Q2 2021 Element Solutions Inc Earnings Call
Earnings Conference call joining me, our executive Chairman for Martin Franklin CEO of banquet, glitch 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 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 the 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.
To differ from our expectations and predictions. These materials can be found on the company's website in the investors section under news and events.
These materials also include financial information of that has not been prepared in accordance with the U S. GAAP. Please refer to the earnings release and supplemental slides for definitions and reconciliations of these non-GAAP measures to comparable.
For example, GAAP financial measures. It is now my pleasure to introduce Ben quick glitch CEO of element solutions.
Thank you for Arun and good morning, everyone. Thank you for joining.
Element solutions had an outstanding second quarter.
We're executing well against our strategy to capitalize on growth trends in our businesses.
Comparable drive efficiency and deploy strong free cash flow prudently the compound earnings growth.
The momentum in our markets remained strong and the contrast between the second quarter of 2020 in the same period in 2021 is stock.
Our sales grew 52% year over year lap.
As in the most COVID-19 impacted quarter of 2020, while adjusted earnings per share doubled.
Despite supply chain related constraints of the electronics industry in the broader industrial economy continued to accelerate in the second quarter.
Our core markets continue to see the benefits of the expanding secular megatrends of increasing electronics.
And automotive applications rising adoption of electric vehicles, and increasing content in <unk> enabled mobile devices.
Our team continues to demonstrate its ability to position our business well within these attractive growth market and to capture value above and beyond market growth.
As expected the increase.
The lap and economic activity in the first half of 2021 stretch supply chains and created challenges that continued in the second quarter around raw material pricing raw.
The raw material scarcity and logistics.
The team did an outstanding job of navigating the effect of these factors, which combined with negative mix impacts weighed on <unk>.
Increased net margins relative to the first quarter.
Many raw materials have seen meaningful price increases.
<unk> of of metals, we saw raw material cost basket increased almost 10% sequentially.
Freight cost increased materially and lead times significantly.
Demand for logistics.
Profit are outweighing supply of across nearly all transportation modes and regions of the global economy recovers.
We expect the same imbalance to continue into 2022.
Our second quarter free cash flow, partially reflects the decision to continue building stocks in case of persisting raw material shortages and associated longer.
Our lead times.
It also reflects the broad impact of higher input prices.
Shortages of semiconductors in the automotive supply chain also impacted our business in the quarter or.
Our industrial business saw muted growth from automotive customers in the Americas and Europe. However, this was more than offset by strong demand in the broader construction machinery.
The building products markets the <unk>.
Relationship between chip shortages in automotive markets and record demand in the broader electronics market is clear.
We're benefiting from this demand in electronics more than we are suffering from the automotive market slowdown.
Our expectation is that automotive demand will largely be deferred.
<unk> until the additional supply comes online versus being lost altogether.
Overall of the supply chain challenges of the product of a strong economic recovery and robust demand in many of our markets, which together are propelling our business to record levels.
On slide 3 you can see a summary of our second.
Second quarter financial results, we grew the top line, 30% organically year over year and grew adjusted EBITDA by 57% on a reported basis.
In constant currency terms second quarter, adjusted EBITDA grew 47% and adjusted EBITDA margin expanded 50 basis points year over year.
The primary driver of the year over year performance of their lapping the global manufacturing shutdowns that accompanied the COVID-19 in the second quarter of 2020, however, when compared to the pre pandemic 2019 figures, we grew net sales, 28% and adjusted EBITDA of 32%.
Operating leverage on higher volumes.
Out of an overall increase in margins year over year, despite an increase in metal prices and our lapping a period of crisis level of cost containment.
Operating expense was higher sequentially international travel, it's still suppressed and we're harvesting the benefit of certain cost savings initiatives.
We expect of modest sequential increase in opex over.
And during the year as economies continue the process of reopening more fully.
Our 8%, excluding the impact of the $107 million of pass through metal sales and our assembly solutions.
The hallmark of this business is its strong cash flow and we continue to reinvest those cash flows.
For the remainder of support growth.
