Element Solutions Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Element Solutions Q2 2023 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Varun Gokharan, Senior Director of Strategy and Finance.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for participating in our Q2 2023 earnings conference call. Joining me are our Executive Chairman, Sir Martin Franklin CEO, Ben Klicklitsch and CFO, Cary Dorman. In accordance with Regulation FD or fair disclosure, we are webcasting this conference call. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Element Solutions is strictly prohibited. During today's call, we will make certain forward looking statements that reflect our current views about the company's future performance and financial results.

Speaker 1

These statements are based on assumptions and expectations of future events that are Please refer to our earnings release, supplemental slides and most recent SEC filings for a discussion of material risk factors that could cause These materials can be found

Speaker 2

on the company's website at www.elementsolutionsinc.com

Speaker 1

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.

Speaker 1

It is now my pleasure to introduce Element Solutions' CEO, Ben Glicklitsch.

Speaker 3

Thank you, Varun, and good morning, everyone. Thank you for joining. Element Solutions reported sequential adjusted EBITDA growth in what we believe is the trough of the most severe dislocation in the electronics market in recent history. Key drivers and inputs to the electronics market such as smartphone shipments and semi production declined more than 10% year over year and this impacted our results. We believe we outperformed our markets and are pleased to see indicators of a recovery in our order book and the electronic supply chain generally as we entered the Q3.

Speaker 3

We also took advantage of this period of dislocation to significantly improve our position in the highest value, fastest growing subsectors of the electronics ecosystem and did so at what we consider attractive values with significant potential upside. Challenging economic conditions were not limited to electronics, with the broader Chinese economy soft and certain countries in Europe on the brink of recession. Nonetheless, our non electronics portfolio is growing earnings through solid execution, margin expansion from cost deflation and synergy realization. Overall, gross margins improved over 200 basis points year over year despite lower volumes. Though it was deeper than We believe we can call the 2nd quarter the trough in electronics.

Speaker 3

Our semiconductor customers are ramping activity in their fabs. We see this in our July orders. Historically, this has been a leading indicator for an improvement in mobile phone production that also drives demand for our circuit board chemistries and assembly materials. Smartphone sell in has been lower than sell through for the last two quarters suggesting These dynamics are reflected in our second half outlook. It was also a productive quarter.

Speaker 3

We completed 2 exciting strategic transactions that materially improve our semiconductor capabilities ahead of an expected market recovery. In June, we agreed to pay $200,000,000 or roughly $185,000,000 net of estimated cash tax benefits to buy in a long standing distribution agreement for our VIAFORM electrochemical deposition products from Entegris. Element Solutions has historically manufactured these semiconductor materials, And now we have complete ownership from innovation and manufacturing through to sales and support. Early feedback from customers has been consistently positive, And we're excited to grow this high value product line in the future. Based on its run rate as of closing, we expect to realize annual incremental revenue of $18,000,000 And adjusted EBITDA of $15,000,000 at current demand levels, which should reflect a low point in the cycle.

Speaker 3

This transaction should be gross margin and CRI accretive and increase the contribution of our Electronics segment to the company's annual adjusted EBITDA to over 70%. The purchase price implies an attractive multiple relative to comparable front end of line semiconductor assets and off of trough earnings. We believe this is a high quality profit stream with upside potential from commercial optimization and minimal execution risk given our deep knowledge of the technology and existing manufacturing. We also purchased Cuprion, a developer of next generation nano copper technology for the semiconductor, circuit board and electronics assembly markets. The acquisition brings a highly differentiated capability to our portfolio together with the world class R and D and applications team who developed it.

Speaker 3

Their active copper technology addresses emerging complex challenges associated with thermal management and adhesion in leading edge electronics. This should be industry changing technology with broad applications across our portfolio, including power electronics for electric vehicles, Infrastructure to support high frequency 5 gs Networks, advanced semiconductor packaging and IC substrate metallization. Element Solutions is well positioned to commercialize Couprion Solutions and technical capability given our presence across each of these markets. We bring applications know how and deep relationships to support the adoption of this technology in our customer base. Customer engagement and the pace of development and qualification work has already exceeded our expectations.

