Q4 2020 Element Solutions Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the element solutions Q4, and year end 2020 financial results Conference call. At this time all participants are in a listen only mode. Later, you'll have the opportunity to ask questions. During the question and answer session. You may registered to ask a question by pressing the star.
And one on your Touchtone phone you may withdraw yourself from the queue by pressing the pound key.
This call may be recorded I'll be standing by should you need any assistance I will now turn the call over to her own Gokarn senior director of strategy and finance. Please go ahead.
Good morning, and thank you for participating on our fourth quarter and full year 2020 earnings Conference call. Joining me, our executive Chairman Martin Franklin CEO, Ben <unk>, and CFO Cary dormant 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 element solutions is strictly prohibited.
During today's call, we 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 earnings release supplemental slides and most recent SEC filings for a discussion of material risk factors that could cause actual.
Results to differ from our expectations and predictions. These materials can be found on the company's website at www Dot element solutions, Inc. Dot com in the investors section under news and events. Today's materials also include financial information that has not been prepared in accordance with U S. GAAP. Please refer to the earnings release and supplemental slides for definitions.
Reconciliations of these non-GAAP measures to comparable GAAP financial measures. It is now my pleasure to introduce <unk> CEO of element solutions.
Thank you, Brian and good morning, everyone. Thank you for joining.
We had an outstanding year in 2020 outstanding on an absolute basis, and particularly on a relative basis in light of the macroeconomic backdrop.
We grew net sales adjusted EBITDA adjusted earnings per share and free cash flow.
The fourth quarter was the culmination and the capstone on it.
He was a record quarter for net sales on adjusted EBITDA since we launched element solutions in early 2019.
We grew the top line, 10% organically year over year, and adjusted EBITDA by 20%.
This was entirely a testament to our outstanding team, who live our culture every day and so intense dedication to our company our customers and our colleagues.
We're only as good as our people and this year proved our people are outstanding.
The Stark contrast between our performance this year and the tragic ongoing health and socio economic crisis is not lost on us.
We feel deeply for those who are sick suffering in the morning.
This pandemic has touched all of us and in that context, we are especially grateful for the resilience and persistence of our team who drove our success in 2020, while navigating the turbulence created by Covid and its ramifications.
When we launched element solutions in February 2019, we espoused strategy balancing operational excellence and prudent capital allocation.
Running our high quality businesses, better every year and deploying our strong cash flow as they generate and long term value enhancing ways.
On page three we consider 2020 against those objectives.
In the face of a dramatic economic dislocation, we grew adjusted EPS by 9% and adjusted EBITDA by 2%.
This 2020 earnings growth did not come at the expense of investing in our long term growth trajectory or in our people.
We continued investing throughout the year, maintaining our prior year spending levels in both R&D and capex and notably delivering on our commitment to preserve our employee base. Despite the COVID-19 related shutdowns.
We demonstrated the resilience of our variable cost operating model and stable cash flow profile preserving margins throughout the year and generating robust cash flow every quarter.
Free cash flow was approximately $250 million up 5% like for like over 2019.
And we deployed that cash flow prudently with a small bolt on acquisition that we believe creates a great long term growth opportunity for us a high returning debt refinancing and accretive share repurchases.
We demonstrated our commitment to balanced capital allocation with the initiation of a five cent per share cash dividend in the fourth quarter as well as the repurchase of nearly $56 million in shares throughout the course of the year at an average price below $10 per share.
Even as we invested in growth and return capital to shareholders. Our balance sheet continued to improve our net leverage ratio fell to two nine times at year end.
Yeah.
While 2020 is not a year, we expect to remember fondly.
It's a year, we exited stronger than we entered in a year that we will be proud of.
Our fourth quarter results are summarized on slide four the.
They exceeded our mid December expectations as business, particularly in electronics remained strong through what is typically a slow period at year end.
November was the best month since we launched element solutions until December which was even better.
Net sales of $537 million in the quarter were also a record since launch.
