Q2 2024 Element Solutions Inc Earnings Call

Thank you for standing by my name is Krista and I will be your conference operator today at this time I would like to welcome everyone to element solutions second quarter 'twenty 'twenty four financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a key.

Question and answer session. If you would like to ask a question during that time simply press star followed by the number one on your telephone keypad and if you'd like to withdraw that question again press Star. One. Thank you I will now turn the conference over to the ruin of Gauguin Senior director of strategy and Finance you may.

Begin.

Good morning, and thank you for participating in our second quarter 2024 earnings conference call joining.

Joining me today are our president and CEO of <unk> 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.

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, which are subject to risks and uncertainties. Please.

Please refer to our earnings release supplemental slides and most recent SEC filings for a discussion of material risks factors that could cause actual results to differ from our expectations and predictions.

Materials can be found on the company's website in the investors section under news and events.

Speaker Change: 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 CEO and quick glitch.

Thank you Lauren and good morning, everyone. Thank you for joining.

Element solutions had an exceptional second quarter.

Our efforts over the past several years to reclaim value in our supply chain and position ourselves as key enablers of emerging electronics technologies are paying off with strong earnings growth.

Capabilities to serve fast growing high performance computing applications data center customers and semiconductor fabricators drove volume growth in high value verticals, and what remains a soft consumer electronics and industrial environment.

Similar to the first quarter, we saw robust incremental margins driven by mix impacts and pricing stability amidst deflation in certain commodities.

Our adjusted EBITDA margins expanded 250 basis points and adjusted EBITDA grew by over 20% year over year on a constant currency basis with both segments growing by double digits.

Electronics segment results were driven by more than 10% volume growth in our circuitry solutions business, primarily due to strong demand from HBC, AI EV and certain mobile markets.

Our revenue in circuitry solutions grew over 20% organically, despite the mobile phone market remaining well below long term average units.

We also saw continued strength in advanced wafer level packaging applications in our semiconductor business to support increasing semi fab utilization.

This strength was moderated by relatively soft demand for power electronics, and electronics assembly materials with certain EV customers.

Considering the first quarter trend of the industrial and specialty segment saw a combination of softer automotive demand in Europe, and the impact of lower revenue from metal price surcharges in the core industrial portfolio.

The ability and the segment still increased significantly from lower raw material costs and ongoing strength in our energy solutions business, which grew net sales by almost double digits at high incremental margins.

Margin expansion in the first half was a key contributor to strong earnings growth.

For many of our businesses. These margins were achieved in volumes well below where they had been the past few years. So our margin strength underscores the success of our investments in higher value higher margin applications, and our ability to take permanent cost actions that contribute to profitability.

Moving into the second half, we should lap the benefits of lower raw materials, and some of our supply chain actions, but margins should remain stronger year over year.

Through long term concentrated investment in new capabilities within our electronics portfolio, we've positioned ESI to capitalize on emerging sources of demand that propelled the business this quarter.

That dynamic supports our confidence in the long term growth algorithm of our electronics franchise.

Our investments in di and package attach solutions, our new research center in the fast growing India market and our scale up of high volume manufacturing capacity for nano copper technologies are just a few examples of element solutions investing to align itself as a critical development partner for both Oems and fabricators.

Computing performance improvement increasingly requires unique material sets that spanned the circuit board the chip and the variety of attachment technologies, which connect them and we are the only solutions provider with decades of technical expertise across the breadth of those applications in the electronics manufacturing supply chain.

We have a differentiated ability to solve emerging customer pain points and high growth areas and our pipeline of commercial opportunities and wafer level packaging and circuitry solutions reinforces that advantage and has accelerated as we build on improved customer intimacy from our successful via form investment and customer excitement around our coup reactive com.

Applications development over.

Over the next 12 months to 18 months, we're focused on scaling our manufacturing capacity to meet the commercial opportunity that has become apparent in these areas.

Speaker Change: At the same time, our balance sheet is improving to the point, where we can consider additional inorganic capital deployment aligned with our strategy, it's an exciting time.

Terry will now take you through our second quarter business results in more detail Gary.

Thanks, Dan and good morning to everyone.

Continuing on slide three which provides an overview of our second quarter financial results.

