Q3 2023 Element Solutions Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the element solutions Q3, 2023 financial results Conference call. At this time 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'd like to ask a question during that time.
Simply press Star one on your telephone keypad.
If you want to withdraw your question Press Star one again.
As a reminder, today's call is being recorded.
I'll now turn the call over to Bill round Gokarn Senior director of strategy and Finance. Please go ahead.
Okay.
Good morning, and thank you for participating in our third quarter 2023 earnings Conference call. Joining me are our executive Chairman Martin Franklin CEO, Ben quick Glitch and CFO Carey Dorman.
In accordance with regulation FD, we are webcasting. This conference call a replay will be made available in the investors section of the company's website. Shortly after 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 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.
Now my pleasure to introduce element solutions CEO Ben Good College.
Thank you Irwin and good morning, everybody. Thank you for joining.
Element solutions had a solid quarter as our electronics end markets began to recover from their second quarter trough and easing raw material prices drove favorable margins.
We continued to deliver against important strategic initiatives and generated strong free cash flow.
The overall macro environment remains a challenge declining economic activity in central Europe, a slow post COVID-19 recovery in China, and the ongoing UAW strike or headwinds compounded by the once again the strengthening dollar.
On the other hand, the green shoots in the electronics market are growing taller and we have reason for optimism as we prepare for 2024.
Another source of that optimism is margins.
Gross margins improved nearly 500 basis points year over year on a constant currency basis, despite lower volumes as we benefit from declining raw material inputs and logistics costs and continued synergy actions.
These cost trends are encouraging setting us up nicely as demand rebounds.
On our last call, we talked about uncertainty around Q3 versus Q4 timing given the ongoing recovery in electronics market and what that might mean for phasing of earnings.
The third quarter proved to be better than planned and we now expect to see a more normal seasonal pattern in the fourth quarter.
This means a sequential slowdown in electronics, but we do not view this as end market softness just ordinary course the seasonality.
Demand in our industrial portfolio is impacted by the macroeconomic factors mentioned earlier, but improvement in both cost of goods and opex are offsetting that impact.
In the third quarter, we recorded an impairment charge in our graphics solutions business.
We've had a few years of challenging markets driven by CPG packaging trends, SKU rationalization and stubborn raw material inflation.
We do not believe our demand experienced in this business diverges from the competition and we have several work streams underway to improve its profitability in the years to come.
This impairment is the primary driver of the difference between reported and adjusted EPS This quarter.
We're very pleased with our progress on the transactions, we announced in June to enhance and grow our high end electronics portfolio.
The via form distribution rights, we reacquired are already driving deeper commercial engagement and unlocking new sizeable pipeline opportunities with the largest semiconductor manufacturers in the world.
On track to complete the integration of customer service quality support and inventory management for via form later this quarter.
We believe this front end of line offering is well positioned for growth beyond our initial expectations and have traction on both leading and legacy notes.
These products complement our back end of line advanced packaging solutions that enable the increasing complexity and ship lift design, which should drive the next leg of computing performance improvement for data Center, AI Iot devices and industrial automation.
We're confident in our semiconductor business is poised to deliver significantly above market growth, even as the market rebounds in 2024.
The customer response to the nano copper technology, we acquired with Cooper has been outstanding.
Many large electronic component and semiconductor manufacturers are eagerly working with us on applications development.
The team is busy driving commercialization of the technology and progress on product qualification.
We're ahead of our expectations from the onset of this transaction and the business may begin to contribute to profits as early as the second half of 2024 and should drive growth in 2025.
Taken together, our electronics businesses will bring an increasingly differentiated set of solutions to market in 2024, with a powerful and unique breadth of enabling technologies for our global semiconductor industry that is rebounding from a deep cyclical trough is experiencing robust support and investment.
And has been reinvigorated by the promise of generative artificial intelligence.
Looking through any near term noise. The next few years promise profound opportunities for element solutions.
Gary will now take you through third quarter business results in more detail Gary.
Thanks, Dan Good morning, everyone on.
On slide four you can see a summary of our third quarter financial results.
Net sales declined 3% on an organic basis, primarily reflecting continued year over year electronic softness throughout Asia, where most of the business resides.
Reduced commodity costs and stable pricing drove significant gross margin improvement leading to constant currency adjusted EBITDA growth of 2%.
Excluding the impact of a sizable bonus accrual reduction in Q3 2022.
And EBITDA growth would have been 8%.
Relative to the second quarter, our reported revenue improved 2%, while adjusted EBITDA improved 16%.
So there were pockets of improvement in the electronics segment compared to the particularly weak end market in the first half overall consumer electronics demand in Asia was still weak relative to the prior year.
This drove a 5% year on year decline in organic sales.
Our industrial and specialty business declined 1% organically, a soft industrial demand in Asia, and Europe, offset double digit growth in our offshore energy business.
In constant currency terms, adjusted EBITA margin improved 110 basis points year over year, Robert 250 basis points sequentially.
Electronics segment, adjusted EBITDA margin benefited from lower pass through metal costs and mix within our circuitry business driven by sales from the higher margin smartphone supply chain.
Industrial segment margin improved 70 basis points in constant currency due to positive mix from energy solutions as well as ongoing synergy realization pricing benefits and input cost deflation.
Excluding the impact of the $94 million of pass through metal sales in our assembly solutions business. Our adjusted EBITDA margin would have been 27% in the third quarter.
Adjusted EPS was flat year over year with the graphics impairment Dan mentioned, the primary driver of the year over year difference in the GAAP figures.
On slide five we share additional detail on organic net sales.
Our electronics segment results were driven primarily by mobile phones and consumer electronics markets in Asia.
Consistent with the first half of the year, our automotive electronic business remained resilient.
Typically for power electronics applications in electric vehicles.
Assembly solutions sales were flat organically as new business growth and traction with new higher reliability alloys for use in automotive end markets was offset by soft consumer electronics.
Semiconductor solutions declined 6% organically better than recent trends for semi MSI.
