Q4 2022 Element Solutions Inc Earnings Call
Good morning ladies and gentlemen and welcome to the element solutions forth quarter and full year 2022 financial results conference call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. If you would like to ask a question during this time simply press the star key followed by the number one on your telephone keypad.
If you would like to withdraw your question, you must press star one once again. Thank you, and I will now turn the call over to a Varun Gokarn, Senior Director of Strategy and Finance. Please go ahead. Good morning, and thank you for participating in our fourth quarter in full year 2022 earnings conference call.
Joining me are our CEO Ben Glicklitch, our CFO-Carry Dorman, and our executive chairmen Sir Martin Franklin.
In accordance with regulation FD, we are webcasting this conference call. A replay will be made available in the investor section of the company's website shortly after a completion of the call.
During today's call, we will make certain forward-looking statements that reflect our current views about the company's future performance and financial results. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties. Please refer to our earnings release, supplemental slides, and most recent SEC filings.
for a discussion of material risk factors that could cause actual results to differ from our expectations. These materials can be found on the company's website in the Investor 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 our executive Chairman Martin Franklin. Thank.
Thank you for Rune and good morning, everyone.
We've now completed our fourth year as element solutions the businesses evolved exactly as we had hoped the strategy of driving organic growth along with accretive bolt on acquisitions as led to another year of record sales and earnings per share what are the face of a challenging macro environment.
The management organization has evolved into a growth oriented team that has created a working cadence and culture that is better than ever before.
Macro headwinds, but the business is outperforming its end markets and growing share.
There was a general consensus that at some point the demand cycle pick up steam and element solutions is perfectly positioned to benefit from growth in its core and adjacent markets.
I've always believed in focusing on markets that have long term secular growth.
Sensible moats and strong margins.
Element solutions personifies these criteria and continues to be at the cutting edge of customer development programs that create demand for many years to come.
With best in class free cash flow characteristics.
The balance sheet that continues to delever, all while returning significant cash to shareholders. There was much to be excited about the company's future.
None of this would be achievable were it not for the entire employee base of the company.
To recognize and say thank you for that.
True dedication and <unk>.
Excellence of the people, we are fortunate enough to employ at element solutions.
With that I'll hand over to Beth.
Thank you Martin and good morning, everyone. Thank you for joining element solutions delivered record revenue adjusted EBITDA and adjusted earnings per share in 2022 despite.
Despite a challenging backdrop, we grew earnings.
Our commitment from day, one has been to drive above market profitable growth and we did that once again.
The automotive sector continued to suffer from a disjointed global supply chain and consumer electronics markets suffered from Asian, economic malaise, and an overstock following COVID-19 related order patterns.
Nonetheless, we grew organic net sales by 5% for the full year in both of our operating segments.
In the face of raw material inflation and elevated logistics costs adjusted EBITDA grew in absolute terms and 8% in constant currency.
We grew adjusted EPS to $1 41, or 2% despite the nearly 8% FX headwind from the strong U S dollar.
One of the hallmarks of our business has been steady cash flow across a variety of operating environments and this year, we generated free cash flow of $253 million.
Our formula for value creation is a combination of operational excellence to drive above market profitable growth and a prudent capital plans.
In 2022, most of our cash flow returned to shareholders in dividends and share repurchases, but we also continue to improve the returns on our prior year M&A we.
Over delivered our original synergy targets for the acquisitions of <unk> in.
Generating more than $10 million of incremental savings in 2022.
The position, we built as a global leader in industrial metal, finishing with enhanced scale and technical capabilities should continue to deliver for both our customers and our shareholders.
The first half and second half of 2022 were very different electron.
The electronics momentum from 2021 continues for the first six months of the year, but quickly and sharply ran out of steam in the second half of.
This was partially offset by a recovery in automotive.
Overall volumes and demand softened while inflation persistence.
We believe this is a dynamic cannot.
Either demand will come back or inflation subsides.
In fact, there are reasons to believe both may happen simultaneously.
Either path alone would translate to better outcomes that we saw in the second half of 2002.
Electronics markets are expected to reflect in our industrial business has started the year strong outside of China.
This underpins our full year guidance, which we will cover shortly.
First Karen will take you through the financials in more detail Gary.
