Good morning, ladies and gentlemen, and welcome to the Element Solutions Q1 2022 Financial Results Conference Call. At this time all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. [Operator Instructions]. Please note, this call maybe recorded and I will be standing by should you need any assistance. I’d now like to turn the call over to Varun Gokarn, Senior Director of Strategy and Finance. Please go ahead.

Good morning, and thank you for participating in our first quarter 2022 earnings conference call. Joining me are Executive Chairman, Sir Martin Franklin; CEO, Ben Gliklich; and CFO, Carey 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. These statements are based on assumptions and expectations of future events that 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 at www.elementsolutionsinc.com in the Investors section under News & 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. It is now my pleasure to introduce Sir Martin Franklin, Executive Chairman of Element Solutions.

Thank you Varun and good morning everyone. Before turning the call to Ben and Carey I wanted to take a moment to recognize this leadership team and all our colleagues at Element Solutions for navigating a complicated backdrop to the quarter very well. Demand has been strong, the megatrends and semiconductor proliferation, 5G and electronic vehicles continue to see great momentum. However due to raw material scarcity, ongoing COVID lockdowns, and logistics unavailability serving our customers was at times challenging, but a challenge this company has managed deftly. At this time this team is investing for the long term in culture, capabilities, and people while delivering on its commitments in the short term and I'm very proud of their performance. With that let me turn it over to Ben.

Thank you Martin and good morning everybody. Thank you for joining. We had a strong start to 2022 with our end markets remaining broadly supportive through a period of increased geopolitical volatility and supply chain complexity. We drove organic sales growth in all six of our business verticals. Despite ongoing disruptions from COVID, production in the electronic supply chain has remained healthy in the first quarter. Industrial end markets were mixed with continued supply chain challenges impacting the auto industry with more robust demand in general industrial and energy markets. The ongoing integrations of our recent acquisitions are going well and a commercial rationale for these deals is proving even stronger than initially anticipated. Logistics cost and raw material prices continue to climb in the quarter but overall resilient demand and effective price actions allowed us to deliver constant currency adjusted EBITDA growth of 9% over Q1 of last year. These results reflect the strength of the secular trends propelling our business, the value we are bringing to our customers, and solid execution from our commercial, technical, and supply chain teams against our growth strategies in a dynamic operating environment. While recent macroeconomic factors have created a less predictable short term outlook, we continue to believe our business is well positioned to navigate these challenges. Our team remains focused on executing the strategy we laid out at our Investor Day, to deploy our capital effectively and position our business with an attractive growth markets such as electric vehicles, 5G enabled electronics, and sustainable chemistry solutions to best compound per share value. Importantly this is not required compromising on our short term objectives. It has been and remains an extraordinarily challenging time for the people of Ukraine and the world at large. Our thoughts are with those immediately affected by the…

Thanks, Ben. Good morning, everyone. On Slide 4, we share additional detail on the drivers of organic net sales growth in our two segments. Organic sales for electronics was 8% year-over-year in the first quarter. Demand for high-end electronics applications remained steady, and all three of our business verticals grew organically despite tough year-over-year comparisons. In our Assembly business, we saw sustained growth across most of our core product categories, including solder technologies and polymer-based adhesive products, which show 5% organic growth. We are also seeing continued strong uptake from a broader base of power electronics customers related primarily to the proliferation of electric vehicles. Our Circuitry Solutions vertical grew 13% organically, driven by strong demand in the Americas for both mobile and automotive electronics as well as strong growth from memory disk customers in Asia, driven by continued demand for cloud computing and data storage. This strength helped offset weaker demand in certain Asian markets due to supply chain constraints and COVID-related shutdowns. Semiconductor Solutions grew 11% organically due to continued end market demand for our wafer plating, advanced packaging, and advanced assembly products. On a year-over-year basis, adjusted EBITDA margins in our electronics segment declined 330 basis points, nearly 300 basis points of which is explained simply by higher pass-through metals with an increase in tin prices which increased sales with no commensurate increase in gross profit dollars. This metals adjusted margin stability underscores our ability to take price actions that offset inflationary pressures and drive positive mix through exciting high-margin growth applications. For the first quarter, organic net sales in Industrial and Specialty increased to 4% year-over-year. Given the softness in auto-related end markets, we expected a more subdued level of growth in this segment to start the year. Despite this overhang and general macro uncertainty in…

