Good morning, ladies and gentlemen, and welcome to the Element Solutions Q2 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note that this call may be recorded, and I will be standing by should you need any assistance. I would 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 second quarter 2022 earnings conference call. Joining me are our 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 and 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 Ben Gliklich, CEO of Element Solutions.

Thank you, Varun, and good morning, everybody. Thank you for joining. Element Solutions had another quarter of solid earnings growth in a complicated macro environment. Supply chains remain challenged. The lockdowns in major commercial hubs in China persisted longer than expected. Auto markets have not yet recovered and currencies moved significantly against us. Nonetheless, we delivered on our commitments in the quarter. Organic net sales grew in every vertical, and we met our adjusted EBITDA guidance. We believe this once again demonstrates the stability of our businesses and the ongoing execution of our strategy by our talented team. Demand across the electronics segment generally remained healthy, driven by continued EV and 5G penetration. We grew modestly across our industrial verticals despite continued weak production in the automotive market and the overhang from geopolitical volatility in Europe. The ongoing integration of our recent acquisitions is going well, generating better-than-expected synergies, and we’ve started to capitalize on new long-term growth opportunities around sustainable chemistry. Overall, our sales growth was driven more by pricing actions and raw material surcharges than by underlying unit growth. In certain of our markets, demand was resilient, while in others such as China and automotive, it was weaker. We grew constant currency adjusted EBITDA by 13% over a difficult Q2 2021 comparable, which was before supply chain disruptions and inflation took hold. The biggest headwind to our financial results in the second quarter was the strengthening U.S. dollar, which weighed on sales by 7% in the quarter and presents additional headwinds into the second half of the year based on current FX rates. While macroeconomic sentiment has worsened, many of our end markets remain resilient. We expect the electronics business to grow sequentially and year-over-year in the second half from new smartphone platform launches and ongoing demand for mobile infrastructure and EV markets. Softness in other consumer electronics sectors, such as white goods and personal computers, has less of an impact on our portfolio and has been in line with our expectations coming into the year. We also expect a modest recovery in the automotive market, where underlying structural demand still remains higher than the industry’s production levels. As we’ve demonstrated multiple times over the last several years, we can and will continue to keep a long-term strategic focus while also actively managing the business to navigate near-term volatility and deliver on our targets. On Slide 3, you can see a summary of our second-quarter financial results. We grew the top line 6% organically, similar to our first quarter performance. This first half growth comes against a difficult comparison as the first half of 2021 benefited from a strong COVID recovery. On a constant currency basis, adjusted EBITDA grew 13% year-on-year. Adjusted EBITDA margin declined 170 basis points, with higher metal prices driving 100 basis points of margin headwind on a year-over-year basis, though the dollar value of pass-through metals in our assembly business declined sequentially as metal prices fell. Excluding the impact of $123 million of pass-through metal sales in our Assembly Solutions business, our adjusted EBITDA margin would have been 25% in the quarter. Our adjusted EPS in the quarter grew a healthy 9% on a reported basis despite a negative 7% impact from FX translation from the stronger U.S. dollar. Carey will now take you through our second-quarter business results in more detail. Carey?

