Q1 2022 Element Solutions Inc Earnings Call
During todays program. Please press star zero.
Okay.
Good morning, ladies and gentlemen, and welcome to the element solutions Q1, 2022 financial results conference call. At this time all participants are in a listen only mode. 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 Antoine.
Touchtone phone. Please note this call maybe recorded and it will be.
Newpage to meet any assistance 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 in our first quarter 2022 earnings Conference call. Joining me, our executive Chairman Martin Franklin CEO , Ben <unk> and CFO Cary dormant.
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 are subject to risks and uncertainties. Please refer to our earnings release supplemental slides and most recent SEC filings for a discussion of the material risk factors that could cause actual results to differ from our expectations.
That prediction.
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 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 for Arun and good morning, everyone.
Before turning the call to abandon and Carrie I wanted to take a moment to recognize this leadership team and all our colleagues at element solutions for navigating a complicated backdrop to the quarter very well.
Demand has been strong.
The trends in semiconductor pillar for proliferation, five G and electronic vehicles continued to see great momentum.
However, due to raw material scarcity ongoing COVID-19 lockdowns and logistics on availability. So I think our customers was at times challenging but the challenge that this company has managed definitely definitely.
This time it is Steve is investing for the long term and culture capabilities and people while delivering on its commitments in the short term and I'm very proud of their performance with that let me turn it over to Bert.
Thank you Martin and good morning, everybody. Thank you for joining.
We had a strong start to 2022 with our end markets remaining broadly supported through a period of increased geopolitical volatility and supply chain complexity, we drove organic sales growth in all six of our business verticals.
Ongoing disruption from Covid production in the electronic supply chain has remained healthy in the first quarter.
Industrial end markets were mixed with continued supply chain challenges impacting the auto industry, but more robust demand in general industrial and energy markets.
The ongoing integrations of our recent acquisitions are going well and the commercial rationale for these deals is proving even stronger than initially anticipated.
Logistics costs and raw material prices continued to climb in the quarter, but overall resilient demand and effective price actions allowed us to deliver constant currency adjusted EBITDA growth of 9% over Q1 of last year.
These results reflect the strength of the secular trends propelling our business the value, we're bringing to our customers and solid execution from our commercial technical and supply chain teams against our growth strategies in a dynamic operating environment.
While recent macroeconomic factors have created a less predictable short term outlook. We continue to believe our business is well positioned to navigate these challenges our team remains focused on executing the strategy, we laid out at our investor to deploy our capital effectively and position our business with an attractive growth markets such as electric vehicles <unk> enabled.
Electronics, and sustainable chemistry solutions to best compound per share value.
Importantly, this does not require compromising on our short term objectives.
It has been and remains an extraordinarily challenging time for the people of Ukraine and the world at large.
Our thoughts are with those immediately affected by the war and their families throughout the globe.
Unemployment have responded to this humanitarian crisis with incredible generosity.
Through our ESI carriers, giving programs employee donations and ESI Foundation matches have raised tens of thousands of dollars in the last few months and our teams in Europe have also organized multiple food drives for Ukrainian refugees.
From a business perspective, we've taken several steps to address the increased volatility and supply chain risk created by this conflict.
Our commercial exposure to Russia, and Ukraine was less than 20 basis points of our total sales in 2021.
Our supply chain historically source certain materials from Russia, but we have very little sole source and are actively engaged in re qualifying additional sources of supply where needed.
At this time, we don't anticipate raw material scarcity to material impact materially impact our commercial commitments.
Our financial strength has allowed us to build excess inventory. This is an opportunity that we acted on late in the first quarter similar to the actions we have successfully taken in prior years.
Pricing is impacting margins.
However, our customers have accepted new surcharge mechanisms to improve our ability to capture raw material cost increases.
We are protecting margin dollars.
Hello should metal prices remain elevated and you should expect to see gross margins below long term averages in the coming quarters.
On slide three you can see a summary of our first quarter financial results. We grew the top line, 7% organically year over year in constant currency adjusted EBITDA by 9%.
Level of organic growth represented an acceleration from the pace of growth in the fourth quarter of 2021 and reflected sustained sequential strength in high end electronics and our non automotive industrially oriented end markets.
Recall Q1 of 2021 benefited from the continuation of the recovery from Covid shutdowns without the supply chain pressure, we experienced through the balance of 2021.
