Q2 2020 Element Solutions Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the elements solutions second quarter 2020 financial results Conference call.
I'll turn the call over two years rationality Associate director corporate development and investment relations. Please go ahead.
Good morning, and thank you for participating on our second quarter 2020 earnings Conference call. Joining me. This morning, our executive Chairman, Sir Martin Franklin C.L., Ben Gliklich, Oh, sorry.
According to the regulation FD are fair disclosure, where webcasting this conference call any redistribution retransmission or rebroadcast of this call any form I thought they expressed written consent elements solutions is strictly prohibited.
During today's call will make certain forward looking statements reflect our current views about the company's future.
Actual results.
These statements are based on assumptions and expectations about future about.
That are subject to risks and uncertainties. Please refer to our most recent FCC volumes for discussion of the most significant risk factors that could cause actual results to differ from our expectations or predictions.
And the earnings release, and supplemental flight issued I'm supposed to today I want to solutions has provided financial information not I'm prepared in accordance with U.S. GAAP for definitions and reconciliations of these non-GAAP measures to comparable GAAP financial measures refer to the release on slides, which can be found on the company's website at www dot elements, we should think dock.
And the Investor section underneath that.
Now my pleasure to introduce Ben Gliklich C.L. negligence.
Thank you, Josh and good morning, everyone.
Like last quarter I'll begin by taking those.
Fight against the current EIRIS health care workers first responders hospital staffers and others going to work everyday around the world, helping the sick and protecting their communities have our deepest appreciation.
We also think our suppliers our customers we've overcome a great deal to remain open and keep our supply chain slowly to support their communities that are markets.
He said adaptation in our supply chain has been a remarkable.
Nearly all of our facilities.
The second quarter and our team adjusted to remain productive despite substantial disruption to our normal business cadence.
I'm very proud of our team has stepped up the challenge of Coke.
Without losing focus on the other longer term activities.
Beginning this pandemic has added to the work for our people and while we had two active we prioritize we've not lost momentum I keep projects in innovation organizational transformation or otherwise.
Have a world class organization that has demonstrated its prowess these past five.
And during the second quarter our visibility.
We can always speculate about the depth and duration of the impact you hope it on our markets in Europe in the Americas.
The depth of the decline into major industrial and automotive.
[laughter].
As expected that people would market trial may was worse.
Net sales in May were down 23% year over year.
This was primarily driven by our industrial and assembly businesses in the Americas in Europe, which have significant exposure to the automotive sector.
And during the quarter as expected our customers in the sector. Once again reopening in early may and while some did the pace of reopening was slower than the industry anticipated and suffered from stops and starts.
Automotive production on the second quarter was down dramatically.
Nonetheless, our financial results exceeded our expectations going into the core we generated $85 million adjusted EBITDA net sales of $387 million.
Despite net sales declined 15% organically, we preserved year over year adjusted EBITDA margin.
Adjusted EPS in the quarter was 18 cents.
We began to see a recovery business is June July all our high end electronics business remained resilient.
Driven by wireless infrastructure investments data centric.
Well mentioned in our circuitry and semiconductor business is from Q1 carried into Q2.
The strength, partially offset the decline or more industrially oriented business.
Our semiconductor business grew nearly 20% year over year on the second quarter.
This is smaller business for us, but a strong.
Gross like this it should not remains smaller for long.
As our higher margin business is generally outperformed mix improved in the second quarter, which together with fixed manufacturing cost management allowed us to hold our gross profit margin steady despite a sizable production volumes.
We were able to mitigate the impact of the decline in revenue adjusted EBITDA margin through continued cost actions about Cogs yesterday.
Adjusted EBITDA margins improved modestly.
Once again, we have demonstrated our ability to preserve process in spite of considerable topline pressure.
This is one of the hallmarks our business.
Opex declined to $16 million year over year on a constant currency basis in Q2.
Combination of reduced employee compensation expense lower travel expense.
Other cost management actions as well as the contribution from various government initiatives to address the impact on businesses and then.
Importantly, we have not fundamentally restructured our talented workforce, because we believe our markets will occur.
We are not damaging the long term growth potential.
[music].
The other hallmark of our business is strong and stable cash flows.
This was once again on display in the second.
We generated $61 million free cash flow in Q2, and more than $110 million free cash on the first half.
That compares to $86 million in the first half of 2900 adjusted basis.
A year over year, our topline declined 8% or south or free cash flow increased 29%.