Speaker 3

Taken together, these transactions solidify ESI's position as an integral partner and solutions provider to the leading electronics companies in the world. They increased our participation in compelling long term growth markets propelled by the proliferation of high performance computing supporting AI, Industrial Automation and Other Emerging Applications. Our perception and importance to the company's innovating in electronics hardware have improved dramatically. As we said last quarter, periods of low demand and market uncertainty often generate unique opportunities. We believe 2023 is such an environment and expect to exit this year better positioned than when we entered it.

Speaker 3

Our core electronics markets are returning to growth, and we are positioned to benefit from that growth and more profitably. Our portfolio weight towards higher growth, higher profit markets is increasing and our commercial pipeline in these markets is growing disproportionately. These are very promising leading indicators. Cary will now take you through Q2 business results in more detail. Cary?

Speaker 4

Thanks, Ben. Good morning, everyone. On Slide 4, you can see a summary of our 2nd quarter financial results. Organic sales declined 6% year over year In constant currency adjusted EBITDA declined 14%. We saw sequential improvement in both revenue and adjusted EBITDA relative to the Q1.

Speaker 4

Our expectations entering the quarter were impacted by the softer demand environment in China and deterioration in the broader consumer electronics market. Despite a 9% year on year decline in organic sales, we believe the electronics business continues to outperform key PCB and smartphone end markets. Our Industrial and Specialty business declined 2% organically as soft industrial demand in Asia offset double digit growth in Offshore Energy. Our 2nd quarter adjusted EBITDA of $116,000,000 was 3% higher sequentially. In constant currency terms, Adjusted EBITDA margin declined 60 basis points year over year.

Speaker 4

Electronics segment adjusted EBITDA margin was negatively impacted by volume declines And higher margin circuitry and semiconductor applications, partially offset by reduced pass through metal prices. Industrial segment margin improved 100 basis points in constant currency due to positive mix from Energy Solutions as well as on ongoing synergy realization, pricing benefits and modest input deflation. Adjusted EBITDA margins improved sequentially 30 basis points from the Q1. Lower prices on pass through metals such as tin and silver We're tailwind to margins relative to Q2 2022. Excluding the impact of $89,000,000 of pass through metal sales in our Assembly Solutions business, Our adjusted EBITDA margin would have been 23% in the 2nd quarter.

Speaker 4

On Slide 5, we share additional detail on organic net sales in our two segments. For our Electronics segment, mobile phone and consumer electronics demand had the most material impact in the quarter. Our Automotive Electronics business remained resilient, particularly for power electronics applications in electric vehicles. Assembly Solutions grew 3% organically, driven by new business growth and traction with new High Reliability Alloys for use in automotive end market. The assembly business is less driven by the smartphone market.

Speaker 4

Semiconductor Solutions declined 16% organically, reflecting reduced utilization levels at semiconductor fabs. Circuitry Solutions declined 23% organically as persistent smartphone weakness continued from the end of last year. Customers across the mobile supply chains on meaningfully lower production volumes and the overall PCB market was as weak as we have seen in many years. Our Q2 performance is better than data we are seeing from several of the largest suppliers of printed circuit boards, who are reporting greater than 30% declines in Q2. Additionally, we are comparing against a period of particularly strong performance in cloud computing and data storage that benefited our memory disk products in the first half of twenty twenty two.

Speaker 4

We expect demand from both smartphone suppliers and memory disk customers to improve in the second half and into 2024. For the Q2, organic net sales in Industrial and Specialty declined 2% year over year. Industrial Solutions 3% organically as demand in global construction and industrial markets slowed from strong prior year levels. Our automotive business in the Americas and Europe relatively stable sequentially. Our participation in local Chinese OEM supply chains flagged that in other regions.

