Yahoo Finance Element Solutions Inc (NYSE:ESI) Q1 2024 Earnings Call Transcript
Element Solutions Inc (NYSE:ESI) Q1 2024 Earnings Call Transcript April 30, 2024
Element Solutions Inc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone. My name is Shelly, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Element Solutions 2024 Quarter Finance -- First Quarter Financial Results Call. [Operator Instructions]. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions]. I'd now like to hand over the call to Varun Gokarn, Senior Director of Strategy and Finance. You may now begin, please.
Varun Gokarn: Good morning, and thank you for participating in our first quarter 2024 earnings conference call. 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 Investors section of the company's website. During today's call, we will make certain forward-looking statements that reflect our current views about the company's future performance and financial results. These statements are based on assumptions and expectations of future events, which are subject to risks and uncertainties. Please refer to our earnings release, supplemental slides and most recent SEC filings for a discussion of material risk factors that could 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. Today's materials also include financial information that has not been prepared in accordance with US. GAAP. Please refer to the earnings release and supplemental slides for definitions and reconciliations of these non-GAAP measures to comparable GAAP financial measures. It is now my pleasure to introduce our CEO, Ben Gliklich.
Benjamin Gliklich: Thank you, Varun, and good morning, everyone. Thank you for joining. Element Solutions' strong results for the first quarter reflect solid execution in recovering electronics markets. With a mixed overall macro environment in which our strength and increasing capabilities in fast-growing events packaging and data center markets, offset a mediocre market for smartphones and softness in Western automotive and general industrial supply chains. Our improving value proposition through investments in leading-edge semiconductor technologies and the impact of legacy pricing actions amidst deflation in certain commodities drove substantial profit growth. Constant currency adjusted EBITDA grew 17% year-on-year on the back of over 250 basis points of margin expansion.
Our growth this quarter reflects the benefit of portfolio diversification and suggest the potential for further improvement as the electronics market recovery broad. Our focus on deep growing profit pools should continue to generate market outperformance and strong incremental margins. The Electronics business is recovering with a surge in semiconductor solutions, including advanced and wafer level packaging applications. Our volumes in that vertical grew in the high teens year-over-year, outpacing the market and our Circuitry Solutions business. Our more industrially-oriented circuit board assembly business declined slightly. The Industrial and Specialty segment saw a combination of softer automotive demand in the US. and Europe and lower revenue from metal price surcharges as certain commodities have deflated.
Profitability in the segment increased significantly on lower raw material costs, ongoing strength in our offshore business and an improvement in our Graphics business. Our markets are roughly off to the start we expected and margins are driving our outperformance. Gross margins returned solidly north of 40% this quarter, an internal benchmark for us and should be stable at these levels borrowing metal price impacts. While many of our supply chains are normalizing after a period of heightened volatility and shortages, logistics prices remained elevated relative to 2019 levels. Notably, our margins in the first quarter have been achieved volumes well below where they had been in the past few years. While our cost of goods are mostly variable, margins have improved despite volume deleveraging.
This further underscores the success of our investment in higher value, higher-margin applications and our ability to offset cost increases. The benefit of cost actions taken last year contributed to bottom line profitability as well. This has not come at the cost of growth capital. We continue to invest in strategic capabilities, semiconductor assembly or advanced packaging technologies, a research center in fast-growing EMEA and high-volume manufacturing capacity for our new Kuprion products. Throughout what has been a prolonged downturn in our electronics end markets, we've maintained and in certain instances, grown sales and technical resources needed to support customers as the market evolves and new technologies take root. Our commercial and innovation teams remain focused on delivering high-value solutions to solve customer pain points and high-growth applications.
Our late-stage electronic sales pipeline in wafer level packaging and circuitry solutions grew meaningfully in the first quarter. This is in part due to the improved customer intimacy afforded by our highly successful ViaForm transaction, an investment we've made in improving our circuitry technical capabilities. We paid our first product milestone earnout payment for Kuprion this quarter and ActiveCopper opportunities are progressing rapidly. We're pleased with the outlook from our 2023 investments, but work remains on the operational steps necessary to maximize their long-term value. At the same time, our balance sheet is improving to the point where we can consider additional capital deployment aligned with our strategy. The year is off to a solid start and the outlook is positive.
Carey will now take you through our first quarter business results in more detail. Carey?
Carey Dorman: Thanks, Ben. Good morning, everyone. Continuing on Slide three where Ben just talked to some of the highlights. You can see a summary of our first quarter financial results. Organic sales grew 1% year-over-year and constant currency adjusted EBITDA grew 17%. These strong incremental margins reflect a substantial mix benefit from recovery in higher-margin semiconductor and Circuitry Business in Asia as well as lower raw material costs in industrial surface treatment and favorable mix in the overall I&S segment. In Q1 2023, the high-end smartphone supply chain and the memory disk markets experienced significantly reduced demand with inventory destocking that continued through much of that year. As we lap this period, we have seen memory disk recovery and growth in smartphone supporting circuitry solutions.
Net sales in our Industrial and Specialty segment declined organically 3% at high levels of offshore energy activity and improving North America printer demand in graphics were offset by declines in our industrial surface treatment business. This quarter, total company net sales and adjusted EBITDA were both negatively impacted by strengthening US. dollar by roughly 2% and 4%, respectively. Adjusted EBITDA margin improved almost 300 basis points year-over-year in constant currency terms. The margin trend accelerated this quarter, improving sequentially 120 basis points from Q4 2023. Excluding the impact of the $79 million of pass-through metal sales and Assembly Solutions, our adjusted EBITDA margin would have been 26% in the first quarter.