Charlie will not take your doors opened a little more.
Sorry.
Thank you Ben.
Good morning, everyone.
On slide four provide some additional color on the performance parties segments.
Now electronics, we saw an organic net sales declined only 6% year over year.
The assembly business with soft primarily due to prolong shutdowns throughout the automotive supply chain, where our bid into the key supplier.
Well you're up in America decline in conjunction with the broader auto in each region.
Asia was mixed with China, showing strength offset by softness in India.
Both circuitry and semiconductor had strong second quarters with organic net sales above the same period in the prior year.
Continued momentum in Fiveg infrastructure investment, it's a lot increased demand for datacenter and cloud infrastructure body to positive market Tailwinds.
Adjusted EBITDA margin in the second were roughly flat at positive product mix and Opex savings were offset by the attack.
Hi.
Organic net sales in industrial and specialty declined 26% versus last year.
The industrial solutions vertical drove most of it decline down approximately 35% organically in the quarter, that's kobin related automotive shutdowns and general economic softness impact at all region.
Graphics fitness would show double digit growth in Q1 as demand for consumer packaging surged moderated to a small decline in the second quarter I CPG companies delayed the launch in products and their volumes normalized.
Significant oil price volatility drug declined in energy solution as operators reduced inventory and thoughts phone drilling activity in response to the uncertain macro environment.
Yeah size declines in industrial solution, so positive gross margin, making the corridor, which is by lower volumes, how does that mean expand gross margin approximately 40 basis points.
Despite material Opex saving in the segment in the quarter adjusted EBITDA margin Diana they'll decline at the overall dollar <unk> dollar value of net sales decline was not fully offset.
Well, our business hadn't significant variable cost them on and we were able to flex and tough market environment, you have to balance short and long term objectives, making spending decisions.
We believe we struck the right balance in the second quarter introducing costs without damaging the growth potential I'll be speaking dates for the long term.
On a consolidated basis operating expenses were down 16 million or 10% year over year quarter on a constant currency basis.
Reductions in travel in discretionary expenses drove approximately 40% of the state and you ever yet.
Compensation expense reduction, including temporary salary reduction furloughs long term variable compensation and government subsidies drove approximately 30% of the savings.
We also continued to deliver ongoing savings through continuous improvement cost activity, which explains the rest of the variance.
Well I travel cost reductions should continue to some degree in the third quarter do you have already rolled back some furloughs and salary cuts how did you see demand activity starting to recover.
Similarly government subsidies are hard to predict when we believe gifting most of you expected benefits already.
On slide five we cover cash flow in the balance sheet.
We generated 61 million of free cash flow in Q2, which takes into account our $23 million semiannual bond payment made in June.
She is almost double Q2, 2019, cashflow, just like a far more challenging backdrop.
Working capital release with a large store to cash in the quarter as we focused on collection and managing inventory to reflect the demand environment.
We have not seen any material issues with bad debt.
Our inventory build from the first quarter. These YY at an opportunity into the second half.
Nonetheless, we do expect to build some working capital back in the second half I do expect to grow the topline sequentially.
Cash taxes in Q2 remained lower year over year in line with lower earnings.
Capex, it's always modest in this business and well disciplined we're not acts like any significant spend this year.
We remain focused on long term.
Free cash flow should remain strong the second.
We are revising up our full year 2023 castle expectations to more than $185 million.
Net leverage at the end of Q2 remain unchanged from Q1 3.2 times adjusted EBITDA as our strong cash flow mitigated the effect of a decline in or.
As noted last quarter, we drew one or corporate revolver in March had an abundance of caution again paid it down entirely in mid April.
Our liquidity position remains in excess of $500 million.
We did not repurchased any shares in the quarter I still have employed on reduced wages and furloughs. However, we remain committed to deploying strategic capital compound earnings per share while remaining under our targeted net leverage ceiling, three and half times adjusted EBITDA throughout 20 Twond.
With that I will turn it back to back then.
Thank you carry.
Given the ongoing impact and uncertainty of Cobot 19, we intend to continue to get only quarterly rather than a longer term guidance until the macro environments becomes more clear.
Our Q3 guidance just for adjusted EBITDA of at least $80 million.
Well our markets are improving we remain cautious that macro conditions may exceed the recovery in demand, we're seeing over the short term.
July shaping up to be about 5% better on the topline in June.
No about 10% down year over year.
