Element Solutions (ESI) - 2024 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported adjusted EBITDA margins expanded by 250 basis points, with adjusted EBITDA growing over 20% year-over-year on a constant currency basis [15][40] - Net sales in electronics grew 7% organically, while net sales in the Industrial & Specialty segment declined 1% organically [20][21] - 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 [40] Business Line Data and Key Metrics Changes - Revenue in Circuitry Solutions grew over 20% organically, driven by strong demand from high-performance computing, AI, EV, and certain mobile markets [9][15] - The Industrial & Specialty segments experienced a combination of softer automotive demand in Europe and lower revenue from metal price surcharges, yet profitability increased significantly due to lower raw material costs [10][11] - Semiconductor solutions grew 2% organically, with significant increases in wafer-level packaging sales in Asia, partially offset by softer semiconductor assembly sales for power electronics [23] Market Data and Key Metrics Changes - Demand across Europe and from automotive customers globally was sluggish, while Asia showed relative strength with increased demand from Chinese exports [24] - The smartphone market has not recovered meaningfully year-to-date, with estimates suggesting only low single-digit growth from Western OEMs [42] - Energy Solutions remained a bright spot with organic sales growth of 9% in the quarter, driven by volume and modest pricing actions [44] Company Strategy and Development Direction - The company is focused on scaling manufacturing capacity to meet commercial opportunities in wafer-level packaging and Circuitry Solutions [27][18] - Investments are being made in dye and package-attached solutions, a new research center in India, and high-volume manufacturing capacity for nano copper technologies [16][18] - The company aims to optimize its footprint by expanding manufacturing capacity for future growth areas and building research and applications development in high-leverage geographies [47] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in long-term growth, citing emerging sources of demand in electronics and a constructive view on broader electronics demand improvement beginning in the second half [46][37] - The company does not expect a recovery in industrial markets in the second half but anticipates stronger results from the semiconductor business [81][46] - The outlook for 2024 has improved, with expectations for market outperformance [37] Other Important Information - The company generated $52 million of free cash flow in the second quarter, with$33 million invested into working capital due to sequential revenue acceleration [25] - CapEx in the quarter was $15 million, focused on strategic capacity expansion projects and applications development initiatives [33] - The company is on track for record EBITDA this year, despite a$50-plus million FX headwind [130] Q&A Session Summary Question: Importance of smartphones and second half outlook - Management indicated that while smartphones are a significant source of demand, new sources of demand are emerging outside the smartphone market, propelling business growth [51] - The third quarter is historically the strongest, with expectations for a 5% to 10% uplift in the second half, depending on smartphone market recovery [53] Question: Strength of 2Q and uncertainty in 3Q - Management does not see 2Q as a pull forward, citing new emerging sources of demand driving substantial growth [55] Question: Semiconductor business growth - The wafer-level packaging business had strong growth, while the semi-assembly business was softer due to the electric vehicle market [60] Question: Free cash flow conversion - The company expects free cash flow in the range of $280 million to$300 million for 2024, driven by working capital investment [71] Question: M&A focus - Management is open to opportunistic M&A, looking for businesses that can be improved and are available at attractive valuations [82] Question: Incremental margins in the quarter - Incremental margins were driven by a favorable mix and cost deflation, with higher-margin verticals outperforming [112] Question: Long-term growth confidence - Management cited cyclical recovery and secular growth as key factors for confidence in record earnings ahead [130]