Q4 2021 Element Solutions Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the element solutions Q4, and full year 2021 financial results conference call.
Later, you will have an opportunity to ask questions. During the question and answer session. You May Register to ask a question at any time by pressing the star and one of your Touchtone phone.
You may withdraw yourself from the queue by pressing the pound key.
Please note this call maybe recorded.
I would now like to turn the call over to Rune Gokarn Senior director of strategy and Finance. Please go ahead.
Good morning, and thank you for participating on our fourth quarter and full year 2021 earnings Conference call. Joining me. This morning are our executive Chairman Martin Franklin CEO , Ben Glitch in our CFO Carey Dorman.
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 expressed 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 it's 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 expectation.
And predictions these materials can be found on the company's website in the investors section under news and events.
Today's materials also include financial information that has not been prepared in accordance with US GAAP. Please refer to the earnings release and supplemental slides for definitions and reconciliations of these non-GAAP measures to comparable GAAP financial measures. It is now my pleasure to introduce certain Martin Franklin Executive Chairman of element solutions.
Thank you, Brian and good morning, everybody. Thank you for joining us.
Today, we are reporting results from another outstanding year for element solutions. This is a company hitting its stride in terms of execution and capital allocation and culture.
In the three years of our journey as evidenced solutions. This company is safe and managed through a myriad of headwinds from COVID-19 related disruptions to supply chain issues.
These experiences have both sports this leadership team's capabilities and proven them out and the results have been very good.
Today, we reported adjusted EPS that delivers on our initial five year commitment in just three years.
The leadership team is delivering for shareholders with a focus on long term strategic breakthroughs without taking aside of meeting its short term commitments.
We are outgrowing our markets through strong execution.
We have driven operating leverage on that growth through a thoughtful approach to cost and investment.
That solid execution and prudent strategic capital allocation has compounded earnings per share at 27% CAGR over three years.
Underpinning this financial performance is a highly motivating culture that the leadership team has created and which fostered balancing ambitious goal setting delivering on commitments and carrying for all stakeholders stakeholders.
This culture is a solid foundation for continued outperformance.
Our company has made enormous strides in a relatively short period of time.
This is uniquely positioned business to generate industry, leading returns on assets that we believe have not yet been properly appreciated by the market.
It's gross requires relatively low capital investment and it is positioned in some of the most exciting addressable markets and the specialty chemicals arena.
We're very much looking forward to providing a more granular outline of the opportunities for growth tomorrow at the Investor day.
Im looking forward to seeing many of you that with that introduction, let me turn the call over to Ben Thank you through the quarter and year in more detail.
Thank you Mark.
Element solutions had an exceptional year.
We are executing at a high level through an unusual backdrop of both record demand in our end markets and severe disruptions in raw material supply logistics and labor.
The company delivered strong sales growth adjusted EBITDA, adjusted EPS and free cash flow. Each of these were annual record since we became element solutions in 2019.
Our culture of embracing challenges and delivering on our commitments have been tested through the unprecedented operating environment over the last three years and we feel proud of the results.
We entered 2021 with the mantra winning now leaning later as we start to capitalize on the strength in many of our key markets. While also increasing our investment in the capabilities that should allow for longer term success.
To that end, we focused our energy on strategy development and implementation and commercial execution across both our electronics and industrial portfolios to leverage our scale and win larger opportunities with strategic accounts we.
We enhanced our operational processes to focus on better planning pricing and supply chain management tomorrow effectively respond to changes in our markets.
We also accelerated investment in internal capacity in both manufacturing and technical capabilities and focused growth areas, such as power electronics advanced semiconductor packaging solutions and leading edge printed circuit Board technology.
As we invested in future growth. We also delivered on our financial commitments in 2021, our business grew net sales organically, 13% for the year evenly split across <unk> across both segments.
We grew adjusted EBITDA by 20% in constant currency terms, we delivered $280 million of free cash flow, a 12% increase over last year, even after making larger investments in strategic Capex and working capital to ensure reliability of supply to our customers.
We closed two exciting acquisitions and increased our quarterly dividend.
Finally, we achieved a $1 38, and adjusted EPS exceeding our initial five year target to double adjusted EPS in just three years.
