Q3 2019 Earnings Call
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Good morning, ladies and gentlemen, and welcome to the element solutions 2019 third quarter financial results Conference call. This call is being recorded at this time all participants have been placed in a listen only mode and the floor will be open for your questions. Following the presentation. If you would like to ask a question at that.
Time, Please press star one on your Touchtone phone if at any point. Your question has been answered you may have remove yourself from the Q by pressing the pounds key we ask that when you pose. Your question you. Please pick up your handset to allow optimal sound quality lastly, if you should require operator assistance. Please press star zero.
It is now my pleasure to turn the floor over to Yashi, a heavy senior associate corporate development and Investor Relations. Please go ahead.
Good morning, and thank you for participating on our third quarter 2019 earnings call. Joining me. This morning, our CEO , Ben Gliklich, President and COO, Scot Benson and CFO Carey Dorman.
Our executive Chairman Martin Franklin will also be on the line for QNX.
Please note that in accordance with regulation FD or fair disclosure. We are webcasting. This conference call any redistribution retransmission or rebroadcast of this call in any form without the express written consent of elements solutions is strictly prohibited.
During today's call will make certain forward looking statements that reflects our current views about the company's future performance or financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Please refer to item one of our most recent Form 10-K for a discussion of them.
Significant risk factors that could cause actual results to differ from expectations or predictions.
Please note that in the earnings release, and supplemental slide issued and posted today elements solution has provided financial information to has not been prepared in accordance with U.S. GAAP for definitions and reconciliations of these non-GAAP measures to comparable GAAP financial measures. Please refer to the release on slide which can be found.
On the company's website at Www Dot elements solutions, Inc. dotcom and the investors section under news and events. It is now my pleasure to introduce Ben Gliklich CEO of elements solutions.
Thank you, Josh and good morning, everyone and thank you for joining.
This was a solid third quarter.
We delivered strong operating performance, considering the persisting weak macro environment with 9% constant currency adjusted EBITDA growth and demonstrated our hallmark strong free cash flow generation.
Producing $80 million this quarter alone.
The sequential increase in activity, particularly in high end electronics, which we expected materialized in the quarter, but the overall macro backdrop, both in terms of our end markets and currency remained a headwind.
Nonetheless, adjusted EBITDA margin expansion from product mix and cost initiatives drove significant adjusted EBITDA growth. Despite our organic net sales declining 2%.
Adjusted EBITDA margins expanded by 260 basis points year over year.
This was the third consecutive quarter of year over year end sequential margin expansion, which exemplifies the resilience of our operating model in difficult market environments, and our teams ability to manage through them.
From a capital allocation perspective, it was also a productive quarter.
As part of our authorized $750 million share repurchase program, we repurchased about 5.6 million shares representing 2% of shares outstanding for $51 million, where an average price of $9.06.
About $254 million remains on the currently approved program.
Turning to page three you can see that today, we reported net sales of $465 million for the quarter and adjusted EBITDA of 115 million.
Net sales declined 2% on an organic basis year over year as they were impacted by weak global industrial activity, including automotive markets.
As well as persisting softness in underlying demand in a broader electronics market.
Just on the benefit of a strong seasonal pickup in our electronics business associated with new platform launches by global mobile phone Oems, but this did not fully offset the generally weak environment.
Our expectation for the fourth quarter is for activity to return closer to the levels. We saw in the first half of 2019.
This would imply a slowdown in our core smartphone markets from Q3, and the automotive market to continue to soften sequentially.
We'll discuss fourth quarter expectations towards the end the call.
In electronics organic net sales for the quarter declined 1% year over year as a seasonal uptick in high end mobile phones, and circuitry was offset by general market softness in assembly in semiconductor.
Growth in circuitry was weighted to higher margin smartphone markets and drove solid profit margin improvement.
In fact overall our mix improved across each of these businesses.
Content per unit continues to grow with increasing technology requirements in new devices. For example specific technology solutions needed for multi camera applications and Threed camera designs have been a tailwind for us in high end markets.
The global mobile phone shipments down meaningfully this year, we believe our results suggest that we have continued to outperform our end markets.
In industrial and specialty modest year over year growth in graphics in energy and Q3 was offset by lower demand at industrial, particularly in Europe and Asia.
This was largely due to the slowdown in global automotive markets, but impacted also by the generally slower industrial economy.
Participants in our industrial supply chain remain cautious regarding project production activity for the remainder of the year.
Adjusted EBITDA in the third quarter grew 6% year over year on a reported basis and 9% on a constant currency basis.
Our 260 basis points of margin expansion in the quarter was driven half by gross profit improvement as a result of product mix and half by reduced operating expenses.
Our savings related to operating expenses continued to grow as a result of effective cost containment in our businesses and our corporate restructuring while maintaining our best in class high touch customer service.
Year to date SGN, a is down approximately $30 million year over year of which we would classify about half as cost savings with the balance as cost avoidance.
We reported adjusted EPS of 26 cents this quarter.
And we'll use the $80 million of free cash flow generated this quarter for our share repurchases and to settle some of the remaining post closing tax obligations associated with the sale of Arista.
We remain on track to generate approximately $200 million of free cash flow on adjusted basis for the full year 2019.
Importantly, despite our successful cost containment. This year, we continue to invest for long term growth.
While our total Opex spend is down approximately 10% year to date, our R&D spend remains in line with historical levels on an absolute dollar basis, and therefore increases as a percentage of net sales.
Additionally, we continue to expand our markets when new geographies and demonstrate our differentiated capabilities.
We believe we are well positioned to disproportionately benefit from the future recovery of the industrial economy.
With that I'll turn it over to Scot Benson, our president and COO.
Who will now provide more color.
Hello.
Sure market I know you you touched on any view a little bit, but maybe can you provide a little bit more specific detail. There in terms of you know kind of that that that positioning.
Yeah, we're a market leader in the markets in which we participate we are continuing innovating and on the bleeding edge of innovation to enable our customers solutions. So when things picked up we expect to be Uh huh.
An active participants in the recovery and to be growing market share tend to see the benefit of the market share we've retained in grown.
In this downturn when things pick up we look at certain markets like the Asian automotive market, where we've been growing market share for many many consecutive quarters since our acquisition since the combination of a lenten Mcdermott.
When that market comes back the market share, we've been gaining and retaining we'll as we talk about disproportionately benefit us.
So those are the types of things that we're referring to when we say that we want to be we'll get more than our disparate we'll get more than our proportionate share of business when things get better.
Got it appreciate thanks guys.
Sure of course.
This does conclude our question and answer session I would now like to turn the floor back over to Benjamin Gliklich for any additional remarks.
Thanks, very much operator, and thanks, all for joining the call and for your questions. We look forward to seeing you.
In the coming weeks and months.
And again.
When we report results for the full year in in 2020. Thank you.
This does conclude today's program. Thank you for your participation you may disconnect at anytime and have a wonderful day.
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