Q3 2024 Element Solutions Inc Earnings Call
Speaker Change: Good morning, ladies and gentlemen and welcome to Element Solutions Q3 2020 for a financial results conference call. All lines have been placed on mute to prevent any background noise. After this speaker's remarks, WB a question and answer session. If you would like to ask a question during this time, see their press star followed by the number one on your telephone keypad.
Speaker Change: People would like to withdraw your question for a star one again. Thank you. How will not turn the call over to Varun Gokarn? Vice President, Strategy, Integration. Please go ahead.
Speaker Change: Good morning and thank you for participating in our third quarter 2024 earnings conference call.
Varun Gokarn: Joining me today are our President and CEO, Ben Gliklich and CFO, Carey Dorman. In accordance with Regulation FD, we are webcasting this conference call. A replay will be made available in the investor section of the company's website.
Varun Gokarn: During today's call, we'll make certain forward-looking statements that reflect our current views about the company's future performance and financial results.
Varun Gokarn: These statements are based on assumptions and expectations of future events, which are subject to risks and uncertainties.
Varun Gokarn: Please refer to our earnings release, supplemental slides, and most recent SEC filings, for discussion of material risk factors that it cause actual results to differ from our expectations and predictions. These materials can be found on the company's website in the Investors' section under news and events.
Varun Gokarn: Today's materials also include financial information that has not been prepared in accordance with the US gap. Please refer to the earnings release and supplemental slides for definitions and reconciliation of these non-gap measures to comparable gap financial measures.
Speaker Change: It is now my pleasure to introduce our CEO, Ben Gliklich.
Ben Gliklich: Thank you for your own good morning everyone.
Ben Gliklich: Thank you for joining. Element Solutions delivered strong results once again this quarter, financially, operationally, and strategically, we executed well. Our multi-year effort to target the highest value and fastest growing segments of the electronic supply chain. In position ourselves as key in neighbors of developing technologies is working.
Ben Gliklich: As the market has developed for our offering supporting high performance computing, data centers, event packaging use in cutting-edge ship designs and power electronics for electric vehicles are revenue has grown along with it.
Ben Gliklich: And because of these emerging growth factors, our electronic segment has outperformed sluggishness in more traditional electronics and industrial and market this year.
Ben Gliklich: In the quarter, stand out volume growth and wait for level packaging and semiconductor assembly through an acceleration in sales for the electronic segment, which through 9% organically. Our advanced packaging applications and power electronics businesses accelerated sequentially as expected.
Ben Gliklich: Circus solutions also grew over 9% organically, driven by demand for data storage, certain EV applications and circuit boards for high performance computing.
Ben Gliklich: The electronics market overall, however, was not uniformly stronger in the third quarter. Smartphone sales growth did not accelerate as quickly as expected, and electronics were more industrial applications remained soft in line with those markets.
Speaker Change: A results are a testament to the business shifting away from some of its legacy drivers and towards emerging growth sectors.
Speaker Change: The combination of softening demand in Europe and lower revenue from metal price surcharges in the core industrial portfolio were headwinds for our industrial and specialty segment.
Speaker Change: Profitability, however, improved and so did adjust the EBITDA for raw material cost actions and ongoing strength in our energy business, which grew sales by double digits at high incremental.
Speaker Change: The businesses in this segment benefited from work we've done to improve them, whether through procurement, facility rationalization, or pricing actions. The impact of these actions translated into earnings growth in a soft market and should be even more evident when end markets inevitably rebound.
Speaker Change: St. with our industrial and specialty segment, this quarter we announced the divestiture of our Graphics Solutions Business. McDermott Graphics Solutions is a high quality business with great attributes that does not align with ESI's core businesses and operating model.
Speaker Change: This transaction is long term growth, margin and return on capital, a creative. For example, the midpoint of our 2024 Adjusted UBID.Guydans implied an average constant currency growth rate of 7% since 2019. Ex-Graphics!
Speaker Change: That rate increases to 8%.
Speaker Change: Transactions should be 230 basis points of creative to see our eye.
Speaker Change: This transaction values the business at an attractive double-digit multiple, and given our legacy tax attributes, we should pay minimal taxes on the $325 million of gross proceeds. Perform up for the transaction, our net leverage ratio would have been two and a half times this quarter.
Speaker Change: Transaction is expected to close in late 2024 or the first half of 2025, pending closing conditions and regulatory approvals.
