Q3 2020 Element Solutions Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the element solutions third quarter 2020 conference call. All lines are currently in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session. You May Press star one at any time to enter the question queue.
Please note today's call is being recorded.
I will now turn the call over to Jaeson I had tea associate director of corporate development and IR. Please go ahead.
Good morning, and thank you for participating on our third quarter earnings Conference call. Joining me are executive Chairman, Sir Martin Franklin video, Ben Gliklich, and CFO Carey Dorman in accordance with regulation FD or fair disclosure. We are webcasting. This conference call any redistribution retransmission or rebroadcast of this call in any.
<unk> form without the expressed written consent of element solutions is strictly prohibited.
During today's call will make certain forward looking statements that reflect our current views about the company's future performance and financial results. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties. Please refer to our most recent SEC filings for a discussion of the most significant risk factors that could cause actual results.
Differ from our expectations or predictions.
In the earnings release, and supplemental slides that you shouldn't posted yesterday afternoon element solutions that provide a financial information that has not been prepared in accordance with U.S. GAAP.
Definitions and reconciliations of these non-GAAP measures to comparable GAAP financial measures refer to their release and slides, which can be found on the company's website at www Dot elements solutions, Inc.
Tom in 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. Thank you for joining us.
For a third consecutive quarter the team Mds I managed a challenging environment gracefully and with resilience I'd like to start by recognizing all of my global teammates for navigating kobin related disruptions exceptionally well through focus hard work and sacrifice.
In a period of uncertainty what began earlier this year with dropping volumes rising pay cuts and furloughs.
Was followed by a sharp increase in activity this quarter.
The team was consistently on task and delivered the quality products and services our customers demand all without seeing other longer term improvement projects the rail.
We could not be prouder of our people.
Well could is still with us in the third quarter, our most impacted end markets rallied meaningfully from the 2022nd quarter lows at the same time strengthen our high end electronics businesses continued to demonstrate the same macro outperformance that characterized the first half of the year.
The recovery, we saw in our automotive in industrially oriented businesses beginning in June and July accelerated into August and September.
Sequentially net sales across our industrial and assembly businesses increased roughly 40% in the quarter.
We ended the third quarter with our industrial vertical down 7% organically year over year after having been down more than 40% in may.
We ended the third quarter cautious about our high end electronics businesses, given their market outperformance relative to the broader economy.
Additionally, the third quarter of 2019 was particularly strong making a tougher comparison.
Despite a lower than normal seasonal uptick from the circuitry business, our electronics business grew year over year on the back of a robust rebound in our assembly business and the continued strength in our semi business.
Overall this translated to a strong quarter, we generated $102 million of adjusted EBITDA on net sales of $478 million.
Sequentially adjusted EBITDA grew 20% sequential net sales growth of 23%.
Year to date net sales were down 7% organically and adjusted EBITDA is down 4%, which reflects a margin of 23%.
Good results in a turbulent time.
Adjusted EBITDA margins in the quarter declined year over year, which we expected due to the third quarter 2019 mix of business.
They are flat sequentially and would have been stronger were it not for a year to date incentive compensation related accrual true ups in the quarter driven by the sharp increase in full year earnings expectations.
We expect an operating costs to increase in the third quarter and they did modestly even before the compensation true up.
We expect Opex to decline from Q3 to Q4, and the Q4 level of spend should be more reflective of the quarterly rate, we expect in 2021 as well.
Adjusted EPS in the quarter was 22 cents and 65 cents year to date nearly flat versus the same period in 2019.
We generated $63 million of free cash flow in Q3, and $174 million of free cash flow through nine months of the year.
That compares to $166 million in the same period last year on an adjusted basis.
This is textbook performance from our business showing that we can preserve profits in difficult markets and generate outsized cash flows.
Okay.
During Q3, we announced our acquisition of DMP Corp, and the formation of a new business Mcdermott in via solutions.
The acquisition was modest in size, but not an ambition.
We paid a mid single digit multiple for a few million dollars of adjusted EBITDA. It.
It fits our acquisition criteria perfectly a tuck in transaction opening an immediate adjacency with synergy potential and available at a reasonable multiple but.
But we believe this acquisition also creates a pathway for terrific growth into a large and new addressable market for us.