Circuitry solutions declined 12% organically as China consumer electronics activity remains subdued and some commodity related surcharges rolled off.
The overall PCB market is improving sequentially, but remained soft in comparison to prior year activity levels.
We believe our third quarter performance outpaced the broader PCB market and are heartened by supply chain commentary a much improved inventory levels.
Our business with memory customers is notably weak and drove a significant portion of the organic sales decline.
For the third quarter organic net sales in the industrial and specialty declined 1% year over year.
Industrial solutions declined 2% organically as demand in global construction and industrial markets remain soft and commodity related surcharge revenue per palladium fell versus Q3 of last year.
Energy solutions remains a bright spot with sales again growing 11% organically in the quarter despite difficult comps from Q3 of 2022.
Production and drilling activity is sustained their rebound and price actions continued to benefit sales. We expect continued growth from this business throughout the year and into 2024.
I'd stick to address cash flow and the balance sheet.
We generated $75 million of free cash flow in the third quarter.
Working capital was relatively flat sequentially, reflecting increased sales that were offset by modest inventory improvements.
Net capex year to date was $35 million and we expect our fourth quarter investment to be approximately $20 million a certain growth projected integration initiatives progress.
We now expect to spend approximately $55 million on a full year basis.
Turning to the balance sheet, our net leverage ratio at the end of the quarter would have been three six times with the estimated full year benefit of the vehicle arm product line for which we reacquired distribution rights in June.
We continue to expect to be below our targeted ceiling of three five times by year end.
As a reminder, the swap maturities on our term loans are split over the next three years and our capital structure is 100% fixed until 2024 and more than 80% fixed until 2025.
We have no debt maturities until 2026, and our liquidity position remained strong.
With that I will turn it back to Ben Thank.
Thank you Gary.
We're pleased our results have inflected positively here in the second half you.
<unk> seen what we considered the trough and are beginning to recover from it.
We didn't know what to expect in terms of the slope of the recovery and the sequential seasonal slowdown we expect electronics in Q4 suggests that while we will not see a sharp immediate recovery, we will continue to improve from the cyclical trough.
Against our last guidance, we've seen an incremental $5 million of FX headwind to adjusted EBITDA due to the strengthening dollar.
Slightly less than half of that headwind was in the third quarter.
That together with timing of sales associated with our via form transition lead to a modest reduction in our full year adjusted EBITDA guidance of approximately $485 million.
The via form impact is timing related to idiosyncratic customer ordering and inventory management around the transition.
Given this timing impact we now expect a greater contribution from this transaction in 2024 on a year over year basis.
Gross margins for the company are back over 40% and cash flow conversion remains very strong.
Even with the second half recovery, we're seeing in electronics semiconductor production and high end electronics markets remained far below their long term averages.
Overall, we've seen soft volumes across nearly all of our businesses for over a year.
This is not a reflection of share but of inventory destocking and economic malaise.
The current situation suggests substantial room for margin accretive growth in the years to come.
However, we're not waiting idly by for that broader recovery.
We've identified an action $10 million of cost savings to impact next year and we've invested in gain real traction in the technologies and market niches that we expect will propel market growth and then packaging new semiconductor node transitions expanding vehicle electrification programs and thermal management.
We believe it's reasonable to expect the business to deliver adjusted EBITDA growth north of 10% in 2024 and to continue to grow from there.
As you can tell we're enthusiastic about the future and have evidence that the growth we've come to expect from our business is returning.
Our team is doing a terrific job navigating the complicated macro environment and continuing to deliver reliable high quality solutions for our customers existing and newly emerging needs them.
I'm very grateful for their energy and effort this quarter and going forward.
With that operator, please open the line for questions.
At this time, if you'd like to ask a question press star one on your telephone keypad.
Would you like to withdraw your question Press Star one again.
Please hold for your first question.
Your first question is from the line of Babish.
<unk> <unk> with BMO capital market.
Yeah.
Okay. Thanks for taking my question.
So in the North Dakota, we saw a nice margin expansion across both of our segments. There appears to be a case of you all legal onto price.
Input costs at all as logistics some of those have moved lower so can you help us provide more color on what's driving the success there and how should we think about your EBITDA margins as you see volume growth come back in next year.
Yes, thanks for the question Bob.
A few things contributed to the margin expansion price.
Relative to costs with a big one.
We've always said that this is a business that has sticky pricing actions and thats been made manifest in the quarter, we have not seen.
Real price asks.
As our raw material prices have come down which is what we would've expected.
Another large contributor just mix so last year at this time with high metal prices.
Some portion of sales are coming from surcharges, which are much lower margin and then we will call. It proprietary chemistry sales and so those surcharge sales of metals.
<unk> have fallen away as metal prices have come down has been replaced by higher value sales of propel.
Jerry chemistry.
So.
That explains a chunk of the margin expansion that we experienced in the third quarter. As we look forward volumes are still low year over year volumes are down.
And as we see volume growth, we should get greater facility utilization and see incremental margin expansion.
Sure.
Metal adjusted EBITDA margin in the quarter was 27%. It peaked at 30% in 2021, we see room for margin expansion from here.
Got it and as a follow up so I believe you mentioned EBITDA growth of 10% <unk> 24.
As possible for Netflix.
Given what you saw in the third quarter.
<unk> guide for the fourth quarter would you say annualize in the second half of this year is a good baseline for the business.
Are there some other puts and takes maybe landfall.
Yes.
The simple rule of thumb right. It's early to give guidance, it's a short cycle business visibility, especially into the second half of 2020 fours is.
Is limited.
Historically, we've said that the second half of the calendar year is a pretty good indicator for the first half of the subsequent calendar year and that remains to be the case the timing of the second half ramp is unpredictable as we saw this.
This year.
So starting with annualized in the back half seems reasonable we do get a contribution from via form.
Which as you know an incremental $10 million going into next year, there's a little bit of an FX headwind, we've talked about some cost actions, we've taken and those are the puts and takes as we start 2024, but theres a case to be made for 10 plus percent EBITDA growth.
As we said in our prepared remarks.