Speaker 4

We have not seen the full benefit of automotive recovery in China. We have a specific strategy associated with that supply chain and opportunities in their EV market. It is a large and largely untapped market opportunity that we intend to pursue actively. Energy Solutions remains a bright spot, With sales growing 11% organically in the quarter as production and drilling activity has rebounded and price actions continue to take effect. We expect continued growth for this business throughout the year, but at a lower rate than experienced in the first half given tougher comps.

Speaker 3

Slide 6 addresses cash flow

Speaker 4

and the balance sheet. We generated $67,000,000 of free cash flow in the 2nd quarter. We invested $16,000,000 into working capital, which reflects a modest inventory build primarily related to a large new business win in Mexico and expectations for stronger demand in Q3. Net CapEx in the first half was $22,000,000 which is below the annual run rate we expect for this year. This number is expected to increase as certain growth projects and integration initiatives progress, but we now expect to spend less than the $70,000,000 we previously forecasted.

Speaker 4

Turning to the balance sheet. Our net leverage ratio at the end of the quarter was 3.7 times when including the estimated full year benefit of the VIAForm product line. This sequential increase was driven by the Viaform transaction, which we primarily funded through the issuance of $150,000,000 in term loan A. The new term loan is floating rate at SOFR plus 1.75. However, we have swapped it into 4.6% euro fixed through its January 2026 maturity.

Speaker 4

Our net leverage ratio is temporarily elevated above our targeted ceiling of 3.5 times, but we expect to be back below this level by year end. We believe this modest uptick is appropriate for a short period of time given the unique capital allocation opportunities in the second quarter and the continued strong cash flow generation we have seen and should continue to see. As a reminder, the swap maturities on our Term Loan B are evenly split over the 3 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 remains strong. And with that, I will turn it back to Beth.

Speaker 4

Thank you, Carrie.

Speaker 3

Our first half does not reflect the long term earnings power of our business. We've seen the trough and are beginning to recover from it. The self help steps we are taking around cost and ongoing investment in technology should drive incremental earnings acceleration through the recovery. The pace of that recovery is uncertain as we sit here today, but we have conviction it is underway. Our circuitry business is on track for 10% month over month Growth in July and our semiconductor orders appear to reflect the utilization increases we're hearing about at the fabs.

Speaker 3

For the Q3 of 2023, we expect adjusted EBITDA of approximately $125,000,000 This sequential improvement assumes a pickup in our You should also begin to see impact from ongoing cost actions. We expect our electronics business to grow about 10% sequentially 2nd half over first half this year. This is only modestly lower than our expectation entering the year. However, we'll be growing off a lower baseline. This translates to an updated full year 2023 adjusted EBITDA guidance range of $490,000,000 to $500,000,000 Given some favorability on CapEx and cash taxes that partially offset the lower level of adjusted EBITDA, we expect to generate roughly $265,000,000 of free cash flow for the full year.

Speaker 3

In 2023, even with the expected second half recovery in electronics, semiconductor production and units in high end electronics will be far below their long term averages, let alone more recent peaks. With emerging applications for computing power, Expanding vehicle electrification program, our continued commercial execution with large wins converting to revenue as new fabs come online In the full year benefit from our cost program, we're confident that Element Solutions is positioned for strong growth in 2024 and beyond. In that context and in closing, despite a challenging quarter and first half, we remain enthusiastic about the future and have evidence that the growth we have come to expect from our businesses is returning. The potential for our business resides in the people in our business, And I'm grateful for their energy and effort this quarter and going forward. With that, operator, please open the lines for questions.

Operator

We'll pause for just a moment to compile the Q and A roster. Your first question comes from the line of Josh Spector with UBS. You can go ahead.

Speaker 5

Yes. Hey, guys. Thanks for taking my question.

