DuPont's Third Quarter 2020 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 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 Armed 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 health care 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 unit separation as a premier pure-play technology solutions partner to the semiconductor value chain. Unity 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 around 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 Tibet Garment branded Tyvek Apex. 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 rent 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 health care 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, health care 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 node 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, community management will host a call later today to provide a business update. Earlier this week, we announced the successful completion of the unity separation. In connection with this transaction, we received approximately $4.2 billion of cash in the form of a midnight dividend from Unity, 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 unity and the presentation of the Aramis 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 health care and water technologies and diversified industrial. 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 health care 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 unity separation.

With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A.

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

Just -- I wanted 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 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.

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 health care 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 health care 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.

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

Echo what Jeff said. Congrats, you guys have done a lot of wood shop in the last few years, particularly the last few months. There's kind of a lot of moving parts in 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?

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 Aramis 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.

Yes. And on the opportunities you had mentioned spectrum. So we did actually complete a small tuck-in acquisition in the water space recently. So 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 the health care 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. And then we'll also be opportunistic as we can in additional water opportunity. So we've got a really rich pipeline. And as Antonella mentioned, the strong balance sheet to be able to be proactive with it and will be prudent. So we'll have a profile on a return that we want to deliver. So we would get to ROIC greater than WACC by year 5 and a nice path line to it. 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 higher in that regard on chief operation, I think, title, whatever you to. 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 the in your current portfolio? Just talk a little bit about the opportunity and what you're planning for here.

Yes. So we picked up Dave Cook from Danaher. So he was the op 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 to 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.

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

This is Chiusaatoko on for Steve. Just following up on the 80/20 initiatives that 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. So we had mentioned at Investor Day, to as part of the team refresh we brought in Beth Forero, who had a background at ITW who was well versed within the 80/20 framework. And so 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. I think as far as pruning, we had mentioned that we have a goal to be able to continue to work the portfolio towards more secular based end markets. And so today, we're about 50-50 with respect to health care and water in the diversified businesses and ideally we would be more like 2/3, 1/3. So I don't really want to comment on what businesses those would entail, but the goal is to continue to get more into the secular base, mid-single-digit growth.

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

Maybe just a quick 1 on the pro forma EBITDA forecast, inched up a little bit, not a huge amount, but it's a pretty brief amount of time. And I think you attributed it to stronger underlying business performance. I guess where is the area that you're being surprised on? And 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. So 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. So you see that kind of flowing through the pro forma -- so 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. So clearly, some things out there on your radar that you're opportunistically going after. I guess can you give us a little bit more color as to what you see in the pipeline if there are a lot of targets out there at this point if it's a little bit scarce, I guess, how you're thinking about that?

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

Your next question comes from the line of Chris Parkinson of Wolfe Research.

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? And what are you the most enthusiastic about now that you have full independence.

Well, I think if I speak in that today and now I think -- the Street is confused on our number, just given where the free market trading is. So there was a lot of noise, obviously, around the numbers with arms coming out as a disc ops 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. So I think that's 1 kind of short-term confusion. I think longer-term, it's just a view on who we are. And so I think there's still a view that potentially we're a chemical company versus we have significantly transformed the portfolio to a multi-industrial and we've got the financial performance that is right in line with the multi-industrial. And so we would expect that we would continue to re-rate up towards more of that multi-industrial multiple. So I think that's one of the biggest confusing points is that we have a much more streamlined, simplified portfolio and a refresh 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 kind of as a tangential kind of growth theme in terms of how that market is evolving over the next 3, 5, 10 years. Just 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 obviously the largest player in all the key technologies. So to get 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 valuation are quite high. But we are looking at opportunities more potentially here in systems plays or potentially other areas of filtration beyond just generally water. So we do have, within our ion exchange resins business, some water filtration around food and beverage and microelectronics and dairy. So potentially, are there some opportunities there that kind of take us beyond traditional industrial wastewater purification and desalination.

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

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. So on the cash on the balance sheet at the end of Q3 is the cash position for both the new DuPont as well as community. So there is some cash that will go over to unity as part of the separation. So again, on a pro forma basis, we expect to be at around $1 billion is what the new DuPont will have as a cash position, 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 towards the end of the year between the timing of when certain separation costs would be paid. We obviously said we're going to move pretty imminently on the ASR. So clearly, that's before we get to year-end in terms of doing that. So there will be some cash out the door related to that we'll have before year-end. There's also timing of separation costs. So there is the potential that by end of year, we may have a little bit of commercial paper that's on hand. But clearly, as we mentioned before, we do have a nice amount of proceeds coming in the door in Q1 of '26 related to the Arabic divestiture.