Your next question is from the line of John <unk>.
Lincoln with C. J S Securities.
Hi, Thank you for taking my question.
First what's driving the via format Tigris.
Inventory dynamic and the reduction this year.
How does that set up your positioning going into next year with pricing and service levels and just the demand recovery that you would probably expect to see in semiconductors.
Yes.
No.
We reacquired the distribution rights for this product line.
And we required them to have integrity and they were holding our inventory we took the decision to stop selling during this transition period to just simplified legit.
And.
And so those sales basically stopped for several months and that's not lost sales. It's just delayed sales the customers expect up to hold a certain level of inventory and we will when we are in the process of rebuilding that inventory now that we're in that trends now that we.
<unk>, we're just not realizing the value for it.
In in this calendar year. So that's really what's driving it is a decision we took and its deferred revenue. It has no bearing on our expectations for this business frankly, our expectations for the business are for the product line are higher today than they were when we announced this.
This transaction.
Okay got it and then just a question on inventories versus demand.
Shipping to end demand levels now in electronics or are there some element of restocking going on in Australia after inventory the trough.
How should we think of that dynamic and where you're actually at versus what what is being sold through.
Yeah. So so sell in was lower than sell through through the first half.
Units of smartphones are down year on year still in the third quarter.
And our volumes are down still in the third quarter.
There is as we.
As our customers begin to ramp for production there is a restock.
It is not what's driving the performance in the business unit. If you look at smartphone units.
In.
In the third quarter, they were still down mid single digits year over year, but they were sequentially. The forecasted mid single digits. Our circuitry business was also up mid single digits. So.
This.
Bump in performance the random performance is not an inventory restock is it's driven by underlying demand.
Your next question is from the line of Chris <unk>.
Loop capital markets.
Yes, good morning, good morning, Ben So it sounds like.
Okay.
A key part of the story in the third quarter is a subtle inflection more about the cyclical recovery than than the secular story and drivers. So I guess my first question is is that a fair characterization and then.
More importantly, if I if I revisit.
<unk> early 'twenty two Investor day event, a key theme there was of course the secular drivers. So I'm just curious how you see these opportunities developing against the backdrop of a.
World That's changed since then.
Are those still valid drivers for a multiyear progression for ESI I know in your formal remarks, you highlighted advanced packaging, so maybe thats, where visibility is greater but maybe you could touch on <unk> and the automotive about electrification those growth factors and just your competitive positioning generally.
We've seen those secular drivers thank you.
Thanks for the question, Chris It's a compound question so first.
With regard to the cyclicality versus secular growth.
We've always said that secular growth isn't linear.
There is.
Volatility around the upward trend and Thats clearly, what we've been living through for the past 18 months or so.
The recovery, we saw in the third quarter was a recovery in high end electronics.
They are still down we are way off of peak. So we're still in a recovery and that recovery will.
We will take us to.
Our higher value end market because of the secular growth, we're seeing from trends around artificial intelligence and vehicle electrification and all the things we called out earlier.
Do you think the third quarter is more of a cyclical recovery, but the longer legs in this end market.
Our from secular growth from new market and.
New technologies.
In advanced packaging is a great example.
Of an emerging application where element solutions brings a really differentiated breadth of capabilities those capabilities come from the legacy businesses.
That element is owned and has been investing in innovation around and also from new things like what we're bringing to market and coopery on most of the engagement that we have been.
Talking about with <unk> is for next generation artificial intelligence applications and customers are spending a lot of time on it and the order quantities today are small from a volume perspective, but growing incredibly quickly and that shapes our perspective on the contribution from <unk>.
Around both the speed at which it will contribute and.
Potential sort of medium term substantial earnings that technology will bring in addition to the existing high quality offerings that we're already providing and advanced packaging applications.
Okay. That's helpful and maybe if you could touch on the.
How the competitive positioning is evolving.
If anything has really changed there.
And in addressing some of the secular drivers. Thanks.
Yes.
The core of our business in electronics is.
Stable from a competitive perspective.
The things that have worked to continue to work as we get to some of these leading nodes we are starting to see.
Unknown Executive: Good morning, ladies and gentlemen, and welcome to the Element Solutions Q3-2023 by Natural Results Conference Call. At this time, all lines have been placed on mute to present any background noise.
Exploration of new materials, and Cooper on really helps with that via form and some of the innovation that we've done there.
Unknown Executive: After the speakers remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. As a reminder, today's call is being recorded.
Is improving our competitive positioning as new nodes come online and we have a real expectation will be gaining share.
In copper deposition and in.
IC substrate market because of the new technologies, we're bringing to bear this isn't.
Varun Gokarn: I will now turn the call over to Varun Gokarn, Senior Director of Strategy and Finance. Please go ahead.
A market where share shifts radically from one year to the next the way that we grow our shares by getting a disproportionate amount of emerging applications, we feel very well positioned for that and those emerging applications are going to be coming online in 2024 and 2025.
Varun Gokarn: Good morning, and thank you for participating in our third quarter, 2023 Ernie's Conference Call. Joining me are Executive Chairman, Sir Martin Franklin, CEO, Ben Gliklich, and CFO, Carey Dorman. In accordance with regulation, FD, we are webcasting this conference call.
And that speaks to our ability to continue to grow well above market in that timeframe.
Varun Gokarn: A replay will be made available in the investor section of the company's website shortly after 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 Ernie's release supplemental slides and most recent SEC filings for discussion of material risk factors that could cause actual results to differ from our expectations.
Your next question is from the line of Steve Byrne with Bank of America.
Hi, Rob Hoffman on for Steve Byrne.
In terms of.
Near form.
We think it has potential to drive cross selling of other products semiconductor.
Semiconductor fabs.
It's a great question. Thank you for it and the answer is absolutely yes, we've been really pleased to see.
Varun Gokarn: 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 US GAP. Please refer to the Ernie's release and supplemental slides for definitions and reconciliation of these non-GAP measures to comparable GAP financial measures.
The change in.