Terry: We delivered constant currency adjusted EBITDA growth of 21% off a 4% organic sales growth.

Strong incremental margins reflect the substantial mixed benefit from standout growth in our high margin circuitry business is in Asia.

Terry: As well as in energy solutions.

Terry: Net sales in electronics grew 7% organically led by growth in high value Advanced Circuit Board Metallization, chemistry, and memory growth for cloud storage market.

Net sales in our industrial and specialty segment declined 1% organically.

Solid growth in offshore and modest growth in North American printer demand in graphics.

However was more than offset by lower precious metal surcharges and softness in industrial surface treatment.

The strengthening U S dollar negatively impacted total company net sales and adjusted EBITDA by roughly 3% and 5% respectively on a year over year basis this quarter.

Both segments expanded adjusted EBITDA margins over 200 basis points.

Constant currency adjusted EBITDA grew 26% in electronics, driven by positive mix from circuitry and gross margin expansion in all verticals, primarily from input deflation and stable product pricing.

And IMS constant currency adjusted EBITDA grew 12% with a similar vertical mix impact as well as meaningful gross margin expansion in industrial driven by product mix and lower input costs.

Excluding the impact of $99 million of pass through metal sales and Assembly solutions, our adjusted EBITDA margin would have been 26% in the second quarter.

Moving on to slide four.

Terry: Additional detail on the drivers of organic net sales growth in our two segments.

We continue to see improving sales dynamics in electronics, driven by our targeted growth areas.

This is a positive sign for our business, especially as the market recovery is expected to broaden in the second half.

Industrially oriented customers remain a headwind to growth, particularly in industrial solutions and our assembly business in electronics.

And assembly soft automotive demand in Europe continued from the first quarter, but this was offset by improving consumer electronics in China.

The vertical grew net sales organically by 2% and year over year volumes were up.

[noise] circuitry solution sales improved 22% organically.

What's led by continued demand for memory gets chemistry, and cloud storage markets and strong volume growth in our core circuit three applications for specific customers in Asia mobile as well as China, EV and AI related applications are.

Outside's growth in circuitry demonstrates the emergence of demand for our high value applications outside of the traditional high end smartphone market that has driven our performance over the past several years.

The smartphone market has not recovered meaningfully year to date.

Third party estimates for global smartphone unit growth of 7% in the quarter suggests only low single digit growth from western Oems with significant upside coming from domestic Chinese handsets.

Our customers are expecting an improved second half and while still early new AI enabled smartphone tablet and PC <unk> have the potential to drive meaningful refresh cycles over the next several years.

That lever is not considered in our outlook for the rest of 2024.

Semiconductor solutions grew 2% organically.

<unk> increases in wafer level packaging sales in Asia about semi fabs and <unk> were partially offset by softer semiconductor assembly sales into power electronics for IB customers.

We anticipate power electronics will see sequential improvement in Q3 by looking at both customer forecasts and the progress we have made broadening our power electronics customer base.

Terry: We saw improved utilization from major Oss and I expect a multiyear continuation of demand growth in wafer level packaging driven by advanced packaging applications that support memory server and AI chip markets.

Terry: Moving to industrial and specialty.

In industrial solutions, the majority of the 3% sales decline with reductions in surcharges for commodity metals like Palladium nickel.

Terry: While these metal price impact headline sales the higher mix of value add high margin recurring chemistry revenue drove margins up.

Demand across Europe, and from automotive customers globally was sluggish.

Asia was a relative bright spot with Chinese export demand, increasing both year over year and sequentially.

We expect a negative mix impact of commodities start driving pricing to ease in the second half and new customer wins to drive additional sales volume.

Energy solutions remains a bright spot in the <unk> portfolio with organic sales growth of 9% in the quarter driven by volume and modest pricing actions.

We expect the energy business to continue to operate at similar levels of profitability for some time.

Turning to slide five.

We generated $52 million of free cash flow in the second quarter.

$33 million was invested into working capital primarily into accounts receivable due to sequential revenue acceleration, particularly in Asia.

Terry: And into inventory also from sequential increase in demand as well as from higher tin prices, which is our single largest raw material.

Terry: Capex in the quarter was $15 million as we progress on strategic capacity expansion projects and applications development initiatives in select growth geographies.