Thank you, Carey. The strength in our first quarter results gives us confidence to increase the low end of our full year adjusted EBITDA guidance, which you can see on Slide 6. We expect to deliver $580 million to $590 million of adjusted EBITDA this year despite a $5 million higher headwind from FX than when we introduced this guidance in February of this year. So we're effectively increasing our guidance for constant currency adjusted EBITDA growth by a percentage point or two to a range of 15% to 17%. This guidance is based on an expectation of sustained strength in electronics and a recovery in automotive production in the second half of the year. However, given the pace of synergy realization from our recent acquisitions and strength in our non-automotive business, the magnitude of the recovery in auto implicit in our guidance is lower than it was initially. In spite of the increased level of uncertainty driven by geopolitical events, we believe most of our markets remain healthy, and our teams are executing well against our growth strategy. For the second quarter of 2022, we expect adjusted EBITDA to be approximately $140 million. This expectation is based on sequentially higher level of revenue but also slightly softer margins driven by the impact of still elevated raw materials and freight costs, higher OPEX from travel and our annual salary increases, and it also includes an estimate of the impact from the lockdowns in Shanghai and a stronger U.S. dollar. These results would still represent a strong constant currency adjusted EBITDA growth of approximately 10% over the second quarter of 2021. Our first quarter results and outlook reflect the strength of our business and our team's solid execution. We believe we're executing on our strategy for Element Solutions to benefit disproportionately…

[Operator Instructions]. And we'll take our first question from Josh Spector with UBS. Your line is now open.

Yeah, hey guys. Thanks for taking my questions. Congrats on a strong quarter here. Just a question on the sales side. And if I heard you right, Ben, it sounds like you expect sales up sequentially. And I guess, if I go back to the last quarter, you guys are pretty clear in highlighting some of the more normal seasonality, and you guys outperformed that in electronics in the first quarter. I guess how does your comments on 2Q impact the rest of the year and just curious on an organic perspective, do you think revenues are up sequentially or do they step down, so is it metals or organic?

Yes, absolutely. So we -- thanks for the question. We expect organic revenue growth in the second quarter. There will be a metals impact in the second quarter that will drive the top line optically if you will but we will see organic growth in addition to that, both from pricing actions we've taken. There are some metals pass-throughs that aren't captured. They're not exactly pass-throughs, but there's metal price impact that aren't captured in our metals adjustment and from volume. The electronics business is very healthy. The C&I, the Construction & Industrial business and our Industrial Solutions vertical remains healthy. And so we do expect growth in the second quarter. With regard to the back half, there's nothing that suggests that the typical seasonality where the electronics business is bigger in the second half than the first half will change. And so that's obviously implicit in our guidance where we have higher EBITDA in Q3 and Q4 than we've seen in Q1 and we expect in Q2.

Okay, thanks, that's helpful. And I guess just kind of related to that, I guess, if we assume sales are higher, I guess if I look at the incremental margins in 2Q and 1Q, excluding metals from both of them, they're both well below what would be your typical normal incremental from that perspective. And I guess, even sequentially, there was a big improvement from first quarter to fourth quarter, but there's less improvement in second quarter from first quarter. So what incrementally leaves that not improving significantly without pricing? And do you expect that to improve significantly in the second half?

So a portion of the organic growth we're generating is from price, but that price is tied to inflation in raw materials. And so if your raw material price goes up 10%, and your sales price goes up 10%, you're not getting a substantial margin associated with that price increase. And so that's one of the factors that we're battling with right now. Carey, is there anything more you want to add?

No, I think that's exactly right. I think that we've caught up along pricing actions, we're seeing a relatively stable inflationary environment since March, and we're assuming that in the second quarter for the time being. So I think you hit it well.

Okay, thank you.

We will take our next question from Chris Kapsch with Loop Capital Markets. Your line is now open.

Hi, good morning. Kudos to your entire team on the continued execution, especially given the many challenges. So my question is focused on the electronics business and circuitry in particular. So despite the broad strength, you mentioned some pockets of weakness in certain Asian markets. I'm just curious if there's any more visibility or granularity around the nature of that weakness, was it skewed towards certain end markets, or was it a function of COVID lockdowns or supply chain disruptions, any more clarity there would be helpful? Thanks and I had a follow-up.

Yes, you hit it. There are certain countries whose flagship products haven't launched the way they would have been expected to or on the same schedule as they have in the past. And so that's been a headwind to sales out of that country that come at a high margin. And then in China, just driven by lockdowns. We've seen some weakness in the year-to-date period. It's been offset by strength in other pockets of the business. As you've seen, we grew nicely organically, but mix was a headwind to margin in the Circuitry business because we've got higher-margin products in certain Asian countries where organic demand wasn't what we expected it to be. Overall, however, we expect recovery in some of those North Asian markets, and we see general robust strength for the year in our Circuitry business.