It makes for a difficult comparison in our year on year growth is a positive reflection of the continued strength in our markets.
In constant currency terms, adjusted EBITA margin declined 370 basis points year over year.
Margins improved sequentially to 240 basis points from Q4 2021.
But compared to the same period last year, our first quarter results reflect many of the same headwinds from higher pass through metals logistics and other raw material inflation that we saw last quarter.
Higher prices on passenger metals drove a 160 basis points of year on year headwind, while increased logistics costs on the raw materials and mix impacts drove another 100 basis points or so.
Excluding the impact of the $132 million of pass through metal sales in our assembly solutions business, our adjusted EBITDA margin would have been 26% in the quarter.
Karen will now take you through our first quarter business results in more detail Gary.
Thanks, Dan Good morning, everyone on slide four we share additional detail on the drivers of organic net sales growth in our two segments.
Organic sales for our electronics with 8% year over year in the first quarter.
And for high end electronics applications remained steady and all three of our business verticals grew organically despite tough year over year comparisons.
In our assembly business, we saw sustained growth across most of our core product categories, including solder technologies and polymer based adhesive products, which drove 5% organic growth.
We are also seeing continued strong uptake from a broader base of power electronics customers related primarily to the proliferation of electric vehicles.
Our circuitry solutions vertical grew 13% organically driven by strong demand in the Americas for both mobile and automotive electronics as well as strong growth from memory disk customers in Asia, driven by continued demand for cloud computing and data storage.
This strength helped offset weaker demand in certain Asian market due to supply chain constraints and COVID-19 related shutdowns.
Semiconductor solutions grew 11% organically due to continued end market demand for our wafer plating advanced packaging and advanced Assembly products.
On a year over year basis, adjusted EBITDA margins in our electronics segment declined 330 basis points.
Nearly 300 basis points of which is explained simply by higher pass through metals related to increasingly tin prices, which increased sales with no commensurate increase in gross profit dollars.
This metal's adjusted margin stability underscores our ability to take price actions that offset inflationary pressures and drive positive mix through exciting high margin growth applications.
For the first quarter organic net sales and industrial and specialty increased 4% year over year.
Given the softness in auto related end markets, we expected a more subdued level of growth in this segment to start the year.
Despite this overhang and general macro uncertainty in Europe , and China, all three of our <unk> businesses posted growth in the quarter.
Industrial solutions grew 5% organically with shrank from construction general manufacturing and aerospace end markets more than offsetting continued automotive production softness.
We remain cautiously optimistic about a significant increase in auto related production into the second half of the year, but are happy that the diversification and quality of the rest of our industrial portfolio is shining through as well.
Graphic solutions increased organically by 1% year over year, reflecting a low level of growth and new packaging design introductions with CPG customers, we anticipate new customer wins will drive modestly higher growth as we move through the rest of the year.
Energy solutions also grew 2% organically in the quarter continuing the rebound that began late last year at sustained high oil prices drove additional rigs back online there.
Start up of new rigs benefits the drilling portion of this business, while we provide hydraulic fluids from vehicle sales on the other hand, new production is slower to come on line, but we expect growth to accelerate in this business over the balance of the year.
Now on slide five when we address cash flow and the balance sheet.
On net basis in the first quarter, we concerned about $15 million of cash. This compares to generating $24 million in Q1 of 2021.
The operating cash flow reflects a sequential buildup in working capital of $56 million compared to $41 million in the same period of 2021.
The primary driver of this working capital investment with inventory driven by a combination of increased raw materials higher than expected demand and the need for greater safety stocks due to global supply chain disruption.
As we have said before we believe we can differentiate ourselves from our competitors through business continuity and a strong balance sheet position.
As we have done in each of the last two years, we made the decision to increase our safety stocks to enable delivery for our customers on a timely basis.
We believe these actions have contributed to stronger relationships with these customers.
And this quarter. We also made the semiannual cash interest payment on our bonds of $16 million and paid the majority of our 2021 incentive compensation at a level that was roughly $20 million higher than last year, given the strong full year of 2021 performance.
Although use of cash in the quarter included nonrecurring costs related to our acquisitions of <unk> and the related synergy programs, which are running nicely ahead of schedule.
Turning to the balance sheet, our net leverage ratio at the end of the quarter was three two times. If we had the benefit of owning <unk> for a full year, our net leverage on a trailing 12 month basis would've been three one times.