Thanks, Pat on Slide four you can see a summary of our fourth quarter results net.
Net sales grew 3% organically, primarily driven by pricing actions and new business wins that offset a softer volume environment in most of our verticals.
Demand across the electronics ecosystem deteriorated further from Q3 Q4.
We believe we meaningfully outperformed our end markets with flat organic sales.
Global smartphone shipments declined by over 18% in Q4 2002.
With even the larger western Oems seeing mid teen year on year reduction.
Against that market backdrop, our circuitry and semiconductor vertical saw organic sales declined 12% in the quarter.
Was offset by 11% organic growth in our assembly business, while we continue to benefit from strong power electronics demand and resilience in Circuit Board Assembly products that primarily serve industrial and automotive customers.
In constant currency adjusted EBITDA for the electronics segment declined 11% year over year with margins roughly flat.
In our IMS segment, we continued to benefit from our proactive pricing actions in industrial solutions.
Modest growth with automotive customers are channel inventories began to normalize.
Our industrial vertical grew 7% organically in the quarter broadly in line with estimates of the fourth quarter automotive unit production growth.
Energy grew 31% organically on a back of an increase in offshore drilling and graphics grew 1% organically.
Cross the business, we experienced the moderation material and logistics cost inflation that should continue into 2023.
Constant currency adjusted EBITDA in the IMS segment grew 16% with roughly 100 basis point improvement in margin versus the first quarter of 2020.
Adjusted EBITDA in Q4 declined 2% in constant currency terms, a function of negative mix from higher margin high end electronics and non metal cost inflation across the business.
This weighed on gross margin, but was offset by Opex discipline.
Once again, we demonstrated our ability to preserve overall profitability in a challenging demand environment.
Our reported results reflect a $14 million headwind from the translation impact of a stronger U S. Dollar.
On slide five we summarize our full year financial results.
We grew the top line, 5% organically a significant portion of that organic growth was driven by both surcharge bait and negotiated price increases instituted in the first half of the year.
On a constant currency basis, adjusted EBITDA grew 8% year on year.
Reported results reflect FX fluctuation, which drove a roughly $40 million year over year headwind.
Constant currency adjusted EBITDA margins declined 110 basis points.
Raw material and logistics inflation as well as mixed headwinds within our high end electronic portfolio.
Excluding the impact of $428 million of pass through metal sales and our assembly solutions that.
Our adjusted EBITDA margins of 25% for the year.
Adjusted EPS grew 2% on a reported basis, despite the negative 8% impact from FX.
Next on slide six we share additional detail on full year organic results for each of our businesses.
Organic growth for electronics was 5% year over year in 2022.
As Ben said with a story of two halves.
Our circuitry and semiconductor vertical saw double digit growth in the first half of 2002 driven.
Driven by strength in semiconductor plating memory demand for data centers and raw material surcharge pricing actions.
These same trends reversed in the second half.
Smartphone unit volumes declined datasets.
Data center investments slowed leaving.
Leaving overbuilt downstream Meredith channel.
Precious metal prices stabilized quarter.
This all translated to 4% annual organic net sales growth for our circuitry solutions.
This figure includes a 12% organic decline in the fourth quarter as high end electronics market softened due to COVID-19 related impacts in Asia and memory desk Destocking.
Semiconductor solutions grew 3% organically for the full year with a similar 12% decline in Q4.
Our assembly solutions business, which has more significant exposure to industrial and automotive end market. Some more positive trends with acceleration through the course of the year.
This business grew 7% organically for the full year and 11% in the fourth quarter.
Demand for our power electronics technologies remained strong throughout the year driven by expanding electric vehicle production, while demand for Circuit Board Assembly products and our non consumer electronics applications also remained strong into year end <unk>.
Organic net sales in the industrial and specialty segment also increased 5% year over year.
Industrial solutions, which constitutes almost 80% of segment revenue grew 5% organically driven by pricing actions and surcharges.
Sales into auto, which is roughly 40% of the business.
Grew mid single digits for the year grew double digits in the fourth quarter.
While supply chain for many Oems appear to be stabilizing we are still planning for more muted growth in automotive in the first quarter of 2023.
Geopolitical uncertainty in Europe drove sequential softening in European construction and industrial end markets that have been resilient in the first half of the year.