And 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. And as Lori mentioned earlier, I would keep in mind that when you look at our health care and water business, as we exit this year and go into next year, we are still in a very good position to be able to grow at mid-single-digit growth. And you really only need a little bit of growth, I would say, on the diversified industrial side of the house to kind of get to, I would call it, the low end of our organic revenue growth CAGR as we move forward. So that was a piece of it. So 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. And as I mentioned at the Investor Day, the plan would be to get that out by the end of year to so you'd have that margin improvement in the first 2 years of the plan. And then you heard Lori talk a little bit earlier about our lean initiatives and how we're operating as a new company going forward. So we do have another additional up to 50 basis points coming from productivity, greater than inflation. And I would say the teams are doing a really good job relative to that. We even saw underlying margin improvement this quarter, and we would expect to continue to see that as we go forward.

Your next question comes from the line of John Roberts of Mizuho.

Where are we on the discussions with MSCI on reclassification? And 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 Dick question first because it's one of my favorite topics. So I would say we are continuing to make progress towards an industry classification change. As I'm sure you've seen, unity got their semiconductor classification, which we obviously positioned for. So that has worked out well. I would say the way that S&P and the MSCI work, they do kind of wait for your publicly filed information. So I think they'll see clearly the new DuPont as we get to this upcoming 10-K filing. But we will continue to push on that. I would say the one thing that I would always recall is that the fact that really our valuation is really going to dependent more so on our consistent performance more than any classification, but I would tell you that I'm on a personal mission related to our GICS code to ultimately as that appropriately reflects the DuPont portfolio that we have today.

In terms of pro forma, on Monday, this past Monday, we did file an 8-K that did show pro forma information. So some of that is actually already out today and already out as of now. And then clearly, as we get to the end of the year, all of our financials will clearly show both electronics and ARM as discontinued operations so you'll have a nice 10-K with historical periods, all recasted for the new DuPont as we go forward.

Your next question comes from the line of Alexia from of KeyBanc Capital Markets.

This is Ryan on for Alexia. I just want to echo some of the earlier comments, my congratulations in getting everything done. The earlier part of the call kind of 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 health care 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 kind of on what's going on in medical device space.

Yes. So we're really excited about all aspects of the portfolio, but the health care and water with the mid-single-digit growth are areas that will continue to differentially invest. And so we saw nice growth across the broader health care business. And so we kind of said mid- to high single-digit growth on a full year basis for health care and water combined. The health care business would be north of that average. And so it was really a combination of nice performance across Livio, which is our biopharma business. And so I think as you've seen across many of the peers that have exposure in biopharm, this was a nice year with like kind of completion of the destock and a return to a really nice growth. We saw really nice growth in the Med packaging and then to your question specifically on health care and the med device space, we're seeing nice growth, too, as we exit the year. And so we actually just announced that we are bringing in a new leader for the health care business to lead the spectrum and Livio businesses. He joined us from a long history of running other types of CDMO.

So he starts Monday, and we're really excited to have and joined the portfolio as well. So we look for nice growth from that business and then 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 just kind of been talking about softer market conditions. So just kind of wondering what your outlook is? I know it's still early kind of getting into '26, but just maybe if you can give some high-level commentary about how you're thinking about it.

Yes. So a little bit of reminders of kind of where we've been related to our shelter business that is what's tied to the construction market. So when we look actually at 2024, I would say we were in a relatively good position. We actually held flat with the market. And as you know, I would say, over the last at least 4 years, we've all been in that second half of the year recovery and then it kind of gets pumped into the next year. And those were the early thoughts, I would tell you, as you start to read different reports that are out there related to the construction market that the second half of next year would start to get better. As Lori mentioned earlier, we do expect the shelter business to be down around 4% organically this year. So we do feel we're at a relatively low level at this point. So we really aren't going to be expecting a significant amount of growth next year. But quite honestly, even getting to flat actually has a nice impact on our overall organic growth.

So we do expect a little bit of growth in shelter next year, again, though off of a pretty low bottom here.

Your next question comes from the line of Matthew Deo of Bank of America.

Congrats on the formal separations, but it's been a long road. I think if we look under the surface at new pro forma IndustrialsCo. I think the comment was industrial -- organic sales were plus 4% ex and then 2% ex the pull forward. Can you just parse that out a little bit on a segment basis -- just trying to get a sense for like volume and price in health care and water versus diversified IndustrialsCo. Just trying to get a little bit more granularity on what the pro forma business is doing here.

Yes. So on a reported basis, health care and water were up high single digits. I would say if you kind of adjusted that for the full forward impact, we were at mid-single digits. And diversified industrials was up on a reported basis organically in the low single digits. And I would say, if you adjust for the pull forward, it would have been pretty relatively flat.

All right. And then you had said Shelter was minus 4% on the year. As we just look at like 3Q into 4Q, I can't -- I'm not sure if you said it or not, but like where is where is that construction business comping? Is it like minus 2%, minus 3% in this quarter in 3Q or maybe a little bit more out there.

Yes. I would say in the third quarter, relative to the pull forward we had, it was like down around 2%. And we do expect as we get into the fourth quarter, we're down more in that 3% to 4% range. But I would say 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 of the year.