Barring further capital allocation, we expect our net debt to adjusted EBITDA ratio of roughly two five times by year end.
Additionally, important to note that all of our floating rate borrowings have been swapped to fixed so rising interest rates should not meaningfully impact our cash interest expense in the next couple of years.
We closed on our acquisition of <unk> in January of this year, our business that brings some exceptional talent and technology to our market, leading industrial surface treatment business.
We paid approximately $23 million in cash for HFF, which represented a mid single digit multiple on EBITDA.
We also deployed $43 million of capital in the quarter to reduce our share count by roughly $1 9 million shares.
Approximately $19 million worth of shares was related to our normal stock repurchase program and.
In addition, we withheld approximately 1 million shares or roughly $24 million to cover taxes related to divesting of long term incentive grants.
We continue to remain opportunistic as it relates to share repurchases and expect to accelerate this activity. When we believe our stock is trading at significant discount to its intrinsic value.
After this Q1 activity our remaining availability under our existing stock buyback authorization with over $700 million as of March 31, and with that I will turn it back to that Ben.
Thank you Carrie.
The strength in our first quarter results gives us confidence to increase the low end of our full year adjusted EBITDA guidance, which you can see on slide six we expect to deliver 580 million to $590 million of adjusted EBITDA. This year, despite a $5 million higher headwind from FX and when we introduced this guidance.
In February of this year.
So we're effectively increasing our guidance for constant currency adjusted EBITDA growth by a percentage point or two to a range of 15% to 17%.
This guidance is based on an expectation of sustained strength in electronics and a recovery in automotive production in the second half of the year. However, given the pace of synergy realization from our recent acquisitions and strengthen our non automotive business the magnitude of the recovery in auto implicit in our guidance is lower than it was initially.
In spite of the increased level of uncertainty driven by geopolitical events. We believe most of our markets remain healthy and our teams are executing executing well against our growth strategy.
For the second quarter of 2022, we expect adjusted EBITDA to be approximately $140 million.
This expectation is based on sequentially higher level of revenue, but also slightly softer margins driven by the impact of still elevated raw materials and freight costs higher opex from travel and our annual salary increases.
And it also includes an estimate of the impact from the Lockdowns in Shanghai, and a stronger U S dollar.
These results would still represent a strong constant currency adjusted EBITDA growth of approximately 10% over the second quarter of 2021.
Our first quarter results and outlook reflect the strength of our business and our teams solid execution. We believe we are executing on our strategy for element solutions to benefit disproportionately from the powerful Mega trends propelling our end markets with targeted investments in strategic growth areas like <unk> mobile, enabling technologies power electronics for electric vehicles.
<unk> and sustainable solutions.
On the topic of sustainability I'd like to highlight that we recently published the 2021 ESG data and resources supplement to our 2020 ESG report.
It contains update several key ESG topics and announced sustainability goals, which can all be found on our ESI sustainability website.
Good to highlight the over $650 million of roughly 27% of net sales that we generated last year from sustainable products as well as improvements on a number of key energy use emissions employee health and safety and social impact metrics.
<unk> thousand 21 supplement we've also provided updates to our <unk> SaaS.
SaaS be disclosures as well as an initial TC ft index related to climate change our investors are increasingly focused on topics and we believe we have enhanced our disclosure.
To help highlight the compelling story, we have to tell about how ESG is a value driver for our business.
To wrap up I'd like to thank all of our stakeholders for their continued support of element solutions and in particular, our talented and dedicated people around the world responsible for another very strong quarter.
With that operator, please open the lines for questions.
At this time, if he would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key.
Once again that is star one if you would like to ask a question and we will take our first question from Josh Josh Spector with UBS. Your line is open.
Yeah, Hey, guys. Thanks for taking my questions and congrats on a strong quarter here.
Okay.
Just had a question on the sales side of it and if I heard you right that it sounds like you expect sales up sequentially and I guess, if I go back to last quarter, you guys were pretty clear and highlighting some of the more normal seasonality and you guys outperform that in electronics or first quarter.
I guess, how does your comments on <unk> impact the rest of the year and just curious on an organic perspective.
Think revenues are up sequentially or do they step down so is it metals or organic.
Yeah, absolutely. So we thanks for the question, we expect organic revenue growth in the second quarter.
There will be a metals impact in the second quarter that will drive the top line.