Graphic solutions sales were flat organically in 2022.
<unk>, new business that contributed to sales growth and the impact of additional pricing action slowdown in new packaging lines in Europe , and North America drove a decline in industry volumes.
We are making progress on multiple initiatives designed to accelerate sales and improve margin in that business in 2023.
Energy solutions topline grew 12% organically with an acceleration in the fourth quarter.
We have momentum in the drilling side of the business, which should lead over time to increase production related revenues as well.
We expect this high margin business to continue its growth in 2023.
Moving to slide seven we generated $253 million of free cash flow in the year of which $87 million was in Q4.
The quarterly cadence reflects the release of approximately $70 million of working capital in the second half.
This was driven by a sequential sales decline.
Modest raw material deflation and a reduction in thank you.
Our other uses of cash in the fourth quarter, including cash taxes, Capex and interest all came in better than our expectation.
We expect Capex in 2022 of approximately $60 million predicated on several key investment projects in power electronics, R&D lab expansion and additional manufacturing capacity for <unk>.
Several of these projects have been delayed due to key equipment availability, which drove lower capex deployment in our original forecast.
This then will rollover into 2023.
We also invested capital behind integration efforts and customer equipment to enhance long term relationships primarily in circuitry on industrial.
These are high returning investments that are supporting near term profitable growth.
In 2023, we expect cash interest of approximately $50 million in cash taxes about roughly $80 million.
Can you to model at 20% adjusted tax rate for EPS purposes. This year.
We returned over $230 million to shareholders. This year, including over 150 opportunistic share repurchases are roughly 8 million shares at an average price of $18 76.
Net leverage at year end was roughly flat year over year at $3. One times. Despite this capital return and modest strategic investments.
All of our floating rate debt remains swap the debt euro obligation through early 2024, our balance sheet and liquidity position are strong and with that I will turn the call back to Ben.
Our financial guidance for 2023.
Gary the outlook for our end markets entering this year as cloud not unlike the overall macroeconomic outlook.
Certain risks have receded others are emerging.
The warmer winter in Europe mitigated the potential worst case energy inflation impact to industrial activity, while certain metal input prices have begun to rise again.
The medium term impact of China reopening is hard to predict and its influence on industrial and consumer demand and second derivative effect on raw material pricing and logistics costs will be important drivers of 2023 results.
In this context, we're guiding to roughly flat adjusted EBITDA in 2023 on a constant currency basis.
At today's rates that implies a range of 510 $530 million.
We expect adjusted EPS between $1, 40, and $1 43, and free cash flow of approximately $275 million.
The first half of 2023 will be a challenge as we enter the year at an electronics downturn compared to the momentum carried from 2021 to the first half of 2022.
Typically electronics activity in the first half is determined by the prior six months and we see no exception in 2023.
Customers have reduced production significantly and utilization level that circuit board and semiconductor fab have declined.
Reflecting the current softness in high end electronics and uncertainty around China reopening impacts to industrial activity. We expect Q1 2023, adjusted EBITDA to increase only modestly versus Q4 2022.
While adjusted EBITDA in the second half is typically higher in the first half. This year, we expect that dynamic will be more exaggerated.
We have reasons for optimism in 2023, as we look towards the second half, particularly in our electronics business.
We anticipate the impact of inventory Destocking in electronics end markets will ease by midyear.
Industry expectations are for demand to inflect positive in the second half.
Given the third party estimates expect flattish smartphone sales for the year. The first half will almost certainly show year over year decline, implying a return to growth in the second half.
We are already seeing relative resilience in automotive electronics, and telecom infrastructure and expect there will be pockets of relative strength for the broader electronics manufacturing supply chain.
These are applications, where we have strong presence.
As we've noted in the past secular growth is not linear and we have conviction that the current volatility will not impact the long term positive trends driving our electronics business.
The growth opportunities, we see in power electronics, <unk> enabled devices and networks electric and autonomous vehicles high performance computing and sustainable chemistry remain substantial over time.
In the industrial and specialty segment weak industrial activity in China will weigh on first quarter results. However, overall, we expect the supply constraints that have hampered global automotive production will ease through the year.
Our European construction and industrial customers are outperforming their forecast coming off of a warmer winter.