When we launched element solutions in February 2019, we espouse the strategy balancing operational excellence and prudent capital allocation running a high quality business is better every year and deploying our strong cash flows they generate and long term value enhancing ways.
Last year, we were excited to have the ability to deploy a significant amount of capital with high expected returns in strategic markets that we know very well.
We believe the acquisitions of <unk> NDA HK Wentworth position, our business for higher growth in our core markets, while providing expansion opportunities into attractive adjacent.
With <unk>, we enhanced our position in industrial metal, finishing with significant global scale and product breadth to support customers were on track to exceed $15 million of run rate synergies, which as we previously communicated we expect to achieve by the end of 2023.
We further grew our industrial solutions business through the acquisition of <unk> in January of this year are more regionally focused company with strong manufacturing and research talent in a highly complementary environmentally friendly surface treatment.
HCA westwards and in particular intellectual loop brands provide us with an expanded portfolio of high end electronics products, including conformal coating capsulation resin and thermal interface materials.
These polymer based adhesive products are increasingly critical and high end electronics as thermal management and enhanced durability ever.
Ever more critical performance attributes, we've seen strong interest from our existing semiconductor and assembly customers for these products and we see a path to double that business over the next several years.
We funded these acquisitions without additional equity and finished the year with the same leverage ratio as we entered it.
In 2021, we also made great strides on the ESG front.
We started the year by publishing our inaugural ESG report, which provided more transparency on the way our business is driving more sustainable outcomes and customer supply chain and are in.
In the coming days, we'll be publishing our ESG goals, and which we commit to improving across four key pillars of ESG emissions safety Eni and sales of sustainable solutions.
This is another step forward in our commitment to ESG.
We've also significantly expanded our employee volunteerism charitable giving program and launched several new talent and career development initiatives to expand opportunities for our people.
Overall, we're very pleased with the culture that has taken root as element solutions and believe that these values will continue to serve as a competitive advantage for the company in the years to come.
Gary will now take you through the financial results in a bit more detail Gary.
Thank you Ben good morning, everyone.
Our fourth quarter results are summarized on slide four.
Net sales of $647 million in the quarter were a record since our launch and reflect our first full quarter with <unk>.
We grew net sales organically by 2% despite a difficult comparison to the fourth quarter of 2020, and we saw an initial post COVID-19 manufacturing recovery and the timing of smartphone launches drove a surge in growth in our electronics segment.
Our electronics business grew net sales, 1% organically in the fourth quarter compared to Q4 of 2020. However.
However, when compared with the same quarters in 2019, our organic net sales growth over the two years accelerated from 13% in Q3 to 17% in Q4.
Demand in our electronic business inflected positively in 2020, asking for assistance and staff.
The secular inflection of growth in these end markets should continue in 2022.
ALLETE these trend driving that remain in the early stages.
Net sales in the industrial and specialty segment grew 4%.
This was driven by strong European construction and general industrial end markets.
High single digit organic growth in our graphics business and a return to growth in our energy business that more than offset a decline in automotive end markets in the quarter.
We began to see inflation in our supply chain in early 2021, which continued through the fourth quarter.
We experienced inflation in raw materials logistics and pass through metals.
The metal prices impact on the margin percent not margin dollars.
Overall, adjusted EBITDA margins were down 460 basis points, when compared to Q4, 2020, which is a tough comparable given that was unusual and strong period.
Approximately 150 basis points of the adjusted EBITDA margin change is explained by the pricing impact of pass through metals and a further 70 bps as explained by acquisitions.
The rest is driven by mix raw materials logistics and Opex growth.
Approximately $10 million of its opex growth is associated with the above target annual incentive compensation, which is not planned to carryover into 2022.
Excluding the impact of Assembly pass through metals revenue adjusted EBITDA margin would have been 23% in the quarter.
Turning now to our full year 2021 financial results on slide five we delivered 13% organic growth on the top line and we converted that improvement in sales into 20% constant currency adjusted EBITDA growth or 17% growth when excluding the $11 million contribution of <unk> in the last four months of the year.
Full year adjusted earnings per share grew 44% as our strategic capital deployment compounded our strong operating results.
On slide six we provide additional full year details by segment.
Electronics net sales grew 13% organically year over year with strong performance in each vertical.