Speaker 3

Good morning, Matt. So just looking

Speaker 5

at the cadence Hey, good morning. So looking at the cadence into 3Q and 4Q, I mean, you talked about order books for circuitry up 10%, I think smartphone So I'm looking about up 10%, gross margin benefit via form layers on. I guess with what you laid out there, less than 10% What are some of the offsets in your mind that we should be considering? Or is it just the fact that the recovery has been more slow and there's some conservatism in pushing that

Speaker 3

Yes. Thanks for the question. Look, phasing in the second half of The year is difficult to call in most years. And so the guidance assumes a continuing ramp in the second half, Both in the semiconductor market and in the circuitry market, smartphone units will still be down in Q3, year over year. And it also has incremental cost actions that will contribute more in the Q4 than the Q3.

Speaker 3

We have additional cost levers at our disposal Should we need them, they're not fully contemplated in the guidance and which we could potentially use in both quarters. So as we think about the back half of the But could be more equal or it could be more 4th quarter weighted. And we took a more conservative position on Q3 given that we're still Early in the recovery. When you compare the Q3 of 'twenty three guide to the Q3 of 'twenty two, it's important to note And we called this out at the time. We took a $12,000,000 bonus accrual reduction in Q3 of 2022.

Speaker 3

And if you adjust for that and look Currency, we're actually showing underlying growth in adjusted EBITDA year over year.

Speaker 5

Okay. Thanks for that. That's helpful. And just with Viaform and that acquisition, just Can you quantify what you're layering in this year versus what flows into next year? And just you continue to talk about that as a way to deepen customer relationships.

Speaker 5

So just how is that going so far? And how do you think about what that could mean to the rest of ESI's semis or broader electronics portfolio?

Speaker 3

Yes. So there are 2 questions in there. The first is the current year impact of VIAForm. Given timing and inventory builds, We're expecting, call it, dollars 4,000,000 impact in 2023. And unfortunately, a lot of that's been Eroded by FX headwinds, incremental FX headwinds over the Q2.

Speaker 3

So it's about net to the 2023 year. With regard to the longer term opportunities here, the customer reception to this Development has been very, very positive. And we've gone from a more modest player in some of the front end of line customers to a very important one. And our engagement with those customers has rapidly accelerated. The roadmap exchanges we've had have increased and the Seniority of the people at the customer level involved in those roadmaps has increased.

Speaker 3

Combine that with Cuprion and our engagement at the leading edge Has really accelerated and the perception of our company has radically improved. And as we said on the call, it's a leading indicator For longer term growth and wallet share.

Speaker 5

Okay. Thanks, Ben.

Operator

Your next question comes from the line of Kieran De Bruin with Mizuho Securities. Your line is open.

Speaker 6

Hey, good morning.

Speaker 3

I was just

Speaker 6

wondering if you can dial in a little bit more into the Industrial segment. Yes. I know that China has particularly been weak on the construction side, but automotive seems to have been trending, I think ahead of expectations during the first half of the year. So kind of any color that you can give us in terms of what you're seeing globally From an automotive perspective and from like an industrial

Speaker 3

and constructive perspective and how you're thinking about that in

Speaker 7

the back half of the year would be helpful.

Speaker 3

Yes, thanks for the question. So the industrial business, the largest exposure is automotive followed by construction. The construction market has softened in Europe and remains quite soft in China. And the automotive recovery hasn't been equal On a regional basis, the Chinese market has seen more of an increase and that increase is coming from local Chinese OEMs where we're under traded, right? We've always been more heavily weighted towards Western OEMs, both in China and in the West.