Speaker Change: Taking together, we've repositioned the company through innovation acquisitions and features for faster profit growth.
Speaker Change: With a support of electronics market, our confidence in the long-term algorithm for ESI is increasing.
Speaker Change: Where uniquely positioned with decades of technical expertise.
Speaker Change: across the breadth of the electronic manufacturing supply chain. To support OEMs and fabricators, as they increasingly rely on unique material sets, spanning the circuit board at the chip and the variety of attachment technologies which connect them to deliver computing performance improvements.
Speaker Change: Our investments in new technologies from advanced packaging and diet hatch offerings to nano-compor, as well as new applications and research centers in Southeast and subcontinental Asia, support our enhanced profile and mine share with specifiers, qualifiers, and customers in our supply chain.
Speaker Change: With this invigorated and focused organization and drive powder to capitalize on strategic opportunities, elements solutions is well positioned for 2025.
Speaker Change: will now take you through a third quarter of results in more detail. Carey, thanks Ben, and good morning to everyone. I am now on slide three, which will provide an overview of the third quarter financial results. We delivered 6% organic sales growth, translating the constant currency adjusted e-bidag growth of 8%.
Speaker Change: The spite difficult comparisons, gross margins and both segments improved year over year, as we benefited from mix in electronics and additional raw material favorability in INS.
Speaker Change: Year to date, incremental margins for the business remained well ahead of our targeted 30 to 40% range. These margins did moderate as expected in two, three, given year over your comparisons on the op-X line, primarily due to incentive compensation or cruise and other variable spend items as a business continues to perform well against plan.
Speaker Change: In the third quarter last year, we were a crewing below target in the stand-up conversation, and this year we are above. Together, that accounts for over 100 basis points of your over year impact to a just city but a margin in the quarter.
Speaker Change: Electronics through 9% organically, an acceleration from 7% in the second quarter, led by growth in advanced packaging solutions, a sequential rebound in power electronics, continued demand for high value, advanced circuit board metalization chemistry, and growth in memory disk for cloud storage markets.
Speaker Change: Net sales in our industrial and specialty segment work flat organically. The strengthening US dollar negatively impacted total company net sales in the capacity of the product in the quarter by roughly one and two percent respectively year over year.
Speaker Change: Conson currency adjusted E-Piddog Group 10% in electronics. If you're even by the mixed benefits of higher sales and semiconductor and circuitry solutions.
Speaker Change: In I&S, Concentrancy Adjusted Evidakt Group 4% with improvement in offshore margins and input cost-favorability, offsetting software volumes and industrial service treatment.
Speaker Change: Excluding the impact of the $109 million passed through metal sales in assembly solutions, our Jeffedy but our margin would have been 27% in the quarter. This is flat over year, but up when excluding the compensation of cruel discussed earlier.
Speaker Change: On fly-for, we share additional detail in the drivers of organic net sales growth in our two segments.
Speaker Change: Growth in the electronic segment was robust in the quarter, as the higher end of electronic supply chain continued to improve.
Speaker Change: Assembly grew 4% organically, improving from 2% growth in the second quarter. The growth was in Asia, particularly in the China, where solder-paste volume demand increased, given electronics assembly activity in the region.
Speaker Change: Vyams for core assembly products continue to decline in Western markets, through automotive and broader industrial market conditions.
Speaker Change: Secretary-Solutions sales through 9% organically despite the softer than expected smartphone market.
Speaker Change: This result reflects a mixture of our business towards emerging electronics applications, this is the positive development which is a confidence that the next driver of high-end electronics market growth is emerging.
Speaker Change: Nonetheless, we still believe smartphone and other legacy markets will continue to grow over the medium term as new AI-enabled devices drive refreshed cycles.
Speaker Change: The American Dr. Solutions root 26% in the quarter. Last year, in the context of our via-form transaction, customers built up inventory in the second quarter ahead of closing.
Speaker Change: which made the third quarter and easier comparison this year.
Speaker Change: When adjusting for the timing-related item, the semiconductor business still would have grown in the mid-teens.
Speaker Change: Do do improve utilization at major OSAPS.
Speaker Change: Hi Dorman for Way for Plating Chemistry at Asian Semifabs and certain new tabs that came online in the quarter.
Speaker Change: We have seen a runaway for several years of double-digit organic growth in these product areas. We are gaining market share on legacy nodes and seeing a surge in demand from emerging, advanced packaging applications and other innovation we are bringing to market.