Assembly vertical grew the top line, 15% organically, even after adjusting out the large impact of metal prices.
Assembly was down modestly in 2020, primarily due to its automotive exposure.
We benefited in 2021 from the beginning of an automotive recovery as well as the increased penetration of electric vehicles and power electronics, where our business is a strong market position and product portfolio.
Sales in assembly, including the impact of metal prices increased 44%.
The increase in Cana in silver prices, which we contractually pass onto customers impacted sales by $143 million in the year.
The pass through nature of these increases pretax profitability in dollar terms, but it's a large impact on reported margin percent.
The semiconductor business delivered 13% organic net sales growth in 2021.
We continue to see the higher demand opportunity in the advanced packaging market and benefited from increased demand in semiconductor markets driven by computing mobile telecom infrastructure and vehicle electrification.
This growth in 2021, followed a 17% organic growth in 2020 versus 2019.
The circuitry business grew net sales, 10% organically in 2021.
Business is driven by high end electronics like next generation mobile devices, which continued to grow nicely.
We also sell into data storage market, which had another strong year driven by demand for network and computing infrastructure.
Overall, adjusted EBITDA margins in the electronics segment were down about 90 basis points year over year in constant currency negatively impacted by almost 240 basis points of pass through metals pricing.
Excluding this impact positive mix benefits and pricing actions more than offset the increase in other raw materials and logistics costs for the full year.
These headwinds are more acute in the second half and we are actively working to further offset these pressures in line with most of our industry.
Organic net sales and industrial and specialty also increased 13% we capitalized on the strong recovery in most of our end markets against the weak macroeconomic backdrop in 2020.
The industrial vertical grew organically, 18% year over year, which excludes any impact from the acquisition of <unk>.
The business has been down around 10% in 2020, mainly driven by Covid related manufacturing shutdowns.
The COVID-19 impact on manufacturing even into 2021.
We saw our sales growth for copper.
Our automotive business grew in the double digits, despite lower than anticipated underlying unit production.
Our graphics business grew net sales, 6% organically in 2021 with strong sales execution and new wins across the Americas and Europe .
The investments, we are making making in expanding our product portfolio strategic account management and in our go to market strategy are all delivering.
In offshore net sales declined 6% organically for the year, but grew 6% organically in the fourth quarter versus Q4 2020.
Demand picked up later in the year as new drilling rigs began to come online.
Bodes well for 2022.
Adjusted EBITDA margins in the IHS segment were down 170 basis points year over year. This decline was largely driven by mix impacts cost inflation in raw materials and logistics and the contribution of <unk> at lower than average segment margins before synergies.
We expect <unk> to contribute at least $15 million of annualized synergies by year end 2023, and therefore add approximately 200 basis points of adjusted EBITDA margin to the sector all else equal.
Turning to slide seven.
We generated $280 million of free cash flow in 2021, an increase of 12% year over year. Despite a significant full year investment in working capital to support stronger sales growth and inventory safety stock.
While we began to work through their safety stock in the back half of the year, we are still operating with elevated inventory and will likely continue through most of 2022.
We increased our capital expenditures this year to $46 million as we invested in capacity to support strategic growth projects and power electronics semiconductor and graphics.
In 2022, we're continuing to invest to support growth and new high value areas.
We are happy to have the opportunity to make these types of high returning capital investments and find growth in adjacent markets.
In 2022, we expect capex of approximately $60 million, including these growth investments and several <unk> integration initiatives.
The maintenance capital needs of our business are largely unchanged at around $20 million.
And we do not expect total ongoing annual capex to remain at these higher levels.
Finally interest and cash taxes, both came in slightly better than our last forecast for 2021.
And we expect cash taxes roughly in line with earnings in 2022.
Our net leverage ratio exiting 2021 was two nine times adjusted EBITDA, when acuity, including the full year contribution of Carinthia.
We deployed a significant amount of capital in the year, including two acquisitions over $60 million in dividends and repurchasing approximately 1 million shares of our common stock.
Nonetheless, we held our year end leverage ratio constant from year end 2020, a testament to the cash generative nature of our business.
Without further capital deployment, we would expect to delever organically into the mid twos in 2022.
This should leave us plenty of capacity to continue to invest prudently to drive shareholder returns.
And with that I will turn it back to <unk> to talk more about 2022.