Our customers are clamoring for help managing their waste streams.
We did a survey of the top 50 customers in our industrial solutions business and 90% of them said sustainability with the top three priority, 25% said it was their primary priority.
Mcdermott in bio solutions, the DMP and our Camtek metal recycling business offer capabilities that will allow us to help customers with sustainability.
Both businesses have good technology, but were limited to the Americas we.
We believe we can bring them global and win mindshare and market share by adding to our already extensive list of critical solutions offered to our customer base.
The commercial integration of this business is ongoing in the EMEA sales backlog is growing fast I look forward to providing more detail on our progress with this initiative in coming quarters.
Kerry will now take you through our third quarter financials in more detail Kerry.
Thanks, Brad and good morning, everyone.
As Ben mentioned, our performance in the quarter was quite strong when viewed through the lens of the macroeconomic backdrop COVID-19.
We exceeded our revised adjusted EBITDA guidance for the quarter at September ended well ahead of plan.
On slide four we share additional detail on net sales in our two segments.
In electronics, we grew organic sales, 2% year over year, which is a sharp reversal of a 6% decline reported in Q2.
Semiconductor again, what the best performer.
Proliferation of sensors and computing power, our long term trends that should continue to propel this business.
The automotive recovery dropped Q3 assembly net sales to just about flat organically year over year, a sequential improvement of 36%.
For the first time this year secretary experienced a modest decline in organic net sales despite a sequential improvement of 6% in that business as well.
Circuitry, which is exposed to high end mobile PCB had a strong Q3 and 2019, creating a tough comp for the quarter.
Adjusted EBITDA margins in the segment were down approximately 300 basis points in the quarter driven by negative mix contributions from assembly higher metal sales prices that pass through at little to no margin and the year to date variable compensation true up that Ben mentioned earlier.
Electronics adjusted EBITDA margin would have been down by only 100 basis points versus Q3, 2019, if we exclude the negative impact of the variable compensation change.
Organic net sales and industrial and specialty declined 10% versus the same period last year, but improved sequentially by 24%.
All three verticals experienced continued pressure this quarter on a year over year basis due to COVID-19, and various impacts on supply chain oil prices and consumer buying patterns.
The industrial solutions vertical was down mid to high single digits, but up 41% sequentially as the cobot related automotive shutdowns reversed course.
Both offshore and graphics experienced mid teen organic sales declines.
Graphics continues to experience softness in the non core newspaper business, which though a small percent of overall vertical was the primary driver of the decline in sales.
The core flexible packaging business also continued to see the impact of delays and CPG marketing initiatives, which we expect to see resumed to some degree in the fourth quarter.
Sustained low energy prices are the primary driver of declines and offshore but slower drilling activity, resulting little new production coming on line.
Adjusted EBITDA margins for IMF decreased year over year by almost 500 basis points of which approximately 300 basis points was driven by the compensation accrual true ups. This.
This was partially offset by continued underlying opex savings.
The sequential adjusted EBITDA margin declines were about 200 basis points, driven almost entirely by mix as but offshore and graphics are higher margin businesses than industrial.
On slide five we cover cash flow and the balance sheet.
We generated $63 million of free cash flow in Q3 year to date, we have generated almost $175 million of free cash flow is about 10 million better than our adjusted 2019 year to date free cash flow.
Working capital only grew modestly due in part to declining inventories as we continue to work down safety stocks, we have built at the peak of Cobiz disruption.
We expect working capital to be flat to modestly improved in Q4, though ultimately this will depend on demand patterns towards the end of the year.
This quarter, we Opportunistically took advantage of our strong business execution, and a recovering market backdrop to refinance our senior unsecured notes.
Our 3.875% coupon set a recent record for high yield chemicals and reflects the improvements we are making across our business.
We extended our maturity by three years to 2028.
And reduce our interest expense by 200 basis points or $60 million annually, which we expect to realize 5 million this year.
Our cash flow this quarter was burdened by approximately $10 million of accrued interest paid in conjunction with our refinancing.
While the interest amount was paid earlier than expected December coupon we.
We will see the benefit of this refinancing in Q4 as our next bond to bond is not to occur until March of 2021.