In the second quarter read of acquisitions that we believe will for.
Solutions are people growth up.
For our communities and our shareholders accelerated earnings growth.
Both acquisitions fit our criteria of well high quality business.
We deeply understand can be better inside the ESI represent good value for them.
Horrible at reasonable prices.
On June 11th we announced our planned acquisition of Covid here for a purchase price of approximately $420 million in euros or $500 million at current exchange rates.
Loews this price represents a synergize the adjusted EBITDA multiple of under 10 times based on Covid. He is projections for fiscal year 2021, ending in September.
Colombia has been 1 of our Unicorn acquisition targets for many years, it's a leading global specialist in index.
Industrial surface treatment technology with a long history in many of our existing and adjacent markets.
Bringing <unk> into our family furthers, our ability to support our global customers with industry, leading new attractive markets for element solutions book.
Exciting opportunity later in the call.
On may 5th.
We closed our bolt on acquisition of the HK Wentworth group for approximately $50 million net of closing adjustments, which represents the high single digit adjusted EBITDA multiple before synergies.
The technology history and promise the electro loop product line is an attractive adjacency to our existing electronics portfolio.
Offering high quality solutions that meet the increasingly rigorous requirements to protect electronics hardware and demanding applications.
We believe their conformal coatings thermal interface materials and other encapsulation products are purpose built for the needs of next generation mobile App.
Today generates approximately.
The $45 million of annual net sales, but we see sizable opportunities with our market reach with them.
The semiconductor and electronics Assembly.
While the global economy remains resilient the pandemic appears from over the rise of more true.
Pace of vaccinations around the world represent real threat to global economic recovery and more importantly, global health and safety.
Throughout the past 18 months, we've put our people and our partners first and that continues today.
While were looking forward the spending more time together with our colleagues in person.
The solutions continues to operate under enhanced companywide health and safety protocols.
Deeply grateful to our colleagues who have remained focused on supporting our company and our customers throughout this extended challenge.
Cary will now take you through our first quarter performance in more detail Gary.
Thanks, Dan Good morning, everyone.
On slide 4 we share of additional detail on the drivers of organic net sales growth in our <unk> segment.
Organic growth for electronics was 25% from the second quarter with all 3 verticals again growing at double digit rates.
Global consumer and automotive electronics market sustain their high level of demand in the quarter.
The worst of the COVID-19 related production shutdowns in Q2.2020.
Strong demand from automotive and power electronics market drove 37% organic growth in assembly solutions in the second quarter, which was the most impacted in the same period last year from the temporary declines in automotive electronics demand.
I mean, lower circuitry solutions vertical grew 13% organically driven by strong demand in China and the Americas.
Semi solutions group.
For organically, 18%.
For our wafer plating and advance assembly products.
Specialty increased 41% on an organic basis.
That's really lapping the most COVID-19 impact.
The quarter of 2020.
On a sequential basis, our industrial business saw demand hold up well from a strong first quarter with strength in European construction and industrial manufacturing offsetting softer automotive production.
On the back of chip shortages and other supply chain challenges.
Graphic solutions had a strong quarter for returning to organic growth of 11% net year over year at the business on uptick in packaging sector demand in the Americas and Europe.
Sequentially, the graphic business improved sales, 15%, which is greater than we would expect from typical seasonality.
Energy solutions grew net sales sequentially and was flat year on year at the deepwater drilling activity.
Across our businesses the experience raw material inflation in the second quarter for metals and other inputs.
Metals price increasing net okay.
Yeah.
In many cases.
These are contractually passed onto customers grow with no contribution to profit.
This impacted gross margins by more than 200 basis points in the quarter year on year.
Other input price inflation in the quarter with significant but out of smaller dollar impact.
We work to offset price increases by passing the market customers. Although there is typically.
Likely of lack of effect.
Gross margin.
As we were impacted on a sequential basis due to the expect pricing actions in the second half to help moderate disinflation.
The logistics, which means we expect to continue catching up for the next several months at least.
Overall adjusted.
The EBITDA margin still improved year over year in the second quarter.