Speaker 3

And so taken together, we saw A modest organic decline in IS in the second quarter that's been offset by pricing actions and synergy realization. So from a profit that business has actually had modest growth in the second quarter. And we're not anticipating a dramatic Change in those dynamics in the second half, we expect the second half to be comparable to the first half, with some incremental margin improvement from raw material deflation, logistics

Speaker 6

Great. Thank you. And then maybe just a quick follow-up. You mentioned additional potential cost levers that aren't Currently in the guidance that you could pull in the back half of the year, can you just dial in a little bit more into what those might be and how we should think about that impact if you were to have to pull those levers? Thank

Speaker 3

you. Sure. So as one of the hallmarks of the businesses Are there variable operating expense models? And the buckets are things like T and E and marketing And then incentive compensation and when the company is not growing, all of those levers are at play. And so we have plans around cost containment, some of which are temporary around travel and so forth.

Speaker 3

And then there's a modest cost program, which will be Permanent cost savings that will accelerate earnings growth into 2024. Think about the order of magnitude combining those two things is around $20,000,000 in the back half.

Speaker 6

Great. Thank you.

Operator

Our next question comes from the line of John Roberts of Credit Suisse. Your line is open.

Speaker 8

Thank you. I just have one. Are your backlogs improving equally across assembly, Dmitry and semiconductors, normally we think of semiconductors being upstream of the other businesses. I don't know whether the backlog there is increasing first or Talk about any unevenness you might be seeing between the different parts of the supply chain.

Speaker 3

Yes. So our semi business, we talked about it Being down 16% organically year over year in the Q2, if you take out the precious metal impact there, it was down about 9%, which is outperformance relative to the circuitry business, which was down below the impact of Smartphone units driven by some of the inventory, Bill, particularly in local Chinese smartphones. So the room for recovery, You could say is greater in the Circuitry business. The semi business is recovering earlier as one would expect. But the circuitry business, as we said, in July, that business looks to be up 10% over June.

Speaker 3

So there isn't a huge lag. A bright spot across the whole portfolio was the assembly business, which has been really resilient from a high end electronics perspective given its Penetration in vehicle electrification, some of the innovation we've had around higher reliability alloys, which are gaining share from more legacy technologies, particularly automotive applications. That's a business that's been stable and we expect it to grow Nicely in the back half.

Speaker 7

Great. Thank you.

Operator

Your next question comes from the line of Bhavesh Ladaya with BMO Capital Markets. Your line is open.

Speaker 2

Hi, good morning. Thanks for taking my questions. Good morning. Maybe one on Cuprion acquisition, We noted you are working towards getting product qualifications in place around the nanocopper technology. Clearly in early innings today, can you comment on the timeline it would take for earnings to show up in this platform?

Speaker 2

And is this thermal management, a decent technology, something that you can use in your existing offerings in the semi or circuit resolutions?

Speaker 3

Yes. It's a great question. We're really, really excited about Cuprion. It is industry changing technology The reception we've had from existing customers and even new customers has been outstanding. The number of projects we're working on, Qualifications around is huge.

Speaker 3

North of 30 opportunities have been created just in the 1st couple of months here. They're all at the leading edge. And so it's long qualification timelines, but they're big revenue opportunities. The earn out attached to this business is capped at $100,000,000 of revenue, Right. So we pay a multiple of revenue translates if we hit it and the margins we expect to about 4 times EBITDA.

Speaker 3

And we've got, at this point about 5.5 years to get to $100,000,000 of revenue. We fully expect to pay all of that earn out, Which would make this an outstanding transaction because it would contribute tens of 1,000,000 of dollars of EBITDA, all incremental growth. The other thing that's great about this is the applications for this material span all of our existing electronics verticals and into new verticals. So it's got applications in IC substrate metalization, got applications in die attach, it's got applications in package attach. And we're working with customers in each of those areas, existing customers and new ones as I said.

Speaker 3

It's got the outlook is very bright.

Speaker 2

Got it. And then a question on your balance sheet. Your leverage went higher following the Uniform transaction. You're targeting reaching 3.5 by year end. Assuming we are there, what comes next for you?

Speaker 2

Do you believe you have invested what you want during this trough deciding? Or is the philosophy to continue investing as long as the right assets come along? Just wanted to get a sense of your priorities once we reach your leverage targets.