On Slide 4, we share additional detail on the drivers of organic net sales growth in our two segments. In Electronics, categories that saw significant destocking from last year, grew in the first quarter of 2024, a positive sign for more broad-based recovery as the year progresses. We saw consistent softness in our industrial-oriented businesses, particularly in the Americas and Europe, that impacted growth in both Industrial Solutions and our Assembly Business in electronics. In Assembly, soft industrial demand in Western markets drove a 2% decline in organic net sales. The circuit board assembly business has more exposure to industrial applications with certain capabilities focused on high reliability alloys required for demanding automotive electronics use cases.
While year-over-year volumes in China and Asia were broadly were positive in the quarter, volumes declined in Americas and Europe. Circuitry Solutions sales improved 8% organically, with growth primarily coming from a recovery in our memory disk business. Inventories of our customers' finished products declined in 2023, and this market has picked up again in 2024 on the back of resumed investment in data storage for cloud computing enterprise servers. Our disk drives still represent the most affordable mechanism for data storage per bit and the near-term growth outlook is favorable. The first quarter showed other signs of market stabilization with overall smartphone units estimated to have grown at 8%. However, not all handset OEM supply chain experienced growth in the first quarter of 2024 with the bulk of the improvement occurring in China-based manufacturers.
While we do skew towards the non-Chinese device makers, we have content across most smartphone models. Our customer base is broad, and our growth generally should correlate to overall industry units rather than any particular manufacturer over time. Customers globally are expecting an improved second half. Semiconductor Solutions led growth for the segment with organic net sales up 11%. We saw significant increases in wafer level packaging sales in Asia for both semi fabs and [ph]OSAT. We expect a continuation of this demand growth related to advanced packaging that supports memory, server and AI chip markets. Power Electronics products also continued to grow in the first quarter. as we successfully expand our Argomax centered silver technology to a broader customer base of electric vehicle manufacturers.
Moving to Industrial & Specialty, organic net sales declined 3% year-over-year. Roughly half of the 6% decline in the Industrial Solutions vertical was driven by reductions in surcharges for commodity metals like palladium. While these price swings impact headline sales, the higher mix of value-add, high-margin recurring chemistry revenue benefits margins. Demand from automotive customers was sluggish, in line with global auto production in the first quarter. European construction and industrial end markets remain soft, with customers continuing to operate at reduced volumes. As we move through 2024, we expect a negative impact of commodity surcharge pricing to ease and new customer wins to benefit sales volume, particularly in the second half of the year.
Graphic Solutions sales increased organically by 5%, reflecting improved demand primarily with flexible packaging customers in North America. Encouragingly, adjusted EBITDA margin in this business also showed a meaningful expansion of almost 300 basis points year-on-year. Energy Solutions remains a bright spot in the I&S portfolio with sales growth of 14% organically in the quarter as production and drilling activity remained strong. We expect this growth for energy business to continue this year. Slide five addresses cash flow and the balance sheet. We generated $39 million of free cash flow in Q1. The first quarter of the year has a typical uses of cash relative to annualized targets, including annual incentive payments and a semi-annual bond payment.
We invested $28 million in our working capital, which primarily reflects the seasonal inventory build. CapEx in the quarter was $19 million, which is above the $50 million to $60 million annual run rate we expect for the year and reflects the late timing of certain growth projects and integration initiatives that were originally planned for the end of 2023. Now turning to the balance sheet, our net leverage ratio at the end of the quarter was 3.3 times, inside of our long-range target ceiling of 3.5 times and once again demonstrating our ability to quickly de-lever with cash flow generation and earnings growth. Our capital structure remains fully fixed rate for the remainder of the year. We have no debt maturities until 2028. Through cross currency loss, the effective interest rate on our term loan is fixed at 3.2% as of March 31, and our liquidity position remains strong.
With that, I will turn the call back to Ben.
Benjamin Gliklich: Thank you, Carey. We've had a strong start to 2024 and are optimistic about the trajectory through here. Our investment in leading-edge and emerging technology is driving high incremental margin sets. While our markets are not uniformly improving, our conversations with customers and suppliers support a constructive view on more broad-based electronic demand improvement in the second half. There are reasons, however, for a level of conservatism this early in the year given geopolitical risk, sluggishness in Western industrial markets and modestly lower full year expectations from certain supply chain participants. For the second quarter of 2024, we expect adjusted EBITDA to be approximately $125 million or approximately flat ex currency on a sequential basis.
We're also updating our full year adjusted EBITDA guidance range to $515 million to $530 million, which reflects 10% to 14% constant currency growth as the year-over-year FX headwind is now expected to be greater than $15 million. Were it not for the recent strengthening of the US. dollar, we would have increased the high end of the range as well. Overall, we're pleased with our execution to start 2024. Commercially, we're building a high-quality, high-probability pipeline of large leading-edge electronics opportunities and margin-enhancing industrial projects. Operationally, we're increasing volume manufacturing capacity for future growth areas, such as nano copper and power electronics, streamlining our legacy manufacturing footprint and building research and applications development in high-leverage geographies.
We continue to make systems improvements and better leverage our data to increase the proportion of time our employees can spend on value-added technical service and product development. Taken together, this positions us towards delivering on our commitments for the year in the current demand environment and generating above-market growth to exceed them as the environment improves from here. To wrap up, I'd like to thank all of our stakeholders for their continued support of Element Solutions, in particular, a talented and dedicated people around the world working productively and collaboratively to support our customers and objectives. With that, operator, please open the lines for questions.
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