Good morning, ladies and gentlemen, and welcome to the Element Solutions Q4 and Full Year 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. [Operator Instructions] I will now 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 fourth quarter and full year 2023 earnings conference call. Joining me are our Executive Chairman, Sir Martin Franklin; our CEO, Ben Gliklich; and our 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 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. These materials can be found on the company's website 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 our CEO, Ben Gliklich.

Thank you, Varun and good morning everyone. Thank you for joining. Element Solutions had a productive 2023. We improved our businesses across multiple vectors while demonstrating our hallmark stability in a challenging backdrop for several key end markets and geographies, positive price and mix impacts from emerging high value offerings, together with disciplined cost management, preserved profitability. Adjusted EBITDA margin was flat despite a high single digit decline in volumes and an even greater decline in our higher margin verticals. 2023 was arguably the biggest electronics market dislocation in a generation and ESI emerged improved. Gross margins are climbing back towards their historical levels. We took out costs both permanently and temporarily while improving the long-term growth profile of our businesses. While organic net sales in our electronics segment declined last year, we exited 2023 with the circuitry and semiconductor businesses returning to organic growth in Q4. One of the hallmarks of our business has been steady cash flow across a variety of operating environments. This year, Element Solutions generated record annual free cash flow of $282 million. Our consistent cash flow generation affords us significant flexibility to deploy capital, whether that is through M&A, debt reduction or returning cash to shareholders, all of which we did opportunistically in 2023. The results from our M&A in 2023 continue to look promising. Two transactions last year ViaForm and Kuprion strengthened our high-end electronics value proposition, just as those markets are poised for a recovery and improve our ability to participate disproportionately in significant long-term growth tailwinds. The ViaForm distribution rights we reacquired are driving deeper commercial engagement and unlocking sizable pipeline opportunities with the largest semiconductor manufacturers in the world. We completed the integration of customer service, quality support and inventory management in the fourth quarter and our front end of…

Thanks Ben. On Slide 4 you can see a summary of our fourth quarter results. Adjusted EBITDA grew 11% year-on-year and margins expanded 210 basis points. We benefited from return to growth in our high-end electronics verticals and easing raw material and logistics costs for most of our business line. For ESI, overall net sales declined 3% organically, primarily driven by a softer volume environment across most of Asia and in our industrial markets globally. Demand across the electronics ecosystem continued to improve with organic growth declining 1% compared to high single digit year-over-year declines earlier in the year. Our circuitry business grew 2% organically in the fourth quarter and our semiconductor vertical grew 7%. This trend tracks shipment growth for global handsets in Q4, though we think some of that benefit accrued to us in Q3 given the production timeline. Nonetheless, this inflection is a positive development as we enter 2024. Our assembly business experienced volume weakness in circuit board assembly products that primarily serve industrial and automotive customers. This softness was regionally concentrated in Europe and China at the end of the year. Despite the muted volume backdrop, improving mix and cost management drove 16% higher constant currency adjusted EBITDA for the electronics segment as a whole, and margins improved by 230 basis points. Our I&S segment declined 7% organically in the fourth quarter as industrial surface treatment volume softened in Europe industrial and Chinese automotive markets. Net sales in industrial solutions declined 9% organically in the quarter, with volume declines in the mid-single digits. A reduction in commodity based surcharges driven by lower input prices contributed to the rest of the organic sales decline. These commodity based price fluctuations do not meaningfully impact profit dollars as the surcharges in this business are at low margins. Energy Solutions…

Thank you, Carey. We enter 2024 with solid grounding for optimism, as we anticipated the inventory correction that has taken place in the semiconductor and PCB end markets over the past year now appears behind us, and activity levels and orders are improving sequentially. After two consecutive years of declines, industry experts expect smartphone units to grow in 2024, with some third-parties estimating mid-single digit percentage improvements. Our volumes in 2023 reflected destocking downstream in our supply chain, which in other words, meant a weaker demand environment than what was captured in the already quite weak unit sales of smartphones. Volume growth from that market, therefore, could be greater than unit growth. At the same time, growing demand for advanced packaging and other enabling material solutions, driven by generative AI, both in the cloud and on device, is a multiyear opportunity for many of our enabling technologies across advanced circuitry, semiconductor and assembly solutions. Overall trends are positive. That said, in 2024, despite solid growth, industry volumes across our electronics market drivers such as smartphone, PCB square meters and MSI are expected to remain below prior peaks. Similarly, on the industrial side, the outlook for global industrial production is for modest improvement. Global auto production is forecasted to grow in the low single digit range in 2024, but global unit production will remain meaningfully below its 2017 peak. Electric vehicles, ADAS and automotive semiconductor applications should grow faster than the overall market. These are technology areas where we have built meaningful exposure. Our strategy deployment efforts have positioned us nicely and our core businesses to benefit from these trends. Looking internally, in 2024, we plan to rebuild approximately $15 million in variable costs and incur some additional OpEx expansion in an environment of higher demand and customer activity. Most of…

Thank you. [Operator Instructions] Your first question comes from the line of Josh Spector with UBS. Your line is open.