Speaker 3

Yes. Our priority at the moment is to get inside of that leverage ceiling and that's where we're going to be that's what you should expect in the back half of the year and then we'll remain opportunistic going forward from there.

Speaker 2

Fair enough. Thank you.

Speaker 3

Thank you.

Operator

Your next question comes from the line of Chris Kapish with Loop Capital Markets. Your line is open.

Speaker 8

Good morning. So one question as a follow-up to some of the conversation around these copper acquisitions. So it sounds like the engagement The ecosystem has been vitalized. I'm curious if that engagement has Is it more focused on solely next generation technology nodes or is it also a play here For your materials, with a more focused and direct approach commercially to display some Alternative suppliers and legacy nodes where interconnects were definitively copper or is it really across the board in terms of technology nodes?

Speaker 3

Are you referring to VIAForm or Cupriant, Chris?

Speaker 8

Well, I guess, I was thinking more via form, but I guess, it's Yes. Couprie and I'm assuming it's more next gen.

Speaker 3

Well, it's relevant for both. Couprion could display some of the current technologies used for lower end power electronics, where some of the lower end V users are using legacy assembly products, given that it's less expensive than And argomax and has better thermal management capabilities and adhesion capabilities than legacy solder products. VIAForm is an interesting situation where we do believe we have the opportunity to win existing business And displace existing vendors, that's upside to the plan. So there are really 3 avenues for growth versus Increasing utilization with existing customers. 2nd is wins at new nodes that are coming online.

Speaker 3

And third is displacing Competitive material and we've got a good shot we believe at all three of those, which translates to significant incremental earnings contribution from this acquisition.

Speaker 8

Got it. That's helpful. And then just to follow-up on, you called out sort of semiconductor Fab utilization rates recovering, exiting, 2nd quarter. I'm just can you just confirm, my understanding is your deposition materials into Chipmakers is more relevant with logic foundry fabs. And if that's the case, is this could this be looked at as a harbinger for Pronounced improvement in PCB activity at some point, just any color on that and how you see that right now?

Speaker 8

Thanks.

Speaker 7

Sure.

Speaker 3

So yes, our semiconductor materials skew towards logic applications. And as folks in our supply chain like to say chips don't float. So the more chips that are being made, the more PCBs need to be made to for the electronics hardware they're going into. And so yes, we do believe it's a leading indicator for the circuit board industry and that's contemplated in our Got it. And evident in our July numbers.

Speaker 3

Right.

Speaker 8

Okay. And then finally, is there any visibility in and around Any sort of inventory builder destocking activity for your materials feeding into this ecosystem? Or has that not really I don't know if you have visibility, but I'm just curious if the overall demand weaknesses could be tied to that at all. Thank you.

Speaker 3

Sure. And so our materials are not stocked at the customer level. Some finished goods from our customers Have been docked at the customer level and we've been digesting that. We saw that in the Q3 last year in our industrial business. And over the past two quarters, sell in has been less than sell through of smartphones.

Speaker 3

And so finished goods, right, Smartphone inventories were elevated and they're starting to be digested. And that's why if you look at the large PCB fabs, for example, In Asia, they were reporting numbers down 30%, 40% in the second quarter, because of that inventory dynamic. We believe that inventory dynamic is largely is very much improved as we enter the Q3.

Speaker 8

Thank you.

Operator

Your next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is open.

Speaker 7

Hi, good morning. Thank you for taking my questions. I was wondering if I could dig a little bit more into your confidence on the sequential improvement you expect in Q4. And I guess, you do have some The cost cutting in your pocket and then maybe some more accretion from the VireForm business, but I was looking more at the demand side. Is that based More on the leading indicators that you're seeing on the semi business, maybe firm orders in hand or direct forecast from your customers, just trying to get a better sense of demand as you head into Q4 and into 'twenty four as well.

Speaker 9

Yes.