The sustainability heart recovery depends on many variables that are unknowable today. So we do not think it's prudent to guide you went out and to the right recovery in demand.
Our industry listen our industrial and Assembly business is strong sequential quarterly topline growth as their markets begin to recover but we still expect them to be down on a run rate basis more than 10% or 2019 levels at year end.
In our high end electronics business, we believe inventory buildup in the first half accounts for some of the sales strength, we have seen year to date.
Expect that strength could moderate sequentially in the back half a year.
Overall, the long term macro trends in electronics business are robust and encouraging.
Well, we intend to continue managing cost prudently several of the cost benefits. We saw in the second quarter will not repeat in second half.
We rolled back some of our salary reductions in July we do not expect the same level of impact from government subsidies and Q3.
The combination of modest sequential net sales recovery product mix and discrete opex increases underpins, our third quarter adjusted EBITDA guidance.
The recovery be more robust there's upside to our adjusted EBITDA guidance.
On a full year basis at June Thirtyth rates FX is a headwind to adjusted EBITDA $8 million against 29 machine I wish we have crystallize $5 million that first half.
About $2 million will impact Q3.
On our Q1 call, we projected full year 2020 free cash flow to be at least $175 million, which we are now increasing $285 million.
The implied Frontloading overhang cash flow generation is due to the working capital investments, we expect to see we sit quite show net sales growth.
The other drivers or cash flow as Carey mentioned should be relatively stable.
We believe our ability to write a full year 2020 free cash flow outlook in the absence of a full year adjusted EBITDA guidance differentiates our business.
We've demonstrated our first 18 months to the site that our businesses can generate strong cash flow in all markets.
With regard to how we deploy that cash flow I'd make a few comments.
With adjusted EBITDA declining year over year, we intend to be prudent with our capital given our targets you only have three and a half times net debt to adjusted EBITDA.
Nonetheless, despite those parameters, we remain a growth oriented company and we continue to evaluate modest bolt on acquisitions businesses that are better as a part of the S. I bring us talent and your capabilities represent good value and can accelerate our growth rate.
We view our own shares at an attractive acquisition alternative as well when trading below what we believe there intrinsic though.
We do not plan to buy shares until we finish rolling back salary actions companywide, which we expect to do before yearend.
We do however continue to consider modest tuck in acquisitions that improve our portfolio.
Before turning to questions I want to reiterate a comment I made on its you one call. This crisis that making element solutions, a better company for its customers and for its employees.
Continues to bring our team together.
The relationships, we have built across the organization are lasting improvements.
At the same time, we've shown our workforce, which is the very foundation of the company. We're committed to then even in difficult times, we've shown our customers that we can supply them for many locations around the world in the midst of an unprecedented supply chain disruptions.
In addition, our confidence in that criticality of our solutions to high growth supply chain has been reinforced.
We've also seen the value of our diversification.
Through this trial period, we've proven our industry leadership, which is further you'll profitable growth in the inevitable market recovery.
With that operator, please open the lines for questions.
At this time, if he would like to ask a question. Please press the star and one keys now when you were Touchtone telephone that is star one on your Touchtone telephone one moment won't be Q for questions.
And we'll take your question from Steve Byrne Bank of America. Your line is open.
Yes. Thank you.
You have wanted to do.
Yes, good morning.
But very strong functional area middle of the ship them I just wanted to ask you about what you're seeing in terms of.
Trends in that technology or.
Either your autos are electronics end markets is there is there any changes in.
New products or new technologies in middle of the action.
Yeah. It's a it's a good question, yes mineralization Circuit Board mineralization is is one of the core.
Ah focus areas for our circuitry business, it's a market that moves slowly so innovation incremental development as opposed to radical change and we are on the leading edge of that development.
Obviously circuit boards are getting more complex is more functionality is coming into them that as smartphones have more capabilities.
As automotive circuitry becomes more demanding in terms of what is what is required in a car in the computer a car.
We're seeing more flex circuits were seeing more high density interconnect circuits, and we're seeing more directly medicalization and that's it that's an area where we are differentiated in a market leader, which is using alternative to electrolytic plating, which is a lower cost.
Ah, but still quite strong margins for us and better for the environment. So there was some incremental development there, but nothing radical in terms of change.
And it's a growth market for us for sure.
Well, thank you Ben and maybe a more and more broad question and R&D.
The the R&D expense line items seems to be quite.