Thank you Gary.
Our full year 2022 financial guidance reflects the continuation of the dynamics, we experienced in 2021 into the first half of 2022, our end markets remain healthy and our teams are executing well in what remains a dynamic supply environment.
We believe easier presents significant opportunities for growth for growth from current macro tailwind continued execution and expected improvements in supply constraints towards the second half of the year.
Our full year guidance for adjusted EBITDA is a range of between $575 million to $590 million, representing constant currency growth of 13% to 16%.
We expect to deliver adjusted earnings per share of between $1 55, and $1 60, representing 12% to 16% growth year over year.
Net sales growth in 2022, and both of our segments should be above their long term rates buoyed by the expected cyclical recovery in auto and industrial end markets and ongoing strength in the electronic supply chain.
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.
Given the end of January 'twenty, two exchange rates, we anticipate FX will be an approximately 3% headwind to sales and a roughly $15 million headwind to adjusted EBITDA for the full year.
Year over year earnings growth will likely be weighted to the second half given continued constraints in automotive supply chain and the fact that raw material prices increased throughout the first half of 2021, which represent a year over year headwind.
We continue to take action to offset raw material inflation.
For the first quarter of 2022, we expect constant currency adjusted EBITDA to be approximately flat compared to the prior year.
We have demonstrated in our first three years as element solutions that our business enabled to generate strong cash flow in a variety of markets and we expect this year will be no exception, we expect to generate a record $310 million to $325 million of free cash flow in 2022, despite adding significantly to our capital expenditure plans and funding certainty.
One time integration related activity.
This cash generation ability create flexibility for further prudent capital allocation to compound long term earnings.
To wrap up I'd like to thank all of our stakeholders for their continued support of element solutions, we delivered on our vision and commitments in our first three years as element solutions running are excellent businesses better and deploying their strong free cash flows to become a better supplier to customers create more opportunities for our people and compound.
Per share earnings for our investors in early 2019, we announced our goal to double adjusted earnings per share over five years and implemented leadership incentives to help us achieve this goal in four years, we achieved this target in three years.
In 2022, a new incentive targets has been established to double earnings per share again from the prior $1 36 target to $2 72 by the end of 2026.
We see multiple levers for driving the company to superior returns and look forward to detailing this at our Investor Day Tomorrow.
I am grateful to all of our employees for their commitment and happy to share that our team is more excited and engaged than ever and on board for this next leg of our journey.
Operator, please open the line for questions.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key again that is star one if you would like to ask a question. We do ask that you. Please limit yourself to one question and one follow up and we will take our first question from Bob Court with Goldman Your line is now open.
Good morning. Thanks. This is Mike Harris <unk> sitting in for Bob This morning.
When we look at the <unk>.
<unk> of the 22 EPS Scott.
What are the swing factors or I guess scenarios that would determine whether or not you came in at the high or the low end of that rate and maybe speak to what macro assumptions or share count reduction that you have baked in.
Yeah, absolutely. Thanks for the question Mike.
So our EPS guidance range doesn't correspond exactly to our EBITDA guidance range. There is a modest amount of capital allocation required to get to that EPS range. The.
The big drivers as we think about that range are specifically that capital allocation, how we deploy the substantial cash flow that this business generates over the course of the year.
And the other critical variables are the timing and magnitude of the auto recovery in our guidance, we're assuming it's back half weighted.
And so the supply chain constraints that had been weighing on automotive production start to ease in the second half.
<unk> is obviously a variable that has been increasingly volatile.
And then.
We believe that there will be persisting strength in electronics through the course of the year.
And we have a lot of conviction that that's going to continue.
But could it even accelerate further and that would obviously drive us toward the higher end.
Okay. Thanks, and then just a quick one.
Looking at the industry consolidation going on in perhaps a change in competitive landscape can you speak to.
Or how that May change your business strategy or M&A appetite.
Yeah, absolutely. So we've always said that from a strategic perspective consolidation in let's call it electronics materials and in our markets doesn't impact us.
We're fortunate to be market leaders in the markets in which we participate and that position hasnt been diminished by the consolidation that we've seen surely other vendors to shared customers have consolidated but not in our product portfolios and so that consolidation does.
Not drive.
Any change in our strategic frame.