They represented growth of 10% driven by strength in high end electronics and the continued recovery in industrial oriented businesses.
We grew adjusted EBITDA by 20% in constant currency to a quarterly record of $126 million adjusted EBITDA margins in the quarter improved 100 basis points year over year as we saw both mix benefits and continued operating efficiencies.
Adjusted EPS in the quarter of 31 cents grew 41% versus the same period in 2019.
Yeah.
Turning to our full year 2020 financial results on slide five we delivered growth in net sales adjusted EBITDA and adjusted earnings per share in a year when several of our end markets. Some marked declines.
Organic net sales declined 3% for the for the full year as COVID-19, driven production slowdowns heavily impacted automotive and general industrial end markets in the second quarter before recovering in the second half of the year.
Strong underlying demand for next generation smartphones, <unk> telecommunications infrastructure and data center markets supported our high end electronics business throughout the year. Despite the macroeconomic weakness we saw in most other manufacturing markets include.
Including currency movement, and the benefit from our acquisitions of DNP on catcher net sales were up 1%.
We grew adjusted EBITDA, 2% on a constant currency basis, and expanded adjusted EBITDA margins modestly versus the prior year.
Full year adjusted earnings per share grew 9% as our work on the capital structure and share repurchases compounded our full year earnings performance.
These results in this backdrop shine a light on the quality of our business and our team.
Cary will now take you through our full year financials in a bit more detail Gary.
Thanks, Pat good morning, everyone.
On slide six we share additional detail on net sales drivers on our two segments.
Full year organic growth in electronics was 2% driven by strong growth in semiconductor and circuitry and a sharp recovery in assembly beginning in Q3 affirming up in Q4.
We believe our electronics business significantly outgrew their end market this year.
Semi which demonstrated double digit organic net sales growth in each quarter of 2020 continues to benefit from growth in the advanced packaging market and general mobile phone and data infrastructure chip demand.
Circuitry talk similar trends driven by <unk> applications, which with particularly strong growth in Q4 up 13% sequentially over Q3 at timing of high end mobile launches were pushed to later in the year.
While 5% growth is slightly above our long term expectations for the business. We do believe 2021 should be relatively similar market trends, which will continue to support these growth rates.
And assembly the strong recovery into Q4 did not make up for the automotive electronics driven weakness we saw in Q2 and early Q3, particularly in Asia.
However, the sequential trends in both high end mobile launches and increasing auto production supported double digit year over year growth in Q4.
Our power electronics business for the EU market is growing very nicely as well and contributing to our outperformance.
The relative net sales growth of the three electronics businesses helped support a 40 basis point increase in adjusted EBITDA margin in effect, along with Covid related cost management activity that occurred primarily in the second and third quarter.
For the full year organic net sales and industrial and specialty declined 10% as a result of the weak macroeconomic backdrop.
The industrial business declined 11% as production slowdown first to Asia in mid Q1 and persistent in the west through early Q3 on global production returned, albeit at muted levels.
About half of our industrial sales serve the auto market, which is estimated to have declined in the mid teens globally in 2020.
The recovery in the back half was strong and we believe it should continue into 2021.
Our graphics business had a strong start to the year driven by both customer wins and Kogan driven demand.
Restrictions on consumers throughout the rest of the year dampened consumer packaging demand and impacted the launch of new products and marketing campaign, which typically drive new sales for the business.
Similarly, low energy prices and macroeconomic uncertainty led to reduced energy production rates and limited capex investments, which drove declines in our App store solutions net debt.
Given the longer cycle on this business, we do expect some additional sales pressure into early 2021.
Constant currency adjusted EBITDA margins in the IHS segment declined 40 basis points in the year, primarily as a result of net with energy being the highest margin business in the segment.
Slide seven highlights our cash flow on balance sheet activities in 2020 and expectations for 2021.
We generated $249 million of free cash flow in 2020, a 5% increase over the 2019 figure after adjusting out the impact of our prior capital structure.