Our full year expectations for cash interest cash taxes, and Capex remain unchanged.

Turning to the balance sheet.

Our net leverage ratio at the end of the quarter was three two times.

Our capital structure includes no interest rate exposure for the remainder of the year.

Terry: And we have no debt maturities until 2028.

We expect net leverage at below three times by the end of the year barring further capital deployment.

And now I will turn the call back to <unk> to discuss our outlook for the second half.

Thank you Gary.

Speaker Change: We've had a strong first half and expect that to continue as reflected in the increased guidance we introduced in June.

Our markets are not uniformly improving our conversations with customers and suppliers support our constructive view on more broad based electronics demand improvement beginning in the second half.

We do not see the industrial market is recovering in the second half nor do we expect them to be weaker.

Speaker Change: Historically, the third quarter is seasonally the strongest given the timing of product launches and pre building activity in electronics.

This is likely to be the case again, however, the exact cadence and magnitude of that uplift in the second half will depend on the pace and level of improvement in mobile phone markets.

The midpoint of our recently increased adjusted EBITDA guidance translates to a healthy 15% constant currency growth.

Speaker Change: We would anticipate achieving the higher end of our range should mobile markets improve beyond current expectations of low single digit unit growth for the year.

Our focus remains on execution.

Commercially we have a high quality high probability pipeline of large leading edge electronics opportunities operationally, we're working to optimize our footprint by expanding manufacturing capacity for future growth areas, such as nano copper in power electronics.

Driving productivity in our legacy industrial manufacturing assets and building research and applications development and high leverage geographies.

We've seen an inflection in our business in terms of the sources of demand in electronics.

Adoption of our technology by new customers and the quality of engagement, we have with large Oems and specify ours.

Our outlook for 2024 exceeds where we began the year and our go forward expectations for market outperformance have improved as well.

To wrap up I'd like to thank all of our stakeholders for their continued support of element solutions and in particular, our exceptional and highly engaged people around the world who were responsible for another strong quarter and our improved outlook with that operator. Please open the line for questions.

Speaker Change: Thank you we will now begin the question and answer session. As a reminder, if you would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue and if you would like to withdraw that question again press star one.

Speaker Change: I ask that you limit yourself to one question and one follow up your first question comes from the line of John Roberts with Mizuho. Please go ahead.

Thanks, and congrats on the strong results here.

The range in the second half seems to depend on smartphones, but youre, having really strong results in spite of minimal recovery in sport smartphones. So just how important our smart phones and can you remind us about the second half outlook seasonality compared to your normal seasonality before the pandemic.

Thanks for the question John.

So historically, we would point to smartphones as.

A strong indicator for our circuitry business.

Speaker Change: And what you saw in the second quarter is that there are in these new sources of demand emerging outside of the smartphone market that are propelling the business right. We're in a.

An improving but still not strong smartphone environment in the circuitry business is up 22% in the quarter.

Smartphones remain a big and important source of demand for the overall electronics ecosystem and a strong recovery of stronger than expected recovery in the smartphone market is what we sort of pinned the upper end of our guidance range on.

But we still have a path to getting to the midpoint of guidance without that stronger than expected recovery.

With regard to the second part of your question around typical seasonality the third quarter is historically, our strongest quarter in the second half.

It's usually somewhere around 5% to 10% stronger than the first half.

Well, you've got about a 5% uplift because of the smartphone market is not expected to be particularly robust based on call. It market estimates research estimates today.

Speaker Change: And so that's why we're sort of in that 5% range in the 10% range is tied to a stronger smartphone market.

Great. Thank you.

Your next question comes from the line of Josh Spector with UBS. Please go ahead.

Yeah, Hey, good morning, guys.

I wanted to ask on a relative view on the strength of <unk> and the uncertainty I guess and forecasting <unk> right now.

Has anything been pulled forward in your view or is it more uncertainty around production plans call. It in September that's making <unk> tougher to call.

So.

We don't see <unk> as a pull forward right. We keep talking about these new emerging sources of demand for the electronics business, which are frankly very exciting.

As the business is moving away from being at.

As driven by smartphones that it was over the past decade.

Things like high performance compute industrial automation electronics and electric vehicles are all driving pretty substantial.