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

Congrats. This is Turner Henrik 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. So as we had mentioned, we don't expect to start in the hole to be able to achieve our medium-term targets of 3% to 4% over the '26 to '28 time frame. So if we look at our performance in the second half of 2025, which can be an indicator of what you might be seeing as beginning 2026, our health care and water business is performing in line with our medium-term targets. So with that being around the 5%, about half our company, you get 2.5% organic growth straight from that. And as we had mentioned, the shelter business which is about 25% of 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, but just the absence of a negative brings an opportunity incrementally from the second half.

And as we look at the rest of the industrial tech portfolio, which makes up about 30%, we would expect to see sort of a minimum low single-digit growth, we had mentioned the whole portfolio should be at average 2% for the industrial technology side. So if you take that piece, you can generally roundly get to your medium-term targets at the midpoint range with really just the big inflection point being cooptation of the shelter market and no longer being a drag on the total organic growth.

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

Yes. I would actually say, I believe you mentioned the construction markets of the shelter business. I would say, overall, actually, the business has actually been doing pretty well from a margin perspective. So I would do a nice shout out and kudos to the team that despite the fact that volume has been down, they have been significantly driving productivity, watching costs, making sure that we are positioned for the current market environment that we're in. So that should set us up nicely for when we get back to being in growth mode in the construction.

Your next question comes from the line of Patrick Cunningham of Citigroup.

This is Rachel Lee on for Patrick. Can you expand more on the strategic rationale for the ARO acquisition in China. Understand it enables you to be more local for local, but can you touch more on the technology value add perspective? And specifically what you're seeing in terms of water market growth in China.

Yes. So the acquisition was more 1 of a capacity add. So on the ion exchange side, we've got different 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 really only at 1 spot for the most part in the U.S. and nothing outside the U.S. of any materiality. And we have started to build fabrication capabilities outside the U.S. through contract manufacturers, and we had established capabilities within the Asia Pacific region. But it was really important that we also get membrane capacity in Asia just given that it's about 1/3 of our sales and there's growing local for local preferences in the region. So it really doesn't give us any additional technology. We've got the leading technologies that we'll continue to protect here in the U.S. operations. It just gives us more local production capabilities for membrane within the China region.

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

Yes. So on the diversified side, we had a little bit better performance than we had expected. A lot of that was related to the timing shift though. So from a full year perspective on an organic basis, we continue to expect to be at 2% and it really hasn't materially changed across any of the lines of business or reporting units. But to your question, we did see nice improvement on the kind of general next-gen mobility space, which would include both the automotive and the aerospace side. So we had mentioned at Investor Day, I believe that we are starting to feel a little bit of momentum building in the auto space, and we saw that play out in Q3. And so the revisions that have been happening in the last few months have been improving with respect to auto builds. And so we're cautiously optimistic that we keep on pace there.

And the improvement that we've been seeing more importantly, has been in the U.S. and North America markets, which is where we're outsized exposure is versus China. So we'll remain optimistic on the automotive piece and then the EV piece that we've talked about to PAUSE continue to perform really well. So we've got share gains realized and more opportunities coming in the pipeline with 1 opportunities with the EV battery space.

Your next question comes from the line of Mike Sison with Wells Fargo.

Just curious, I think the case to change the get code is pretty straightforward. But if it doesn't change as Steve in Chemicals, why do you think that is? And then 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. So I would say it's not a straightforward process. One might think that it should be, but it's clearly not in terms of having the classification change. So as I mentioned earlier, we will continue down that path. At the end of the day, our performance will drive our valuation, and that's what we're focused on. So as an organization, nothing will change in terms of our strategy, how we're expected to perform and what we would do relative to peers, quite honestly, none of the chemical peers would be our peers that we should be compared to. I mean we just had very different portfolios. So there is no comparison to the others that are listed within specialty chemicals. We will continue to say for no matter who's following us and reporting on us that at the end of the day, you really got to look at the multi-industrial peers to kind of compare our performance.

Your last question comes from the line of Aaron Viswanathan of RBC Capital Markets.

You commented on maybe some details on your health care portfolio. Could you also comment on the water side you guys recently completed that acquisition in China. What else are you guys looking at? And I guess, how are you prioritizing capital allocation towards this business?

Yes. So on the water space, we'll look to see if we can be opportunistic to add to our water filtration capabilities. But as I mentioned, they might be a little bit more minimal because of the consolidation that exists in the space as well as our market leadership that have across the core technology. So we'll look more broadly into potentially systems plays or some services place. I had mentioned 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 that we can get a return that's in line with our expectations. But I think that the pipeline is rich on both sides, the health care and water will differentially invest in those businesses, both from an R&D and a capital perspective to ensure that we're getting outsized returns and we'll bias our M&A activity towards those businesses as well.

There are no further questions at this time. And with that, I will turn the call back to Ann Giancristoforo for closing remarks. Please go ahead.

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.

Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect your lines.