Speaker 3

So thanks for the question, John. It's a short cycle business, right? So our visibility to Q4 right now is Limited, but we're comfortable with our second half. And in all years, it's hard to Be concrete on what's going to fall in the Q3 and what's going to fall in the Q4 and we've basically taken a more conservative approach to the Q3 With knowledge that the semi ramp isn't going to be an elevator, it's going to be a slope and that the cost actions we're going to be taking Will impact the Q4 more than the Q3. And that's basically the framework for the second half guide.

Speaker 7

Okay, great. Thank you. And then just more specifically on the VIAForm business, how Quickly do you expect that to grow in the coming years? Do you have maybe some internal targets you could share? I know that there's probably a lot of opportunity out there with the new foundries that are going up.

Speaker 7

But maybe just help me understand what Entegris maybe wasn't doing that you can do to help gain share in that business and maybe some of the audit development and other marketing stuff that you can

Speaker 3

Entegris was a great partner for us for many years and really grew this business nicely over a 20 year period.

Speaker 2

The most immediate

Speaker 3

growth will come from increased fab utilization. The incremental opportunities are from new fabs coming online, which should happen in 2024 into 2025 and then our ability to display some competitive material, which Is 9 to 12 months cycle. And so and then there's incremental innovation where we have been innovating around This product should have new technology to bring to bear to the market. So in 2024, we should see the benefit of the increased fab utilization Driving earnings contribution growth and some of the new fabs coming online and then beyond that it should be from competitive wins and Technology Introduction.

Speaker 7

Okay, great. And then we may Talked about this before, but I was wondering at a high level, could you just give us an update on the long term EPS goals that you've put out there? What needs to happen for you to hit that, just given the environment we're in today and kind of what you're seeing within a couple

Operator

of years or so?

Speaker 3

Yes. Obviously, the earnings power in 2023 is behind the straight line trajectory from when we That goal back in early 2022. But what we've seen from this business is that it can recover very rapidly. And from a capital allocation perspective, very interesting things can become available. And so we're going to have opportunities to deploy substantial cash flow Over the next 3 years and participate in recovery from a cyclical trough that should contribute at attractive incremental margins And drive the bottom line.

Speaker 3

If we look back to 2020, we thought there was very little chance we were going to hit our goal Sitting in the middle of the year and we did so 18 months later. So we have not lost hope or confidence in our ability to deliver Even though the slope is a little steeper from where we stand today.

Speaker 2

Great. Thanks, Bill.

Operator

Your next question comes from the line of Steve Byrne with Bank of America. Your line is open.

Speaker 9

Hi, this is Rob Hoffman on for Steve Byrne. I want to go back to your assembly business and just see if I can get a little more detail on your penetration And do you

Speaker 3

have electrification? Sure. So we provide Materials used in power electronics, both for die attach and package attach were very high performance, electric vehicles. And we've got a world class material for that application that improves reliability And performance speaking to range for those vehicles. Our penetration in that market It's actually still modest, because legacy technologies are still being used.

Speaker 3

When you look at some of the emerging electric vehicle, providers In China, they're not using this material. We just opened an application development lab in Shanghai to much fanfare and Have really strong engagements with most of the leading electric vehicle companies in China and around the world. And this acquisition of Cuprion brings to bear another lower cost, Slightly lower performance, but still much improved performance relative to legacy technology product to meet that growing need. So vehicle electrification will be a significant tailwind and we're in the pole position to benefit disproportionately from that, as units grow. And I'm just talking about the assembly business.

Speaker 3

I'm not even talking about our other businesses. But as units grow and as our technology It's better understood, and therefore deployed.

Speaker 9

Thanks. And then in regards to your progress on the internal initiatives to

Speaker 3

Yes. So this is The appropriate activity in all times to manage cost, the variable cost nature of the business is something that is unchanged. And then there are some other ongoing actions to reduce OpEx and accelerate growth going into The 2024. Our view is if one of our businesses is impaired, We will reduce significant costs, but our view is that none of the businesses are impaired. And therefore, our cost actions are around the margins Opportunistically, we feel strongly that we have to retain our very talented people all over the world to benefit from the recovery that's inevitable.