Framework in our capital allocation decisions at all we've got great moats around our business leadership positions and.
That's been unchanged and we will continue to be unchanged. If anything we're consolidating our leadership position through capital allocation and execution, which has been driving our market outperformance through through share gain and some of the new markets, we've been able to enter through organic and inorganic capital allocation.
Great. Thanks for taking our question.
We will take our next question from Chris <unk> with loop capital markets. Your line is now open.
Hey, good morning. Thanks. So one question is Ben you mentioned when talking about end market growth tailwind for 'twenty two you highlighted <unk>.
Ahead of Evs and just broader strengthen.
Suffocation of autos.
I think <unk>.
Theres, probably can get a reasonable calibration on smartphone builds in content for <unk> enabled smartphone was helpful too.
Here are a few.
Theres a way you could quantify farmers Ram just more of the <unk> ecosystem build out including base stations more generally what's the opportunity here, how does ESI to eat into that.
Yes.
Great question and a great observation.
Units are growing in the mobile phone market and the percentage of those units that are <unk> enabled is also growing at a 15% content uplift on a <unk> versus a legacy technology fund. So we see growth in the underlying units and in the content.
But there is also a huge opportunity in the mobile infrastructure right. The base stations that are required enable to support five G technology and.
And we see an opportunity order of magnitude three times the size of the base of the number of base stations that are being built in 2021 over.
Over the next five years to support the rollout of <unk> capability, such that it's able to service all of the <unk> phones that are going to be sold and Thats, a big opportunity from a content and unit perspective for element solutions electronics business.
That's helpful. I appreciate it and then the follow up is maybe just.
A bigger picture question about the evolution of the printed circuit board industry and in your role.
Over time and feeding into that so to win.
There was a period of time when that industry manufacturing was more global in nature than it is.
As as the industry matured and became.
Lower cost it was concentrated more in China, but now the growth drivers that you are talking about in terms of.
Just the overall electrification of the economy, it's driving the pendulum shifting back to higher and so I guess the question is is that the notion that that only sort of the elite suppliers like yourself are feeding into the higher end electronics is that.
So our position is still valid for this evolution and strengthen the electronics industry today.
Yes, it's a.
Good observation Chris.
There are only a few vendors in our tier that are capable of delivering the highest level technology.
To meet the needs of next generation circuit boards, and IC substrate and so as the technical requirements for higher end electronics become more challenging.
That drives more of the market and more of the market value right to folks like us, which is our market share driver for us and we are accelerating investment to ensure that we participate over and above our current share in those higher end applications, which are growing faster have higher margins and wider moats.
And so that does explain some of our outperformance relative to our markets and some of the really exciting trends that are going to propel this business for the next many years.
Thanks for the color I appreciate it.
We will take our next question from Steve Byrne with Bank of America. Your line is now open.
Dan I wanted to drill into this new.
Five year targets of double EPS.
Perhaps you would like to do that in three years.
But.
More importantly, really we'd like to hear your view as to.
What gives you the conviction that you can do that and maybe you can rank. These potential drivers is it the strength in these end markets that you sell into is it your expectation for bolting on more.
More acquisitions.
Your internal initiatives either on the cost side.
Or cross selling into new markets and geographies, how would you rank those.
Steve Thanks for the question.
We're going to spend two hours on that tomorrow at our Investor day, and so I don't want to steal too much of its thunder, but.
A few things, we said our internal target a little bit outside of our external target and so we're going to communicate our external target tomorrow, and we're going to talk about the compelling path forward, we have to deliver on that and it's comprised of all the things you said were participating in markets that are growing secular Lee at faster growth rates than what they were grown.
Three years ago, and we believe that sustainable we're running the business is better.
Every day every year to convert that sales growth that we're going to get from the secular growth in our execution that at higher rates from sales into profit and we're going to generate billions of dollars of free cash flow to deploy to compound earnings per share and so the model we espoused at element solutions is operational.
Excellent and prudent capital allocation, we've done it for our first three years and we intend to do it for the next five years and that's how we get to that stretched target, we'd like setting ambitious goals and we certainly like delivering on them.
I will also just wanted to ask you about this.
The comments made about higher logistics costs.