Engagement level with the front end of line technologists at the largest semiconductor fab since we completed this transaction and so we have ongoing more robust dialogues and we did before.
Benjamin Gliklich: It is now my pleasure to introduce element solution CEO, Ben Gliklich. Thank you, everyone. Good morning, everybody. Thank you for joining. Element solutions had a solid quarter, as our electronics and markets began to recover from their second quarter trough, and easing raw material prices drove favorable margins. We continue to deliver against important strategic initiatives and generated strong free cash flow. The overall macro environment remains a challenge. Declining economic activity in central Europe, a slow post-COVID recovery in China, and the ongoing UAW strike are headwinds compounded by the once-again strengthening dollar.
Understood.
Just a follow up.
What are the growth opportunities for you in electric vehicles that are different than internal combustion engine pulse and.
Any update on the flexible circuit technology that you've had in development.
Yeah.
Really good question and really exciting area for us.
Electric vehicles and a lot more electronic content then.
Internal combustion engines, and we have some really special capabilities in power semi applications. So these are the materials that are used in the power semiconductors that regulate the flow of energy from the battery to the motor.
Benjamin Gliklich: On the other hand, the green shoots in the electronics market are growing taller, and we have reason for optimism as we prepare for 2024. Another source of that optimism is margins. Gross margins improved nearly 500 basis points year over year on a constant currency basis, despite lower volumes, as we benefit from declining raw material inputs and logistics costs and continued synergy actions. These costs trends are encouraging, setting us up nicely as demand rebounds.
And.
What we provide in that market is enabling technology to the high end electric vehicle supply chain.
We've got differentiated technology that is currently.
And used in.
A very large portion of high end electric vehicles and the traction for that technology is.
Is growing in the automotive supply chain, both in the west and in Asia.
Benjamin Gliklich: On our last call, we talked about uncertainty around Q3 vs Q4 timing, given the ongoing recovery in the electronics market, and what that might mean for phasing the earnings. The third quarter proved to be better than planned, and we now expect to see a more normal seasonal pattern in the fourth quarter. This means the sequential slowdown in the electronics, but we do not view this as end-market softness, just ordinary course seasonality. Inc. Demand in our industrial portfolio is impacted by the macroeconomic factors mentioned earlier, but improvement in both costs of goods and op-ex are offsetting that impact.
We see about one five to two times the value in an electric vehicle versus a conventional IC and so we see again.
The business is driven by units, but there is a content story over and above units and that's one of the key levers thats, giving us incremental content incremental growth relative to unit growth in the automotive supply chain.
With regard to the flexible form of goal.
Printed electronics.
Business that has a nascent technology that we've had some really interesting breakthroughs and have a lot of hope for in the medium term, it's not a material contributor to profits today.
Benjamin Gliklich: In the third quarter, we recorded an impairment charge on our graphics solutions business. We've had a few years of challenging markets driven by CPG packaging trends, Q rationalization and stubborn raw material inflation. We do not believe our demand experience in this business diverges from the competition, and we have several work streams underway to improve its profitability in the years to come.
But it's an emerging frontier for electronics hardware and one where we believe we've got a right to play and win.
Yeah.
Your next question is from the line of Josh Spector with UBS.
Benjamin Gliklich: This impairment is the primary driver of the difference between reported and adjusted EPS this quarter. We're very pleased with our progress on the transactions we announced in June to enhance and grow our high end electronic portfolio. The Viform distribution rights we re-acquired are already driving deeper commercial engagement and unlocking new sizable pipeline opportunities with the largest semiconductor manufacturers in the world. We're on track to complete the integration of customer service, quality support and inventory management for Viform later this quarter.
Okay.
Yes, Hey, guys.
So first I just wanted to ask on I mean, you made a comment in your prepared remarks about the green shoots getting taller for next year I mean, obviously the seasonality in second half shifted a little bit, but it's somewhat unchanged. So whats looking more positive to you now versus a quarter ago, where you have confidence.
Even frame 2024 might look like.
So.
We're pretty transparent about the fact that it's a reasonably short cycle business and so it's not an order book, but its tone from the supply chain, it's telling them from.
Benjamin Gliklich: We believe this front end of line offering is well positioned for growth beyond our initial expectations and have traction on both leading and legacy nodes. These products complement our back end of line advanced packaging solutions that enabled the increasing complexity and chiplet design, which should drive the next leg of computing performance improvement for data center, AI, IoT devices and industrial automation. We're confident our semiconductor business is poised to deliver significantly above market growth even as the market revamped in 2024.
A large semiconductor fabs, who remained bullish about 2024.
Market research, who are pointing to mid single digit growth in smartphone handsets.
And general industry expectation for.
Recovery next year.
Yes.
Appreciate that and I actually wanted to follow up on <unk>.
In advanced packaging and how that how to think about what that means for you. So I mean, you're talking about some of the.
Benjamin Gliklich: The customer response to the nano copper technology we acquired with Coupe Rion has been outstanding. Many large electronic component and semiconductor manufacturers are eagerly working with us on applications development. The team is busy driving commercialization of the technology and progress on product qualification. We're ahead of our expectations from the onset of this transaction and the business may begin to contribute to profits as early as the second half of 2024. And should drive growth in 2025.
Newer smaller businesses, but there's also some impact on your existing business and if I think if I look at your different opportunities. We can kind of size the content opportunity in smartphones Evs et cetera advanced packaging is a bit.
The harder so I don't know what you think that does in terms of industry growth ex MSI growth ex youre content grow wide as a result of a shift in this technology is there any way to quantify that so we can better incorporate that into our models.
Benjamin Gliklich: Taken together, our electronics businesses will bring an increasingly differentiated set of solutions to market in 2024 with a powerful and unique breadth of enabling technologies for a global semiconductor industry that is rebounding from a deep cyclical trough is experiencing robust support and investment and has been reinvigorated by the promise of generative artificial intelligence.
Yes, it's a difficult thing to parse out because we've got technology.
In all of our electronics businesses that supports advanced packaging applications, whether that shortage.