Next year, our full year cash interest should be closer to $50 million or 30% reduction as compared to the 2020 initial expectations that we had.
Cash taxes in Q3 remained lower year over year in line with lower earnings.
Our full year cash tax expectations are now approximately $70 million, a $5 million reduction from our prior outlook.
Capex is trending roughly in line with our expected $30 million level.
We continue to invest in our business as you would in a normal year.
For the full year of 2020, we expect to generate approximately $215 million of free cash flow.
Net leverage at the end of Q3 was in line with previous quarters. This year at 3.2 times adjusted EBITDA.
Our strong cash flow generation and prudent balance sheet management, largely mitigated the effect of Cobiz related decline in our.
On our leverage ratio.
We restarted our share repurchases in late Q3 purchasing about $3 million or the stock over only a few days in September.
Our buying window with limited due to the financial guidance revision, we released in September.
In October we also repurchased an additional $17 million or 1.5 million shares.
As we enter Q4, we believe we have more than adequate capacity to invest in growth and return capital to shareholders.
Ben will touch on this shortly.
And with that I will turn it back to Ben.
Thank you Carrie.
For Q4, 2020, we expect adjusted EBITDA of $90 million to $95 million, a slight increase to the quarter relative to what was implied by our updated financial guidance in early September and a more significant increase to the back half of the year relative to that guidance.
Built into these figures is the expectation that our auto and industrial end markets do not improve much beyond the recovery, we experienced in the third quarter. They.
They are about 5% to 10% below prior year, which is where we think they will stay through Q4.
We expect a higher end electronic strength to continue, albeit sequentially lower given fewer operating days and the typical calendar year seasonality that we see in that business with the third quarter generally stronger than the fourth.
The topline will therefore, it declined sequentially as usual in Q4 in our business.
However, opex should also decline sequentially given the variable compensation accrual true up to reported in Q3.
Overall adjusted EBITDA margin in Q4 should be roughly the same as in Q3.
At current FX rates, we expect a modest year over year translational tailwind for the first time since late 2018.
We've demonstrated in our first seven quarters as the site that our business is able to generate strong cash flow in different types of markets and we are proud of our track record of capital deployment over that period.
We spent approximately $75 million on acquisitions and these investments are on track to generate more than $13 million of adjusted EBITDA. This year.
In addition, we repurchased five and a half million shares so far this year.
So while our end markets have been weak and currency is expected to be a full year headwind to $5 million, leading to a decline in adjusted EBITDA of about 6%. Our adjusted EPS. This year is expected to be approximately flat versus 2019.
Our cash flow deployments in founding the ESI has driven strong earnings per share performance.
We expect earnings growth to accelerate our de leveraging into next year and together with free cash flow generation create additional capacity under our leverage target.
We remain a growth oriented company and we continue to evaluate modest bolt on acquisitions of businesses that we believe would be better as a part of the ESI bring us talent and new capabilities represent good value and have the potential to accelerate our growth rate.
We view our own shares as an attractive acquisition alternative as well when trading below what we believe to be intrinsic value.
As indicated earlier, we began to repurchase shares again modestly towards the end of the quarter as their salary restrictions and furloughs rolled off.
Our business generates far more cash than it needs to invest internally to fund capex and more than we normally expect to deploy into acquisitions that fit our criteria.
In that context, we believe it makes sense to institute a regular cash dividend to return some of that strong cash flow to our investors.
We believe we can do so without materially impacting our ability to compound earnings and without reducing our flexibility to opportunistically invest in inorganic growth or to de lever.
Although the actual declaration of any future cash dividends as well as their amounts and timing will be subject to final determination by our board, we expected dividend to be initiated in the current quarter, a five cents per share and to continue at that level into 2020 one.
We've deployed capital prudently as the ESI and this step will further support our balanced approach between the Mega trends driving our end markets and our ability to outperform our markets through sound execution and strategy. We remain committed to our just to our target of adjusted EPS of $1.36 per share by two.
2023.
Before turning the call over to Q in a I would conclude by noting that our results. This quarter underpinned two facts about our business in which we are gaining conviction every quarter and building a track record of delivering.