Speaker Change: Finally, as expected, the business benefited from sequentially higher power electronic sales for EV customers due to greater production rates at existing customers and new business wins.
Speaker Change: In industrial solutions, a little over half of the 3% sales decline.
Speaker Change: was due to reductions in search arduids for commodity metals such as palladium and nickel. As it's been the case for most of this year, these metal-priced swings negatively impacted headline sales, but the higher mix of value add, high margin chemistry revenue, it's beneficial to margins.
Speaker Change: Automotive Dorman weakened over the course of the quarter as production slowed. Our expectations for revenues in the fourth quarter reflect this trend. The continued margin of favorability and cost discipline should partially offset the impact of the bottom line.
Speaker Change: Energy Solutions remained a bright spot in the INF portfolio, with organic sales growth of 10%. The energy business just continues to operate at similar levels, given ongoing drilling activity.
Speaker Change: Turns to slide five. We generated 86 million of free cash flow in third quarter and remain on track to deliver 280 million to 300 million for the full year. Inventory levels improved and overall working capital increased modestly.
Speaker Change: and Flecton Sequential Sales Group. CapEx wasn't lying at $13 million as we further progress strategic capacity expansion projects, and applications development initiatives and growth geographies. Our full-year expectations for cash interest, cash taxes, and CapEx remain largely unchanged.
Speaker Change: A Tralling Fault Month in that leverage ratio at quarter-end was 3.0 times.
Speaker Change: The strength of our balance sheet was highlighted earlier this month when we repriced the interest rate on our term loans to SOFER plus 175, which we believe are the tightest levels at high yield credits of an able to achieve in the current market. In conjunction with this repricing, we paid down $100 million of term loan debt.
Speaker Change: Overall, we believe we have navigated several years of elevated interest rates with only a modest impact to cash flows.
Speaker Change: When we include our expected 210 million plus improceeds from the graphics scale, our Proforma NetLeverage ratio would have been 2.5 times at quarter end.
Speaker Change: As Ben mentioned, we are in a great balance-y position with meaningful capacity for future valuing-handling capital deployment. Now we'll turn the call back to Ben to discuss our outlook.
Speaker Change: Gokarn.
Ben Gliklich: Thank you, Carrey. We're on track for a record year in 2024. Our competitive position in electronics is as strong as it has ever been, as reflected by record segment revenue in the third quarter. Even though recovery in these end markets has been mixed.
Ben Gliklich: through the first nine months of the year. We expect broader-based growth in our electronic and markets in 2025.
Ben Gliklich: Conversely, industrial and markets are weaker than we expected a few months ago. And our fourth quarter outlook for the INS segment reflects what is typically a seasonally softer period of activity.
Ben Gliklich: It remains to be seen whether interest rate cuts in the US and Europe, as well as shiny stimulus, will prove to be a tailwind for large industrial sectors like construction and automotive, that have remained weak for much of 2024.
Ben Gliklich: Our narrowed, full year 2024 adjusted EBITDA guidance range of 535 to 540 million dollars, retains the midpoint of our prior guidance and translates to healthy midteens constant currency growth this year.
Ben Gliklich: Well there's macroeconomic uncertainty as we look out to 2025.
Ben Gliklich: We're confident in how we position the business for the next several years.
Ben Gliklich: We're a critical material solution partner to our supply chains with broad applications expertise to address a diverse set of growth areas, many of which are proving resilient against the macro backdrop.
Ben Gliklich: We have a focus strategy to invest behind and grow our businesses and meaningful opportunities to optimize costs and process these across the company which we are pursuing.
Ben Gliklich: Our balance sheet is in great shape and gives us a great deal of flexibility.
Ben Gliklich: In short, we're well positioned for another record year in 2025.
Ben Gliklich: In closing, 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 that laid the foundation for more to come.
Ben Gliklich: Before we begin the Q&A session, I want you to acknowledge the recent media speculation around our business.
Ben Gliklich: We don't comment on rumors and we therefore ask that you keep your questions focused on our quarterly results and outlook. Now let's begin the Q&A session.
Speaker Change: If you would like to ask a question, simply press star, followed by the number one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. We had face you to please leave me to one question and one follow up. We'll pause for a bit moment to compile the queue in a roster.
Speaker Change: i
Speaker Change: And your first question comes from the line of just specter with UBS, just your line is now open.
just specter: Yeah, he got good morning guys and congrats on this all the quarter. I just wanted to ask on electronic chat trends more broadly.