Circuitry business IC substrate markets in our assembly business some of our advanced interconnect materials and of course in our semiconductor business.
Benjamin Gliklich: Looking through any near term noise, the next few years promise profound opportunities for element solutions.
In multiple in multiple areas. So there's not one line I can point you to and some of the chemistry, if we're providing the IC substrates. We are also providing high density interconnect.
Carey Dorman: Carrie will now take you through third quarter business results in more detail. Carrie, thanks Ben.
Carey Dorman: Good morning everyone. On slide four, you can see a summary of our third quarter financial results. Next sales declined 3% on an organic basis, primarily reflecting continued year over year electronic softness throughout Asia for most of the business resides. Reduced commodity costs and stable pricing drove significant gross margin improvement leading to constant currency adjusted EBITDA growth of 2%. Excluding the impact of a sizable bonus to cruel reduction in Q3 2022 adjusted EBITDA growth would have been 8.
Markets. So it's not clean I think the simple way I would characterize it as we say we can grow a point or two faster than our underlying markets.
And we believe that our.
We're investing both dollars and R&D to grow our leadership from a technology perspective in these markets.
That plays into the underlying growth algorithm, we talked about call. It mid single digit growth through the cycle.
Carey Dorman: 2% Relative to the second quarter, our reported revenue improved 2% while adjusted EBITDA improved 16% Though there were pockets of improvement in the electronic segment compared to the particularly weak end market in the first half, overall consumer electronics demand in Asia was still weak relative to the prior year. This drove a 5% year-on-year decline in organic sales. Our industrial own specialty business declined 1% organically, a soft industrial demand in Asia and Europe offset double-digit growth in our offshore energy business.
On the top line.
Yes.
This is contributing to it.
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Your next question is from the line of David Silver with CL King.
Okay. Good morning, Thank you.
Carey Dorman: In constant currency terms, adjusted EBITDA margin improved 110 basis points year over year, or over 250 basis points sequentially. Electronic segment adjusted EBITDA margin benefited from lower passenger metal costs and mix within our circuitry business, turned by sales from the higher margin smartphone supply chain. Industrial segment margin improved 70 basis points in constant currency, due to positive mix from energy solutions, as well as ongoing synergialization, pricing benefits, and input cost deflation.
I'd like to go back to I guess, Ben your comments about your front end of the line opportunities and I believe the quote was growth beyond initial.
Expectations. So just a couple of things.
Keeping with that theme I'm, just scratching my head and I'm wondering if you could maybe discuss.
I guess in regards to via form where that incremental growth might be now that you've brought the distribution rights in house in other words was the original.
Carey Dorman: Excluding the impact of the $94 million of pass-through metal sales in our assembly solutions business, our adjusted EBITDA margin would have been 27% in the third quarter. Adjusted EBITDA with flat year over year, with the graphics impairment mentioned, the primary driver of the year over year difference in the gap figures. On slide 5, we share additional detail on organic net sales. Our electronic second results were driven primarily by mobile phone and consumer electronics markets in Asia.
Arrangement kind of suboptimal in terms of exploiting the full potential.
Via form and then secondly, maybe a little bit more speculative but.
If I understand you correctly, you're talking about like meaningful commercialization on Coopery on maybe being advanced I don't know 18 months or more from what we heard last quarter.
Carey Dorman: Consistent with the first half of the year, our automotive electronics business remained resilient, particularly for power electronics applications and electric vehicles. Assembly solution sales were flat organically, as new business growth and traction with new, higher reliability alloys for use in automotive and markets was offset by its off-consumer electronics. Semiconductor solutions declined 6% organically, better than recent trends for semi-MFI. Circuitry solutions declined 12% organically, but China consumer electronics activity remained subdued, and some commodity related surcharges rolled off.
And regarding that I was wondering if you could just discuss a couple of things may be your intellectual property position. There and then is this a product that is best exploited.
By developing it or prepared by handling the upstream in house or to accelerate the deployment would you.
Contract manufacturing or other aspects of.
Commercialization of Cooper.
Two others.
Carey Dorman: The overall PCB market is improving sequentially, who remains soft in comparison to prior year activity levels. We believe our third quarter performance outpaced the broader PCB market, and are heartened by supply chain commentary at much improved inventory levels. Our business with memory disk customers was notably weak and drove a significant portion over the organic sales decline. For the third quarter, organic net sales and industrial and specialty decline 1% year over year.
How best to exploit that opportunity. Thank you sure absolutely. Thanks for the question so yes.
The partnership.
Distribution agreement, we had with via form was a very productive one it's a product line that grew massively in the 20 years during which we were partners with integrity and its predecessor organization.
Since we now control.
That product line from manufacturing R&D through to the customer we do believe there are incremental opportunities.
Carey Dorman: Industrial solutions declined 2% organically, as demanding global construction and industrial markets remained soft, and commodity related surcharge revenue for palladium sales versus Q3 of last year. Energy solutions remained a bright spot, with sales again growing 11% organically in the quarter, despite difficult comps from Q3 of 2022. Production and drilling activity have sustained their rebound, and price actions continue to benefit sales. We expect continued growth from this business throughout the year and into 2024.
And our partners also saw that and understood that there would be an opportunity from one party owning soup to nuts.
That product line.
What we found when we say opportunities in excess of our initial expectations is one a lot of new semiconductor fabricators are coming online new fabs are coming online and we believe we've got a real opportunity to convert that at a higher rate than our current share of that market and to where.
Carey Dorman: Slide 6 addresses cash flow in the balance sheet. We generated 75 million of free cash flow in the third quarter. Working capital was relatively flat sequentially, reflecting increased sales that were offset by modest inventory improvements.
We're having conversations about backwards integrating our technology on existing lines, which is not something or in existing fabs to displace competitors, which is not something that would have been in our base case at all.
The qualification process is expensive and time consuming and not something that we typically see.
Carey Dorman: Next cap of year today was 35 million, and we expect our fourth quarter investment to be approximately 20 million. A certain growth projects and integration initiatives progress. We now expect to spend approximately 55 million on a full-year basis. Turning to the balance sheet our net leverage ratio at the end of the quarter would have been 3.6 times, but the estimated full-year benefit of the VFORM product line for which we re-acquired distribution rights in June.