Slide 5 adjusted cash flow and the balance sheet.
We generated $72 million of free cash flow in the second quarter.
We continued to make moderate working capital investment associated with stronger than anticipated quarter over quarter net sales growth.
Increased raw material price.
And our inventory.
And some additional safety stock built given continued supply chain disruption.
In total our year to date working capital investment had been close to $70 million, primarily driven by the inventory build across both raw materials and finished goods.
This is an investment that is necessary to provide the reliability.
<unk> and quality our customers expect from us.
As we noted last quarter, we need to differentiate ourselves through the.
Our full year free cash flow expectations.
$285 million requires a modest working capital release in the second half of which.
Which we believe is reasonable baseline given.
Given our current working for the balance of the year.
Our net debt to adjusted EBITDA ratio at the end of Q2 was 2.4 times on a trailing 12 month basis.
June <unk>.
We successfully price and allocate the new $400 million add on to our term loan to fund the majority of our proposed acquisition.
1 of <unk>.
This debt, which the conditioned upon the closing of the prevent the acquisition.
Thought of in swath of euros.
Kind of fixed rate of under 2% through 'twenty.
And the 25.
With the cutback of acquisition.
Formation of existing ratings from both credit rating.
The agencies reinforces the credit market recognition of our business quality and stability.
With that I will turn it back to Ben to discuss our <unk> acquisition in more detail and provide an update on 2021 guidance.
Thank you Carrie.
Slide 6 provides more detail into India.
This is an excellent business that aligns seamlessly with our acquisition criteria and the company that we've admired for decades.
The business is projected revenues of roughly $190 million for its fiscal year ending September.
It brings the global scale and capabilities with over 650 employees 13 manufacturing facilities in 8 R&D of.
Represents a meaningful.
Expansion of our industrial solutions business of sales along the current solutions and our industrial business and the strength in protective and anti corrosion technology is a nice complement to our leadership in decorative applications, particularly in key growth markets in Asia.
In addition to enhanced.
Enhancing our positions in these large product.
2 of solutions in attractive and growing the adjacencies like light metal surface.
The treatment that we believe will become increase.
Increasingly important with wider adoption of the left beyond the increased product breadth, we look forward to welcoming of world class team.
Moving to Iran, which brings an infusion of experienced commercial and operating talent as well as strong customer relationships built over several decades.
We see a significant cost synergy opportunity more than $15 million, which we expect the action within 2 years.
Because of closing the transaction.
Not a cost savings exercise, we believe this combination will accelerate growth for both companies by leveraging technological complementarity of enhances the customer reach.
Subject to customary conditionality, we anticipate closing in September of this year.
Sure and look forward to updating you on our integration progress on future.
This balance of 2021, our updated guidance of on slide 7.
Despite the ongoing challenges of Covid.
Our markets remain healthy and our team capture value beyond market growth.
We expect third quarter of 2021.
Moving $25 million to $130 million.
We expect a similar demand environment sequentially in the quarter.
And price actions taken in the first half should balance increasing logistics costs and modest travel and operating expense growth to arrive at this range.
These results of represent year over year third quarter, adjusted EBITDA growth of 25% and this guy.
<unk> assumes no contribution from the acquisition of preventive.
Okay.
The visibility in the second half demand trends.
You want adjusted EBITDA expectation to a range of $505 to $520 million. We're also expect.
Raising our expectation for full year 2021.
Earnings per share to at least $1.35, which is approximately 40% growth year over year.
Embedded in the guidance is an expectation that we return to a more typical second half seasonal pattern with the strong third quarter, driven by holiday demand of new phone launches and a sequential deceleration in.
The fourth quarter.
This guidance also excludes any contribution from the <unk> acquisition, which on an annualized basis, we expect to contribute approximately $35 million and adjusted EBITDA and about <unk> <unk> per share and adjusted EPS. This year.
Our second quarter showcases our ability to.
To execute on multiple fronts, both organically and through strategic capital deployment to best position this business for near term and longer term earnings growth.
We continue to have high conviction around the secular megatrends powering our end markets and have demonstrated the ability to invest prudently behind them.