Cash interest was $52 million on a year on $19 million reduction year over year against 2019, reflecting the positive impact of our senior note refinancing.
Cash taxes were $67 million or.
A $5 million reduction versus 2019, which reflects the success of numerous tax efficiency activities around the globe.
As Ben mentioned, despite COVID-19 demand impacts we continued our planned capex in the year spending $27 million on a net basis across the business.
Working capital was an investment of approximately $30 million driven almost entirely by the sharp net sales growth we saw in Q4.
Working capital released earlier in the year as net sales declined in the midst of Covid shutdowns. However, in our business working capital as determined by near term sales performance, which has been strong.
While we expect strong sales growth next year, we believe we can keep on working capital investment more modest than our topline growth rate would imply given the current levels on the business.
In 2021, we expect to generate approximately $275 million of free cash flow.
While earnings are increasing we expect cash tax dollars to go down by over 10% to approximately $60 million.
This significant improvement as a consequence of changes to our tax profile to reflect the new structure at element solutions and benefit of changes to the tax code.
To reflect this change in cash tax expectation, we will be reducing the tax rate we used on our adjusted EPS calculation for 2021 down to 20%.
Our net leverage ratio exiting 2020 was two nine times, we are proud of showing a flat or declining leverage ratio throughout the volatile 2000 twenty's environment.
This reduction from mid teens to high twos throughout the year is particularly impressive in light of the fact that we deployed more than $100 million from buybacks acquisitions dividends and refinancing related expenses.
As you look to 2021, we expect to continue to deploy capital opportunistically, while preserving a conservative balance sheet with that I will turn it back to debt.
Thank you Carrie.
On slide eight we introduce our full year 2021 financial guidance. The strength, we saw on our end markets in the fourth quarter has carried into the first quarter.
Our markets remain healthy and our teams are executing well.
Our guidance is for full year, adjusted EBITDA growth of approximately 7% and adjusted earnings per share between $1 10, and $1 15, representing 15% to 20% growth year over year.
We expect net sales growth in both segments to be above their long term average rates buoyed by the cyclical recovery in auto and industrial end markets and ongoing strength in high end electronics.
In particular, we expect to benefit from increasing content opportunities driven by the wider adoption of <unk> increased production of electric vehicles and the broader electrification of the automobile industry.
Overall, we expect adjusted EBITDA margins to be roughly flat as strong net sales growth should be offset by both the return to normal operating expense environment and gross margin mix modestly reversing the trend we saw in 2020.
When excluding travel expenses Q4, 2020 was a relatively normal quarter from an operating expense standpoint.
However on a full year basis, we are lapping temporary cost actions taken in 2020, including salary reductions government subsidies and significantly reduce travel most of which we do not expect in 2021.
Given current exchange rates, we anticipate FX will be an approximately 2% tailwind for full year net sales on adjusted EBITDA.
2021 growth should be weighted to the first half of the year, given the timing and magnitude of the operating disruptions in 2020.
For the first quarter of 2021, we expect adjusted EBITDA growth in a range in a range of 8% to 10% over the same period in 2020.
We've demonstrated.
Australia, and our first two years as element solutions and our business is able to generate strong cash flow in all markets and we expect this year will be no exception.
As Carey mentioned, we expect to generate $275 million of free cash flow a record for ESI, representing 10% growth over 2020.
The cash we generate should create flexibility to allow for some combination of additional prudent tuck in acquisitions and opportunistic share repurchases and potentially increased cash dividends.
Earnings growth together with free cash flow generation should create meaningful additional capacity for capital deployment under our leverage target.
We remain a growth oriented company and we continue to evaluate bolt on acquisitions of companies that we believe would be better as a part of ESI bring us talent and new capabilities represent good value and have the potential to accelerate our growth rate.
Finally on slide nine I'd like to highlight some recent developments regarding ESG.
Topic that has long been a source of commercial and internal success for element and has become an increasingly important topic in our stakeholder engagement.
First we published our inaugural inaugural ESG report yesterday afternoon.