Speaker Change: Demand drove substantial demand in the second quarter, we don't see that we don't see that going away.

Speaker Change: With regard to uncertainty.

Speaker Change: The large Oems don't know how many smartphones are going to sell in the back half of the year and Thats whats going to drive volume.

And there is quite a dispersion I would say between what some research analysts are forecasting in terms of units and then some of the things you see in the press, which are more optimistic about smartphone units in the back half.

That accounts for the the range that we have going into the second half and also some of the uncertainty around phasing because production cycle ramps.

Speaker Change: Start earlier in Q3, and sometimes fall into Q4.

But with regard to the back half we feel pretty good.

About about the range and about getting to the higher end of that range should smartphone units be higher than the low single digits from a growth standpoint in 2024.

Thanks, Ben I guess thats on the semi side.

Can you talk about the two parts of the business, maybe a little bit more what kind of growth are you seeing on front end and assembly and frankly, the impact of I think the power management side of it was bigger than we anticipated and somewhat surprising to hear you talk to you about that improving so just curious how you see that trajectory move into the second half as well. Thanks.

Speaker Change: Yes, thanks for that question Josh.

Good point to clarify.

<unk> business has two components, there's wafer level packaging, which is on the front end and then semi assembly, which is back.

Backend the wafer level packaging business had a very strong second quarter, we are outstripping MSI growth high single digit.

Growth from a revenue standpoint in that business.

Speaker Change: Tied to the vehicle arm transaction share gains there theres a lot of momentum in our wafer level packaging business.

Speaker Change: On the assembly business was softer in the second quarter and Thats tied to our power electronics portfolio, where the electric vehicle market, particularly within certain customers was pretty soft in the second quarter, we see that semi assembly part of the business accelerating in the third quarter.

Very constructive for the long term perspective, we've been winning power electronics business outside of the core Oems, where we have been concentrated in the past and so our confidence in the growth opportunity for our power electronics business.

Grew.

Speaker Change: The pipeline there is very strong and we're converting it very effectively.

And in general the outlook for that semi assembly business is very very strong over a multiple year period.

Alright, Thanks Ben.

Speaker Change: Your next question comes from the line of Chris Parkinson with Wolfe Research. Please go ahead.

Christopher John Kapsch: Great. Thank you so much Ben just as an extension after that after that question for the intermediate to long term.

Made some decent investments and you've been kind of drawing some capacity in specific substrates within that semi business can you just offer some further insights. In addition to what you just said in terms of like how the street should be in kind of gauging that business not just for the next six to nine months, but ultimately for the next two to three years based on your vision overall.

Thank you.

Yes, thanks for the question Chris.

So we've been out.

With a couple of electronics deep dives.

Teaching.

The investor community about.

Christopher John Kapsch: The capabilities in our semiconductor portfolio and our broad our electronics portfolio.

And there are a few observations I'd make first.

The semiconductor portfolio, we have is very differentiated.

In terms of what we can offer from a front end perspective wafer level packaging perspective, which gets to advanced packaging and then semi assembly, which is advanced packaging and package attach.

Those are.

Areas of the electronics hardware market, where theres a lot of innovation.

Our solutions are enabling our customers and their customers.

Next generation products and the traction we have from.

Christopher John Kapsch: The breadth of solutions and <unk>.

Complementarity of our portfolio with the supply chain is very very strong and it's creating significant opportunities, which we see in our pipeline and are very excited about.

Christopher John Kapsch: The broader electronics portfolio hangs together very very well.

And this comment I've been making about emerging sources of demand in our electronics business is very compelling for us and gives us a lot of conviction in our long term growth opportunities for the business because our addressable market is expanding as these new sources of demand become large markets.

Sources of demand, our AI high performance compute data storage, even electronics and electric vehicles.

And we see significant runway here.

Christopher John Kapsch: As demonstrated by the strength in the second quarter in what was generally soft industrial and electronics markets gives us.

Good visibility to record results.

Christopher John Kapsch: In the coming years.

Speaker Change: Got it and just the quick follow up I would say just on free cash I understand obviously, the working capital investment, but capex is flat numbers moving in the right direction, perhaps for the second half.