First we have a first class operating team driving businesses with stable defensible margins and robust cash flows that we are making better everyday through strategy implementation and process improvement.
Second these are businesses in growth markets and the ESI is providing enabling technology and service to end markets with exciting demand drivers that are the product of trend, which we believe are just beginning to impact our top line.
With that operator, please open the line for questions.
Certainly at this time, if you would like to ask a question. Please press Star then one on your Touchtone phone you may withdraw your question at any time by pressing the alky. Once again that is star one and as a reminder for today, we do actually you. Please limit your questions to one question and one follow up will take us.
Next question from Steve Byrne with Bank of America. Please go ahead.
Yes, good morning.
Let me see found one of the drill in a little bit on this new business unit of waste water treatment and more specifically on dual on the acquisition loan CMP.
What what is particularly.
Proprietary or their areas of expertise.
For example is this.
His primary primarily about.
Recovering models, all the waste water or is this removal of organics as well.
Yes, so we have two businesses within Mcdermott advice solutions. The first is camtek, which we acquired over a year ago and that's the metals recycling business. That's a piece of equipment that we attach onto customers production lines and it reclaims.
Metals, whether its nickel chrome.
From depleted backs and so our customers are able to take that metal in solid form and resell it reclaim some value and that metal is no longer in their waste stream.
It's.
An incredible offering that has very fast paybacks for our customers and is proprietary in its nature.
DMP does is equipment and chemistry at the end of the line for separation of solids and water at.
At the end of <unk>.
Production lines, so it cleans water.
Eliminate some of the solids that would be in typical discharge with the Holy Grail being.
Circular line in a no discharge line recycled water, which is something that we've been able to provide in some instances. So whats differentiated about this business is it.
Engineering capability.
And it's really been focused in the U.S. has got very happy customers in the U.S. and many of them and we can leverage that engineering capability into.
Internationally and Thats the plan for this business.
We tell the folks at DMP that they were acquired by 4500 person lead generation engine, because our customers could benefit from their technology and we're already seeing the benefits of that.
So would you see the value proposition of your owning DMP to globalize or mortgage capture more wallet share with your existing customers.
Yes.
There are two ways to win with this the first is to grow the business by bringing it to existing customers who are looking for help.
In reducing their environmental footprint, it's an existential issue for the owners of our customers.
And the second is to offer this technology to grow our mind share with those customers and convert or win more market share of future manufacturing lines by having more solutions and we can we can package isn't the right word, but what we can offer the equipment in conjunction with the new line, where we're getting the chemistry business.
And so we view this as as both a growth business from an bias solution standpoint, but also a market share driver.
For our chemistry.
Okay, and just if I could just curious about your outlook for the for this new phones dividend policy over time is this something that you think you will likely grow annually or is this more opportunistic overtime.
So the plan with the dividend at the start of five cents a share and I think as we indicated in our comments keep it there.
Going into 2021, it's not a hard and fast percentage of free cash flow, but as free cash flow grows we would expect the dividend to grow as well.
Thank you Glenn.
Thank you.
And we'll take our next question from Josh Spector with GBM. Please go ahead.
Yeah, Hey, guys congrats on a good quarter.
Josh just wanted to ask if I look at the second half and try to think about all the moving parts in the crop cost perspective wanted to see if you could kind of bridge to your second half cost structure into next year and think about the opex puts and takes but also some of the temporary cost reductions on the travel and then the other side that we should be.
Sit around as they start to look towards next year's cost base.
Yes, thanks for the question Josh.
Clearly there are several moving pieces.
We took $16 million of costs out in the second quarter.
We expected that to rebuild with government subsidies rolling off with some of our salary cuts and furloughs ending.
Coming into the third quarter and that did happen as we said in our prepared remarks, opex increased modestly going into the third quarter and then we had this accrual reversal, which was a year to date true up as the way to think about that that was onetime in nature.
Call that high single digit million dollars.
As we roll into Q4, therefore, you should expect to see that.
Okay, especially opex decline from the Q3 level and we expect that to be roughly.
The right number for the first half of 2021 from an Opex standpoint.
And so think about where we landed this year this quarter less 10 there.
There is still some travel that we're not doing that will build back hopefully is as we return towards normal.