But because of our technology.
And service levels is being considered which would absolutely be upside.
With regard to <unk> and your second the second part of your question.
This is really special material.
When we acquired was the technology and materials technology and.
Carey Dorman: We continue to expect to be below our targeted ceiling of 3.5 times by year end. As a reminder, the SWAT majorities on our term loans are split over the next three years, and our capital structure is 100% fixed until 2024, and more than 80% fixed until 2025.
Great people, who know how to work with that material and.
And Nathan applications for that material and the work we've been doing has been refining that application technology to meet specific customer needs to commercialize that technology.
Carey Dorman: We have no debt majorities until 2026, and our liquidity position remains strong.
And the receptivity from our customer base.
Benjamin Gliklich: And with that, I will turn it back to Ben. Thank you, Carrie. We're pleased the results have inflected positively here in the second half. We've seen what we considered the trust and our beginning to recover from it. We didn't know what to expect in terms of the slope of the recovery, and the sequential seasonal slowdown we expect in electronics in Q4 suggests that while we will not see a sharp immediate recovery, we will continue to improve from the cyclical trust.
It has been.
Really really great.
These are products that we know how to make already.
Theyre not vastly different from manufacturing technology that we have in house.
Our IP we have.
Have an IP position, there, but theres also speed and customer intimacy that we bring to the table.
That is differentiated in solving an urgent customer need frankly.
Benjamin Gliklich: Against our last guidance, we've seen an incremental $5 million of effects headwind to adjust the EBITDA due to the strengthening dollar. Slightly less than half of that headwind was in the third quarter. That, together with timing sales associated with our VFORM transition, lead to a modest reduction in our full-year adjusted EBITDA guidance of approximately $485 million. The VFORM impact is timing related to idiosyncratic customer ordering and inventory management around the transition.
We are going to manufacture this product.
Ourselves most likely.
The investment required to manufacture the product is not.
That substantial such that you would see a big lumping Capex next year associated with it.
At this time there are no further questions I will now hand, the call backups to presenters for any closing remarks.
Great well. Thank you for joining thanks for your questions and we look forward to seeing many of you.
Benjamin Gliklich: Given this timing impact, we now expect a greater contribution from this transaction in 2024 on a year-over-year basis. Both margins for the company are back over 40% and cash flow conversion remains very strong. Even with the second half recovery we're seeing in electronics, semiconductor production and high-end electronics markets remain far below their long-term averages. Overall, we've seen soft volumes across nearly all of our businesses for over a year. This is not a reflection of share, but of inventory destocking and economic malaise. The current situation suggests substantial room for margin of creative growth in the years to come.
In the weeks and months to come and have a good day.
This concludes today's call. Thank you for joining you may now disconnect your lines.
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Benjamin Gliklich: However, we're not waiting idly by for that broader recovery. We've identified an action $10 million of cost savings to impact next year, and we've invested and gained real traction in the technologies and market niches that we expect will propel market growth. Event packaging, new semiconductor node transitions, expanding vehicle electrification programs and thermal management. We believe it's reasonable to expect the business to deliver adjusted EBITDA growth north of 10% in 2024, and to continue to grow from there.
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Benjamin Gliklich: As you can tell, we're enthusiastic about the future and have evidence that the growth we've come to expect from our business is returning. Our team is doing a terrific job navigating the complicated macro environment and continuing to deliver reliable, high-quality solutions for our customers existing and newly emerging needs.
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Benjamin Gliklich: I'm very grateful for their energy and effort this quarter and going forward.
Unknown Executive: With that operator, please open the line for questions. At this time, if you'd like to ask a question, press star one on your telephone keypad. If you'd like to withdraw your question, press star one again. Please hold for your first question.
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Bhavesh Lodaya: Your first question is from the line of Babish Lodaya, BMO Capital Market. Okay, thanks for thinking my question. So in the quarter, we saw a nice margin expansion across both your segments. There appears to be a case of you holding on to price as your input cost or logistics. Some of those have moved lower. So can you help us provide more color on what's driving the success there? And how should we think about your EBITDA margins as you see volume growth come back in next year?
Thank you.
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Benjamin Gliklich: Yeah, thanks for the question, Bhavesh. A few things contributed to the margin expansion. Price relative to cost was a big one. We've always said that this is a business that has sticky pricing actions and that's been made manifest in the quarter. We have not seen real price ask as our raw material prices have come down, which is what we would have expected. Another large contributor is just mix. So last year, at this time, with high metal prices, a deep portion of sales were coming from surcharge, which are much lower margin, then we'll call it proprietary chemistry sales.
Benjamin Gliklich: And so those surcharge sales of metals have fallen away as metal prices have come down and been replaced by higher value sales of proprietary chemistry. So that explains a chunk of the margin expansion that we experience in with their quarter. As we look forward, volumes are still low. Year over year volumes are down. And as we see volume growth, we should get greater facility utilization and see incremental margin expansion. Our metal adjusted EBITDA margin in the quarter was 27%.
Benjamin Gliklich: It peaked at 30% in 2021. We see room for margin expansion from here. Got it. And as a follow up, so I believe you mentioned EBITDA growth of 10% for 24. It is possible for next. It's for 24. Given what you saw in the third quarter and your implied guide for the fourth quarter, would you say analyzing the second half of this year is a good baseline for the business? Or are there some other puts and takes, maybe at all, via foam?
Benjamin Gliklich: Yeah. So the simple rule of thumb, right, is early to get guidance to short cycle business. Visibility, especially if the second half of 2024 is limited. But historically, we've said that the second half of the calendar year is a pretty good indicator for the first half of the subsequent calendar year. And that remains to be the case. The timing of the second half ramp is unpredictable as we saw this year. So starting with annualizing the back cap seems reasonable.