Give us a little bit color on the puts and takes for second half free cash flow conversion and just remind us of how we should be thinking about this conversion of 'twenty five onwards, just given the evolving mix of your businesses. Thank you.

Sure Chris So for the rest of 2024 to hit that first point as you noted we're holding the free cash flow range of $2 $80 million to $300 million and the real driver of that is the working capital investment that we're expecting for the full year based on where our growth is coming from.

Christopher John Kapsch: The electronics business is where we're seeing most of our growth that is heavily Asia focused and then working capital intensity for the Asia business is slightly higher than the average for the company. So that's really the dynamic youre seeing for 2024 and you actually look at the.

DSO in DIY for the business, you're seeing sequential stability, if not some improvement and then we expect to see our working capital percent of sales improvement as we trend to the fully to the end of the year. So you should see some release by the end of the year, you will still be an investment on a full year basis.

Christopher John Kapsch: When we think about 2005 and beyond I don't think much has changed on the overall dynamics of cash flow conversion.

In growing years slightly lower than more average growth years should be back to the range we've seen over the.

Christopher John Kapsch: The last five.

Very helpful.

Speaker Change: Yes no.

Speaker Change: No Lumpiness, we would expect from a capital perspective.

And we've been able to hold taxes and interest flat and so we will get operating leverage or.

Speaker Change: Leverage on those lines.

Understood. Thank you.

Speaker Change: Your next question comes from the line of <unk> <unk> from BMO capital markets. Please go ahead.

Ben: Hi, good morning, Ben.

Ben: We saw sort of divergence in organic growth in circuitry versus semis and assembly is that just timing or the impact of some new business wins that you spoke about maybe some examples on what they are.

Speaker Change: Sure thing.

Speaker Change: So we've spoken already about what we saw in the semi business, where the wafer level packaging business.

Speaker Change: Has been very strong in the semi assembly business tied to electric vehicles.

Speaker Change: Offset that growth on the top line.

Speaker Change: And the Circuit Board Assembly business <unk> got a broader set of exposures and youre more industrially driven.

The automotive market and generally weaker industrial backdrop are responsible for the performance divergence I would say between circuitry and Circuit Board Assembly.

Speaker Change: In in the second quarter.

Speaker Change: On the circuit tree solution side.

We saw strong demand driven by these emerging applications in electronics so.

Okay.

You look at high performance compute talked about AI, we talked about EV certain mobile market. So there was some strength in the local Chinese mobile market. There was strengthened certain tablet applications in the second quarter volumes in that business were up north of 10% and mix was also a draw.

Speaker Change: River there as these new applications are high value applications. So the price point of our chemistry, and our solutions are higher and Thats driving.

The balance of the organic growth that we saw.

As we as we look forward to the second half.

I think that that divergence between circuit Board Assembly and circuitry should persist because we don't expect the industrial markets to get materially better, but we do see the semi business accelerating in the second half and so you should expect a stronger semi set of results from the semi business into H.

Understood and then you sounded more.

Has it opened about potential M&A.

Speaker Change: Investments.

In the past you've done all kinds of transactions with existing businesses like <unk> or even something like <unk>, which is multiple crude development timeline story can.

Can you tell us what your focus is going to be as you as you go into the second half of next year, what kind of businesses are you looking at.

Sure.

Speaker Change: So I think that as you rightly pointed out.

What I would characterize as flexibility and an opportunistic approach when it comes to M&A and I would say that it's an opportunistic approach when it comes to all of our capital allocation.

Speaker Change: We look at the opportunities available to us and we deploy the capital to the highest returning available.

Channel.

Speaker Change: And we will continue to pursue that strategy. We just have more capacity today and will have increasing amounts of capacity as we roll forward.

From a sizing perspective.

Our M&A philosophy is pretty straightforward, we look for businesses, we want to invest behind our businesses.

Into businesses.

That are of equal or greater quality that we can make better that are better inside of our company and available at attractive valuations and.

We've been able to surface those types of opportunities over the past several years and I would expect.

Speaker Change: And over the next couple of years, we will have an opportunity to continue to do so.

Speaker Change: Yes.

Thank you.

Your next question comes from the line of Steve Byrne with Bank of America. Please go ahead.

Steve Your line is open.

Sorry about that I was on mute sorry about that.

Dan on that 7% organic sales growth.