Anecdotally when we surveyed our largest European surface treatment customers in the fall nearly half expected to go to short work over the winter due to cost inflation and gas action.
None.
Together with the momentum we have in our offshore business. The IMS segment has some wind in our sales and during 2023 while.
While the consumable nature of our products and our highly variable cost structure helped insulate our business from macro volatility we are not immune.
We have a prudent operating plan that accounts for the heightened level of macroeconomic uncertainty this year without sacrificing long term profitable growth.
We're proud of our efforts to protect profit and positioning the business to capitalize on the inevitable end market recovery.
And there are significant opportunities for us in this operating.
Our scale liquidity and strategic horizon should allow us stability to weather and capitalize on these markets. Our customers are actively engaged with our new technology platforms, and our commercial and technical teams are focused on high impact growth opportunities.
This is a reflection of the longer term momentum in our markets and the persistent iterative innovation, we provide to our customers products.
Let me conclude with my gratitude to all of our stakeholders for their continued support of element solutions and in particular, my deep appreciation to our talented and dedicated people around the world responsible for another year of growth.
Our success in the future will be a product of their tenacity and commitment and I am grateful for it.
Operator, please open the line for questions.
Okay.
Thank you.
And as a reminder, if you would like to ask a question Press Star then the number one on your telephone keypad. We ask that you. Please limit yourself to one question and one follow up question, we will pause for just a moment to compile the Q&A roster.
And we will take our first question from Josh Spector with UBS. Your line is open.
Yeah, Hey, good morning, Thanks for taking my question.
Just first a couple on the EBITDA guide. So first wondering if you could walk through your expectations on the cadence through the year, I guess, particularly <unk> to Q does that step up much what drives that and then second assuming most of the unknown and your range is in the second half what are the main drivers there we should be thinking about a wash.
And in terms of high versus low end.
Sure thing Josh Thanks for the question.
So our expectations for the year are for it to look like the reverse of 2022 right. So in 2022, we had a strong first half and a weaker second half and we'll have the reverse in 2023.
Sure.
The first half of 'twenty three will look like the second half of 2022, so expect around 240 or so million dollars of EBITDA in the first half, which does have a step up from <unk> to <unk>, we won't have the Chinese new year.
Impact and <unk>, which accounts for some of that and then as you think about.
The range for the full year, the bigger variable in the second half, obviously and that that guidance range is predicated clearly on an electronics market recovery in the second half and the strength of that recovery. The slope of that recovery is the largest variable our results will fall within that.
Right. So the low end of the range implies call it 10% to 11% EBITDA increase in two in the second half versus the first half.
And the high end implies about a 20% increase in the second half versus the first half.
There is reason to believe.
That we'll see that ramp there is typical seasonality in the business. But then there are other indicators that suggest that give us confidence.
In electronics recovery in the second half rate smartphone units are forecast to be roughly flat this year.
And there'll be down significantly in the first half, which implies a real ramp in the second half.
If the recovery comes later in the second half it bodes very well for momentum into 2024 and to the extent that we don't see that recovery, we have cost levers at our disposal to preserve products. So that's sort of how we think about the range.
No. Thanks, that's helpful. I was just wondering how the costs that into all of this maybe you look at logistics raws those thing I mean, how much have you absorbed and not recovered over the past year or so and I mean, you made a comment earlier potential pulp demand.
Demand returns and inflation abates.
What would that scenario look like.
Yes.
The the best scenario, right, where you see a recovery in electronics demand and we've seen moderation in input costs, we've seen our input costs stabilize in Q4, but we haven't seen them starting to come down yet.
Logistics is a $25 million headwind year over year in 2022 overall other raw material inflation takes total inflation in our cost of goods to.
About $100 million and we've taken a lot of price, where we haven't gotten all of it. So there is a margin opportunity from <unk>.
Potential deflation that would also help us get towards the higher end of our guidance range.
We have continued to be opportunistic around price.
And so there may be an opportunity associated with that as well in 2023.
Okay. Thanks Pat.
Thank you Bill we will take our next question from John Roberts with Credit Suisse. Your line is open.
Okay.
Thank you since we have Martin Franklin on the call that I thought I'd ask a question Martin how does the board think about the portfolio.
Do you need to be broader.
