Element Solutions (US:ESI)2022-07-30 21:25Financial Data and Key Metrics Changes - Organic net sales grew 6% in Q2 2022, consistent with Q1 performance, despite a challenging comparison to the strong COVID recovery in the first half of 2021 [12] - Adjusted EBITDA grew by 13% year-on-year on a constant currency basis, with adjusted EBITDA margin declining by 170 basis points due to higher metal prices [10][13] - Adjusted EPS increased by 9% on a reported basis, despite a negative 7% impact from foreign exchange translation [13] Business Line Data and Key Metrics Changes - Electronics segment saw organic growth of 8% year-over-year, with Circuitry Solutions growing 14% and Semiconductor Solutions growing 13% [14] - Industrial & Specialty segment experienced a 2% organic growth, with Industrial Solutions growing 1% and Energy Solutions also growing 2% [17][18] - Adjusted EBITDA in the Industrial & Specialty segment grew 13% on a constant currency basis, but margins declined by approximately 3 percentage points due to increased logistics and freight costs [18] Market Data and Key Metrics Changes - The strengthening U.S. dollar negatively impacted sales by 7% in Q2 2022, with expectations of continued headwinds into the second half of the year [10][23] - Demand in the electronics segment remained healthy, driven by electric vehicle (EV) and 5G penetration, while the automotive market showed signs of recovery [11][29] - The company expects a modest recovery in the automotive market, with underlying structural demand remaining higher than production levels [11] Company Strategy and Development Direction - The company is focused on long-term strategic growth while managing near-term volatility, emphasizing the importance of sustainable chemistry and integration of recent acquisitions [9][24] - The management highlighted the importance of maintaining a strong sales pipeline and new business wins, indicating confidence in future growth opportunities [40][41] - The company is positioned to benefit from secular growth trends in electronics, particularly in EVs, internet infrastructure, and data storage [28][29] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the complicated macro environment, including supply chain challenges and geopolitical volatility, but expressed confidence in the resilience of many end markets [7][10] - The company revised its adjusted EBITDA guidance to a range of $565 million to $575 million, reflecting expectations of sustained strength in electronics and a modest recovery in automotive production [23][25] - Management indicated that they have cost levers available to manage profitability in case of adverse market conditions [24][53] Other Important Information - The company generated $56 million of free cash flow in Q2 2022, with a total cash flow guidance revised to $270 million for the year [19][20] - Share repurchase activity accelerated, with approximately $43 million of stock bought back, representing nearly 1% of shares outstanding [20] - The net leverage ratio remained steady at 3.2x, with term loans swapped to fixed rates to mitigate the impact of rising interest rates [21] Q&A Session Summary Question: How did your volumes for auto manufacturers in Q2 compare to industry bill rates? - Auto bill rates were down 14%, while the company's auto business was up 1% on sales, primarily driven by price [31] Question: How flexible are the PCB and semiconductor fabs in shifting between markets? - PCB fabs have some variability in end markets, and many are running close to full capacity [32] Question: Can you parse out the organic performance in the quarter and your outlook? - Price was a larger driver than volume in Q2, but there was volume growth in certain end markets, with expectations for organic growth in the second half [34] Question: How much are you under-earning at this point versus normalized production levels? - There is a significant unit deficit in auto production, indicating substantial earnings opportunity when production normalizes [36] Question: Have you seen evidence of inventory building in the automotive supply chain? - No evidence of inventory building has been found in the automotive supply chain [39] Question: Can you elaborate on the record sales pipeline and new business wins? - The company won more business in value in the first half than in all of 2019 or 2020, indicating strong medium-term momentum [40] Question: What is your exposure to different chip makers in the semiconductor market? - The business is disproportionately in the logic side of the semiconductor market, which remains strong despite weakness in the memory market [43] Question: How much of the pricing pushed through in the last 12 months can be retained when costs subside? - Pricing is broken into three buckets, with negotiated prices historically retained, while metal pass-through and commodity surcharges are more variable [45] Question: Are you seeing any pent-up demand from the lockdowns in China? - The electronics business did not see significant impacts from lockdowns, while the automotive market is expected to recover in Q4 [47] Question: How sensitive is the company to a potential recession? - The company has proven the ability to grow in mixed markets and has a highly variable operating cost model to manage profitability [49] Question: How confident are you in your smartphone customers' orders for the rest of the year? - The company has accounted for a softer smartphone ramp in its guidance and has multiple ways to deliver on its commitments [50]