We've had the impression that you your manufacturing base is generally close to your customers. So can you provide a little more explanation as to what is causing the higher logistical costs is it.
Is that you're trying to source the raw materials.
Or is it.
Delivery to your end customer.
And what mode is primarily that issue and is it getting any better.
Yes, so higher logistics costs are driven by the fact that basically all modes of transport are many percent if not multiples from a rates perspective on where they were a year or so ago.
And we use all modes.
A lot of trucking, we've had to do some air freighting to get products to customers on time, given logistics on availability.
And that's just become significantly more expensive over the past year or so we historically haven't passed on logistics costs actively to price it's something we're considering.
And we don't see logistics costs abating. So we do have as we look to our guidance about a $20 million headwind to EBITDA from logistics costs thats taken into consideration and.
And obviously, we are taking action to try to offset inflation, both in raw materials and in the broader cost base.
<unk> actively to preserve margin.
Thank you.
We will take our next question from <unk> with Morgan Stanley . Your line is now open.
Hey, good morning, and thanks for taking my question just I was wondering if you could just unpack a little bit more in terms of organic growth.
You saw during the quarter and as we think about maybe what's embedded in the.
Our guidance for both <unk> and 2022 in particular I was wondering if you could talk a little bit about maybe assembly circuitry it seems like.
From my analysis right I guess it would seem to suggest that assembly with maybe negative in the fourth quarter and typically that would be a low single digit so.
I assume a lot of that is probably auto.
Give us a little bit more color on those and how you how does kind of fit in as well into the guidance.
Yes, the fourth quarter of 2001 is comping against an anomalous quarter in the fourth quarter of 2020, the Covid related manufacturing shutdowns. We saw in 2020 in the second and third quarters really pushed a lot of volume into Q4 of 'twenty and into Q1 of 2021, it's very odd that the first quarter of the year as our biggest which was the.
Case in 2021.
But we still grew organically.
And that was driven by strength in our assembly business.
The mix.
Some of that was and strengthen our semiconductor business in the industrial business also had a.
Our strong fourth quarter lapping.
Despite rather automotive weakness, but driven by strength in our other industrial.
In our other pockets of the industrial business construction, and engineering and heavy heavy equipment and building products.
Rolling into the first quarter of 2022.
There is persisting strength in electronics, we should see growth in our electronics business. There is also a persisting strength in industrial and the same pockets.
Some of our smaller businesses like the offshore business should grow in the graphics business should grow and overall it remains a buoyant environment from an electronics perspective, and so we expect.
Pretty stable and consistent growth across the portfolio in the first quarter offset by some margin pressure, which will continue because we are lapping a period, where we didn't see the same raw material inflation and logistics inflation that we saw in the back half of 2020.
2021, excuse me and for the full.
And for the full year, two as you think about that growth what kind of.
Within kind of the bracket, what kind of organic growth.
I'm just wondering if that.
And we are expecting above average above the average long term growth rates for most of our businesses in 2022. So you should think about.
Mid single digit top line.
And that's pretty broad based but there is a phasing aspect to it right. So the industrial business for instance, we will see a pickup in the back half as we expect the auto supply chain too.
He's a bit, whereas the electronics business should be pretty consistent through the year.
Got it thanks, if I could sneak one last one on just what's kind of the share count assumption.
Application.
Embedded in with an EPS.
Sure. This is Gary so I think as a baseline the $251 million of using for adjusted EPS for 2021. It is a good assumption for 'twenty two capital allocation if.
If you do the walk from EBITDA to EPS Youll see that you need about two or three of capital allocation to get to the same equivalent range from EBITDA to EPS.
Either shares or.
Buying earnings.
Very helpful. Thank you.
We will take our next question from John Chen Huang with it.
Securities. Your line is now open.
Hi, guys I think Thats my first first of all congrats on hitting your long term targets. After a really wild ride over the last couple of years.
Thanks, Joe.
I know you'll talk about this more tomorrow, but is there any reason why you can't double earnings again in three years to four years.
On your end markets are growing faster than you expected and are there any incentive structures in place too.
To achieve that.
And five years.
Okay.
John Thanks for the question, we would absolutely love to achieve this target sooner than five years.