Okay. So the follow-up question was, it relates to something another public company said about weakness, which was skewed towards flexible print circuit board markets. And then some follow-up with that company sounded like they were suggesting that the rigid print circuit board markets were more stable or continued strength there. Just wondering if -- I think it may have created a little bit of confusion. Just wondering if you could elaborate on what you're seeing, what your exposures are to flexible versus rigid, and what you're seeing in terms of the different crosscurrents and business cadence related to those different subsectors, if you will? Thank you.

Yes, absolutely. So the flex circuit market is a good market for us. It's a high-value market. We've got a good market share in that market. Some of our direct metallization technologies are very valued in that market. And so we've seen a good performance from that over the past several years. With regard to the first quarter, I don't have that data at the tips of my fingers. With regard to the rigid circuit board market, there's a whole wide set of categories within rigid, single-layer, multilayer, HDI, IC substrates, those are all rigid boards. We participate in the high-value portion of rigid board, so that's HDI and into IC substrates, which have been very good markets for us, both in the Americas and also in Asia. And we see nice growth at the high end over the past couple of quarters, Q1 being a little softer than 2021, but with reason to believe we'll see a recovery and some strength there in the balance of the year.

Helpful. Thanks for the color.

We will take our next question from Steve Byrne with Bank of America.

Hi, this is Rock Hoffman for Steve Byrne. My first question is in the spirit of assessing how cyclical are the end markets that you sell into, what would you estimate the current operating rates are within each of your key end markets, I assume this varies by region?

The operating rates. Is that in terms of utilization at a customer level. We've got six verticals, and they are very different dynamics on a region-by-region basis. I would say that in our electronics business this is -- there is a high level of utilization at our customer sites, and they are adding capacity, right. In the semiconductor market, you're seeing huge investment in fabs, in the circuitry market, you're seeing many, many new lines being added. In the assembly business, we've seen sequential growth quarter-over-quarter-over-quarter for over a year at this point, two years. In our Industrial business, it's more of a mixed bag where our construction and general industrial customers are operating at very high levels, and our auto customers are operating at very low levels. The auto market, obviously, globally has been constrained by supply chains for the better part of the year at this point. Our Graphics customers are operating at relatively low levels given CPG package design evolution and our offshore customers are starting to bring capacity back online. So it's a mixed bag based on macro factors but overall, there's a lot of strength, and there's reason to believe that strength will persist because of significant investments in new plants in many of our businesses. And I'm happy to go through this in much more detail with you offline.

Great, thank you. And kind of leading to my next question, have you guys won any meaningful contracts associated with new capacity additions being built by your customers? And how much volume growth could this provide in the coming years and what it means in terms of your market share comparable to your legacy share?

Yes, absolutely. Yes, so if you look back at the Investor Day we did in February, we showed a slide on commercial excellence and the pipeline that we've built and the conversion, the new wins that we've had and we are going from strength to strength. And so we actually had more new customer wins in the first quarter than ever to date, and we had more new wins in 2021 than in any year prior to that. So we are executing very well commercially to win more business. Each of the wins, the average win size is bigger, so we're winning more bigger business. And we've got a lot of optimism that this isn't transient, this is driven by the strategy we've deployed to grow.

Great, thank you.

We'll take our next question from Jon Tanwanteng with CJS Securities. Your line is open.

Hi, good morning. It's Pete Lukas for Jon. You guys covered a lot. Just one question for me. If you could expand a little on capital allocation priorities and the M&A landscape, are acquisitions more likely as valuations shrink or do you see your shares as a better buy right now?

So maybe I'll start and turn it to Martin. We've been very opportunistic with regard to capital allocation. We made small acquisition in the first quarter that was highly strategic at a great value, and we bought back a bunch of stock. Nothing large, imminent right now. We've been continuing to buy stock in the market as shares have been weak. And that does, at the moment, look like the best use of capital. But we will retain flexibility. I don't know, Martin, if you want to add anything?

No, I completely agree with that. There's a dislocation on valuation at the moment, which we'll continue to take advantage of while keeping our leverage ratio conservative.

Great, that’s it for me. Thanks.

We'll take our next question from Angel Castillo with Morgan Stanley. Your line is open.

Hi, thanks for taking my question and congrats on the strong quarter. Just was hoping you could give us a little bit more color on the organic growth by the sub segments as you think about volume versus, I think you noted some of the price that's maybe not directly passed through. So if you could just kind of disaggregate that and give us a sense for how that's been trending, that would be helpful?