Particularly if you will but we will see organic growth. In addition to that both from pricing actions. We've taken there are some metals pass throughs that arent captured youre not exactly pass throughs, but theres metal price impact that aren't captured in our metals adjustment and from volume electronics business is very healthy the C&I the construct.
The industrial business in our industrial solutions vertical remains healthy.
And so we do expect growth in the second quarter with regard to the back half Theres nothing that suggests that that typical seasonality, where the electronics business is bigger in the second half than the first half will change and so that's obviously implicit in our guidance, where we have higher EBITDA.
In Q3, and Q4 than we've seen in Q1, and we expect in Q2.
Okay. Thanks, that's helpful and I guess, just kind of related to that I guess, if we assume sales are higher I guess, if I look at the incremental margins in <unk> and <unk>, excluding metals from both of them. They are both well below what would be your typical normal incremental from that perspective, and I guess even sequentially.
It was a big improvement from first quarter to fourth quarter.
But theres less improvement second quarter from first quarter. So what incrementally leads that not improving significantly without pricing and do you expect that to improve significantly in the second half.
No.
A portion of the organic growth, we're generating is from price, but that price is tied to inflation in raw materials and so if your raw material price goes up 10 in your your sales price goes up 10, youre not getting a substantial margin.
Associated with that price increase and so that's one of the factors that we're battling with right now.
Carey is there anything more you want to add.
No I think thats exactly right I think that we've caught up a lot of our pricing actions, we're seeing a relatively stable.
Place in every environment.
March and we're assuming that in the second quarter for the time being so I think you hit it well.
Okay.
Okay. Thank you.
We will take our next question from Chris <unk> with loop capital markets. Your line is now open.
Hi, good morning.
As to your entire team on the continued execution, especially given the many challenges.
So my question.
Focused on the electronics business in circuitry in particular.
So despite the broad strength, you mentioned some pockets of weakness in certain Asian markets.
Just curious if there's any any more visibility or granularity around the nature of that of that weakness was it skewed towards certain end markets or is it a function of you know.
Covid lockdowns or supply chain disruptions any more clarity there would be helpful. Thanks, I had a follow up.
Yes, you you you hit it there are certain countries, whose flagship products haven't launched the way they would have been expected to or are on the same schedule as they have in the past and so that's been a headwind to sales out of that country that come at a high margin.
And then in China, just driven by Lockdowns and we've seen some weakness.
In the year to date period.
Offset by strength in other pockets of the business as you've seen we grew nicely organically, but mix was a headwind to margin in the circuitry business, because we've got higher margin products and certain Asian countries, where.
Organic demand wasn't wasn't what we expected it to be overall, however, we expect recovery in some of those north Asian markets.
And we see general robust strength through the year and our circuitry business.
Okay.
So the follow up question was.
It relates to something another public company said about weakness, which was skewed towards.
Flexible printed circuit board markets and then some follow up with that company sounded like they were suggesting that.
The rigid printed circuit board markets, where.
Sure.
More stable or continued strength there just wondering if.
I think it may create.
Created a little bit of confusion I'm, just wondering if you could elaborate on what youre seeing what your exposures are to flexible versus rigid and what youre seeing in terms of the different <unk>.
Cross currents in business cadence related to those.
Orange sub sectors. If you will thank you.
Yeah, absolutely so.
The flex circuit market, a good market for us, it's a high value market and got a good market share in that market. Some of our direct metallization technologies are.
Very valued in that market and so we've seen a good performance from that over the past several years with with regard to the first quarter I don't have that data at the tip of my fingers with regard to the rigid circuit board market, there's a whole wide set of categories within rigid.
Youll layer multilayer HDI IC substrates those are all rigid boards, we participate in the high value portion of rigid boards, so thats HDI and into IC substrates, which have been very good markets for us.
Both in in the Americas and also in Asia.
And we see nice growth.
At the high end over the past couple of quarters Q1, being a little softer.
Then then 2021 with reason to believe we'll see.
A recovery in some strength there in the balance of the year.
Helpful. Thanks for the color.
We will take our next question from Steve Byrne with Bank of America.
Hi, This is a rock Hoffman for Steve Byrne.
First question is in the spirit of assessing how cyclical or the end markets you sell into what would you estimate the current operating rates are within each of the key end markets I assume this varies by region.
So the operating rates is that in terms of utilization at our customer level, we've got six verticals.
And.
They are very different dynamics on a region by region basis.