A reasonable from one quarter and mix I didn't know whether you had any particular challenges in the second quarter with.
With the R&D staff, saying that they how did they how did they manage so the the cold risks and maybe just maybe a one one more extension on that as anything that you see coming out of the R&D.
Capabilities that give you a excitement about a new technology or new product launch.
Yeah, absolutely. It's it's a good question seats. So the comparability. If you wanted to Q2 is a little bit apples and oranges, because we acquired a piece of technology in the first quarter for offshore business and it was categorized as SGN, a and that was about $6 million in Q1, I'm, So Q ones.
Q2 was a decline because of the absence of that but we really haven't cut R&D spending a year over year, a little bit in compensation expense.
Which is associated with some of the salary reductions we did but we are continuing to invest in R&D.
On an equal pace to what it's been historically, we had as Carey mentioned and as I mentioned in our prepared remarks, we're investing in long term growth for this and in this business and the savings that we generated have not come at the expense of long term growth.
With regard to Tobin, how R&D function has been has been operating indeed, it's hard to innovate from home and you know our our innovation team works at the bench in our facilities, we have done things to allow for then too.
Ah continue to work in our facilities, a with social dispensing and play. So for instance, we've got an early shift in a late shifts or some people come in working full day, but they come in early and then second shifts comes in lunchtime and stayed late so we haven't been nimble to allow for innovation not seem to continue to be Purdue.
Yes, despite the disruption or that we've seen with regard to exciting or you know innovation in the pipeline.
As I said to your first question around Medicalization, it's a business that really realize an incremental development as opposed to breakthrough technology. There have been some compelling I call them more breakthroughs around our Silversun dream process. That's used in power Inverters from power electronics, and we have some other things on the.
That that are very exciting and will allow for us to to maintain industry leadership from an innovation standpoint, and contribute to the above market growth that we aspire to it.
And once again to ask a question that is star one on your Touchtone phone that is star one well move next to Josh Spector of UBI, Yes. Your line is open.
Yeah, Hey, good morning, Thanks for taking my question.
So you guys continues discuss gross infrastructure, particularly around five key developments I was curious if he could characterize maybe how much of your sale to earnings benefited from growth in that market and really what I'm thinking is kinda as I look towards 2021 or relative to 2019, how much higher should like base earnings D.
You know assuming that auto markets eventually recover to some some level just trying to think how much additive that is two to your base case assumptions.
Sure. Thanks for that question Josh.
So with regard to.
Wireless and Internet infrastructure investment, we are clearly benefiting from that this year and you can see that in what we call. Our high end electronics in the circuitry and semiconductor businesses that have continued to grow despite what we've seen in the broader macro environment.
And and you know so if you look at our semiconductor business, it's growing 20% the circuitry business grew more modestly in the second quarter is more broadly exposed, but what's supporting that growth is infrastructure investment internet and wireless infrastructure investment.
Mm one of the comments, we made around our guidance is that we expect.
Some of that growth to abate as we look towards the second half we attribute some of that outperformance to inventory bills. We haven't seen that in July or into August. So you know that's a bit of upside as we look out into Q3 and the.
Demand for for this investment is not a one year trend right. This is a multiyear trend where base stations and advisory phones will continue to be invested in around the world.
And so it shouldn't underpin.
You know continued strength in that high end electronics market into next year and the years beyond that.
And so as you think about recovering to the back to you know a baseline for next year I think the critical assumption is around the industrial economy, and automotive, which is where we have struggled this year.
Units have declined we've outperformed those markets, but units have declined significantly or the circuitry business. The semiconductor business those will continue to grow nicely into next year.
Okay. Thanks that I mean, I guess did I hear you correct in that you haven't seen inventories.
The inventory de stocking been into effect yet today this quarter.
And in those businesses I guess I thought that some of that would be.
Some of the headwind that you talked about in terms of your guidance sequentially.
Yeah, It's a it's a good question Josh it until maybe I can I can frame the guidance a little bit in response to that right to it. So I think the place to start around our guidance is that our culture.
He is one of delivering on our commitments right and in an uncertain environment. Like this one you know that leads us to set our targets conservatively.
So our most impacted end markets are recovering there's still a risk of setbacks in that recovery. Those are macro risks there not company specific risks and so that is what.
You know driving us towards a more conservative guide of 80 of at least $80 million EBITDA.