The base is bigger than the levers at our disposal or more modest right. So some of our earnings growth was driven by balance sheet optimization and we've got the balance sheet in a really good place and hard to see a lot of avenues for improvement from a cost of debt perspective. Some of it was from tax rate optimization and we've done a very good job improving that.
As well and that's not an arrow in our quiver. So the levers we have at our disposal or fewer.
Magnitude right, we don't need to add 68 cents, we need to add double that again, the magnitude is greater and so we think if we're able to do this in five years it will be a really exciting.
Exceptional outcome of course, if we can do it sooner it will be more exceptional than we'd love that but it feels reasonably ambitious to setup to set this is a five year target.
Got it assessing the fact dissipating in great markets and have.
Great growth and faster growth frankly than we expected in 2019.
At our backs into <unk> in 2022.
And we will take our next question from Josh Josh Spector with UBS. Your line is now open.
Yes, hi, Thanks for taking my question just to go back to the cost inflation side of things.
You size the logistics impact I was wondering if you could quantify what youre expecting in terms of kind of total cost inflation for 2022, excluding pass through items and if you kind of walk through kind of the cadence of when Youre thinking you could recapture that back does that occurred late 2022 or is this something that recovers in 2010.
Three or maybe cannot be something thats, even recovered or is this your cost to serve higher now than it was a couple of years ago.
Yeah. Thanks for the question, Josh It's a multi variable analysis right. We've been chasing inflation all year and continue to do so for all of last year and continue to do so.
And so there are things in equation that aren't within our control, but it's a good opportunity to really break out the Q4 margin impacts on a year over year basis.
So we can explain the things that are within our control and what we're doing and what.
And what else has happened. So if you look at our margin progression Q4, 'twenty one over Q4 'twenty. There are some 400 or so basis points of margin decline.
Over 100 of that is just metal pass through metal 10 for instance is at an all time high prices have doubled that dollar for dollar. So a $1 increase in 10 of the dollar increase in sales without any attributable profit it's not eroding the profit dollars. It's just increasing sales and had an optical impact on margins.
The <unk> acquisition, we made another roughly $100 million excuse me 100 basis point impact to margin. That's a below average margin business prior to synergies and once we get our synergies, which will beginning to realize and we will realize a lot of in 2022, it will be an above average margin contributor so.
Those two year at about 200 basis points.
We talked about can you talk about opex and incentive comp, which in the fourth quarter was about 100 basis point headwind as well that will go away because it was above target and we expect in 2022 target levels of compensation. So what you are left with is about 100 basis points and what's in that 100 basis points of headwind is logistics and raw material.
Inflation offset by mix improvements and price.
So the way you can think about that is that there's about a point that we're behind from a price perspective, we're pursuing that with actions in the first quarter and second quarter, but raw material inflation could make that point higher an increase what we need to do.
I expect us to recover that point over time.
Mix will help as well price and we're hopeful that the inflationary.
Our environment, we have been existing and doesn't persist such that we don't have to continue to pursue this but we have a history of getting price when we've needed to an end.
And there is no nothing to suggest we shouldnt continue to be able to do so and Josh I would just add on the raw material front, we have seen some stabilization on prices of raws, excluding the metals have been mentioned over the course of the year. So while we saw something like a 10% increase on a Ross ex metals 2020 versus 2021 versus 2020.
By the fourth quarter that was starting to moderate and we only saw a sequential increase of a few percentage points. So.
Our assumption is that there is not further increases in raw material prices ex metals, but obviously, we're going to continue to take price to offset that or logistics.
Thanks, Thats all helped.
And I was just wondering if you could provide some context on your increase in Capex. The projects that you are ramping up what businesses is that targeted at targeted that and then the deck also had a comment on increasing investment in financing our customer equipment I guess what changed in that arena.
Yes, so we're really excited by the opportunity to invest more behind our businesses and very high returning organic opportunities and you talked about execution in existing and some new markets that are attractive adjacencies that our customers are frankly pulling us into we're investing in capacity expansion for our power electronics.
Business, which is a really differentiated high value.
Critical enabling technology for electric vehicles, we've got a great mousetrap, there and it's growing very very quickly we'll talk about that more tomorrow, so were doubling capacity there.
We're adding an applications lab for our semiconductor business in Taiwan, which is a highly concentrated semiconductor market. We've had really great wins in the semiconductor business and this is going to support and accelerate that.