I'm proud of this reported and more importantly, what it showcases.
The intersection between sustainability and profitability is well established in our business and this report highlights our efforts to improve environmental outcomes for our customers and support sustainability objectives across the supply chain.
Our contributions to sustainable outcomes only increased in 2020 with the launch of Mcdermott and <unk> solutions.
Modest sized business, but one with great ambitions.
This business has had better early traction and we expected to support our customers with innovative wastewater treatment and metal recycling solutions and power of the circular economy.
As a company, we're committed to making a positive lasting impact in the communities where we operate.
We believe deeply that our business is only as healthy as the ecosystem around us.
A big step forward in this commitment in 2020 by establishing the ESI Foundation, a Florida based not for profit, which will serve as the company's charitable giving entity is.
501 C. Three organization with initial funding of $5 million from our company. The foundation intends to provide grants to qualified charitable organizations and the communities, where our employees live and work.
The foundation intends to focus on cost is important to the environmental and social wellbeing of these communities.
To wrap up I'd like to thank all of our stakeholders for their continued support of element solutions.
A challenging year, we built a track record of delivering on our commitments in the short term and building for the long term.
We're poised to do so again in 2021.
This is a testament to the talent and dedication of our people around the world.
We are especially thankful this year for their continued effort.
With that operator, please open the line for questions.
At this time, if you'd like to ask a question press star one on your Touchtone phone again that is star one on your touch tone telephone, we'll take a question from Bob <unk> of Goldman Sachs. Your line is open.
Thank you very much good morning.
Was wondering if you could talk a bit about the challenges in the semiconductor industry going on right now both for your electronics business and then for the auto exposure you have as well what are you seeing what are you hearing on the ground and whats the prospect for.
Alleviation of those challenges.
Challenges.
Yes, so youre, referring to the chip shortages.
It had been.
Slowing down production of automotive of automobiles.
West and.
The headwind associated with that is some pockets of reduced on automotive units in the near term and we're seeing that not seeing a huge impact from that its pretty spotty, but we are seeing that in the industrial business, but I'd really point to two silver linings associated with this and what we.
Think are long term positives the first is.
The demand for those automotive units is there and so on the fullness of time those cars will be made in our content will be on those cars and so we won't lose that revenue.
Opportunity.
It may just move a little bit and the bigger positive is what's driving this chip shortage, which is the proliferation of electronics.
In many many markets and huge demand for chips and electronics and that's good for our business right. The strength, we saw on the fourth quarter.
You can draw a line from the strength, we saw on our electronics business in the fourth quarter to what's happening in the chip market and with these cars.
And that's a long term trend that that is bullish for our business and.
We're seeing day to day right now in our operations.
Thanks for that if I could follow up on your margin guidance I think you talked about your revenue growth being fairly robust but.
No material margin improvement.
I understand some of the cost outs of the <unk>.
Moving peak in 2020.
Return, but why isn't there a little bit more.
Cost or unit cost leverage rather.
That strong revenue growth this year or maybe talk about the cadence of returning those costs is it higher growth in the first half margin wise and then you've curated some of the costs come back or why don't we see a little bit more ambitious expression of EBITDA growth.
Yeah.
I appreciate that question, Bob let's talk about the headwinds and tailwind from a growth and margin standpoint for.
For starters our guidance.
7% EBITDA growth I think the base case is that it's a 7% top line and it's a flat margin year over year.
If the top line isn't there for whatever reason if there is softness in the back half of the year will we have other ways to get to that 7% and if the momentum that we're seeing in the first half of the year carries through into the second half of the year, we should be able to do better than that 7% on EBITDA.
So most of our EBITDA growth in our base case comes in in the first half of the year.
On the headwinds.
Tailwind to margin is is as you pointed to greater volumes and operating leverage the headwinds are as you also point to do Opex normalization.
<unk> $7 million of Opex that we were able to take out of the business last year and we expect some of that a good portion of that to come back things on government subsidies and salary cuts that we took and we would expect some normalization of travel as we get towards the back half of the year.