I would say that in our electronics business.
This is <unk>.
There is a high level of utilization at our customer sites and they are adding capacity right in the semiconductor market youre seeing huge investment in fabs in the circuitry market Youre seeing many many new lines being added.
Assembly business we've seen.
Sequential growth quarter over quarter over quarter for over a year at this point.
Two years in our industrial business, it's more of a mixed bag, where our construction and in general industrial customers are operating at very high levels and our auto customers are operating at very low levels.
The the auto market, obviously globally has been constrained by supply chains.
For the better part of the year at this point our graphics customers are operating it at relatively low levels.
Given CPG.
Package design evolution, and our offshore customers are starting to bring capacity back online. So it's a mixed bag based on macro factors.
But overall, there's a lot of strength and there's reason to believe that strength will persist because of significant investments in new plants.
In many of our businesses and I'm happy to go through this in much more detail with you offline.
Great. Thank you and kind of leading to my next question have you guys are one of the meaningful contracts associated with new capacity additions being built by your customers and how much volume growth could just provide in the coming years.
What it means in terms of euro.
Market share comparable to your legacy sure.
Yes, absolutely.
Yeah. So if you look back at the Investor Day, We did in February we showed.
A slide on commercial excellence and the pipeline that we've built and the conversion of the new wins that we've had and we are going from strength to strength and so we actually had more new customer wins in the first quarter than ever to date, and we had more new wins in 2021 than in any year prior to that so we are executing.
Very well commercially to win more business.
Each of the wins the average wind sizes bigger so we're winning more bigger business.
And we've got a lot of optimism that this isn't transient this is driven by the strategy we've deployed.
To grow.
Yes.
Great. Thank you.
We'll take our next question from John <unk> with <unk>.
C. J S Securities Your line is open.
Hi, Good morning, it's Pete Lucas for Jon.
You guys covered a lot just one question for me if you could expand a little on capital allocation priorities in the M&A landscape are acquisitions more likely as valuation shrink or do you see your shares as a better buy right now.
So maybe I'll start and turn it to Martin.
We've been very opportunistic with regard to capital allocation, we made a small acquisition in the first quarter that was highly strategic and a great value and we bought back a bunch of stock nothing large imminent right now we've been continuing to buy stock in the market shares have been weak.
And that does at the moment look like the best use of capital.
But we will retain flexibility don't know Martin if you want to add anything.
No I completely agree with that there is a dislocation on valuation at the moment, which.
We will continue to take advantage of while keeping our leverage ratio.
Great that's it for me thanks.
Thank you.
We will take our next question from Angel Castillo with Morgan Stanley . Your line is open.
Alright, Thanks for taking my question and congrats on the strong quarter. Just was hoping you could give us a little bit more color on the organic growth by the sub segments.
Think about volume versus I think you noted some of the price that's maybe not directly passed through.
So if you could just kind of disaggregate that and give a sense for how that's been trending and that'd be helpful.
Yes, absolutely.
Obviously, we have six sub segments in slightly different story in each.
The organic growth you saw in the assembly business as it is mostly volume driven because there is the pass through metal impact. If you look at the circuitry business, maybe half of that is price and half of that is volume.
Semiconductor business is mostly volume driven.
And then I think that it's a good rule of thumb for the circuitry and industrial businesses to say it's about half.
Price and about half volume.
Maybe a little bit more price in industrial than volumes, given the weakness in auto year over year.
Sure.
Got it and then.
I actually wanted to ask about that as well in terms of industrial. So you noted that maybe the second half and badge, a little bit less autos and more some of this other.
Strength that you're seeing whether it's in construction and industrial or synergies and acquisitions could you give us a little bit more color or maybe quantify some of that and what gives you comfort as we look at a macro that could be potentially getting worse kind of in the second half.
As you look at our construction and industrial markets. What gives you comfort that that maybe it continues to be.
As that strong going forward.
Yes so.
As you heard in the prepared remarks, our assumption for auto in the back half is far less ambitious than it was when we gave our initial guidance.
And even then that auto assumption wasn't particularly ambitious relative to research forecasts, the comps get easier and easier and the industrial business as we get into the second half and so the.
There's not a lot of her Alex I would say implied to deliver on our numbers.
In the in the IC space and that C&I.
Portion of our <unk> business has been really healthy for an extended period of time, and we're seeing pretty good demand from a housing market perspective.