Can you split out volume versus price on that.

Speaker Change: More importantly, how would you compare your volume too.

Underlying demand growth or our product.

Production rates I recall in the past.

We expect.

A few hundred basis points.

Speaker Change: Our performance versus some of your key end markets.

Speaker Change: The case or do you think that that potentially is expanding.

Speaker Change: Yes. Thanks for the question, Steve So not all volume is created equal in our in our.

Speaker Change: Our electronics business as we run the gamut from mostly metal to very small.

Speaker Change: Liter size containers of high value additives into the semiconductor fabricators.

Speaker Change: But I would say most of the growth.

Speaker Change: In the second quarter was volume driven there was also a positive mix impact.

This wasn't a quarter, where we were actively taking price per se, but mix was a contributor to organic growth.

And if you look at the backdrop in which we're operating I do see.

Speaker Change: Outperformance in excess of what we would've pointed to particularly when you look at our circuitry business again, the smartphone market was up in the mid single digits and our circuitry volumes were up in the double digits.

Our front end capability and wafer level packaging that was a high single digit to double digit volume grower and MSI wasn't up in that.

Quarter by that order of magnitude. So we are certainly outperforming our key benchmarks.

As we as we had committed to probably in excess of that baseline, but one quarter is a tough sort of period to make a judgment call around that.

Okay.

Thank you for that and I recall, a couple of years back.

We thought.

Speaker Change: <unk>, maybe it's a combination.

Data store.

Speaker Change: Yes.

Computing power.

Roughly 10% of your sales in electronics.

Where is it now and where do you think just go particularly.

It is competing moves more and more driven by AI computing power.

Yes, it's a good question and again, it's hard to make an assessment on a single quarter.

Speaker Change: Just that better after a full year, but.

Speaker Change: Clearly this quarter.

These new sources of demand are contributing disproportionately to growth and therefore growing from a mixed perspective right. So our data storage business grew really grew really well.

Our content in large server boards grew very nicely content in electric vehicles.

Grew nicely, but was offset by a softer broader automotive market. So clearly there's going to be a.

Significant growth vector and will be a larger portion of the mix.

I'd say it's.

Got several years of runway from disproportionate growth relative to the broader electronics market, but other markets like the smartphone market are still going to be big markets for us and as they recover they're going to contribute significantly to growth because we're closer to the trough and that smartphone market than we are to the long term trend. So the growth vectors here from secular growth in the markets.

You just talked about and an ongoing recovery in the broader electronics ecosystem.

Thank you.

Your next question comes from the line of John can Wai Tang from C. J S. Please go ahead.

Speaker Change: Hi, good morning, Thanks for the <unk>.

<unk>.

Can you expand on the mix and concentration of customers in <unk> business.

Speaker Change: Legacy versus new launches and logos going forward and how you expect that to drive growth and maybe after that how does <unk> factor into that mix in the next year or two.

Thanks for the question John.

Yes, it's an important point to our power electronics business was historically, rather concentrated in a couple of Oems.

And we've done a lot of work to expand our penetration of the electric vehicle market.

Both into legacy Western Oems that have longer product launch lifecycle.

Then just some of the emerging Chinese electric vehicle Oems.

And that's been successful thus far both in terms of current period revenue, but also and more importantly in terms of pipeline of opportunities and so we're diversifying that portfolio actively we've had some great success very big wins and.

Speaker Change: That concentration is going to go into decline.

As that as this technology gains traction in the broader global supply chain I think we're a couple of years away from.

Calling out a complete success a complete victory, but we're certainly on track.

Speaker Change: And what that points to is an ability to outperform electric vehicle units.

Speaker Change: Going forward.

So we're going to be growing that business not just as EV units grow but as the penetration of the EV supply chain expense.

With regard to <unk> impact on that the nearer term coopery on our active copper opportunities are not in power electronics theyre not in die attach applications theyre more in the circuitry side of the business thermal management opportunities metallization opportunities.

Over time <unk> will.

Likely be an alternative.

So that we can offer.

Broader set of capabilities into the electric vehicle market, but the more exciting and very substantial near to medium term opportunities for active copper or actually on the circuitry side and we've got great traction and made significant progress on <unk>.