We are doubling capacity in our graphics business, where we've had some really big wins.
And need this capacity in order to support that growth. These are sub two year payback type investments.
We don't believe that the capital requirements for this business have re rated our increased permanently but this year. There are some really good opportunities to support an acceleration in growth and we're excited about them with regard to customer equipment.
As we are making entrees into higher technology applications in.
The circuitry business, we are supporting that with customer equipment, which is also a very high returning investment for very sticky high margin business.
And we're very interested in supporting our customers with with our technology with our technical service and with our with our balance sheet.
And which will also help accelerate growth.
That notwithstanding that incremental investment, we're still growing free cash flow year over year.
The guidance is for another record year free cash flow in 2022.
And one just an important point on the customer equipment financing that is not equipment that were manufacturing right that is third party equipment that were just financing for the customer in an exchange typically for our contractual sales.
Okay.
Okay. Thanks, guys.
Well take our next question from Karen <unk>.
With Mizuho your line is now open.
Hi, good morning.
Yes.
I think you mentioned the <unk> acquisition, while you were talking about opportunities and kind of these environmentally sustainable products. It seems that the industry is really shifting in that direction.
Can you talk about at the Investor day, but any color you can give in terms of how we should think about.
<unk> profile that environmentally sustainable product group and the mixed profile as well as we think about your business going forward and your opportunities.
In that area that would be helpful.
Sustainability is not a single product category, we have sustainability initiatives in every single one of our businesses. It is.
Our secular growth driver in and of itself and it is an area of investment in and of itself.
We have.
With regard to <unk>, what they bring to US is some really good.
Product technology that eliminates some hazardous chemistries.
For the industrial <unk> market.
<unk> is a wonderful niche business entrepreneurial family owned excited to have them on the team they bring great capabilities and really good customer relationships as well. In addition to that product technology, we've been investing in similar technology to eliminate hazardous chemistries were really concentrating solidifying our leadership position in these.
<unk>, which will drive share our way at high margins.
We're also investing in water treatment, the <unk> solutions business, which we acquired a business called BNP, we've rebranded and Mcdermott and bio solutions that pipeline continues to grow and customers continue to be interested in our ability to provide more solutions than simply trading technologies, particularly in the industrial side.
But also in the circuitry side of the business.
We're a water treatment capability as value added to our existing product portfolio.
We're glad to see recognition from the initiatives, we've made from a sustainability standpoint.
And the transparency, we provided with our ESG report last year, we're going to be publishing our ESG commitments and targets.
In the weeks to come Newsweek ranked us the 46, most sustainable company.
Which was something that we were out of 2000, which is something we're really proud of them.
Seeing the traction from these initiatives, both commercially and from a transparency perspective, an internal supply chain perspective sustainability is a way that we differentiate ourselves in the market and it's great to be recognized for that.
Great and maybe just a quick follow up can you kind of answered all of these in a bit.
Different way throughout the course of the call, but if you can help us if we take the $525 million of EBITDA that we ended the year at maybe you could just help US bridge the different pieces, whether it's the <unk> acquisition the <unk> synergies.
The different components of organic growth and any additional initiatives and how that gets you kind of into that $5 75 to $5 90 range that would be helpful.
Absolutely so.
The 525 is the right place to start there is a $15 million FX headwind. So that gets you to about 510.
We get a full year contribution from <unk> before synergies, which add 20% to $25 million.
So that gets you to $5 35, 7% to $10 million of synergies from <unk> should should hit the P&L. This year. So that gets you into the 540 <unk> and the rest is organic growth.
Six or so percent on the top line. We said, we said mid single digits with some margin pressure as we lap the first half.
The phasing of that organic growth will come to the back half just driven by the auto cycle.
But we see multiple paths to get there that's the nature of this business and.
And have a high level of confidence in our guidance range from where we sit today.
Great. Thank you.
Yes.
We have no further questions on the line at this time I will turn the program back over to Dan for any closing remarks.
Thanks, very much everybody for joining we're looking forward to seeing many of you tomorrow at our Investor day, and those who cannot attend in the weeks and months ahead stay safe and thanks again.
This does conclude today's program. Thank you for your participation you may disconnect at any time and have a wonderful day.
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Yes.
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