Part of that is also an abatement sort of in abating in the strength, we saw in the circuitry and semi businesses I would say that July was stronger than our forecast coming into the quarter and so weve built some additional cushion to the outlook. It was stronger both in N.V. auto bid.
And this recovering I'd say modestly better than we'd expected.
And that that abating in electronics hasn't come through in July.
The first few days of August have seen a continuation of that trend. So you know from where we stand today, we've built some cushion relative to the guidance that we've given.
And ER and we feel pretty good about that.
Okay. Thank you.
And once again to ask a question. Please press star one on your Touchtone phone, one moment won't be too.
And once again that is star one on your touch tone.
On the phone.
[noise] one moment, while week you.
I will take your question from Anthony Walker of Goldman Sachs. Your line is open.
Hey, good morning, guys. Thanks to the question.
Good morning.
Just to follow up on the question related to guidance I can understand maybe on a willingness to capitalize the improvement that you saw in July but if we did see sustained volume improvement how should we think about the incremental margins that you could produce on the lower on sort of fixed costs.
Yeah, It's a good question Anthony and so.
A couple a couple of variables to discuss in that regard you know on the one hand, some of the Opex savings that we.
We recorded in the second quarter won't recur right and we've rolled back some of our salary reductions or some of the subsidies that we received from.
Right and governments around the world, where we operate you know we're not counting on those coming through as well.
So those are real Uh huh.
You know, we talked about Fiveish percent topline growth into July some of that growth is coming from a recovery in the more industrially oriented businesses, which are slightly lower margins, but we're still seeing continued resilience in performance from the higher margin electronics businesses.
So Ah you know our thoughts around around cost or that cost doesn't come unless there's revenue so margin should.
Maintain at these levels would that cost coming in and with that revenue growth.
If not a on the margin improved.
Got it and then maybe just drilling down into those comments around or your profit expectations noted.
As you mentioned I assume those higher sales results in some operating leverage could you just maybe breakout the magnitude of.
Lower subsidies the fellows that you expect to reduce a and how those compared to maybe additional structural cost opportunities that you identified and expect to take out in the second half. Thanks guys.
Sure I believe so so opex was down $16 million year over year.
Uh huh.
You know how about a third of that is lower genie right. So we're traveling far less given the pandemic and we would expect that to persist into the third quarter. The remaining $10 million is split between compensation actually.
And in some of the government subsidies the government subsidies or.
There are $5 million in the rest compensation actions not all of those compensation actions have been unwound.
But a good portion of them happen. So order of magnitude opex growth sequentially should be you know more than five less than $10 million.
And then the permanent improvements that you spoke to you know there's there's a couple of million dollars of that in the second quarter and we're working very very hard to improve the cost structure of this business to to get better quality outcomes at lower costs the implementation to technology.
Well, we're making great strides in that regard, but there's no silver bullet and so that continuous improvement as it is a journey that will be on for you know for several years or the opportunity associated with that tens of millions of dollars, but it will come in small chunks overtime.
Great. Thanks, guys.
Thank you.
Our next question is from John ton, one Tang CGS Securities. Your line is open.
Sir your line is open.
So can you hear me.
Hey, John Yeah, we can you.
You hear me now.
Yes.
Okay. Good morning, guys. Thank you for taking my question right. My first one just Oh I heard your comments on auto industrial business, you know being strong through July and August.
I'm wondering just in your discussions with customers have you heard them, telling you that they plan to be producing.
Through what will be normally seasonal downtimes in Q3, we've heard that you know some of those auto Oems are doing that industrial you know might be going through some restocking just wondering what kind of commentary you're hearing from clients in that regard.
Yeah, it's across it varies by region and by customer John has a good question you know in the U.S., we heard that the major Oems some of them. We're gonna have their summer shutdown, some warrant or that was a a good signal.
And we still believe that in Europe by enlarge the summer shutdowns will occur so august shouldn't be slower than July.
That's our expectation.
And you know it's too early to say anything different just a four days into them up.
Got it and so to be clear that the conservatism you use your I guess, referring to in your outlook on the sell side is coming from electronics business, where you think maybe there might be.
A de stocking situation going forward.
I put it in two buckets John one is.
You know as I said earlier, we attribute some of the strength in the first half in electronics to inventory builds.
And as I said earlier, we haven't seen that play out in July.
Or you get an August though it's early and some of it is just associated with the macro risk and the uncertainty of the global economy.