Benjamin Gliklich: We do get a contribution from via foam, which is an incremental $10 million going into next year. There's a little bit of an FX headwind. We've talked about some cross-actions we've taken. And those are the puts and takes as we start plotting 2024. But there's a case to be made for 10 plus percent EBITDA growth, as we said in our prepared remarks.
John Tom Lincoln: Your next question is from a line of John Tom Lincoln with C.J.S. Securities. Hi, thank you for taking my question.
Benjamin Gliklich: First, what's driving the V.A, format in Tigris inventory dynamic in the reduction this year and how does that set up your position in going into next year with pricing and service levels and just the demand recovery that you probably could expect to see in semiconductors? Yeah, so we re-acquired the distribution rights for this product line and we re-acquired them from Tigris and they were holding our inventory. We took the decision to stop selling during this transition period, it just simplified logistics and so those sales basically stopped for several months and that's not law sales, it's just delayed sales.
Benjamin Gliklich: The customers expect up to hold the certain level of inventory and we are in the process of rebuilding that inventory now that we're in that trend. Now that we own it, we're just not realizing the value for it in this calendar year. That's really what's driving it. It's a decision we took and it's deferred revenue. It has no bearing on our expectations for this business, frankly our expectations for the business or for the product line are higher today than they were when we announced this transaction. Okay, got it.
Benjamin Gliklich: And then just a question on inventory versus demand. Are you shipping to end-to-man levels now in electronics or is there some element of restocking going on in the street? Now, after you've enjoyed the trough, how should we think of that dynamic and where you're actually at versus what it being sold through? Yeah, so sell-in was lower than sell through the first half. Units of smartphones are down year on year still in the third quarter and our volumes are down still in the third quarter.
Benjamin Gliklich: There is, as our customers begin to ramp for production, there is a restock but it is not what's driving. The performance in the business is units. If you look at smartphone units in the third quarter, they were still down mid-single visits year over year, but they were sequentially the forecast is mid-single visits. Our circuitry business was also up mid-single digits. So this bump in performance, the ramp in performance is not an inventory restock, it's driven by underlying demand.
Chris Capat: Your next question is from the mind of Chris Capat with loop capital markets. Yeah, good morning, Ben. So it sounds like the key part of the story in the third quarter is the subtle inflation, more about the cyclical recovery than the secular story in drivers. I guess my first question is, is that a fair characterization? And then more importantly, if I revisit your early 22 investor-day event, a key theme there was, of course, the secular drivers.
Chris Capat: So I'm just curious how you see these opportunities developing against the backdrop of world that's changed synthetically. Are those still valid drivers for a multi-year progression for ESI? I know in your formal remarks, you highlight advanced packaging, so maybe that's where visibility is greatest, but maybe you could touch on 5G and the automotive electrification those growth factors and just your competitive positioning generally addressing those secular drivers. Thanks for the question, Chris. It's a compound question.
Benjamin Gliklich: So first, you know, with regard to the, you know, cyclicality versedicular growth, we've always said that secular growth isn't linear. There's volatility around the upward trend. And that's clearly what we've been living through for the past 18 months or so. The recovery we saw in the third quarter was a recovery in high end electronics. Volumes are still down. We are way off of peak. So we're still in a recovery and that recovery will will take us to a higher value end market because of the secular growth.
Benjamin Gliklich: We're seeing from friends around artificial intelligence and vehicle electrification and all the things we called out earlier. So I do think the third quarter is more of a cyclical recovery. But the longer legs in this end market, you know, are from secular growth from new market and new technology. And advanced packaging is a great example of an emerging application where element solutions brings a really differentiated breadth of capabilities. Those capabilities come from the legacy businesses that element is owned and has been investing in innovation around and also from new things like what we're bringing to market in Coupe Rion.
Benjamin Gliklich: You know, most of the engagement that we've been talking about with Coupe Rion is for next generation artificial intelligence applications and customers are spending a lot of time on it and the order quantities today are small from a volume perspective, but growing incredibly quickly. And that shapes our perspective on the contribution from Coupe Rion, both the speed at which it will contribute and the potential, you know, sort of medium term substantial earnings that that technology will bring in addition to the existing high quality offerings that we're already providing in advanced packaging applications.
Benjamin Gliklich: If that's helpful, maybe if you could touch on the, you know, how the competitive position is involved, if anything's really changed there in addressing some insectivular drivers. Yeah, so the core of our business in electronics is stable from a competitive perspective, the things that have worked continue to work as we get to some of these leading nodes. We are starting to see exploration of new materials and Coupe Rion really helps with that via form and some of the innovation that we've done there is improving our competitive positioning as new nodes.
Benjamin Gliklich: Those come online and we have a real expectation will be getting share, you know, in copper deposition and in icy substrate markets because of the new technologies we're bringing to bear. This isn't a market where shares shifts radically from one year to the next the way that we grow our shares by getting a disproportionate amount of emerging applications. We feel very well positioned for that and those emerging applications are going to be coming online in 2024 and 2025 and that speaks to, you know, our ability to continue to grow well above market in that time.
Steve Byrne: Your next question is from the line of Steve Byrne, with Think of America. Hi, you're Royal Costano and Perciever, in terms of the view form, do you think it has potential to drive cross-telling of other products through semiconductor fabs? It's a great question, thank you for it, and the answer is absolutely yes, we've been really pleased to see the change in engagement level with the front end of line technologists at the largest semiconductor fab since we completed this transaction, and so we have ongoing more robust dialogues than we did before.
Benjamin Gliklich: Understood, and just to follow up, what are the growth opportunities for you in electric vehicles that are different than internal combustion engines and vehicles and any update on the flexible circuit technology that you've had in development? Yeah, really good question, and really exciting area for us. Electric vehicles have a lot more electronics content than internal combustion engines, and we have some really special capabilities in power semi-applications, so these are the materials that are used in the power semi-conductors that regulate the flow of energy from the battery to the motor, and what we provide in that market is enabling technology to the high-end electric vehicle supply chain.