Speaker Change: You know, if I look at your results through the year...
Speaker Change: It looks like we've seen some acceleration on a two three-year stack over the last couple of quarters.
Speaker Change: Obviously there's been some moving pieces and some timing effects here, but wondering if you could acknowledge in terms of how that impacts your view on
Speaker Change: The progression into 25, are we seeing an accelerating trend continue in the fourth quarter into next year? Would you agree with that view or is there some different take in terms of how you characterize it?
Speaker Change: Thanks for the question Josh.
Speaker Change: Um...
Speaker Change: The electronic market this year has not been uniformly improving.
Speaker Change: So when you think about expectations entering the year, there were optimists around smartphone market getting better. Obviously the auto market broadly is worse and that's a big electronics driver. And so what we've seen in our business is traction in some of these emerging technology trends that's offsetting some of that broader weakness.
Speaker Change: And as we turn to 2025, indicators are early forecast.
Speaker Change: are for more general improvement in the electronics market. So as we sit here today, the forecast for MSI is...
Speaker Change: You know somewhere between high single digit and double digit growth in 2025.
Speaker Change: Recent research we've seen shows PCB, square meters growing in the mid-digh single digits.
Speaker Change: That's a better bet up!
Speaker Change: Then what we're seeing in 2024.
Speaker Change: So, yes, we'll see a seasonal deceleration and a seasonal impact in Q4 and electronics this year. But we've got reason to be pretty optimistic for a call in an acceleration from broader electronic health in 2025.
Speaker Change: i
Speaker Change: So if I could just follow up on your comments on Assembly and events packaging or sorry, advanced packaging not assembly, around your comments around acceleration and share games there, are you seeing that within your semi-segment within circuitry and can you characterize just broadly how much that impacting your portfolio in the most recent quarters here?
Speaker Change: Yes, our, the beauty of this business is that a trend-like innovation in package design and advanced packaging impacts all three of our electronic businesses.
Speaker Change: Right, what we sell in the VEA Form and Waste for Level Packaging in the semiconductor business plays into that. The high-end circuit boards are enabling our effectively.
Speaker Change: becoming the base onto which multiple chips are assembled, and then are assembly business at a leading edge also plays into advanced packaging. So the traction and
Speaker Change: Projectory of Advanced Packaging is lifting our broader electronics business. It just happens to be a small slice. For instance, in our assembly business and a bigger slice of our semi-business, and you can see the divergence in the results accordingly.
Speaker Change: Okay, now thanks Ben.
Speaker Change: i
Josh: Thank you Josh.
Speaker Change: Here next question comes from the line of John Roberts, where the missile John, your line is now open. Thank you. Just to follow up on that, how big would you scope advanced packaging to be if you combined the impact across the two segments?
Speaker Change: The event packaging term is somewhat generic. It's hard to capture it precisely because I think it means different things to different people. But it's...
Speaker Change: 100 million dollars of revenue at this point and growing very rapidly.
Speaker Change: Okay, and then circuitry out before in the market, I think during the quarter, kind of EVs, I think were particularly stronger in the quarter because of the stimulus program they had. I think that's been easing so how much does that inflect as we go into the fourth quarter in circuitry?
Speaker Change: Yeah, the circuitry business has, you know, we believe out performed at some market and there are three things we pointed to.
Speaker Change: Chinese, these being one where certain of our final finish applications are really doing very well on the Chinese EV market, but also data storage and circuitry for high performance compute, which seems to have real legs.
Speaker Change: as we look ahead. So, again, I think this is anality that we're pointing to in the electronic business is pretty normal. And the forward-looking indicators are 2025 that I talk to in the first question. Give us...
Speaker Change: Confidence for another record year in 2025 and continues strong results across the electronic business inclusive of circuitry.
Speaker Change: Thank you.
Speaker Change: Dorman.
Speaker Change: Your next question comes from the line of Mike Harrison with C. Frick research partners Mike, your lines now open
Mike Harrison: Hi, good morning. Thanks for taking my questions.
Mike Harrison: Then it sounds like some large chipmakers are talking about a shortage of advanced packaging materials, at least near-term. Does that point to a need for you to spend more on additional capacity in the coming quarters? And as you think about KFX for 2025?
Mike Harrison: and the other piece of that question is, does tighter supply of advanced packaging materials point to higher pricing for some of your leading edge technologies?
Speaker Change: Thanks for the question Mike.
Speaker Change: So our...