As we said in our prepared remarks, we don't want to underwrite to an up into the right recovering demand given how fast moving.
You know that endemic to the virus has been.
You know we're companies culture is delivering on its commitments and so.
We want to give ourselves that opportunity you know in multiple different scenarios for for the demand recovery.
Okay, and then of I may have missed this earlier, but can you give us a little more color on the oilfield in the CPG markets I noticed in your press release.
But or maybe in your slides there were a little bit weaker in the quarter. Just wondering what the update there is especially in oilfield I thought you'd said previously that you'd expected fairly strong demand in the back half of your just based on.
Your customers are producing and not necessarily energy prices until maybe next year.
Yeah. So so so on the energy business or two dynamics I would call out the first is that.
Our customers have inventory of our fluids and so they've been using that inventory and not then they didn't replenish as much in the second quarter. That's a onetime impact right that just cash preservation from customers that are struggling in a market that's struggling.
Customers will be fine, but they're trying to preserve.
ER and the second Theres, a there's an FX impact disproportionate FX impact in that business, we do a lot of business in Brazil, and obviously the re eyes moved pretty significantly and so that's that's impacted results in the energy business.
Energy price volatility you know, we do expect to see some tapering off of drilling activity in the back half the production activity should or shouldn't be steady and so the customers will have to replenish their inventories and would get back to a more normal ordering pattern and so.
You know, we still believe that to be the case into Q3 should be stronger than Q2 in that regard with.
With our graphics business I.
Since Q1, there was a huge surge in that business driven by consumer behavior.
What we're seeing is that a major cpgs are delaying or launching of new package design.
Just given the economic environment, New package design translates to more orders for us and so that business. You know is a little softer Ah from outlook standpoint.
And so that explains those two comments.
Back later this year and it's just the timing thing or is it maybe somebody might be for sometime next year.
I think that it's likely.
Next year recovery right I don't I don't see these these package design launches take awhile and I don't I, we don't expect them.
Okay.
And once again to ask a question that is star one when you were touchtone phone that is star one on your Touchtone phone well move next to Jim Sheehan from Truest Securities. Your line is open.
Oh, good morning, Dan could you discuss the reasons why you maintained your head count through this downturn and where your competitors able to do the same.
Ah we maintained our headcount through this downturn because you know our business in the people based business, there's a huge amount of expertise and capability and our team and we believe these markets will recover.
And we want to have the same capable people, calling on customers and providing them service and innovating for us when when they inevitably do recover yeah.
We've got a lot of conviction in that and we believe we've got a great team and we want to preserve it and we're able to do so.
I can't speak to how customers are reacting you know I feel good about our balance sheet position and the health of our business and some of our competitors don't have that same level of flexibility that we do and so you know I'm confident that that we will be in.
As good of a position if not better when things recover based on the actions that we've taken and the way. The team has come together as I said on the prepared remarks.
We have permanently improved the way we as a team operate.
A lot of goodwill with our workforce based on preserving jobs and and other actions. We've taken and you know this is a long term game for us and we've made some you know good bet in that regard good investments in that regard and what we feel good about.
Oh, Thank you and just.
Capital Your returns efficiency is already quite substantial relative to your peers that what's your outlook for return on capital going forward and how do you create further separation.
Yeah, It's a great question, Jim and that's something we think about and talk about a lot you know the the quality of this business the amount of cash flow generates from a rather modest a set of fixed assets and capital invested.
And that should improve because the business is going to grow organically and it's a business that doesn't require significant capital investments to grow were to maintain its margins. So the returns generated from the growth we can get relative to the investment we have to make is great and so the incremental returns on capital should be improving.
And we've got plans, it's a we've got a collection of great businesses on that basis.
And we're running them better every year right as we talked about earlier in one of the questions.
You know getting better quality outcomes at lower cost about using technology to run these businesses more efficiently that's different than taking out cost when sales are down right that continuous improvement permanent improvement in the cost base in the business of running the business and we've got a multimillion dollar opportunity and we're chipping away at that.
Every quarter.
One of the comments I made in the prepared remarks about.
Managing through this pandemic without losing focus on longer term projects an objective yeah. We've done a really good job. The team has done a really good job of continuing to execute our shared services project.
Other I.T. projects that will make this isn't more efficient and all that will translate to use. It further separation you know for from it's called the industry standard industry median returns on capital, which is how we measure ourselves.