But I'd like to thank all of our stakeholders for their continued support of element solutions and in particular to our talented and dedicated people who helped make this outstanding quarter possible.
With that operator, please open the line for questions.
And again, if you would like to ask a question. Please press star and.
<unk> on your Touchtone phone you can remove yourself from the queue at any time by pressing the pound key.
Ask that you limit yourself to 1 question and 1 follow up we'll take our first question today from Bob Court with Goldman Sachs. Your line is open.
Thank you very much good morning.
<unk> I was wondering if you could talk a little bit about.
1 of the step up in cash flow for the second half does does that presume that you are able to draw down working capital and that some of the logistics cost ever how do you get such a nice lift in the second half on cash flow.
Yes, I appreciate the question. So we've been investing significantly in working capital over the first half of the year.
<unk>.
Some of that is driven by raw material scarcity of some of that is longer lead times.
And we've seen sales growth significantly as well as we look out for the back half of the year that sales growth that significant sales growth begins to abate and so we should have stable working capital.
And even of release over the back half.
As opposed to the sizable investment we made in the first half which accounts for the step up in cash flow to get to the cash flow guidance, we're giving this this year.
And then I don't know if you can give us cellphone convince you, but I was just curious you know they have a.
A more of an auto focus.
And maybe a little bit the.
Let the Asian presence that maybe in the electronics business is there an opportunity to leverage the electronics side of the house to bring in those industrial sales and or do you do that already and in the ESI industrial assets, we expect to see faster growth in Asia.
Okay, and then secondly, do they pass through their zinc and other metal cost or is that something that has to be negotiated.
Yeah. So.
Cross all of element right now.
There is of convergence in the automotive Oems, where automotive Oems are becoming increasingly large customers of the electronics business or their supply chains are and we're trying to take advantage of the breath of our touch points. The the significant value we sell into that broader supply chain across all of our vehicles and <unk>.
<unk> entered the fold should be helpful to prevent your sales and also to 2 element overall relationships with Oems because we are gonna have a bigger seat at the table with regard to the question around Asia, that's less of an opportunity around electronics, but more of an opportunity around having more.
Scale in the market and having more complimentary products in the market and driving growth across both of our portfolios. The the coven to your presence in Asia and anti corrosion is very strong relative to our presence in Asia, which is more of the decorative side. So by combining those too we have of.
Better offering to customers, which should translate into more opportunities for growth going forward.
For.
Finally, with regard to metal pass through the the dynamic around metal pass through in our company is more in the assembly material sign around the things like 10 in silver and the less in our surface treatment businesses, whether that's electronics or industrial however, we do have surcharges and the ability to take price 1 hour of price has gone up.
Which is something we've been actively pursuing and <unk> has been <unk>.
Over the past couple of quarters.
Great. Thank you for the help.
Thanks, Bob.
Our next question comes from Josh Specter with you B S. Your line is open.
Yeah, Hey, guys. Thanks for taking my question. So I guess first did you indicate strong demand into third quarter can I interpret that as sales X medals sequentially is relatively stable in both segments and if that is a fair assumption can you walk through the drivers of the sequential EBITDA decline that's the.
Typically trying to consider how much of that like the temporary that you guys recover in time. Thanks.
Yeah I appreciate that question, Josh Yeah, I think the the the good baseline is for a stable top line from the second quarter inch of the third quarter and so you're right to point out that there is a bit of margin pressure as we rolled from the second quarter to the third quarter and there are a couple of drivers of that the first day.
Is.
Is logistics cost increases and so we've seen significant rise in logistics cost on a percentage basis over the past couple of quarters, and we don't see that abating. That's a couple of million dollars of headwind in the third quarter. The second is opex as we begin to travel a bit more normally and we've had to add.
Some heads to support what is the significantly larger business. Today, then it was entering the year, that's offset by the pricing action that we've taken over the first half of the year and and more in the second quarter and so that's how you get to you know of modest decline on the EBITDA line of flat on flat sales what.
[noise] transient are temporary and in in that in that framework we were.