The other two things we would point to are you.
<unk> seen a bit of raw material inflation coming into this year, we were able to pass most of that through to customers, but not sure we'll be able to get every dollar of that and similarly, theres just a lot of logistics disruptions and freight cost increases that we've been seeing and so we've got we're taking that into account when we give that margin guidance.
Unclear if that will resolve itself over the balance of the year will persist, but again our guidance is a number that we can get to multiple ways.
If the strength, we're seeing carrying into the first half persist into the second half, we should be able to do better.
Once again, please limit yourself to one question and one follow up we'll take our next question from Josh Spector of UBS.
Yeah, Hey, guys. Thanks for taking my question and congrats on a solid 2020 and enter the year here.
I think a lot of the focus over this past year has been on the volume dynamics within electronics and in industrial I guess now we're at the point where volumes are strong here last quarter, you expect that to persist in the first quarter. What are what are the pricing dynamics like it is anything different where you guys can take advantage of some of the tightness.
And perhaps that pricing being a bigger part of the organic story over the next couple of years.
Okay. Thanks for that question, Josh It's a good one.
Where we've been taking price and are positioned to continue to take price is really what raw material inflation has impacted us.
So we have pass through dynamics on our assembly business and some of the metals that aren't on a direct pass through basis, where we're surcharges for.
We don't have a plan to be aggressive from a pricing perspective, we're in nice markets.
And we've got nice market positions in those markets, but it's not the type of market, where you can take.
Take annual price hikes.
On a without any fallout from that.
By and large and so we aren't counting on significant pricing.
And from a go forward perspective, there may be some opportunities associated with that but.
We're not counting on that it's really a volume story from here.
Okay. Thanks, and just a quick one on the free cash flow side pretty impressive step down in the tax rate year over year, both on a cash and book basis.
That is sustainable is that something we should be considering on a forward basis cannot get better or does it step back up longer term.
Yes, so I'll turn this to carry on one second but I would say that the team has done a really good job.
Working on structural changes from a tax perspective.
As Carey mentioned, we're reducing the the tax rate and that we're using in our adjusted EPS calculation from 26 to 21 this year 'twenty, one or 'twenty.
Which which you should interpret as a permanent change for the time being.
And I do believe there's some upside Kerry you want to talk a little bit more about that.
I think you hit the big points, we do believe this 20% rate is sustainable on.
On back of the launch of element solutions. The tax team spent a good chunk of time.
On sort of reallocating profit to better align with the assets and risks on the business.
And along with some favorable changes from due to tax reform. We're in a position that were much more pleased with and we were historically, so I think theres a little bit of upside still from this from this rate, but this range of cash tax rate should be sustainable for the next couple of years at least.
Okay.
Okay. Thanks.
Okay.
And we'll take our next question from Chris cash.
<unk> of loop capital markets. Your line is open.
Yes. Good morning. Thanks, So in your electronics business, it seems and you referenced that you're outperforming.
The end markets I guess, what you would expect given the increasing content.
Per item it for advanced platforms, I guess from both auto and smartphone applications anyway, but it also seems like you're outperforming relevant peers are drafting the same end markets I'm. Just curious if you agree if that's been the case and if you. If there's any explanation do you feel like you gained share or if you'd just.
Caught caught on more commercial traction with the right customers.
Right platforms any color there would be helpful.
Yeah. So thanks for that question Chris.
On the smartphone market in 2020 from a unit standpoint.
Forecast to be down mid single digits and our results in there like the high end electronics business in the circuitry business clearly far far superior to that for 2020 some of that performance in our circuitry business in 2020 with product that's going into 2021 units and the forecast for units in 2021.
One is for pretty significant growth and so we saw some of that benefit in the fourth quarter.
And so I think that you can you can attribute some of our outperformance to that relative to competitors.
It's a healthy market and I think I'm sure. Our competitors are also seeing nice growth.