Speaker Change: Existing footprint for core products is more than adequate to support significantly increased volumes across the electronic complex, inclusive of what we do in advanced packaging. We are working...
Speaker Change: Very quickly to scale up Kupeurian manufacturing capability, for example, and making good progress there. But that's really a new product we're introducing.
Speaker Change: Ciao!
Speaker Change: We have the capacity to support that market and I don't believe that those capacity constraints are pointing to are suggesting or indicative of an issue on our side. They are indicative of really robust demand which you can see other indicators of when you just look at pricing for instance for leading inch chips. And that to us is a...
Speaker Change: A real pale end and again gives us further conviction in the growth opportunity here.
Speaker Change: 2nd part of your question, or I'm pricing. We're actively...
Speaker Change: I would say winning more than our fair share of the new nodes.
Speaker Change: and...
Speaker Change: in discussions on winning legacy nodes and being backwards integrated.
Speaker Change: Thanks for that. You noted that there is some acceleration going on in power electronics. It sounds like some of that, some market recovery, but it also sounds like you're...
Speaker Change: Winning additional business, can you talk about how you see that power electronics, opportunity, maybe evolving or playing out over the next few quarters.
Speaker Change: Thanks for the question. The power electronics business was solved in the second quarter. We pointed that out and we expected it to accelerate in the third quarter and it did. That's a product of several things. Some of our core customers were ramping production rates.
Speaker Change: and we've won new pieces of business. We've got a really exceptional capability in power electronics, a differentiated product and value proposition that enables performance reliability range for leading electric vehicles.
Speaker Change: and because of the product life cycles of certain...
Speaker Change: Automotive OEMs, it's taken some time to get traction in their supply chains.
Speaker Change: and we're seeing that today. So the pipeline for our power electronics capability is very, very strong and the winds have been strong and we're starting to see them contribute to the P&L. Those are winds with Chinese OEMs.
Speaker Change: Western Legacy OEMs and some of the...
Speaker Change: Emerging Western Hawaiians as well. There's a very bright future for what we do in power electronics.
Speaker Change: Notwithstanding a week-evee market that business is growing very nicely.
Speaker Change: Alright sounds good, thanks very much.
Speaker Change: Thank you.
Speaker Change: Here next question comes from the line of Pofesh LaDaya with BMO Capital Markets. Pofesh, your line is now open.
Pofesh LaDaya: Good morning Ben. It's following up on your tournament in the middle of electronics.
Pofesh LaDaya: We have seen consultants calling for roughly twice the growth next year for some metrics like MSI. Now if we look at this year, I realize we have a way of forming some other moving pieces, but we'll see around 15% if we take the growth for the electronic segment.
Speaker Change: With your comments on acceleration in growth and putting them on this transcendent estimates in MSI and PCB market in place. Do you think next year we see a similar growth profile?
Speaker Change: In fact, the question about this earlier to be talking about guidance or even shadow guidance for 2025.
Speaker Change: are commitment and goal every year.
Speaker Change: is the outperformer and markets.
Speaker Change: We demonstrated ability to do so. The data points you just pointed to, we are aware of we spoke to them earlier, and that does give us confidence and conviction for a very good year next year, but it's
Speaker Change: That's...
Speaker Change: Where I would think about that. But the trajectory is good, and furthermore, this isn't just the 2025 trend.
Speaker Change: Tailwinds and the dynamics in the market that are supporting those estimates or 2025 are long tailed and so endureable. So, you know, our outlook isn't just for a strong 2025, but for several years of solid growth in electronics.
Speaker Change: And then have you seen a change in your custom base or market share for advanced packaging? Are you growing volumes as your existing customers ramp up or are you seeing some new business wins outside your current base?
Speaker Change: Yes, so what's interesting in the way that the market has evolved is as we move from monolithic designs, where the...
Speaker Change: Computing Games were from...
Speaker Change: Gale, right, transistor scale to heterogeneous packaging. There's been no standardization, right? So people are coming at.
Speaker Change: Brakes-Ruizorkun, pursuing breakthroughs in computing power through multiple.
Speaker Change: You need designs, and so you've got designs coming from the semi-fabs who are moving into packaging, you've got designs coming from OSATs, you've got designs coming from OEMs and hyper-scalers, and that gives us a really solid seat at the table because materials requirements are different when you're looking at nonstandard designs.
Speaker Change: and so.