I'm not sure we're ready to say that this is the permanent environment from a logistics cost perspective cause he's a record levels and so I'm not sure I'd extrapolate that for many years and so we should have a bit of a tailwind from that over time, and similarly raw material pricing actions of something we are pricing actions to offset raw material pricing increases that's something we continue.
The pursue and should be contributing to profitability in the quarters to come.
Okay. Thanks, and just a follow up on the the full year guidance update so last quarter. You were of 500 of 510 million so of $10 million range now you're out of 15 million dollar range and I understand I'm nitpicking here, but with only 2 quarters left to go in the visibility on 3 Q.
Just curious what creates the additional uncertainty here and what perhaps the or the bigger risks that you're seeing that your accounting for.
Yeah. It is of Nitpicking question [laughter]. So you know the the increased variability is driven by a couple of factors. The first is the increase the logistics costs and the weather, that's persisting or whether that of baked that gives us upside or a little bit of potential downside of the second is understanding of the magnitude of of the slowdown in.
The fourth quarter.
Obviously last year was an anomalous year and we saw an acceleration into the fourth quarter, whereas in.
Many prior years, you see you know the fourth quarter of being down 10 ish per cent relative to the third quarter, we're expecting as you heard in our prepared remarks the.
Uhm there is a slowdown in the fourth quarter. Just for you are selling days with the holidays and also of product launches drive Ah. The volume is higher in the third quarter of in the fourth quarter.
But we're not exactly sure what the <unk> that order of magnitude is hence a slightly wider range and I've been more variability in the fourth quarter expectation.
Okay. Thank you.
And again that of Star and went for your questions. We do also ask that you limit yourself to 1 question and 1 follow up we're gonna of too steep burn of at the Bank of America Caroline is open.
Yes, good morning so.
So then you were talking about the sequential decline in gross margin and you provide some some specific numbers of runes.
The inflation you know metallic was.
And are a real quick whirl Smith's here, if we back out to the inflation in the <unk> roars.
It looks like your gross margin was really kind of flattish, maybe even slightly up sequentially I don't know if the the real Smith is right or not but the.
It's relatively resilient and and you you use of your non metallic roars were up to 10 per cent sequentially. So is there something you were doing to off set of it or is this a mix shift the helped offset that any any comments on that would be helpful.
The.
Yeah I appreciate that question and Uhm, let me make a couple of comments around margins. So sequentially margins were down and about half of that is attributable to metal price inflation on pass through medals really on the that don't impact of aren't of reflection of underlying profitability of the products for selling cause <unk>.
We're passing through metal at cost and about half of the the sequential margin declined was driven by raw material price inflation and logistics cost inflation.
We've taken significant pricing actions in the second quarter, which will offset the raw material price inflation that that we've seen so we're really doing with just the logistics cost inflation as we look into the back half.
You know it.
As we reflect and if you recall the conversations we're having last year at this point there was a significant concern about margin trajectory on the back of the.
Crisis level cost containment cost reduction we took in in 2020, and particularly in the second quarter and what would happen with the snap back in that cost to profitability and this was in advance of any concept of the raw material and logistics inflation that we're seeing which is an additional headwind as we think about year on your margin.
And yet despite that those dynamics and the significant headwinds both on the Opex line and on the raw materials lying on a year over year basis, our margins expanded in the quarter. The the other way we're looking at things as if you were to exclude the impact of metal on sales what was the incremental EBITDA margin on a year.
Over your basis and on a year over year basis incremental margins Uhm EBITDA margins, where in the thirties, which is where we would expect them to be if you exclude the impact of metal so.
So you know and indeed as you pointed out the the margin resilience in light of an inflationary cost environment is something we're quite proud of and the test them into the quality of the business and the price actions. We've taken in other execution. We delivered is responsible for that.
And.
I just wanted to ask you a little bit about what you're seeing in U electronics businesses are you which of those 3 buckets are you seeing the most capacity expansions of.
Your <unk> your customer and any any comment on you.
You know when Los a ratio of of of those capacity of your experiences with respect to whether you're getting the the contract to supply the the incremental you know chemical supply for the for the expansions.