Yes, absolutely. Obviously, we have six sub segments, and it's a slightly different story in each. The organic growth you saw in the assembly business is mostly volume-driven because there is the pass through metal impact. If you look at the Circuitry business, maybe half of that is price and half of that is volume. The Semiconductor business is mostly volume driven and I think that it's a good rule of thumb for the Circuitry and Industrial businesses to say it's about half price and about half the volume, maybe a little bit more price in Industrial than volume given the weakness in auto year-over-year.

Got it. And then it's -- I actually wanted to ask about that as well in terms of Industrial. So you noted that maybe the second half embeds a little bit less autos and more of some of these other strength that you're seeing, whether it's infrastructure and industrial or synergies and acquisitions. Could you give us a little bit more color or maybe quantify some of that and what gives you comfort as we look at a macro that could be potentially getting worse kind of in the second half as we look at the construction and industrial markets, what gives you comfort that, that maybe continues to be as strong going forward?

Yes. So as you heard in the prepared remarks, our assumption for auto in the back half is far less ambitious than it was when we gave our initial guidance. And even then, that auto assumption wasn't particularly ambitious relative to research forecasts. The comps get easier and easier in the industrial business as we get into the second half. And so there's not a lot of heroics, I would say, implied to deliver on our numbers in the IS space. And that C&I portion of our IS business has been really healthy for an extended period of time, and we're seeing pretty good demand from a housing market perspective. The only other comment I'd make is, as you know, this is a variable operating cost business and if we see those pockets of weakness and the top line doesn't show up, the cost will fall out, and we'll be able to deliver. And so that's how we're thinking about that, and that's what gives us the confidence to increase the low end of our range for the year.

And I guess, just to clarify on that one and the synergies and the acquisition, maybe how much that is of the pickup or maybe we're seeing better?

Yes, we talked about $10-or-so million of synergies in the year, and we're trending better than that right now.

Very helpful, thank you.

We will take our next question from Kieran De Brun with Mizuho. Your line is open.

Good morning. I guess just in terms of the logistics kind of raw headwinds, etcetera, can you just parse out where I guess you stand now going into the second quarter versus what your expectations were in the fourth quarter, what has changed, and how much more pronounced is that impact? And I guess you've talked about some of the initiatives that you've been taking in terms of pricing and surcharges to offset that. So how do you see that kind of trending and margins progressing throughout the year? Thank you.

Yes. Thanks for the question. So logistics were up $3-or-so million sequentially, $8 million year-over-year. I would say that is a material headwind that we're climbing up against. We passed through tin prices, we have surge prices for things like nickel and palladium, which are much smaller than tin, but they're not negligible or between nickel and palladium, we spend maybe $100 million, $120 million last year. Those prices are up pretty significantly. So we'll see -- that was the nature of the comment I made, which is with metal prices where they are, you're going to have an optically lower margin percentage, but we're protecting margin dollars through pass through. And we continue to take price and we can -- we have plans to drive more efficiency through the supply chain to drive margins higher. Those things don't happen overnight, but we're very focused on retaining profit dollars and getting the margin back to where it's been. But that will take some time given the pace of the inflation we've been experiencing.

Great. And then maybe just a quick follow-up in terms of the Industrials and Specialty business, but specifically on the Industrial side, I mean it seems that the mix of that business is really outperforming the underlying growth of the kind of end markets and has been doing so for a period of time. As it recovers, how do you think about that kind of incremental delta above the underlying end market trending?

Yes, it's a good question. The business has been doing very, very well, and it's been doing especially relative to its end markets, and it's been doing well because of commercial execution, strategic execution. The businesses we brought together under our Industrial Solutions vertical have integrated well and have been driving really good commercial success. As the auto market recovers, we should see a nice recovery on the top line, and we should see really good operating leverage on that as well because the Auto business is higher margin than the balance of the business. And so we commit to outperforming our end markets by a point or two. We've done much better than that in the INS space, and the profit leverage that we should get should outperform by even more when auto markets do recover.

Thank you.

We will take our next question from David Silver with CL King. Your line is open.

Yeah, hi, good morning. I was hoping to follow up, I think, on the segment or the product line comments on Slide 4. And in particular, under the semiconductor product line, you mentioned customer win in advanced packaging for 5G telecom infrastructure. And I was wondering if you could maybe just talk about the value proposition that Element Solutions presented that led to the win in other words, advanced packaging, 5G, I mean, to me that qualifies as kind of a high competitive ground or very strategic target for your competitors as well as yourselves. So maybe just a comment or two on your value proposition and then if you could characterize it in terms of size or duration that the particular win refers to, that would be helpful? Thank you.