Speaker Change: I would say that our mind share with qualifiers and specifiers is greater than it's been. And that OZAT segment of the market is growing tremendously. So yes, we're seeing growth in existing customers, but we're seeing new customers. And we're having dialogues with new...
Speaker Change: Third Party, right? New specifiers in ways we haven't in the past. Our share is our share of the overall market is growing as this segment of the market is growing faster than the overall market and I think certainly our mind share is growing even faster than that and that's a leading indicator.
Speaker Change: Here next question comes from the line of Steve Bern with Bank of America. Steve, her lines now open.
Steve Bern: Thank you.
Steve Bern: With respect to your auto and market, Ben specifically referring to the ice vehicles, is, are your sales effectively moving just in line with...
Steve Bern: Production rates, or can you come in on whether there's...
Steve Bern: Any kind of a shift within the new models? Is there any increased medallization of body parts and so forth? Or could there be a shift away from that? Just curious on that end market for you?
Speaker Change: Yeah, our ice auto business is not a direct one for one with units.
Speaker Change: There are shared gain opportunities that we've been pursuing in certain geographies where we've been underrepresented. We had some good success there. There are other applications like breaks.
Speaker Change: where we've been winning quite a bit of market share. And then occasionally there are fashion trend changes where things move from, you know, chrome, looking field to paint. And when that happens we lose some value. So it's not a direct correlation. We feel as though our share...
Speaker Change: of our addressable market is solid and improving. We've been committed to this market, we've been consolidating this market. And we see an opportunity when that.
Speaker Change: Market inevitably recovers.
Speaker Change: for that to propel pretty strong earnings growth in that segment.
Speaker Change: Okay, and then your, it looks like your cons were up 10% your rear, you highlighted.
Speaker Change: You know, higher pricing for metals, is that the bulk of that or is there an incentive comp in that, but you also mentioned some procurement rationalizations in your remarks, and is that, is that a meaningful offset? And what are you doing there?
Speaker Change: Yes, so most of what you're seeing is metal price inflation. We have done some facility rationalization, we have gotten better around procurement. Our raw materials sequentially were roughly flat, you're overyear, they were better. So the inflation is metal price.
Speaker Change: and then we have an ongoing productivity effort to make the business better every quarter and it's not huge values on a quarter by quarter basis.
Speaker Change: If you look at the margins in our INS segment, you know, declining volume environment, we're driving margins favorably and we're growing earnings and I think that's a testament to what we're doing to make the business better.
Speaker Change: keep
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of John Tanwantang with CJS Securities. John, your line is now open.
John Tanwantang: Hi, good morning. Thank you for taking my questions. I was wondering if you could give us an updated expectation on power electronics going forward. Should we expect that business to outgrow the EV market in general, just based on, you know, platform wins and share gains and, you know, new platforms ramping up, or does that catch up to just EV growth rate in general at some point?
Speaker Change: No, so from where we sit today, John, and thanks for the question, you know, this business will significantly outstrip EV units.
Speaker Change: There's a lot of white space.
Speaker Change: We've got...
Speaker Change: Good share on certain platforms and no share on other platforms, and we're working very hard
Speaker Change: and have a strong pipeline that supports it.
Speaker Change: significant expansion. There are certain EVs, very low-end EVs, where this isn't an applicable technology, but
Speaker Change: for most of the high-performance EVs.
Speaker Change: this is the best technology and we expect it to be adopted and so
Speaker Change: There's a lot of runway for this business to grow significantly. And as we've seen in a slower growth EV environment, it's significantly outstripping the market.
Speaker Change: Could you share what the run rate of that business is today and maybe secondarily, is there an opportunity outside of EVs?
Speaker Change: So, you know, we tend not to quantify product revenue, but think about it as...
Speaker Change: There is an opportunity outside of EVs, right? So this is a material that's used for
Speaker Change: Thank you.
Speaker Change: you know.
Speaker Change: power-intensive applications. And so where you've got high power densities and small spaces, this material really performs. And so we're seeing it actually or derivations of this material in smartphones and in data centers. And the addressable market is certainly expanding in power conversion and power transmission utility applications.
Speaker Change: there's quite a bit of addressable market for this that's untapped.
Speaker Change: Got it, thank you.
Speaker Change: Your next question comes from the line of Chris Patterson with Wolf Research. Chris, your line is now open.
Chris Patterson: Great, thank you. So when we're taking a step back and thinking about your longer term margin opportunity and looking at your portfolio, obviously, you know, getting rid of graphics and some moving parts and electronics.