Benjamin Gliklich: We've got differentiated technology that is currently in use in a very large portion of high-end electric vehicles, and the traction for that technology is growing in the automotive supply chain, both in the West and in Asia. We see about one and a half to two times the value in an electric vehicle versus a conventional IC, and so we see again, the business is driven by units, but there's a content story over and above units, and that's one of the key levers that's giving us incremental content, incremental growth relative to unit growth in the automotive supply chain.
Benjamin Gliklich: With regard to the flexible, formidable principle electronics business, that is a nascent technology that we've had some really interesting breakthroughs and have a lot of hope for in the medium term. It's not a material contributor to profits today, but it's an emerging frontier for electronics hardware, and one where we believe we've got a right to play and win.
Josh Bechtur: During next question, it's from a line of Josh Bechtur with the ABS. Yeah, hey guys, so first I just wanted to ask on, I mean you made a comment in your repair remarks about the green shoots getting taller for next year. We obviously the seasonality and second half shifted a little bit, but it's somewhat unchanged, so what's looking more positive to you now versus a quarter ago where you have confidence to even frame what 2024 might look like.
Josh Bechtur: So we're pretty transparent about the fact that it's a really short cycle business and so it's not an order book, but it's toned from the supply chain, it's toned from large semiconductor fabs who remain bullish about 2024, market research who are pointing to mid single digit growth in smartphone handsets and general industry expectation for recovery next year. No, appreciate that and I actually wanted to follow up on advanced packaging and you know how to think about what that means for you.
Josh Bechtur: So I mean you're talking about some of the newer smaller businesses, but there's also some impact on your existing business. And if I think if I look at your different opportunities, we can kind of size the content opportunity in smartphones, EVs, et cetera, advanced packaging a bit harder. So I don't know what you think that does in terms of industry grows X MSI grows X your content grow Y as a result of a shift in this technology.
Josh Bechtur: Is there any way to quantify that so we can better incorporate that into our models? Yeah, so it's a difficult thing to parse out because we've got technology in all of our electronics businesses that support advanced packaging applications. Whether that's you know circuitry business, I see substrate markets in our assembly business, some of our advanced interconnect materials and of course in our semiconductor business in multiple, multiple areas. So, you know, there's not one line I can point you to and some of the chemistry of providing the IP substrates were also providing the identity interconnect markets.
Josh Bechtur: So it's not clean. I think the simple way I would characterize it is, you know, we say we can grow a point or two faster than our underlying markets. And, you know, we believe that we're investing both dollars and R&D to grow our leadership from a technology perspective in these markets. And, you know, that plays into the underlying growth algorithm we've talked about, you know, called mid single digit growth through the cycle on the top line. I mean, that this is contributing to it.
Unknown Executive: As a reminder, if you'd like to ask a question, press star one on your telephone keypad. If you'd like to draw your question, press star one again.
David Silver: Your next question is from a line of David Silver with CL King. Okay, good morning. Thank you. I'd like to go back to, I guess, Ben, your comments about your front end of the line opportunities. I believe the quote was a growth beyond initial expectations. So just a couple of things. But, you know, keeping with that theme, I'm just scratching my head and I'm wondering if you could maybe discuss that.
Benjamin Gliklich: I guess in regards to VA form, you know, where that incremental growth might be now that you've, you know, brought the distribution rights in house, in other words, was the original arrangement kind of suboptimal in terms of, you know, exploiting the full potential of VA form. And then secondly, maybe a little bit more, you know, speculative, but if I understand you correctly, you're talking about like, meaningful commercialization on Coupe Rion, maybe being advanced, I don't know, 18 months or more, from, you know, what we heard last quarter.
Benjamin Gliklich: And regarding that, I was wondering if you could just discuss a couple of things, maybe you're intellectual property position there, and then is this a product that is best exploited, you know, by developing it, or by handling the upstream in-house, or to accelerate the deployment. Would you, you know, contract manufacturing or other aspects of commercialization of Coupe Rion, you know, to others, you know, just to help us to exploit that opportunity.
Benjamin Gliklich: Thank you. Absolutely. Thanks for the question. So, you know, the partnership and distribution agreement we had with VA form was a very productive one. It's a product line that grew massively in the 20 years, during which we were partners with integrity and its predecessor organization. And since we, you know, now control that product line from, you know, manufacturing R&D through to the customer, we do believe there are incremental opportunities. And, you know, our partners also saw that and understood that there would be an opportunity from, you know, one party owning soup to nuts around that product line.
Benjamin Gliklich: And what we found, you know, when we say opportunities in excess of our initial expectations is one, a lot of new semiconductor fabricators are coming online, new fabs are coming online, and we believe we've got a real opportunity to convert that at a higher rate than our current share of that market. And two, we're having conversations about backwards integrating our technology on existing lines, which is not something or any existing fabs to displace competitors, which is not something that would have been in our base case at all. You know, the qualification process is expensive and time consuming and not something that, you know, we typically see, but because of, you know, our technology and service levels is being considered, which would absolutely be upside.
Benjamin Gliklich: With regard to Kupriyan, in your second part of your question, this is really special material. What we acquired was the technology and materials technology and, you know, great people who know how to work with that material and, and, and Nathan applications for that material. And the work we've been doing has been refining that application's technology to meet specific customer needs to commercialize that technology and the receptivity from our customer base has been really, really great.
Benjamin Gliklich: These are products that we know how to make already. They're not vastly different from manufacturing technology that we have in house. You know, our IP, we have an IP position there, but there's also speed and customer intimacy that we bring to the table that is differentiated and solving an urgent customer need, frankly. We are going to manufacture this product ourselves most likely. The investment required to manufacture the product is not that substantial, such that you see a big lump in capex next year associated with it.
Unknown Executive: At this time, there are no further questions.
Benjamin Gliklich: I will now hand the call back over to the presenters for any closing remarks. Great.
Benjamin Gliklich: Well, thank you for joining thanks for your questions, and we look forward to seeing many of you in the weekend months to come.
Unknown Executive: Have a good day.
Unknown Executive: This concludes today's call. Thank you for joining.
Unknown Executive: Give me now disconnect your lines.