In the electronics some of your competitors have a lot more breadth or maybe more semiconductor exposure in do you see electronics, just continuing to get larger relative to industrial because it grows faster do you think at some point you do an adjacency and industrial to get more balance between the portfolio.
Okay.
Good morning.
Interesting question I mean, I would tell you.
I've always believed and scale.
What we've done successfully so far is bolt on acquisitions as you know.
No.
Not afraid to be acquirers, obviously semiconductors.
Parts of the market.
Better growth characteristics and come at a higher price, we picked our spots where I think we've made a very good return on the investments that we've made.
But this company generates a lot of cash we want to continue finding areas and pockets, where we can grow.
For the things that I think the public has seen there'd been a number of things.
Looked at.
Haven't seen because we're very disciplined and I think that.
Both Ben and I will.
On the same page as to where we think opportunities exist.
But we do compete.
Very ably with some of the larger players out there.
It takes time to take share, but I think the company has been very well positioned.
To move forward and frankly grow faster than the end market. So.
Yes.
Yes scales with better.
But I think.
I'm very happy with where the portfolio is today and obviously if we can.
Into Adjacencies, we will.
Thank you and then a short term question SG&A was down a lot in the fourth quarter.
Some of that would have been currency, but compensation is also a big part of how you variable is your cost structure. So was there a reversal in the fourth quarter from over accruing earlier in the year given the year ended much weaker probably than we budgeted.
Yes so.
Paper performance culture and.
This year, we had a strong year, we're proud of our results.
But we didn't deliver the level of growth, we would have expected coming into the year and so there were some compensation accrual reversals.
That impacted the second half.
Thank you.
Yes.
And we will take our next question from Karen <unk> with Mizuho. Your line is open.
Hey, good morning.
Good morning, Kevin I was just wondering if you could parse out a little bit more I think you did.
Mentioned the strength in the assembly and sending it seems to be a little incentive to go a little bit weaker kind of ending the year. When we think about the cadence I guess throughout.
2023, it seems like assembly still points to be relatively strong throughout the course of the year with the two inch recovery in circuitry and semi if there's any color you can give us there on how you're seeing that or how you expect that to progress throughout the year that would be helpful.
Yes, thanks for the questions here and yet the assembly business had a strong.
Certainly a relatively strong.
Q4 versus the circuitry and semiconductor businesses. The explanation for that is that the assembly business has a broader electronics exposure and more into call. It industrial end markets. We've got.
A big piece of that business that goes into power electronics for electric vehicles, and we've seen significant production ramps there and so that resilient should persist over the over 2023.
Again, we expect the dynamics in the second half to carryover into the first half and the assembly business should be should not be exempt from that.
Okay.
Great and then I think you just mentioned quickly and you already touched on this a little bit but cost levers to preserve profits. If we end up in a more challenging environment throughout the course of 'twenty. Three so if you can just touch a little bit more on those that would be helpful.
Yes, we didn't throw all the levers at our disposal in 2022.
So as we as we look to 2023, we've got.
A significant cost opportunity at our disposal, if we feel the need or the demand environment does not justify the level of spend that we have in our plan.
<unk> has increased some.
More significantly from 2021% to 2022.
Incentive compensation is still.
Accruals will be there and then other we'll call it discretionary spend.
That we can very quickly moderate.
Without sacrificing long term growth rate and so that's how we think about these things when we when we go after cost is not innovation spend is not.
Not.
Large groups of people.
These are the people our customers rely on and will deliver the long term growth. We expect from these businesses, but there's still a substantial opportunity in cost when.
When the demand environment isn't there.
Great. Thank you so much.
We will take our next question from Chris Capps with loop capital markets. Your line is open.
Hi, Good morning. So you mentioned a couple of times in your formal remarks about the outperformance relative to the market at least in the electronic space and I'm just curious about.
Getting a little bit more granular on the dynamics. There was it was this sort of a function of inventory management or likely more.
A function of your over the last 12 months to 18 months, you've kind of had a disproportionate number of wins and getting specced into new PCB lines. I'm wondering if that's contributing or is it over indexed relative to some end markets versus others, just a little bit more explanation there would be helpful. And then as you see.
The electronics end market and flex later this year.
Is that outperformance you expect it to persist we will become more pronounced or diminished any color on those dynamics.