Chris Patterson: How should we be thinking about your margin progression versus prior peak in each segment and then just holistically, what are your key considerations? I know you don't manage the business this way, but what are the couple of puts and takes we should all be assessing? Thank you so much.
Speaker Change: Yeah, thanks for the question, Chris.
Speaker Change: prior peak was in 2021 Q1 of 2021 it was about 29% and as we look at
Speaker Change: Our business today, right, our overall volumes are down because the industrial business has a lower average selling price
Speaker Change: Graphics is a lower margin than average business.
Speaker Change: and the businesses that are accelerating are higher than average margin businesses. So, you know, we believe that 29% is not a ceiling and we've got a runway to get that number into the 30s.
Speaker Change: than it was several years ago. And, you know, we've got a path forward to driving this margin, that X metal margin, to new record levels in the next couple years.
Speaker Change: basically new new technologies and the part of me also looks at you over the last couple years and just adding a lot of new your product capabilities and neocouper and everything else you know do you feel especially in electronics you know giving your comment about hey you're not the same thing to everyone do you feel that your portfolio is exactly where it needs to be in terms of the core you know semi and circuitry customers or do you think you know there's kind of more to be done over
Speaker Change: Let's say the course of the next two years. Thank you
Speaker Change: Yeah, thanks for the question, Chris.
Speaker Change: We've done a lot of work to reposition the portfolio and invest in new technologies to enhance our value proposition to our customers. And some of it has been fortunate that the market has migrated towards, you know, the core assets that we acquired.
Speaker Change: 10 years ago. We don't feel the need
Speaker Change: to add anything to our portfolio in order to deliver value to our customers today, right? Strategically, we're well positioned. We're in strong market positions in our core markets.
Speaker Change: We've enhanced our value proposition through our deliberate actions, whether that's innovation or acquisitions, but of course we're always open.
Speaker Change: to inorganically add capabilities that would improve our offerings to our markets. We don't feel the need to do that, but that is part of our strategy of operational excellence and prudent capital allocation.
Speaker Change: Importantly, M&A around us doesn't undermine our strategic position, so we don't think our hand would be forced in that way.
Speaker Change: We'll see what's available in the market to enhance our offerings.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Mike Lithead with Barclays. Mike, your line is now open.
Mike Lithead: Great, thank you. Good morning, guys. Ben, I want to stick on the theme of electronics. I think big picture, you've talked a lot on this call about the shift ongoing in the electronics business from, say, the legacy drivers.
Mike Lithead: to some of these new emerging growth drivers. I guess when you think about your electronics business now, how does this change, if at all, your expected growth rate or returns on your business medium term versus maybe what it was the past three to five years under sort of this legacy framework?
Mike Lithead: yeah
Speaker Change: Thanks for the question.
Speaker Change: We're in a broad, you know,
Speaker Change: The electronics market today is not particularly strong, there are just slices of it that are strong, and our traction in those slices is allowing for us to outperform.
Speaker Change: The smartphone market isn't going to be meddling forever. There will be a replenishment cycle. We're not going to be selling 1.1, 1.2 billion smartphones globally forever. And so I think that...
Speaker Change: When we look out a couple of years...
Speaker Change: The markets that we're benefiting from now will have durability, should have durability. And then the broader electronics market, whether that's smartphone, automotive, will have some recovery, some cyclical recovery. And so as we look forward, the growth rate for our business.
Speaker Change: and you would have seen in some investor material we prepared and went through in April and June, the growth rate for the business is accelerating in electronics.
Speaker Change: as a product of traction for new technologies and recovery from a cyclical trough. You know, we can't call when that recovery from the cyclical trough will be, but in the next couple of years, you'd expect...
Speaker Change: that to come, and taken together, that gives us confidence that, you know, our electronics business should be a mid- to high-single-digit grower from here. And margins...
Speaker Change: for all of Element should accrete because of that, because the electronics business has a higher margin than the INS segment and will become a larger percentage of the overall company.
Speaker Change: Great, that's super helpful. And then just two quick follow-ups on capital deployment. One, when you receive the graphic sale proceeds, do you have any immediate redeployment plans? Should we expect any sort of buyback on the back of that closing? And two, just given where leverage is today, can you speak to how you're seeing the M&A pipeline relative to buybacks today?
Speaker Change: Yeah, so...