And think about that as you know a few million dollars a quarter as well, but we wouldn't count on that coming back in the first quarter 2021 based on what we see right now.
Thanks, that's helpful and.
Also just kind of looking at electronics and the growth outlook. There I mean, you've had pretty strong growth in the semi business all year and now you have some recovery in the other businesses as well I'm just thinking around semi growth into Fourq, you and even into next year just trying to.
Take it that presents a tougher comp for you to grow off that or if theres enough green shoots there that you see kind of a continued path to growth over the next year or two years kind of down that line.
Yeah. Thanks for the question Josh the semi business has been a a highlight throughout the year.
Several consecutive quarters of near 20% top line growth.
Wow.
It will remain a growth business for us we expected to grow into Q4, as well and into next year I'm not sure I would extrapolate 20% growth every quarter.
For multiple years, but the drivers of that business are real we see them everyday.
Our customers are demanding more.
Sensors more computing power.
And that's going to stay and so we would expect that business to grow nicely next year and for several years beyond that.
Okay. Thank you.
And we'll take our next question from.
Chris Kapsch with <unk> capital markets. Please go ahead.
Yes, hi, good morning, so in your formal presentation materials and.
Looking at the electronics segment.
Regarding the circuitry business, specifically you referenced share gains from.
Sorry share gains as well as recovery from Kobin weakness in China, and I'm, assuming those are mutually exclusive but so the question Ben we've we've chatted.
You discussed that you know the dynamic that during the dynamic your company. Your firm was able to demonstrate the ability to provide technical support to your customers during during the worst of the disruption.
So that intimacy was unaffected and suggested that that superior service may have manifest itself at least a tactical advantage in addressing some of your key end markets and customers. So in connecting the dots and just curious if that played out in some of the share gains that are referenced so the Tam tangible example, or maybe you could just elaborate and maybe.
The share gains sort of pre dated coded.
Yeah look it's hard to attribute specific share gain too specific dynamics right. We try to lead with best in class service best in class supply chain.
Reliability and best in class products, and that's hitting right now.
The high end electronics business has been very resilient throughout co bid you.
You are seeing new product introductions on consumer.
Consumer electronics side of things and mobile phones that requires new production coming into.
Into service and we're winning that business and so thats what those comments.
In our prepared remarks or in our presentation are referring to we continue to win business at the high end.
And continue to meet customers needs for innovative products.
And that was not disrupted by by co bid, where I think some of our competitors were and that helps.
Got it and your response to that that's first question sort of get that my second one, but let me let me frame it up anyway the.
So the and obviously the circuitry for both for consumer electronics, particularly next generation consumer electronics.
Yes, it continues to get denser more complex and with SEC density becomes more challenging interconnect applications, where you're seeing more content per unit and hopefully you are gaining share in.
In those applications as well, but.
Can you just remind us where your position you think is with these advanced smartphones, specifically and are you starting to actually see some.
Increased content per unit per advance smartphone starting to play out at this juncture. Thank you.
Thanks for that question Greg.
And it is something we're excited about we called out in the past our estimate is that.
Fiveg the phone has about 15% more of our content than a fourg phone and so that's something we're excited about and we are beginning to see.
Come through the PNM now I would note, though that this year mobile phone units are forecast to be down.
Down 10% to 15%.
And our circuitry business hasn't shown that impact.
If you look at a year to date, it's been growing.
Some of that is driven by data storage.
Whereas the there has been a big investment there, but as we look at into next year, we expect mobile phone units to grow and that should be compounded by increased content per unit. So we see a nice growth tailwind.
For several years going forward in our circuitry business.
Thanks for the color.
And again, just as a reminder, that is scar and one for any question today well take our next question from Bob Koort with Goldman Sachs. Please go ahead.
Thank you good morning.
Hi, Bob.
Thank you.
You reaffirmed your commitment to an EPS target a few years out that.
My State College math suggests maybe 18% annual EPS growth from this year's numbers. So just curious in light of some of the the shifts in telecom and.
Infrastructure electronics infrastructure is that sort of things you just mentioned.
Give us a sense or maybe an update on what that algorithm is through the income statement that gets you to that kind of bottom line growth. What do you see in a normalized world for EPS growth, how do you leverage that at the EBIT line and then how does that come to that sort of 18% EPS growth over the next several years.