Sure thing Kristen, we tried to call that out in the slide deck, where we look at our biggest end market and show our relative performance. We look at the electronics market and smartphone the biggest end market for us their smartphone units were down 11% in 2022, they were down 18% in Q4, we grew our electronics business.
Organically on the top line in 2022.
And then our higher end electronics portfolio in circuitry and semiconductor was was down in Q4, but not nearly to the extent that the smartphone market was down.
We it's hard to calculate market share intra period.
But we've clearly outperformed the units in the biggest end markets that we have exposure to in electronics and similarly in industrial we did lag automotive production in the third quarter, which we were concerned by but it was really driven by inventory in the channel clearing and we re accelerated in Q4.
And see significant big new wins contributing to our industrial portfolio in 2023.
That gives us a high level of confidence in share and then when we think about what we're doing in power electronics for example, where we are in a leading position.
We're clearly outperforming that broader electronics market because of our share there and the relative growth. There. So overall, we do see this business is outperforming its end markets and we do see significant share opportunities coming our way and we feel very good about our relative performance.
So just to follow up on that so it's really primarily a function of the success you've had in.
<unk>.
And proactively getting landing effectively new business.
And new PCB production lines or.
The last yes over the course of the last year.
So I think it's new wins and mix.
Closure to faster growing end markets and concentration in those faster growing end markets is growing our share of the overall pie.
Right.
Okay got it and then one follow up on the just to try to reconcile your your EBITDA guidance and your free cash flow.
<unk>.
Given the.
The interest expense cash taxes.
Yes.
Capex assumptions so the plug there is working capital just wondering if thats.
Or just a function of sales recovery and it looks like the euro assumption working capital source of cash in or anything else going on there we should be aware of.
Yes, so working capital is the plug in the sort of multiple ways for us to get to our free cash flow number if we come in towards the higher end of EBITDA, we're going to be investing in working capital because the business will be accelerating in the second half and if we don't see that trend working capital will be.
Smaller use of cash the business does require an investment in working capital as it grows.
But we feel comfortable that at different EBITDA outcomes, we get to a comparable cash flow number.
And just.
The relative inflation or deflation in metals, how does that play out in the working capital number thanks guys.
So it's karri.
The reality is.
Lower metal prices on App that we have today versus the average of 2022.
<unk> should all else equal.
Reduce our need for inventory dollars invested in inventory I don't think youre going to see a significant.
Impact there based on current prices of things like <unk>, which are actually not that far below the 2022 avid price, but certainly if those come down the dollars required to invest will come down but also our reported sales will come down commensurately and so as we look at this from a inventory days perspective is not really an impact.
Thank you.
And as a reminder, it is star one if you would like to ask a question and we will take our next question from John <unk> with CJS Securities. Your line is open.
Hi, Good morning, Thank you for taking my questions.
I was just wondering how confident are you in the guidance range in the second half pickup that picture.
Being out there or are your customers, specifically, telling you to get ready for better demand I noticed specific new projects and programs that are ramping within the electronics business or is it more of a.
We topped out an application where smartphone and other electronics inventories as trough to a market is just simply have to pick up to get back to the flat industry forecast.
The general consensus is for an electronics recovery in the second half of the year.
And.
Broader industry participants are indicating that it's supported by third party research around our recovery around flat smartphone unit year over year now historically, what we've seen is after a bad smartphone year you see a good one.
Which would suggest an even greater ramp in the second half and what's implied in our guidance.
But this is not an industry where there are.
Nine months lead times and so.
It is very it is plausible that that recovery doesn't occur and the way we think about our guidance is that there are multiple ways to win we have that cost lever at our disposal.
As I mentioned in the prepared remarks, we have wind in our sales in the industrial and specialty business and we've got more conviction around that because we see it and it doesn't have the same level of ramp but again, we can get to our guidance range multiple ways. That's the hallmark of this business is a variable operating cost nature the ability to preserve.
Profits when demand doesn't materialize.
Understood. Thank you and then just a question on the EPS guidance for the year is there a specific amount of shares.
Underlying that whether youre purchasing or not.
So if you take that range from EBITDA down to EPS.
Bit of capital allocation to get to.
The low end of EPS compared to low end of EBITDA.