Speaker Change: You know, Proforma IV, when we received the proceeds from the graphic sale, you know, the balance sheet will be the best it's been since the middle of 2021. And, you know, our thinking around capital allocation is unchanged. We're going to be opportunistic and unafraid to move quickly when a great opportunity arises.
Speaker Change: Your next question comes from the line of David Silver with Zell King. David, your line is now open.
David Silver: Thank you very much.
David Silver: Yeah, thank you.
David Silver: So, this is a question, I guess, it's been a little bit over a year since you completed the transactions for Viaform and Couprion.
David Silver: And at the time, I guess one of the ancillary benefits was maybe that with an expanded toolkit, you know, it would lead to doors opening or deeper collaborations with some highly desirable, you know, very large customers that maybe you couldn't, you know, you couldn't deal with at the same high level prior to that.
Speaker Change: So I was just wondering, you know, it's been a little bit over a year, could you just talk about the progress or the success with strengthening your front end of the line offering?
Speaker Change: in terms of...
Speaker Change: you know, getting collaborations going with those newer customers. And then secondly, if you could just provide a update on the progress with commercializing the Cupreon products.
Speaker Change: Sure, yeah, thanks for the question, David. So, the VIAform business...
Speaker Change: The VIA form distribution agreement that we terminated last year and paid to terminate has been an outstanding capital deployment. That's a business that
Speaker Change: We're seeing very strong growth in, we're seeing...
Speaker Change: You know
Speaker Change: double-digit EBITDA growth year-over-year and great traction with
Speaker Change: customers with toolmakers
Speaker Change: The pipeline for that product is more than tripled.
Speaker Change: year over year. And so, you know, that thesis is playing out and the timing was very good. So we feel very good about that transaction and indeed it is helping drive better relationships with the important decision makers in the supply chain.
Speaker Change: Koubryan is going...
Speaker Change: is going well as well, it's just at a different stage.
Speaker Change: So we said a couple quarters ago that what you're going to hear from us about Cuprion is we're focused on supply chain.
Speaker Change: building our capability in high-volume manufacturing and supporting our customers and their capability in applications development at high volume. And we're making good progress there. We're getting closer at scaling the pilot site, I would say. The commercial pull for this product is
Speaker Change: Outstanding.
Speaker Change: and the customers just want more of it to run samples. And so, you know, the thesis around the capabilities.
Speaker Change: of this technology is also playing out.
Speaker Change: I expect we'll have our first product qualification this year, and so revenue will be attached to that, and you know, our confidence in the
Speaker Change: The value proposition it offers to customers and the returns that our owning that will deliver to ESI and its shareholders is very, very high.
Speaker Change: Okay, thanks. And then this next question would kind of would be in the category of like resourcing for your multi-year, you know, gross targets.
Speaker Change: But, you know, your company has laid out kind of five-year targets where adjusted EPS growth, the CAGR, is kind of in the low to mid-double digits.
Speaker Change: and you've mentioned quite often that your business is not inherently capital intensive.
Speaker Change: You know, with all the opportunities that you see, I mean, I'm just wondering, from a, I don't know, two to three year outlook from here, what are the key areas that your company would need to resource to
Speaker Change: And certainly in some locales, you know, you might be competing for talent with, you know, national champions and things like that. So just the thought on where the company might need additional resources to hit your, you know, multi-year growth targets. Thank you.
Speaker Change: Yeah, thanks. We talked about it a little bit in our prepared remarks, right? We're adding...
Speaker Change: Gale Manufacturing, so we're adding a new line for Argo Max Production as an example. We're obviously building Coupri on manufacturing, but from a capacity perspective, we are well equipped.
Speaker Change: We're investing in applications labs close to the customer, and that's probably the biggest area I'd highlight is people and applications capability.
Speaker Change: where our customers are, and our customers are moving, right? So we're building an applications lab in Vietnam. We're building an applications lab in Thailand. We're building a research center in India.
Speaker Change: You know, customer proximity, being able to solve customer problems quickly, locally is very important, and that's where we're building resources and have been for several years. It's on the long-term roadmap.
Speaker Change: and Sync synchronizes BITS with that long-term earnings target that we've articulated. And the long-term incremental margins we expect this business to support in the 30s and 40% range.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Speaker Change: There's no further question at this time. I will now turn the conference back over to Ben Gliklich for closing remarks. Ben?
Ben Gliklich: Great. Thank you. Thank you very much. Thanks, everybody, for joining, and we're looking forward to seeing and speaking with many of you in the days and weeks to come. Thank you very much.
Speaker Change: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.