Speaker 3

And so the cost actions are targeted. The permanent cost actions are targeted and the temporary ones are formulaic, frankly. The cost just falls out of the business when we're not growing.

Speaker 9

Got it. Thank

Operator

Your next question comes from David Silberg with CL King. Your line is open.

Speaker 10

Yes. Hi, good morning. Thank you. So there's been a lot of discussion about the VIAFORM acquisition and to me it looks like a very attractive strategic addition. Couple of questions, but firstly, I'm just wondering how replicable this might Be across your portfolio.

Speaker 10

In other words, are there other distribution agreements or other Relationships where maybe you could bring high value, maybe front end of the line products into your Full control as you did with VIAForm. And then maybe broad more broadly, these last couple of Actions here kind of point to, I guess, the convergence between the chip, the wafer and the circuit board maybe with advanced Packaging is the intersection. But how do you think your balance is right now in that regard Versus where you'd like to be, I don't know, 3 to 5 years from now?

Speaker 3

So thanks for those questions. So the arrangement around Viaform was a unique legacy situation, where we had Split responsibility, if you will, and a predecessor company to Element sold the distribution rights to that product line in 2,003. So I don't see more opportunities like this because typically we go direct for applications like this. That having been said, there have been opportunities where we've identified great technology that we believe we can leverage our leading commercial technical teams and supply chain to help commercialize. And so there may be more opportunities to engage with emerging technology companies and provide the value that our footprint and capabilities bring to them to create win wins.

Speaker 3

That's something that we have been looking at. With regard to this next generation Electronics convergence, it's a very powerful, very powerful trend In our end markets and one that we're benefiting from and we sit really nicely between In that bull's eye, right, where we have capabilities in circuit board capabilities in semiconductor, both front end of line and packaging And capabilities and assembly. And so when we bring the breadth of our product portfolio to bear at the largest OSATs And semi fabs and OEMs, electronics OEMs, they're stunned by our capabilities. And We're seeing it in the P and L already. If you look at the numbers in our semiconductor business, we've said for a long time that it will outgrow our other businesses and it has been.

Speaker 3

And it's just Emerging. It's a unique set of capabilities that we have at Element Solutions that are increasingly appreciated by the supply chain and the future is very bright in that regard.

Speaker 10

Okay. Thank you for that. Appreciate it. Just one more on the Cuprion Purchase or acquisition, but not your last Analyst Day, but I think 2 analyst days ago, you talked a little bit about How your company with its global footprint and leveraging your strong customer relationships, you'd be an attractive Partner for attractive but emerging technologies that could use your Company's assets is kind of a gateway to commercialization and Greater success together than apart. Is the Cuprion transaction an example of that?

Speaker 10

In other words, have you been Working with them for a while and kind of complementary skills at work here and then it got to the point where It made sense to bring this technology in house or is this something where maybe they were shopping Round to a number of buyers?

Speaker 3

Yes. Cuprion is a case study in that and it's Cuprion chose To work with us, they had alternatives and they chose to work with us because we were the only company, we are the only company that has a capability The preponderance of their applications, right? So we've got capability in circuit board where their material can be used for I see substrate metallization. We've got capability in die attach and assembly materials, power electronics. The things that their Potential customers we're looking at were all things that their potential customers for the most part were buying from us already.

Speaker 3

And This was just a new capability for emerging needs. And so we were a perfect match. And, it's a case study for that type of investment.

Operator

There are no further questions at this time. I'd like to turn the call back over to Ben Glicklitsch for closing remarks.

Speaker 3

Thank you very much. Thank you to everybody for joining. We look forward to seeing many of you soon and hope you have a great day.

Operator

This concludes today's conference call. You may now

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Earnings Conference Call
Element Solutions Q2 2023
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