Yes, hi. Good morning, guys.

Good morning, Josh.

You talked about this a little bit from a market perspective, but I was wondering if you could give a little bit more color, kind of, as you look at 2024, what are your assumptions from here through the year? So, relative to what you talked about in first quarter, to hit your guidance, you need markets to improve how much and what do you see ESI performing relative to those markets in terms of outperforming this year? Thanks.

Sure. So the first half of 2024 assumes slight sequential improvement from Q1 to Q2 and then at the low end of our guidance range, it's sort of normal seasonality, an uptick in Q3 and a slight downtick in Q4, and at the high end of the guidance range, it's sort of a more significant ramp in the electronics business in the back half. Our industrial and specialty business, from an end market perspective, is only up modestly, with more growth coming from customer wins and margin expansion, which we see carrying over from the back half of the year. There's a case to be made where the electronics industry really ramps significantly and in that case, there's upside to our guide. What we've seen in the first quarter-to-date has been quite positive from an electronics perspective. That market has accelerated to some extent sequentially, but it's too early to call the back half, hence our guide.

Yes, thanks. Could you maybe talk a little bit more then about what you see in quarter-to-date within electronics? I don't know if you have any further visibility than what you have normally, and you alluded to maybe units growing more than or your volumes growing more than units on inventory rebuild. Are you seeing any of that play out to date or is it still too uncertain?

Yes, that's an opportunity that's not really factored into our guidance, which is thinking about unit levels last year being better than demand for things like circuitry materials because of the inventory clearance. And so there is an opportunity insofar as we're lapping that for incremental volume growth over the unit growth. It's really early to have judgment on that. Right? We're sitting here in the middle of February. We have the Lunar New Year impact in Asia, which really does swing things a bit in the beginning of the year. It's fully falling in February, and so sometimes you see a build in advance of Lunar New Year. What I would say is that January was a very strong month, and we'll have a better sense for the first quarter once we're out of February. We feel confident in the guide for the first quarter and there might be some room for outperformance based on how February falls.

Got it. Okay, thanks, Ben.

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

Hi. Good morning Ben and Carey. Is 2024 a growth year for your industrial and specialty segment? I mean, do you expect organic sales and/or EBITDA to be higher year-over-year? And I guess, what does your guide assume for that segment?

Yes. So the I&S business should grow the top line and EBITDA in 2024 more modestly than the electronics business, but we do expect it to grow. The end markets are not going to be as strong as the electronics business, but we do have some customer wins ramping and margins should continue to -- should be stronger, I would say, particularly in the first half, as we lap a period of higher input costs and higher logistics.

Got it. And then moving to free cash flow, that was ahead of expectations, leverage going under 3 you mentioned by the end of this year. Historically, that's where you have reinvested in the business. So I guess, how do you think about the m and a markets currently, and how do you think about buybacks restarting this year?

Thank you.

Your next question comes from the line of Duffy Fischer with Goldman Sachs. Your line is open.

Yes. Good morning, guys. Can we dig a little deeper into the variable cost? What exactly is that? What are we going to receive from pushing that in? And then is that permanent in that if we achieve what we want this year, does that continue or is that something that is kind of a one year bump and then we'll get a harvest that going forward?

Sure. So, one of the hallmarks of the business is its variable operating cost nature. When demand isn't strong, when end markets are soft, we're able to manage costs in such a way that preserves profit but doesn't damage the long term growth trajectory of the business. And that is incentive compensation by and large, but also things like travel and marketing. So in 2023, incentive compensation was below target to the tune of about $15 million. That allowed for us to preserve margins year-over-year, despite volumes being down in the high single digits. As we begin 2024, our expectation is for a full 100% of our target, and therefore we're rebuilding incentive compensation. That is a one-time rebuild. Of course, if demand doesn't turn up, that cost will stay out of the business. It's not something that you should count on every single year, because in most years, we should be close to our target level. I'd note that excluding that rebuild, as we model 2024, the incremental margins in the business are north of 40%, including that rebuild they are in the 30s.

Fair enough. And then when you look at your guide for this year at the midpoint, what's the assumption for raw material benefit to the margins?

Somewhere around a point of gross profit margin expansion from input costs and mix.

Terrific. Thank you, guys.

Thanks Duffy.

Thanks Duffy.

Your next question comes from the line of John Roberts with Mizuho. Your line is open.

Thank you. I wanted to take advantage of having Sir Martin on the call. What do you think about the portfolio today? Are the non-electronic businesses generating enough cash for them to add value to the portfolio? And how do you think about additional acquisition opportunities in electronics?