Over the past 90 days from a technical and commercialization perspective with active alpha.

Got it thanks for the clarification, and then just to drill a little bit deeper into the smartphone.

Prospects for the second half it seems like Youre expecting strong demand.

But I think Apple has said that they expect to supply constrained as well I was wondering if you could square those two comments knowing that your concentration among the higher end smartphone suppliers.

It is a little bit stronger.

Yes, it's a.

<unk>.

Speaker Change: Good question in that dispersion between some comments from high end smartphone Oems with regard to what they are asking their supply chain to produce for in the back half versus <unk>.

Our market research.

Which is talking to are suggesting low single digit unit growth is that dispersion accounts for the range, we have for the full year.

The EBITDA range, yet for the full year.

It's not a huge surprise that there is some level of supply constraint, we talk about how.

A lot of electronics capacity is generic and so when you've got.

Excess demand from an AI perspective, right at the leading edge, that's going to absorb capacity from smartphones for example.

In the near term as the supply constraints, perhaps but in the long term, it's a very bullish and.

An exciting trend because youre going to see more capacity come online, which is going to drive more volume and growth for us and we participate disproportionately in that higher end electronics area and so it points to real growth at high value for the next several years.

Great. Thank you.

Your next question comes from the line of Duffy Fischer with Goldman Sachs. Please go ahead.

Yes, good morning, guys.

Patrick Duffy Fischer: If you would the implied $2 $76 million of midpoint EBITDA in the back half what's the best guess, how that gets split by quarter and then if we move towards the higher end of that range for the back half is that more likely to be in Q3 or in Q4.

Thanks for the question Duffy.

It's difficult to forecast the September October split, which accounts for <unk>.

Less precision I would say in our Q3 guide.

The way the consensus has it is about right consensus is somewhere around $1 40 to $1 45 for Q3 with the balance falling into the back back into Q4.

Patrick Duffy Fischer: I think that is.

Patrick Duffy Fischer: Mobile phone.

Units are really ramping youll see that in both the third quarter and the fourth quarter.

Okay.

Speaker Change: Then if you exclude the metal pass through in some of the contractual pricing business sequentially. What do you think price cost does into the back half of the year.

Yes so.

Speaker Change: I don't see us lapping.

<unk>.

Cost deflation.

Relation that we saw from the first half.

Darts to.

Yes.

The year over year impact of cost deflation starts.

Okay.

Fall away in the back half and so price cost should be.

They're to neutral in the back half than it was in the first half.

About $3 million to $4 million of X metal.

Raw material savings in Q2, and that number will be lower in Q3 and Q4.

Great. Thank you guys.

Vivek: Thanks Vivek.

Your next question comes from the line of Mike <unk> with Barclays. Please go ahead.

Great. Thanks, Good morning, guys.

Wanted to ask on incremental margins in the quarter. It seems like in both electronics and industrial you posted some pretty high numbers there even before adjusting for some of the metal pass through so as that mix was that the cost deflation. You. Just mentioned can you just kind of help unpack what drove that this quarter.

Sure thing.

It was mix of cost deflation as you rightly pointed out.

So it was it.

Speaker Change: It was more mix than cost deflation. So as I, just said about $4 million of cost deflation across the business on a year over year basis.

And then we had a very favorable mix right. So in the industrial and specialty segment.

Speaker Change: Both from a vertical perspective, right the offshore business outperformed the other two and Thats at a higher margin and also within the vertical so we were selling less.

Speaker Change: Certain of certain commodity metals that we sell with the surcharge and hence lower margins in the industrial solutions business and that volume was replaced by proprietary higher margin chemistry.

Speaker Change: Within the electronics business, it's a similar story, where we saw.

Both outperformance from higher margin.

Verticals like circuitry and also mix within that circuitry business skewing towards these high value.

Speaker Change: Emerging.

Vectors of growth like AI, and so it's mostly a mixed story, but there was of course, some cost deflation and we've been able to hold pricing as we said we would.

Great. That's helpful. And then just a bigger picture question Theres, a lot of headlines and stories around AI enabled smartphones and sort of what that could do to the phone refresh cycle. I think you alluded to that in your prepared remarks.

But if you think about the next gen of smartphones or other devices would you expect your content or profitability per smartphone to improve I guess I'm trying to get at any mix or margin tailwind.