We've been investing in people and technology on an ongoing basis going back.
Many many years, we haven't had any disruption from.
Integration or so forth for five years at this point and so.
Commercially our teams are performing very very well and youre seeing that in the results.
I can't speak to specific market share dynamics, but we feel very good about our performance the products, we're bringing to market and the service we are bringing to our customers.
Okay. Thanks for that and then I guess the follow up would be on the margin question and the initial expectations of flat margins and I guess, there's some some positives and some headwinds on.
On the margin.
Bridge, if you will but.
I'm just curious if.
Could you talk overall about mix.
For the full year, clearly with the industrial businesses recovering, especially against the sort of a COVID-19 impacted second quarter first half you would see some positive mix there, but that might imply there been some negatives from adverse mix in the second half I'm. Just wondering how you see that playing out do you see as mix as being a.
A driver of potential upside if in fact that strength that you referenced in response to Bob's question is.
The demand strength persist through the second half.
Yes, it's a good question Chris.
Mix in the first half is a modest negative.
If you look at the two businesses that were most impacted by Covid as the industrial surface treatment business and the assembly business is there are two more industrially oriented sizable businesses.
And they're going to show the most growth, particularly in the second quarter and those are lower margin businesses relative to the average and so we will have a bit of a negative mix effect.
If the strength, we're seeing in circuitry.
Persist into the second half which is not.
Not baked in.
Our guidance.
Then we will have a positive impact relative to the to the margin guidance we've given.
That's helpful. Thank you very much.
Thanks, Chris.
Our next question is from Duffy Fischer of Barclays. Your line is open.
Yeah, Good morning Fellows.
Into that market that we may be missing in pockets.
Associated with the chip shortages that led to production shutdowns. So so we don't see a big inventory stock.
Issue right now in the business at all.
Okay, and then just a second one could you talk a little bit about the M&A environment, obviously multiples for publicly traded companies have moved up a lot in the last year business is very strong across a lot of the businesses that you would like to acquire in so maybe just go through you know what does that do to a seller's mindset does.
Push multiples too high for you does it you know and sent people to want to sell it what maybe they think is a top or at least you know a better business condition. We've seen over the last couple of years you know just how how does that look multiple and you know opportunity set wise for for acquisitions. This year.
So I appreciate that question Duffy, obviously, the M&A market is very active right now and we're in a great position to be on the offensive we've.
Reduce leverage we're generating significant cash flow and so we're out looking for acquisitions that fit our criteria and one of our criteria is driven by value. So we're going to be disciplined from a value standpoint the tie.
The things that we've looked at.
That we're looking at right now look like the things that we've done in the recent past and.
Until we do believe there are opportunities that will meet all of our criteria.
That are modest tuck ins that make our business better available at reasonable multiples.
And the landscape.
In that regard is constructive we're not going to be pushed to overpay for things because there's plenty of things that we can pay fair prices for in the markets right now.
Martin do you want to talk any more about capital allocation broadly.
Yeah, I mean, I would say a few things festival with the benefit of hindsight I'm very glad that we had the posture that we've had in the past which was to aggressively baibakov first what we thought they were considerably.
Considerably below value I still think that offsets on for.
For the price day or anything close, particularly when we look at our own outlook.
Uhm.
We've got three levels, we've got stuck on acquisitions has been said we've got.
The potential to buyback buyback says and also to increase on dividend.
So I think we're going to look.
Holistically at all three but.
But I think there are opportunities frankly on all fronts. During the course of even this year.
Alright, Thank you guys.
Thanks.
Our next question is from John tons.
C J S Securities.
Good morning, guys. Thank you for taking my questions and get really nice quarter and guidance.
Then your your energy business is one of the higher margin business within the stack of notes relatively small as a percentage of revenue I was just wondering how much EBITDA impacted it'd have on 2020 and how much do you have coming back in your guidance and 21 now the cruise $20 or more iron was for the whole year last year.