Well, thanks for the question. I think at the end of the day, we like to keep the portfolio as it is, and then we're not any traders, we're builders. So I think our mantra inside the business is always there isn't an asset that couldn't be better. But I think in different years, different parts of the business perform better than other years. So I think we have a very strong portfolio and we tend to invest and try to grow each part. In terms of M&A, we've been opportunistic. I mean, the acquisitions that we've made have been longer term in nature in terms of their potential, and I think they've set the foundation for stronger organic growth for the company in future years. And from the [indiscernible] acquisitions and I think the M&A environment has become like the windows open again. But as you heard from Ben Gliklich's comments, the cash flows in the business are strong and we'll have the capability to do things if the right opportunities avail themselves.

Thank you. And then Ben, is the benefit of new electronics in autos still small enough that it gets offset when there's a slowdown in overall ICE vehicle production or how do we think about the balance between the exposure to the secular growth areas of autos versus the cyclical exposure?

Yes, so if you look at our assembly business in 2023, it significantly outperformed our circuitry and semiconductor businesses, and that was largely driven by strength in automotive. So not only are we seeing uplift in content, but we're seeing innovation that our business is bringing to bear to that market and high reliability alloys that's driving share and outperformance even in the auto markets. Again, it depends on the magnitude of automotive production declines to answer that question accurately, but we are seeing a low-single digit uplift in content per unit each year. That's even greater as electric vehicle penetration increases and our performance in power electronics has been outstanding and that's a segment of the market and technology that has been growing really, really nicely and will continue to for several years to come.

Thank you.

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

Yes, thanks. Ben, your guide sounds like it's primarily driven by macro factors. I'm just curious whether that $510 million to $530 million EBITDA incorporates any expectations for end market restocking, not just your customer, but your customers' customers. Any potential for share gains, cross-selling or pricing power? Are any of those in your outlook? And if not, what's the potential for it?

Sure. Thank you. So over the past several years, that the going in assumptions for market performance have been way off relative to the back half performance that was realized and so we have to draw a line based on industry forecasts and that's how we've formulated our guide. There is room for outperformance from an end market perspective as we think about upsides and downsides. Our performance, again organic on a like-for-like basis in the mid-teens from an EBITDA growth perspective, is quite a ways higher than market forecast. And so there is a benefit from margin improvement that we've seen carrying over outperformance relative to end markets on the top line and mix where new technologies that we're introducing into the business are gaining share. We've also held price and the benefit of that execution is accruing to shareholders in the guide.

And with respect to this $15 million increase in comp, do you have any productivity initiatives that might potentially offset it?

Yes. So we have been investing in site consolidation and systems modernization. We have streamlined the organization from a leadership perspective over the past year, and so there are savings built into the plan that offset some of that, but not all. And the incremental margins again, are in the 30s, inclusive of that comp rebuild, and in the 40s, which is above what we target in a normal year, exclusive of it. So we feel as though there is good efficiency being driven through the business and operating leverage.

Okay, thank you.

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

Hi, good morning. Thanks for taking my questions. I was wondering if you could dive a little bit more into your on power electronics and investments in the EV realm. And is that oriented more towards any particular technology like silicon carbide or is it targeted more towards Pure EV, can it be applied to hybrids, or do you have any exposure to any particular player or partner? Just any more detail there will be helpful. Thank you.

Sure. So our power electronics business provides really differentiated material used in the assembly of power semiconductors and then power inverters. Very strong market position within certain OEMs that are Pure EVs. The opportunity there is for growth in those OEMs and also penetration of, let's call them OEMs that have longer cycle times to develop new platforms. And so we are not on every OEM's electric vehicle platforms, and there's no reason that this material shouldn't be on all of the high performing electric vehicles in the market. We've been investing in applications, labs, not just in the west, but we opened one in Shanghai last year. And we've had great traction with the Chinese electric vehicle OEMs. There's a lot of market opportunity for this, both as EV units grow and as our penetration of EV OEMs expands. It's an exciting technology for us.

Got it. Thank you. And then just a question for Carey. Where does the SG&A start the year as you layer the bonus accrual back in?

So you take that $15 million over the full year guide, you're talking $3 million or $4 million a quarter. There's not a lot of other things that happen in Q1 that should make a big difference from the Q4 run rate. We did have a small release in bonus and in some long-term incentive associated with what we landed a year. So call it a $5 million sequential pickup from Q4 is probably the right way to think about it. Then when we get to the second quarter, we do start to see our -- the other piece of the inflation on cost which relates to cost of living adjustments and merit increases. So maybe it's a slight incremental step up Q1 to Q2, I think that's the right ballpark.

Got it. Thank you. And finally, you had a large tax item in Q4, and I was just wondering what that means for you going forward on effective and a reported tax basis and then cash taxes.