Speaker Change: It's just the unit volume story for element.

Yes, I think youre seeing that in the second quarter, where.

The new sources of demand are coming at a higher value.

So youre going to get higher margins from emerging applications, where we've got differentiated solutions.

The more.

<unk> unique.

Speaker Change: Unique our value proposition to solve a customer pain point the higher the margins.

You should get units as well if there is a refresh cycle.

Speaker Change: You're speculating there.

So you should see both.

Volume growth and mix improvement in that scenario.

Great. Thanks.

Speaker Change: Thank you Mike. Our next question comes from the line of David Silver with CL King <unk> Associates. Please go ahead.

Yeah, Hi, thank you.

My question here would be focused on I guess discretionary capex spend but for the first half of the year Ben I guess net income is up.

But the free cash flow was down and you sell you did.

Sorry, Capex is up and you cited some investment in working capital.

I am quoting from slide five, but you said the discretionary capex spend or the higher capex spend reflects progress on several strategic capacity expansion and applications development initiatives could you just highlight.

What youre directing discretionary capital into it at this time, what are the highest priority initiatives that youre allocating discretionary capital too. Thank you.

Yes.

I'm not sure discretionary is the term we use for it but.

This is a business that doesn't require significant capital to support its margins and to grow.

We are doubling capacity.

In one area, where we were somewhat capacity constrained around power electronics for example.

The double capacity there, it's a $15 million investment ballpark, which has been running over the past 12 months or so we're getting close to the conclusion. There. We're building we talked about this in our script a little bit.

Speaker Change: In our prepared remarks, we're building a research and development Center in India, which is a very fast growth in call. It a high leverage geography across the electronic supply chain.

Really we're investing and these are not huge.

Projects and there are only a few that we can manage at any given time.

But we are investing in areas.

Areas, where our customers are going or capabilities that our customers are pulling from us less really capacity, because we have ample capacity by and large across our manufacturing footprint more in.

Capabilities to support customer innovation and build customer proximity.

Speaker Change: Okay.

Okay, Great and then I'd like to just go to the first page of your press release and I'm going to quote.

You by saying you have there is growing confidence for several years of record earnings ahead.

And while I generally agree with that I mean.

There's been a few surprises I guess in the overall end market development transportation consumer electronics has been soft.

Et cetera.

Speaker Change: But if you had to pick.

Just a couple of factors are a couple of drivers that give you that growing confidence for several years of record earnings.

What would you call out would it be the wave of new capacity or specific technologies that the company specific level what.

Speaker Change: What.

Gives you that growing confidence. Thank you, yes. So thanks for the question David.

On an earlier question, we talked about both cyclical recovery in secular growth as we sit here today.

Speaker Change: <unk> industrial market at best the overall electronics market is closer to trough than sort of a long term average.

Yet.

Based on its latest guidance is on track for record EBITDA. This year right and that's before taking into consideration.

50, plus million dollars FX headwind.

The strategic execution here between both value recapture in our supply chain and positioning the business to benefit from these pockets of new.

Speaker Change: The new demand.

Speaker Change: Is it really.

Put the company in a place where.

We see we have high conviction for long term growth.

They say that secular growth isn't linear and theyre going to be air pockets, along the way but.

These emerging sources of demand are very powerful and growing very quickly and so we're just starting to see the benefit of that and recovery in the broader electronics market, which we're also starting to see the the beginning of a potential recovery in the industrial market, which were not counting on in the back half those three things together.

Give us the conviction to say that the runway from here and the outlook is very positive.

And so we're not calling when the industrial market will get better when I come to the magnitude or specific timing of the electronics market getting back to trend.

But we're seeing in the P&L today, the strength of these emerging demand vectors. So between those three things the outlook is great.

Exciting time.

Speaker Change: Great. Thank you very much.

Dave: Thanks, Dave.

Dave: Concludes our question and answer session and I will now turn the conference back over to Ben Glycolic for closing remarks.

Thanks, very much for joining this morning, and we look forward to seeing many of you in the coming days and weeks have.

Have a good day.

And this concludes today's conference call. Thank you for your participation and you may now disconnect.

[music].

Dave: Sure.

Dave: [music].

Yes.