The only other comment I'd make is as you.
You know this is a variable operating cost business and if we see those pockets of weakness in the top line doesn't show up the cost will fall out and we'll be able to deliver and so that's that's how we're thinking about that and that's what gives us the confidence to.
Increase the low end of our range for the year.
And I guess, just a clarifying that one in the synergies and the acquisition maybe how much that is.
Oh the pickup.
Yes.
We're seeing better.
We talked about 10, or so million of synergies in the year and we're trending we're trending better than that right now.
Okay.
Very helpful. Thank you.
We will take our next question from Karen <unk> with Mizuho. Your line is open.
Good morning.
I guess just in terms of the logistics kind of raw headwinds et cetera can you just parse out where I guess you stand now going into the second quarter versus where your expectations were in the fourth quarter like what has changed and how much more pronounced that impact and I guess you know <unk>.
Talked about some of the initiatives that you've been taking in terms of pricing and surcharges to offset that so sort of how you see that kind of trending in margins progressing throughout the year. Thank you.
Yes, thanks for the question.
So logistics were up.
Three or so million dollars sequentially.
$8 million year over year.
I would say.
That is a material headwind.
That were climbing up against.
We pass through tin prices have surged.
For things like nickel, and palladium, which are much smaller than maintain but theyre not negligible or between nickel and palladium, we spend maybe 100 $120 million last year and those prices are up pretty significantly. So we will see that that was the nature of the comment I made which is with metal prices, where they are you're going to have in a particularly lower.
<unk> percentage, but we're protecting margin dollars through pass throughs.
And we continue to take price.
And we can we have plans to drive more efficiency through the supply chain to drive margins higher if things don't happen overnight, but we're very focused on retaining profit dollars and getting the margin back to where it's been.
But that will take some time given that the pace of the inflation we've been experiencing.
Great and then maybe just a quick follow up in terms of industrials and specialty business, but specifically in the industrial side I mean, it seems that the mix of that business is really outperforming the underlying growth of the kind of end markets and has been doing so for a period of time as it recovers how do you think about that kind of <unk>.
Incremental delta above the underlying end market trending.
Yes, good question.
The business has been doing very very well and its been doing.
Especially relative to its end markets and it's been doing well because.
Of commercial execution and strategic execution.
The businesses, we brought together under our industrial solutions.
Vertical.
Have integrated well and have been driving really good commercial success.
As the auto market recovers, we should see a nice recovery on the top line and we should see really good operating leverage on that as well because the auto business is higher margin than the balance of the business and so.
We commit to outperforming our end markets by a point or two we've done much better than that in the <unk> space and the profit leverage that we should get should outperform by even more when auto markets do recover.
Thank you.
Yes.
We will take our next question from David Silver with C. L. King Your line is open.
Yes, good morning.
I was hoping to follow up I think on the segment or the product client comments on slide four and then particular under the semiconductor product line you mentioned.
Customer win in advanced packaging for.
<unk> telecom infrastructure.
And I was wondering if you could maybe just talk about.
The value proposition that debt.
Element solutions presented that led to the win in other words advanced packaging five G. I mean to me that qualifies as kind of a high high competitive ground or.
Very very strategic.
Target for your competitors as well as yourselves, so maybe just a comment or two on your.
Your value proposition and then if you could characterize it in terms of <unk>.
<unk> or duration that the particular win refers to that would be helpful. Thank you.
Yeah. Thanks for the question. This is a really exciting piece of business we won.
With a very large semiconductor customer.
Yeah.
To start with.
We've been investing in our semiconductor capabilities done a lot of work around where we can compete.
From an R&D perspective, developing new good technology. This is a big win at a leading edge at the leading edge and we won because we were technically capable.
Good enough.
The high quality manufacturing and the product we brought to bear was technically equivalent or better and had environmentally friendly attributes.
And this is going to go into.
At least one if not many new fabs for leading edge semiconductor manufacturing and the revenue opportunity is tens of millions of dollars.
Over the next several years.
Once your process of record and these things is very rare that that that the business goes away. So it's a very very compelling opportunity.
Okay, so tens of millions per year, okay. Thanks very much.
Ramping over several years.
Got it got a target of tens of millions okay.
I was just wondering also if you could speak to.
Yeah.
And what would it be the state of doing business in China here right now so whether it's the lockdowns or.
Other supply chain or other issues.