Sure, yes. So we did some really effective tax planning in 2023 that we've been working on for a couple of years. And what you know to Jon is correct, we took a pretty nice credit in the quarter. We basically added around $50 million of deferred tax assets to our balance sheet that will benefit us over the next five years or so, as we estimate. We think that will keep our cash tax rate in and around 20 [ph] maybe picking up slightly from that over the next couple of years. But what that asset will do is will effectively allow us to keep not paying meaningful U.S. tax for the next five years where prior to that planning, we expected to be paying U.S. tax in the next one to two years.

Understood. Thank you.

Thanks, Jon.

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

Yes. Good morning. So in your formal remarks, you mentioned that, I think it was in your assembly business that volumes outpace the PCB market's growth. I assume this is some indication of having gained share. I just wanted to get some more color. Is that accurate? Is the outperformance, is it a function of your over-indexing to higher growth applications or is it actual share gains in sort of the existing or core business or it's little bit of both?

Sure. The assembly business had a much stronger 2023 than the circuit board and semiconductor businesses. It's driven by greater concentration in the automotive market, which was healthier than the smartphone market, and call it higher end consumer electronics markets. It's driven by innovation, which has been driving share both in terms of next generation phases with higher performance attributes. We've introduced some new alloys that are higher reliability than what had previously been in the market, which have really interesting applications, not just in automotive, but also in infrastructure markets. And then our power electronics business sits, a portion of it sits within the assembly business, and that's been very strong. So there's innovation, market share gain and end market dynamics that are supporting that outperformance in the assembly business.

That's helpful. I appreciate that. And then one on Kuprion, I know you've expressed a lot of excitement for the technology, and you had some comments about the progress in commercializing with some leading chip makers. And just wondering if, as you have more visibility to that product, future success, if you think the applicability of the technology is solely for the more advanced and complex architectures or is there benefits to the device also such that you could displace alternative copper solutions and legacy devices? Just trying to get a sense for when you might want to take a stab at the TAM [ph] there and when this starts to move the needle in your perceptions? Thanks.

Thank you, Chris. So Kuprion is really exciting. Our commercial traction is greater than we expected it would be, and our progress towards commercialization is faster than we expected it would be. We expect there to be some revenue contribution in the back half of this year and EBITDA contribution in 2025, probably a bit earlier than we thought it would be when we sort of embarked on this journey. The applications for Kuprion span our electronics business. So originally we thought it would be primarily a dye attached [ph] material, which is in semiconductor assembly and advanced packaging. We're finding that it can also be a circuit board material used to metalize next generation IC substrates. In fact, that's where more of our traction has been; because the qualification cycles are shorter there than in the semiconductor market. So the breadth of applications is wider, the customer engagement is better, and it's on track to be a pretty significant contributor in the medium term here.

I appreciate the color, thanks.

Thank you.

[Operator Instructions] Your next question comes from the line of David Silver with CL King. Your line is open.

Yes, hi, good morning. I'd like to ask maybe if you could comment on your outlook for your overall business in China, maybe from a couple, two, three-year outlook. But over the last year or two, there's definitely been some shifts in terms of trade restrictions and I guess the positioning of some of your major customers, re-shoring, on-shoring et cetera, but I think it's still your largest country business in terms of revenues outside of the U.S. If you could maybe just discuss your thoughts on your opportunity set in that market, and if there are some shifts in either your resourcing for that region or how you expect your business in that country to evolve? Thank you.

Thanks, David. So the business in China had a tough year in 2023. It was down in the double digits from a percentage perspective. That was driven partially by the electronics market, where there is quite a bit of business in the circuit board market in particular, and also in the industrial market, where the industrial economy was soft. As we look to next year with the electronics market ramping, we see growth in China in 2024. The industrial business we expect to be, I'd call it modestly better, not a great deal better. The circuit board market is very strong in China and will remain so. There aren't trade restrictions on the circuit board market and we remain a significant participant in that market. And we do see growth, as we said, we see growth from the Chinese OEMs in electric vehicles. As I mentioned earlier, we opened an applications lab for power electronics there. We see a lot of opportunity associated with that. And even in our industrial surface treatment business, we've been investing in that market. Our share there is lower than it is outside of China, and we see a big opportunity for share gain and are getting traction supporting customers with equipment packages and other innovations, particularly with an environmental lens on them, because of the scrutiny on environmental discharges in that market. So we do see it as a growth market for us coming off of a pretty soft year. There's a compelling case for several years of growth from here, even in a reasonably tepid industrial economy in China should that play out.

Okay. I'm going to stop there. Thank you very much.

Thank you, David.

There are no further questions at this time. I'll turn the call to Ben for closing remarks.

Thank you, Sarah, and thank you, everybody for joining. We look forward to seeing many of you in the days and weeks to come. Have a great day.

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.