Yeah. Thanks for the question John the offshore business as a small business and it had a tough year last year.
Driven by volatility in steep decline in energy prices.
Typically that business as of lag to energy prices. So.
On the decline.
Few quarters after.
Softness in that business as a few quarters after the decline in energy prices and similarly on the way back up.
We're not forecasting significant growth from that business in 2021.
If there is significant growth there is upside associated with that.
It's tough for us to underwrite to that on.
The energy prices and volatile and.
It takes not just a higher energy price, but a stable higher energy price for our customers to turn.
Drilling activity in Capex back on so that's.
That's not a big contributor to growth in our outlook.
Got it. Thank you and you mentioned on the assembly and industrial businesses.
Strengthening into cue too I was wondering if you could provide some similar commentary on just the rest of the business electronics and automotive are you seeing continuation of demand as to speak with a client's dog the second quarter or their headwinds slowdowns and your forecast in on the top line number one and number two are the headwinds on the bottom line.
Uhm, increasing from where you're sitting things, whether it's input prices are logistics.
<unk> any of the above color on the both would be helpful.
Sure John sort of the <unk>.
Comment about negative margin mix and the strengthening.
Driven by strengthened industrial an assembly was more of a year over year comment on a sequential comment right. Because it was in Q2 of 2020 that we saw the biggest impact of from Covid, which was on those two businesses.
But those two businesses they recovered nicely in Q3, we had growth in queue for.
And we would count on growth in Q1 of 2021.
And so those and market in general are very very healthy and we expect them to continue as such in the second quarter.
And.
Our outlook is for a continuation of the trends that we're seeing today into the second quarter, but because we can't touch and feel given the visibility in our business that continuation into Q3 and Q4, we're just a little bit more cautious that's not to say that it won't happen, but when.
Can't underwriting commit.
This continued strength in the back half and that's why there's a bit of consciousness.
Understood. Thank you guys.
Our next question is from Neil Kumar of Morgan Stanley. Your line is open.
Great Alright, thanks for taking my question on <unk>.
Based on your free cash flow and EBITDA guidance.
Yes free cash flow conversion around 60% in 2021 is that a reasonable level of think about going forward and are there any other opportunity to improve free cash flow conversion. Even further and then just also in from your EPS guidance, what does that assume in terms of share buybacks.
In 2021.
Thanks for the question Nielsen So.
We've done a lot of or go to work on the balance sheet on taxes.
And.
Those numbers I wouldn't expect them to creep up interest in tax significantly as we grow earnings and so I would expect.
Our cash flow conversion to improve as earnings grow from here.
And so I don't think that's 60% is.
Is a ceiling by any means.
With regard to our EPS guidance.
At the high end, there is a little bit of capital allocation at the low end there is very little and so.
Doesn't necessarily mean buybacks, but it means that we've reported some capital in an accretive way I don't know if there's anything more you'd add Carrie.
No I think that's right I would just point out on the interest specifically that we have fixed rate on all of that debt. So.
Through the end of 2024, so that should certainly should not be going on.
Okay, Great. That's helpful. And then how are you thinking about the contribution of.
To your longer term growth expectations for the electronics business I think in the past to talk about electronics theme, primarily dde plus markets you think that'll move upwards over the next few years because of the acceleration <unk>.
Yeah absolutely.
So for starters.
<unk> has.
Multiple near term and longer term ramifications for our business on the near term is significant infrastructure investment, where we have meaningful content and an accelerated replacement cycle driving not just more smartphones, but more content on each of those phones for us given the technical requirements and the <unk>.
Versus a legacy technology phone.
That's not a one year trend that's a multiyear trend.
The investment in infrastructure is going to go three five plus years and the smartphone replacement cycle will be.
The smartphone driven demand for our technology will match that.
Once you get beyond that sort of medium term horizon.
You're going to have.
Faster connectivity greater connectivity greater bandwidth distraught.
Distributed and that will allow for.
Disseminated computing power in areas that.
R.
That will open market here.