You could just comment on how that portion of your business.
<unk> has operated let's say over the past couple of months.
What assumptions you're making.
For the balance of the year in other words full steam ahead or mostly similar or.
Moving to adapt to different different operating conditions there. Thank you.
Sure. So the circumstances on the ground in China are very difficult.
And.
But you know we manufacture locally for local cost.
And.
So we have a site in the Shanghai area that is under Lockdown and we've got about 20 people who are living at that site right now to support our customers.
This is a workforce that is unbelievably committed.
To delivering for the company and for our customers and we're very very grateful for that and so we are able to deliver and recognize sales.
Right now in Shanghai, Despite those lockdowns.
Our outlook from the Chinese market.
Is down a bit for the balance of the year.
And that is driven by the Lockdowns that we've been experiencing if the lockdowns.
Proliferate significantly or extend significantly there's a bit of risk associated with that.
Not in the plan three more months of Lockdowns is not in the plan, but we're hopeful that this resolves not just for our business, but for the people there who are clearly having a very difficult time.
Yeah.
Okay. Thank you if I could just sneak in one one more.
I had a couple of points in your comments, Ben you've talked about kind of a new surcharge.
Program or strategy.
So under the broader category of.
How customers how your customers key customers are reacting to.
Continued a continued series of.
Cost or price increases.
Yes, I'm just wondering if how you would characterize how you've gone about implementing these more enhanced or more sophisticated surcharge programs.
And I also just in general are you know.
Seeing any pushback at all from customers as well.
Maybe the initial wave of your price actions are followed by another wave in.
Indications there might be more just kind of customer customer reaction, how you manage that relationship while still.
During your margins thanks.
We've always said in this business that we can take price when our price goes up.
Our customers are understanding of that.
And clearly it's very obvious that the prices of nickel in palladium and these metals are much much higher and we had surcharge mechanisms in the past that took into account commodity price volatility.
What we've done.
Improve them is changed the window, where we're calculating the applicable priced for that commodity. So historically, maybe it was you know prior month average price.
Obviously prior month average price isn't effective to recapture profit dollars and to take into consideration a very dynamic commodity price environment. So we've shortened that window.
In many cases as an example, and I think customers are customers our understanding of that.
This is a unique set of circumstances.
In terms of inflation around the world. There are some geographies that handle price increases better than others, we're being very thoughtful about how we go about recapturing value where price such that our sales prices reflective of the value that we're providing our customers.
And we will continue to do so.
That's great. Thank you very much.
Okay.
And we will take our next question from Chris Shaw with Montes, Chris Heart and co. Your line is open.
Good morning, everyone. How are you doing.
Good morning, Chris.
So maybe following up on that last question that you know with.
Clearly you have metals pass throughs and it sounds like surcharges, which are slightly different.
There's a lot of other.
Product price increases that you would probably have to put through for other input.
Input inflation, but if we get to the point, where you know if ever that you know these inputs are.
Do you play it and go back down.
A sense of how much of.
Those price increases might be able to be maintained over time I assume obviously pass throughs no. The surcharges probably come off but is there still a big bucket that you know, it's just you know potentially capped or are those things also vary.
Specific to certain raw material that your customer can see though that those have deflated in Alaska that that pricing back.
Any sense of that.
So we're operating in a in a unique paradigm, where you've seen this level of inflation in this shorter period of time.
As you heard a lot of them. The commodities are now operating on surcharges and so those surcharges will go away and.
If metal prices go down historically, when we've taken price due to moderate inflation, we've been able to retain that price.
But.
Again, it's a new paradigm, we'll see how.
Pricing or.
Input pricing evolves, you know in the near to medium term and that will determine our ability to hold it.
In the past, we have been able to hold non formulaic.
Okay.
Got it all right. That's all I had thank you.
Great.
Thanks.
We have no further questions on the line at this time I will turn the program back over to bank with itch for any additional or closing remarks.
Thank you Britney and thanks to everybody again for joining we look forward to seeing many of you in the data links to come thanks very much.
Okay.
This does conclude today's program. Thank you for your participation you may disconnect at anytime and have a wonderful day.
[music].
Yeah.
[music].
Yeah.
Okay.
[music].
Uh huh.
[music].
Yeah.
[music].
Uh huh.
[music].
Yeah.
[music].
Uh huh.
[music].
Okay.
[music].
Hum.
Okay.
[music].
Okay.