Yeah, So the way the way that we.
We think about the growth algorithm for this business is that our markets through the cycle grow.
Low to mid single digits, we can grow a point or two faster than that we can convert that topline one and a half to two times business generates a lot of free cash flow and we can deploy that in interesting ways as we've demonstrated clearly we're coming off trough earnings.
And we should see growth.
And beyond sort of through the cycle.
Rates as we come into 2021 and hopefully beyond that.
We're making the business better adding efficiency, taking cost out so that one and a half to two times should play out on the EBIT or EBITDA line, and we're improving our balance sheet, which you've seen which should translate to outsized EPS growth, where we're improving our tax footprint, which should also contribute to it.
EPS growth and even with this modest dividend, we're talking to were going to be generating.
North of $150 million of free cash flow a year to go.
Compound earnings and over three years that can be very impactful and so through that.
That combination that we remain committed to that target.
Got you and if I could ask a couple of.
More recent business questions. One you guys noted the flexible packaging market was maybe saw some product delays from the consumer products companies use.
Can you describe exactly what it is you sell to those companies that that makes it sort of on a campaign basis with new packaging introductions and not.
You know an ongoing continuous sales.
Cycle there.
Absolutely so our graphics business.
Has it has three components to it there are two small components and those have been the ones that have been creating a bigger headwind in the third quarter. One is a newspaper plates business and pagination the number of pages being printed has fallen off very significantly.
The other is screen printing business, which has been under pressure has got industrial exposure, but the core of that business is a packaging business, where we sell flexible plates that are used in the printing a flexible packaging and win.
Consumer products company Rolls out a new chip.
Chip bag or bottle wrapper, they need a new place.
Because that plate has the design for that wrapper.
If they're not introducing new packaging they can use old plate and so demand is driven by package redesigns branding and promotional campaigns and so forth and you've seen that that has dropped off significantly this year the packaging business. Nonetheless, it's still growing this year. So it is a growth.
Business as demand for packaged goods around the world increases and even despite.
A slowdown in.
In packaged redesign that business has grown that's the core of the business, it's growing as a percentage of the business and we expect that business to grow nicely into next year.
Got it that's helpful. Thanks very much.
Well take our next question from Duffy Fischer with Barclays. Please go ahead.
Yes, good morning, guys.
My question just around the free cash flow so with the dividend taking 20% now helpful chart, you're kind of picture as your you know that leaves about a 150 that grows over time.
If I give you a long enough time horizon to take the Lumpiness out here is thinking about like a 50 50 split above the dividend half going to buybacks half going to M&A is that as good a guess is any of that we would have today.
So we're never going to be prescriptive about what we do with that surplus cash flow because as opportunistic in nature.
As you've seen over the past year, and a half or more of our capital is gone to buybacks and M&A.
We believe there is an almost indefinite list of opportunities that look like the M&A, we've done to date.
Small to midsize tuck in that aligned with what we do with synergy content available at reasonable multiples.
And so as our shares.
As and when our shares become less attractive to repurchase we could ramp up the M&A aspect, but again doing things that like what we've done to date.
Yeah.
And we're not afraid to de lever. So if there is anything to do the cash can go to the balance sheet and our leverage multiple will go down through that in addition to earnings growth.
So I'm reluctant to give be prescriptive about that I don't know Martin if theres anything you'd add around capital allocation beyond.
Yeah, I think that you know as it's always been plastic windows in time.
But I think that you know our goal. Obviously is we continue to try to get to what we would consider a value.
On the equity.
Will depend on a number of factors one of them is getting I think our leverage ratio as we bring it into the twos during the course of next year.
That will be perceived as a plus but at the end of the day as Ben says is absolutely right. It depends on the share price share prices.
You know strengthens symbol will focus on on.
Pay downs and then acquisitions so.
But if I try to stay low we're going to keep on buying back our stock it's that simple.
Fair enough.
Then maybe you weren't just two things around the deep water fluid business. So one near term just has volatility in the oil prices you're done anything to.
Current business and then whats kind of the focus on de carbonization and stuff like that very big capital projects is what you're good at their over time do you think that means there's business. After fees as you know are you.