Terrific and maybe you could talk about the U.S., China trade relationship how are you planning to mitigate the risk of further deterioration and not in U.S.U.S. trade.
Conditions and <unk> relationship for China.
Yeah. So so.
You know that dynamic is out of our control, but but how we position ourselves relative to it is something we think about a lot first of all we look local right. So we got local teams on the ground local facilities local manufacturing local suppliers local technical service people. So we look local everywhere, we're doing business.
Another way that you mitigate that is through innovation and being on the bleeding edge and offering capabilities that are differentiated such that should there be preference for local suppliers and our looking local isn't adequate you know there isn't a a good alternative to us so.
Obviously continued investment in innovation is a focus area and helps mitigate that risk in the third thing is being in a position such as it should supply chains move out of China.
To mitigate that risk for themselves right. So our customers and OEM, you know being ready to absorb that demand and that work and so we are a global supply or we can provide the same level quality and capability you know wherever our customers may move.
They're already.
And that is a margin tailwind for us because margins are better and outside of outside of China in business isn't inside.
So we spend a lot of time thinking and planning about that and are well positioned in.
Thank you very much.
Thanks, Jim.
Our next question is from Sean Gil Martin of Barclays. Your line is open.
Hi, guys unproductive. This morning, good to hear of one voice is just a quick one from me and understand completely it's probably a combination of what's already been talked about but you specifically called out kind of a tough year on year comp.
Within the circuitry vertical could you maybe just remind us what was driving that strength in Q3, 19, and how we should think about maybe I'm kind of maybe lower sales are more difficult sales profitability there impacting the electronic segment in Q3.
Yeah, absolutely. Thanks for that question. It's a good point right Q3 last year had a very very strong margins that was driven by the fact that there was a pretty big build up in high end circuit boards for smartphones are coming out of 2018 into 2019 and the smart.
Phone market specifically.
Certain Oems had very strong results in a in Q3 in the back half of 2019, and so there was a surge in demand for very high end circuit boards for the mobile market in Q3 of 19, that's a high margin product for us.
And so it translated to a very strong quarter in Q3 at 19, which meet the comp which makes the cost more challenging this year.
Got it that's super helpful. Thanks, guys.
Sure.
Operator next question.
We do we have a follow up from Josh Spector of you'd be S. Your line is open.
Yeah, Hey, guys. That's let me follow up here just on on industrial or your declines in the quarter were somewhat consistent I think with auto demand declines you expect that to be the case in threeq. He was well or do you expect a lagging that recovery or perhaps any you know lead on that recovery on something.
Central restocking activity.
Thanks for that question, Josh our goal has always outperform our markets.
The primary market and then industrial business is the auto market and it's the best indicator.
So so I would look to that to to the auto market.
As a gut check and that's what we look to when we.
Do our forecasting and planning exercise.
Okay. Thanks, and just last one on Ah you acquired test or at the end of last year. I was just curious if there's any significant deviation performance of caster relative to your heritage Assembly business.
Uh huh, so bifurcated the caster business that was that's in the core sort of traditional assembly market as.
Perform similarly, I would say two to our core assembly business and there was small piece of the caster business, we called out when we acquired if it's in the semiconductor market and that business has grown exceptionally well.
At high margins. So that's been a a great story for us.
And we're very very pleased with its performance.
Okay, I think yes.
Thank you.
And our final question is they follow up from Steve Byrne.
End of America. Your line is open.
Yes. Thank you for let me get back into queue here I wanted to ask you a few expect any changes yeah.
And geographic distribution of your end markets, whether you are seeing any trends towards.
Soaring initiatives for from any of their customs.
So it's a good questions either and we have seen.
Some parts of the supply chain begin to invest a particularly in electronics outside of China in places like India, and Southeast Asia or there's been automotive investment also in southeast Asia.
You know for us to put up a facility is not so complicated on a relative basis. It's a few million dollars, it's warehousing and blending tanks for our customers. It's tens if not hundreds of millions of dollars and so it takes a while we're starting to see some of that but you know it's not in.
Full effect as yet I would say.
Okay. Thank you.
Sure. Thanks.
This does conclude our question and answer session I'd be happy to return the call to Ben Gliklich for any concluding remarks.
Thank you very much thanks to everybody for joining this morning, we look forward speaking with you in the coming days and weeks and ER and please stay safe.
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This does conclude todays element solutions incorporated Q2 2020 earnings Conference call. You May now disconnect your lines and everyone have a good day.
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