And then on the on the high end, there's really no capital allocation assumed in some of the other levers like tax et cetera fall. The other way. So I would think about some capital allocation on the low end, but not significant.
Understood. Thank you just one more if I could as you head into Q1.
I was just wondering about the sequential expectations for mix between industrial electronics, and electronics and maybe within that kind of at the sub segments.
Youre seeing anything unusual just on a sequential basis.
Sequentially.
I'd characterize electronics as being a little softer because the lunar new year impact just means fewer production days in Asia, which is where the bulk of that electronics businesses.
And the balance of that being covered by the industrial and specialty business.
And between those two things you get to what we talked about a couple of percentage sequential EBITDA growth.
Great. Thank you.
We will take our next question from Steve Byrne with Bank of America. Your line is open.
Hi, This is Rob Hoffman on for Steve Byrne.
You guys already mentioned automotive and telecom infrastructure I was wondering if youre seeing any other green shoots in the electronics market, particularly in the high end market.
Confidence in a strong recovery and what does this guidance numerically assume for end market growth, particularly for autos and such in 2023.
Okay.
So it's hard to speak about green shoots and electronics right now at the high end.
I think that generally across the industry folks are expecting trough in Q1 Q2.
That is what is implied by our guidance and.
That is what we are seeing we are seeing a particularly weak electronics market here and now today.
Our guidance implies roughly flat units in smartphones right, we talked about that but there is a phasing to that the first half is going to be down remember in 2020 to the first half was very strong in electronics and then the second half necessarily will be much stronger than the second half of 2022, which underpin.
That inflection we're talking about in the electronics business.
With regard to automotive.
We're modeling roughly flat automotive units.
A modest pickup.
Which is roughly in line with with <unk>.
Third party estimates.
Okay.
Understood.
My second question just.
Our weaker volumes prohibiting any realization of lower raw material costs are you seeing those folks through the current results.
Former should we.
And it should margin opportunity accelerated with the volumes Switzer general outlook for 2023.
Asian or inflation more broadly.
So we don't have cigna.
Significant deflation in our guide.
As we said in the fourth quarter, we saw input prices stabilizing and so we've extrapolated that for 2023. So there is an opportunity from deflation. There is also a risk of inflation.
Pending on how the economy in China develops over the course of 2023 post the Covid reopening of course, if demand improves because of that that's an opportunity for us on the top line that.
Likely offset any potential inflation.
Okay.
Understood. Thank you.
And we will take our next question from David Silver with CL King Your line is open.
Yes.
Yes, hi, good morning, Thank you.
And then you added some color I think on electronics and on smartphones is going.
To ask you maybe if you could.
Add a little detail to your comments about.
Global automotive end market so in your prepared.
<unk> remarks or in the press release, you talked about the market slowly normalizing in your supply chain clearing but I was just wondering.
If you could maybe.
And those comments a little bit I mean is this a call.
<unk> about semiconductor availability or other <unk>.
<unk>, becoming available is it more directed towards global auto builds in general improving or is this more related to the transition or the pace of the transition to Evs where I.
I consider your company very well very well positioned to.
The benefit from that trend so just a little color about what youre seeing in the automotive end markets. Thank you.
Yeah, absolutely thanks for the question.
So the automotive automotive production lagged expectations through the first half of 2022, and then accelerated in the back half we lag that acceleration in Q3, because there was.
Inventory in the channel not in our products, but of our customers products and then we saw that normalize and we saw that inventory clear in Q4, where we outperformed units.
And as we think about 2023, we see some growth.
From.
Lapping that channel inventory.
And the share gains that we've had some of the big wins, we've had in the industrial and specialty in the industrial solutions business.
Our comments about roughly flat auto in that.
Supply chain being more constructive really relate to that and that's primarily on the industrial solutions side. However, the power electronics and the proliferation of electric vehicle impact is in the electronics side of the business and we've got a question earlier about the relative outperformance of our assembly business within electronics and Thats really been.
Driven by Evs, where.
Where we do have a very strong position.
And anticipate.
Continued profitable growth from the proliferation of electric vehicles.
And that's not just a 2023 story that doesn't the year.
Story, where we're still in the early innings.
Okay. Thank you for that I would like to ask just a question now about general trends in working capital. So second half of the year. You cited a 70 million dollar sourcing I guess or release of working capital, but if I look back in your.