On a farm in the oil industry, I'm, probably going to put more capital to smaller projects.
Less risky projects, there and you know these multiyear multibillion dollar deep well projects or kind of what's the long term.
View for that business.
So our Russia business is a really excellent business leading market share.
In.
What is absolutely essential for the functioning of offshore drilling vessels and production of offshore energy that business has been under pressure as drilling activity is slowed down as energy prices have stayed low.
And production new production coming on line has slowed down as drilling has not created new wells.
What we saw when we last went through a period of low energy prices that the offshore operators took a ton of cost out and improve the breakevens.
And so I have a reasonable amount of confidence that will happen. The other thing that we've done in that offshore businesses. We acquired the technology earlier. This year, we talked about it on a prior call that is really a benchmark technology from an environmental standpoint.
And you.
Even though we've got a good market position there this technology should allow for us to increase our market position and take share.
On new drilling activity and on new fills a new wells that are coming on line and so growth here isn't just going to be driven by the market. I think we can we can grow our position.
But it is a tough year for that business and next year will likely continue to have a headwind because of the lack of drilling activity. This year.
Look out.
And in reference to your comments about de carbonization.
That's a.
Very very long term.
Dynamic and not something that we're worried about in the short to medium term or even in the short and the long term.
And I'd note that this is a business that is our smallest vertical from a topline perspective and as our other businesses are growing it's becoming smaller.
Fair enough. Thank you guys.
Well take our next question from Jon Tanwanteng with CJS Securities. Please go ahead.
Hi, good morning, guys great quarter. Thank.
Thank you for taking my question. My first one is that then last quarter you had a reasonably cautious view.
Based on your your thoughts around channel inventories and restocking and all of that is your customers I am wondering if your outlook for Q4 has has a similar kind of viewing it more level of conservative conservatism related to it how do you see your see inventories in the channel that clients use of keeping that fully be filling it.
Yes, So you know last quarter, when we were giving our guidance.
It was a really tough time to our Crystal ball was was it was far less trend.
Transparent than it is today.
Our guidance is based on a plateau going at the level of recovery, we saw into July and clearly we saw a real acceleration in August and September.
And we revised our guidance on the back of that in September.
At this point there is in that same level of conservatism by any means.
We are assuming a.
A rough roughly a plateau going from an end market perspective, and adding in what is less than normal seasonality.
To get to our guidance range.
So I don't see the same.
Lack of clarity around this number and I wouldn't say, there's the same amount of conservatism, obviously, we hope to do better.
But based on prior periods. When you look at Q3 to Q4 EBITDA is normally off 10% to 15% just from a seasonality perspective given newbuilds.
From new product introductions in Q3, and fewer operating days in the quarter and our guidance is for less than that level of decline. So I think it's a it's not as nearly as cautious an.
An outlook as we spelled on our second quarter call.
Understood. Thank you and then as we look out to 21.
It's a bit early and you got the specter of co bid and elections, and whether stimulus is coming or not but can you kind of help us understand what kind of improvements you're looking for on a year over year basis, if it's possible to get the 19 levels of profitability.
Just how you're thinking how you're positioning and then how your strategy changes.
Certain of these factors as we go forward.
Yeah. So it's early to speak to.
To 2021, but.
A few a few comments.
The growth trends that are driving the high end electronics business. This year will persist into next year and so we should continue to grow that business.
Obviously, it was a lumpy year in our industrial businesses.
Which makes for an easier set of comps and so we should see growth in those businesses as well.
We have an FX tailwind at the moment for the first time in several years, which should contribute to dollar realized earnings growth and we're making these businesses better we've taken cost out permanently.
Here and so I view those things is contributing to a pretty nice year for earnings growth in 2021.
But it's a little early to put orders of magnitude around that.
Feel good about our trajectory entering the year based on what we see today.
Got it thank you Greg.
Yeah seems to be no further questions I will turn the call back over to Benjamin Please.
Yeah.
Quickly for any closing remarks.
Thank you very much and thanks to everybody again for joining we look forward to speaking with you in the coming days and please.
Please stay safe take care.
Thank you and this does conclude todays program. Thank you for your participation you may now disconnect.
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