Yeah. So so I think it's well understood. The the semiconductor industry is running at full capacity right now and making substantial investments to grow capacity and were a beneficiary of that as you can see in our semiconductor uhm segment results, but the chips that are gonna be made the additional chips that are gonna be made his capacity comes online need to find circuit boards to go on.
2 I needed the assembled into electronics hardware, and so that whole supply chain of seeing growth and and first high utilization and and second significant investment in additional capacity and we're engaged at the high end of the technology curve with the largest market leaders in P. C B fabs and all.
So in the electronics assembly companies to to to help support that capacity expansion at a time when smaller competitors of struggling to get raw materials and so we do consider ourselves very well positioned to grow in excess of the market through share gain and are converting mmm.
Sales opportunities at a very high clip on an ongoing basis.
Thank you.
Our next question comes from John torn 1 Tankless C. G. S Securities. Please go ahead.
Hi, Good morning, it's people who gets for John you guys of covered a lot. So I'll just keep it brief can you die of a little bit more into your implied expectations for queue for as it relates to what you're seeing in terms of customer inventories seemed to be low across the number of industries and just are you basing your assumptions that the ketchup and.
Q3, or do you think of people are well stocked already.
Thanks for the the question Pete.
So our guidance for the fourth quarter implies a slowdown order of magnitude of 10 per cent, which is what we've seen you know on a sequential basis, which is what we've seen in 2018 and 2019 in the years prior driven by fewer selling days and the fact that in Q3 there's.
Typically of pick up the what we've seen in the first half has been such buoyant demand that we're not we're not underwriting to that same level of pick up.
There's a bit of conservatism based into that we're not expecting a substantial recovery in the automotive industry. For example, which has been which I've seen muted growth driven by chip shortages. So we're assuming normal seasonality and Ah continued height environment around raw.
Materials and logistics to get to that slowdown.
Oh, great. Thanks, and then just the last 1 for me in a bigger picture of type question any update on the M&A pipeline beyond <unk> and if the capital structure is optimized currently for further acquisitions.
Yeah, absolutely. So so we're always looking the bring great businesses into the fold that that bring additional capabilities technologies customer reach 2 hour university of customers and to compound value in an earnings for our shareholders. The balance sheet is.
Very healthy right now and even the pro forma taking into consideration the code of Andy acquisition, we should be nicely inside of 3 times leverage at the end of the year. So we have some capacity uhm from of balance sheet standpoint to deploy additional capital we would do so in a very measured way should we.
Should we find something or or be in a position to execute something between now and the end of the year more like the tuck ins that we've done prior to the <unk> acquisition in terms of size and structure.
Very helpful. Thank you.
We'll take our next question from Josh Silverstein, Let's ball free search. Please go ahead.
And thanks for the morning goes I know who the.
Beforehand, just on some of the working capital of items, where you, suggesting that within the back half of the year of the you're only going to get 20 million back of the roughly 60 or $70 million of working capital of the the that you built up I just wanted to the to clarify the.
Yeah, Josh how are you on the Doctor Pepper yeah.
Yeah. So that that is what is implied by an hour or $285 million. When you compare that to our updated EBITDA guidance uhm. The business overall is growth significantly versus 2020, and so you would expect so I'm out of working capital investment, but yeah, we're expecting of moderation in the release that would probably come from India.
Got it okay, and just just the <unk> I don't know if I'm thinking of looking at what.
Sure could be should I kind of think of at least at a minimum it would be let's say the 285, plus maybe the remaining working capital of we'll just call of $50 million plus the.
On top of the the kind of get you over the 350, Mark possession of 375 is kind of of a starting point.
Or is it or might not thinking about that kind of early for us to comment on 2022, and the biggest driver of obviously other than cold empty contribution of free cash flow in any given year for us is gonna be sales growth uhm. So commenting specifically would take of view on sales growth, but I think in an environment, where our business grows in line with.
Our long term expectations of the 3 to 4 per cent uhm.
Yeah, hopefully I'll.