Here to foreclosed and so this chip shortage that we're seeing today is just the beginning and you can hear from.
Function in the semiconductor industry, the massive ramps of investment to drive capacity. That's all in anticipation not just of five <unk> infrastructure on smartphone, but what <unk> technology will do for the industrial economy, and that's something that's going to drive our performance for many many years, so long way of saying that we.
Got a medium term tailwind in our high end electronics business, that's going to last quite a while.
We will move next to Matthew D O a bank of America.
Thanks for taking my question. So what's next for the water water filtration business should we just expect things to grow organically or are there moves you need to make to increase scale are a product offering.
Yes. So so we are making moves to increase scale on product offering organically.
This is a business as we said in our prepared remarks that has gained traction faster than we expected it too and we expected it to gain traction quite fast.
We've made investments to grow our manufacturing capability in our commercial capability outside of the U S and so we're currently manufacturing equipment.
Equipment in Europe, and about to be manufacturing equipment in Asia, we have commercial teams building in both of those regions. This as a business that was doing 20 $25 million a sales.
Last year, and our expectations are for it to become $100 million business.
Three or four years, and we believe we can do that all organically are.
Our customers are very eager for.
Hour.
The customer service and technology that they know and have come to expect from us in other areas.
To address their water treatment concerns and so it's.
Very exciting opportunity for us and we're executing well against it.
Thank you.
I saw the ESG report that came out I haven't had time to dig through it as much as I would like to but.
Part of it was talking about the circular economy and.
It's obviously a lot of value to the metals you use I'm just kind of wondering what opportunities there are.
Had for ESI within that Rebecca.
Yeah I appreciate that question, we published our inaugural ESG report yesterday.
There's also a website that captures the tops of the waves from the report it's something we're very very proud of.
And.
This intersection between sustainability and profitability is something that has been.
Well trafficked by our businesses for many many years, but not something that we've sort of brought together in one document.
And communicated externally.
Sort of in one place as we did with this ESG report that we published.
There is a huge opportunity for our company to continue to help our supply chains improve their environmental impacts.
And it's an area, where we have quite a bit of sales already and quite a bit of technology underway and.
It's doing well by doing good.
And if you go through the report you can see the many many products.
On the services that our company offers across just about every one of our businesses that align with that theme and will be a growth driver going forward. It's something that is existential for our customers and another example of our businesses.
Providing great solutions to our customers.
And once again price star one if you would like to ask a question star one.
We have a follow up from Josh Specter of UBS.
Yeah, Hey, guys. Thanks for taking the second one here.
Just on electric vehicles, and you guys have been pretty clear and highlighting or content opportunity there and in some cases, you highlight potentially double the amount of content. I was just wondering if you could give some context, if there's any region or battery or build type that would give you that higher leverage exposure.
That perhaps we should pay more attention to as easy as continue to ramp more strongly here over the next few years.
Yes, so without getting into thanks for that question. It's a it's an incredible growth opportunity for our business and without getting into specific customer names I would say that the high end.
In the EV market, we are providing.
Enabling materials for power electronics, and power Inverters and that's a business that is.
Growing.
Credibly fast.
And because we are.
Well established in that market all of the new Oems and tears that are investigating.
How to participate in that market are talking with us and are working with our materials and that's a market that net.
Poised to explode for us.
Can't say if it is a 2021 2022.
Or 2020, 320 24 thing but.
Strong contributor to our above market growth.
And so it will not just be.
On.
More penetration of automotive.
<unk> that will drive growth, but it's the content as you rightly pointed out.
We should see a nice tailwind as more of the fleet moves to Evs and were a key enabler a true enabling technology of electric vehicles.
Okay. Thank you.
And that concludes our question and answer session I'd be happy to return the call to management for any concluding remarks.
Thank you very much for for your questions for participating in the call. We look forward to seeing you.
In the near term stay safe.
This does conclude element solutions full year 2020 earnings conference call. You May now disconnect your lines and everyone have a good day.
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