Yes. Thanks for the question. This was a really exciting piece of business we won with a very large semiconductor customer. To start, we've been investing in our semiconductor capabilities. We've done a lot of work around where we can compete. From an R&D perspective, developing new good technology, this is a big win at the leading edge. And we won because we were technically capable, had good enough high-quality manufacturing, and the product we brought to bear was technically equivalent or better and had environmentally friendly attributes. And this is going to go into at least one, if not many new fabs for leading-edge semiconductor manufacturing, and the revenue opportunity is tens of millions of dollars over the next several years. Once your process of record in these things, it's very rare that the business goes away. So it's a very, very compelling opportunity.

Okay. So tens of millions per year. Okay. Thanks very much.

Ramping over several years.

Got it, got it. Target of tens of millions. Okay. I was just wondering also if you could speak to the -- what would be the state of doing business in China here right now, so whether it's the lockdowns or other supply chain or other issues, if you could just comment on how that portion of your business has operated, let's say, over the past couple of months and what assumptions you're making for the balance of the year, in other words, full steam ahead or mostly similar or having to adapt to different operating conditions there? Thank you.

Sure. So the circumstances on the ground in China are very difficult. And -- but we manufacture locally for our local customers. And -- so we have a site in the Shanghai area that is under lockdown, and we've got about 20 people who are living at that site right now to support our customers. This is a workforce that is unbelievably committed to delivering for the company and for our customers, and we're very, very grateful for that. And so we are able to deliver and recognize sales right now in Shanghai despite those lockdowns. Our outlook from the Chinese market is down a bit for the balance of the year, and that is driven by the lockdowns that we've been experiencing. If the lockdowns proliferate significantly or extend significantly, there's a bit of risk associated with that, that's not in the plan. Three more months of lockdown is not in the plan. We're hopeful that this results, not just for our business but for the people there who are clearly having a very difficult time.

Okay, thank you. If I could just sneak in one more. At a couple of points in your comments, Ben, you've talked about kind of a new surcharge program or strategy. So under the broader category of how customers -- how your customers, key customers are reacting to a continued series of cost or price increases, I'm just wondering how you would characterize how you've gone about implementing these more enhanced or more sophisticated surcharge programs? And also, just in general, are you noticing any pushback at all from customers as maybe the initial wave of your price actions are followed by another wave and indications there might be more, just kind of customer reaction, how you manage the relationship while still deferring your margins? Thanks.

Sure. We've always said in this business that we can take price when our price goes up, and our customers are understanding that. And clearly, it's very obvious that the prices of nickel and palladium and these metals are much, much higher. And we had surcharge mechanisms in the past that took into account commodity price volatility. What we've done to improve them is change the window where we're calculating the applicable price for that commodity. So historically, maybe it was prior month average price. Obviously, prior month average price isn't effective to recapture profit dollars and to take into consideration a very dynamic commodity price environment. So we've shortened that window in many cases, as an example. And I think customers are understanding of that. This is a unique set of circumstances in terms of inflation around the world. There are some geographies that handle price increases better than others. We're being very thoughtful about how we go about recapturing value or price such that our sales price is reflective of the value that we're providing to our customers, and we will continue to do so.

That’s great. Thank you very much.

And we will take our next question from Chris Shaw with Monness, Crespi, Hardt & Co. Your line is open.

Hey, good morning everyone. How are you doing? Maybe following up on the last question. With the -- clearly, you have metals pass-throughs, and it sounds like surcharges which are slightly different. But I know there's a lot of other product price increases that you probably had to put through for other input inflation. But if we get to the point where if ever, these inputs deflate and go back down, do you have a sense of how much of those price increases might be able to be maintained over time, I assume obviously pass-throughs know the surcharges probably come off but is there still a big bucket that is just potentially kept or are those things also very specific to certain raw material that your customer can see and know that those have deflated or last that pricing back. Any sense of that?

So we're operating in a unique paradigm where you've seen this level of inflation in the shorter period of time. As you heard, a lot of the commodities are now operating on surcharges and so those surcharges will go away and if metal prices go down. Historically, when we've taken price due to moderate inflation, we've been able to retain that price. But again, it's a new paradigm. We'll see how pricing -- or how input pricing evolves in the near to medium term, and that will determine our ability to hold it. In the past, we have been able to hold non-formula.

Got it, alright. It is all I had, thank you.

We have no further questions on the line at this time. I will turn the program back over to Ben Gliklich for any additional or closing remarks.

Thank you, Britney and thanks to everybody again for joining. We look forward to seeing many of you in the days and weeks to come. Thanks very much.

This does conclude today's program. Thank you for your participation. You may disconnect at any time. Have a wonderful day.