The working capital investment should be more modest than it would be this I mean, I wasn't assuming of any of the sort of growth.
And that sort of the minimum I was suggesting and then the only thing you had mentioned on customer.
Visibility or whatnot it seems like in the first quarter you had some some live demand.
Or early time.
Some of them some greater visibility for for the the back half of this year.
You guys be more cautious in terms of your your visibility is it on the auto side or the or is there something else for you just being cautious on.
Yeah. So I think we've always been clear that we have visibility into the production lines, where our chemistry or be used but the key driver of revenue is the flow through the utilization of those production lines of our customer sites and that's hard for us to to see where we get.
Confidence as we look out of the back half of the year is based on general industry commentary and the trends that we've seen over the past couple of months and the order patterns that we've seen going forward and so that that's how we get a level of confidence around the second half guidance with regard to the fourth.
Quarter, we're relying on typical seasonality, that's what we keep referring to it in a typical fourth quarter things slowdown materially in November and further in December as we got 2 of holiday season, and that accounts for the decline that we would see in normal year, we're counting on that this year obviously if.
If if those slowdowns don't happen, there's upside of the other pocket of upside would be in the automotive industry as we talked about where chip shortages have been slowing growth in within the automotive sector of our industrial surface dream of business, that's been more than offset by very strong demand in the industrial equipment and machinery and building products.
And the other applications for our industrial surface treatment technologies, if Otto where to pick up we'd see significant upside relative to the guidance, we've given for for for the fourth quarter.
Awesome. Thanks, guys.
Oh.
Our next question comes from Chris Shaw with no net Crosby Your line is open.
Good morning, or on the I thought I dropped out of cute cute asking the question, but I actually have I have another 1 on the convention of acquisition.
And I was curious is it more complementary than you know I, just I guess I'm trying to figure out maybe what the what the sort of status of for the concentration in industrial.
Surface treatment as in you know in the sector itself I mean does it does it make you a major major player or are you still a sort of minor you know.
The 10 per cent of the market kind of player I'm not sure how how concentrated the that industry of.
Sure Chris So it really depends on how you define this market. We've always said of our market leaders in in the niche markets in which we participate and we're cove empty of gives us the additional strength is in decorative coding and anti corrosion coatings. So think about that is.
The rest of resistance and other protective coatings put on plastic and metal and then decorative coating coatings net make plastic look like metal for example, which are which have been hallmark markets and technologies that element of its legacy of companies have participated in and.
The majority of what Covid dsl's about 75% overlaps quite nicely in that market.
And so we are going for market leadership to market leadership <unk>.
That in that and market, but in those specific niche markets, but.
As we've said this is the growth acquisition and it opens additional interesting adjacent markets for us whether that some of geographical perspective, we were talking earlier in the Q&A about increased scale in Asia, which is of unattractive market for us where we are under represented relative to our global market share and also so in the light.
All surface treatment. So the market, we haven't been able to crack into this is Anna dieting aluminum, which is increasingly important in electric vehicles for help.
Helping them become more lightweight conveyance.
<unk> is a nice position in that market with great technology, and we can leverage our our broader seat within automotive supply chains and at the OEM table to drive that business and drive growth. So this is both helping improve our market positions and some existing markets and opening doors and other.
Very exciting markets for element solutions.
I guess not to that and you wouldn't anticipate any difficulties getting approval for the deal.
We we communicated the lawn tractor closed this transaction on the first of September at this point, which reflects the level of confidence uhm and getting it closed in a relatively short period of time.
Got it very helpful. Thanks.
And we will take a follow up from Josh Specter with UBS. Your line is open.
Hey, guys I was actually going to ask about the aluminum and convention and you kind of just went to that so I'll I'll leave it there. Thanks.
Thanks, Josh.
We have no further questions in queue at this time I would like to hand, the call back over to your bank of <unk> for closing remarks.
Great. Thank you so much Catherine and thanks to everybody again for joining this morning, we look forward to seeing many of you in the the weeks and months to come and stay safe take care.
This does conclude today's program. Thank you for your participation you may disconnect at anytime.
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