Our results over the past couple of years I mean, it seems the buildup in working capital.
Has been greater than the $70 million just in general what are your expectations for working capital use or release during 2023, and how much of that factors into your $275 million free cash flow.
Estimate thank you.
Thanks, David Kerry So I'll start with the 2000 2030 point and then go back to the question over the last couple of years. So for 2023, we are assuming in the base case, a use of work the use of cash in working capital.
Again, as we said earlier, it's really the plug to sort of get to that $2 75 and there's.
Depending on the phasing of growth in the magnitude of growth, particularly in the second half of the year that number can vary pretty significantly in terms of the investment will make.
If you just do the walk from EBITDA down to the 275, roughly the same size of investment that we made in 2022.
And I would expect again that you would see.
The similar phasing that we saw that we see in most years where that.
That you would see is abating, so much of that growth where youll see.
Pickup in those dollars invested as the year ago Dawn.
If you go back to 2000 22021.
Working capital as a percent of sales.
Ticked up but has has trended back down throughout 2022, and it's really two reasons that I think we've seen that grow a little faster than sales over that period, one is inflation in.
In these input prices that we haven't fully offsetting.
In selling price as we mentioned.
And the other safety stocks that we had to build because of the supply chain disruptions.
That we've all seen so I think theres opportunity overtime I don't think 2023 is setting up to be the year, where all of that safety stock order at least but it's an opportunity over the longer term.
Very good thanks a lot.
Yes.
And as a reminder, it is star one if you would like to ask a question and we will take our next question from Angel Castillo with Morgan Stanley .
Hey, good morning, Thanks for taking my question.
I was hoping you could give us a little bit more color on just on a regional basis, what you're seeing obviously a lot of that overlaps with electronics and Oems, but maybe in particular some color on the industrial side of things what you are seeing in Europe .
In North America, and as you think about kind of the improvements in <unk>.
Industrial markets or Asia.
Youre kind of seeing in those markets as well from a regional basis.
Yes.
No.
Start with Europe , which is the best story, we were pretty cautious about Europe in the fall and early part of the winter with the risk of gas rationing and the impact of gas price inflation on our customers right. We did that survey I mentioned in the prepared remarks.
One of our largest customers in Europe and half of them expected to go to short work over the winter and none of them did and so the dynamics in Europe are much more constructive than we expected entering the year.
Though that is considered in our guidance.
In Asia, it's hard to get a good read on Asia before call. It in March because of the lunar new year impacts where theres some channel loading before the holiday and then the holiday can be a week or two weeks, but it's been a slow it's been slow partially because of the proliferation.
Because of Covid <unk> impact on our workforce and recovering from the Covid Lockdowns that we saw we don't have a great sense today for the slope of recovery from Covid in China, That's a big variable for US and then in North America things have been pretty steady.
Going back several quarters and thats been a reasonably healthy market for us on the industrial side of the business all of those comments relate to industrial.
But no big surprises I would say other than a positive surprise from Europe .
At this point in the year.
Got it that's very helpful. And then just curious on your <unk>.
Comments around Asia.
One of another electronics company talked about PCB plans potentially restarting in the next few months and also semi fabs utilization rates starting to pick up and get back to maybe more normal. After some destocking here are you hearing anything from your customers that seems to suggest a similar kind of cadence as we get maybe beyond first quarter I recognized.
Limited visibility more than a month, but just anything you're hearing me.
It kind of reinforces that I saw.
Yes, we're not hearing anything inconsistent with that is what I would say I think that overall the industry believes that the second half we'll see.
Material recovery from a slow first half and I think that we're all aligned in that regard.
Very helpful. Thank you.
And there are no further questions at this time I will turn the call back to Ben Glick, which for any additional and closing remarks.
Thank you Abby and thanks, everybody for joining we look forward to seeing you in the coming weeks have a good day.
And ladies and gentlemen, this concludes today's conference call and we thank you for your participation you may now disconnect.
Okay.
[music].
Okay.
[music].
Sure.
Sure.
Yes.
[music].
Yes.
Yes.
[music].
Okay.
Yes.
[music].
Okay.
[music].
Yes.
Yes.
Yes.
Okay.
[music].
Yes.
Thank you.
[music].