Good morning. On Slide 4, we share additional detail on the drivers of organic net sales growth in our 2 segments. Organic growth for electronics was 8% year-over-year in the second quarter. Demand for high-end electronics applications remains steady. Our Circuitry Solutions vertical grew 14% organically, driven by strong demand and pricing from the data storage market. This strength helped offset the impact of supply chain constraints and COVID-related shutdowns in China. Semiconductor Solutions grew 13% organically, seeing continued end market demand for our wafer plating, advanced packaging, and advanced assembly products. Both Circuitry and Semiconductor benefited from higher surcharge revenue, driven by increases in the raw material costs, which account for roughly half of the 8% organic growth in the overall electronics segment. In our assembly business, we saw sustained growth across most of our core product categories despite its greater exposure to automotive. This business benefits from ongoing growth in electric vehicle production through its power electronics products. However, it also has a greater exposure to both ICE automotive and China, which explains the relatively slower growth. On a year-over-year basis, adjusted EBITDA margins in our electronics segment declined 60 basis points. However, excluding the impact of pass-through metals, margins in the segment expanded 100 basis points approximately. One note to make here is that in this quarter, we transitioned operational responsibility of our films business, which generates roughly $50 million of sales annually from our Industrial and specialty segment to the circuitry business within our electronics segment. The change reflects the increase in commercial activity and opportunities we anticipate in printed and in-mold electronics. This market represents a significant opportunity for the company in the next 3 to 5 years. The impact of this change is reflected in both current and prior periods in our earnings release and the other financial information provided today. Organic net sales in Industrial & Specialty increased 2% year-over-year. All 3 of our I&S verticals posted growth in the quarter. Industrial Solutions grew 1% organically, which was driven primarily by pricing actions and surcharges associated with commodity inflation. As we enter the second half of the year, we remain cautiously optimistic about improving auto production, especially in the fourth quarter. Graphic Solutions grew 2% organically year-over-year. However, profitability in this segment declined as pricing lagged cost inflation. We have one business that we expect will drive a stronger back half, and pricing actions should drive adjusted EBITDA growth in the second half and into next year. Energy Solutions also grew 2% organically, continuing to rebound up again late last year as high oil prices drop some rigs back online. The recovery in this business has been slower than in prior periods of rising energy prices, but we are beginning to see increasing levels of activity in the sector, which bodes well for 2023. Industrial and Specialty grew adjusted EBITDA 13% on a constant currency basis, including the contribution of Coventya and synergies. Margins declined roughly 3 percentage points. The combination of increased logistics and freight costs, negative mix from the weak auto market, sales growth from surcharges, and raw material inflation, especially in our smaller I&S businesses, all contributed to this margin decline. As auto recovers and the overall supply chain disruption improves, margins should increase in this segment. Slide 5 addresses cash flow and the balance sheet. We generated $56 million of free cash flow in the quarter, reflecting a strong sequential improvement despite continued investment in working capital of $37 million, primarily into inventory. This sequential build of inventory was largely in Europe and Southeast Asia, given ongoing supply chain disruptions in those regions. Our other uses of cash in the quarter, including cash taxes, CapEx investment, and interest, all came in slightly better than our expectations. We have modestly decreased our full year estimates for these metrics. Year-to-date, we’ve invested over $90 million of cash into working capital, a majority of which was driven by sales growth and safety stock building. We are revising our cash flow guidance to $270 million for the year to reflect our revised EBITDA guidance and uncertainty around the timing of working capital release. We meaningfully accelerated our share repurchase activity in the quarter, buying back approximately $43 million of stock or roughly 2.2 million shares, almost 1% of shares outstanding. We remain opportunistic and expect to be active in the market when we believe our stock is trading at a significant discount to its intrinsic value. Our remaining stock buyback authorization was $670 million as of June 30. Our net leverage ratio remained steady at 3.2x despite returning over $60 million to investors in the quarter. All of our term loan floating rate borrowings have been swapped to fixed. So, rising interest rates are not meaningfully impacting our cash interest expense. These term loans are also swapped to euros, and that cross-currency swap was $86 million in the money at quarter end, effectively reducing our leverage ratio to 3.0x adjusted EBITDA. Note, as the dollar has subsequently strengthened, the value of that swap has increased along with it. And with that, I will turn the call back to Ben.

Our second quarter results demonstrate the durability of many of our end markets and strong execution in other more challenging markets. We’re growing a strong market on the top line and converting that sales growth efficiently into profits. The translational headwind from the strengthening U.S. dollar has grown significantly in recent months. Based on mid-July FX rates, we now expect a greater than $35 million year-over-year headwind to 2022 adjusted EBITDA, due to FX translation. That’s over $15 million higher than what we’ve expected at the end of Q1. Consequently, we are revising our adjusted EBITDA guidance range to $565 million to $575 million. This new range implies modestly greater constant currency adjusted EBITDA growth over our prior growth guidance as we are not reducing guidance by the full impact of currency. It’s based on an expectation of sustained strength in electronics and a modest recovery in automotive production in the second half of the year. Although these end market dynamics are still weaker than our expectation entering the year. However, we’ve been over delivering on synergies and managing other costs to reflect a shift in macros. Should those end market conditions be worse than expected, we have further cost levers at our disposal. We’ve historically demonstrated an ability to preserve profits in challenging macro environments and intend to do so once again in the second half. We’re also updating our adjusted EPS guidance to a range of $1.52 to $1.55, and our full year free cash flow guidance to approximately $270 million, largely reflecting the lower EBITDA and taking into account higher working capital usage in the first half. This guidance implies substantial year-over-year growth in the second half in absolute dollars and more than 20% growth on a constant currency basis. For the third quarter of 2022, we expect adjusted EBITDA to be approximately $140 million, which is an improved margin from lower metal pass-through impacts and a sequentially higher level of revenue in constant currency. These results would represent a strong constant currency adjusted EBITDA growth of approximately 20% over the third quarter in 2021. We’ve always said that secular growth is not linear. There will be air pockets along the way. And we are entering the period where the macros may be less favorable in the short term, but we believe Element Solutions is well positioned to continue to deliver profit growth. We’ve won more business year-to-date than we did in all of full year 2019 or 2020, a reflection of the longer-term momentum in our markets and our ability to convert those opportunities. This gives us more conviction in our belief that the trends propelling our business are more entrenched today than they were entering this year. Electric vehicle units are going quickly, internet infrastructure, data storage, and next generation mobile markets are growing as well. We’re playing a critical role solving complex technical challenges for the electronics hardware industry as circuit boards and semiconductors converge. These secular growth drivers are just getting started, and Element Solutions should continue to benefit disproportionately from them. At the same time, this has been an off year for the smartphone industry and the automotive component of our industrial business is operating well below 2017 levels of activity. We don’t believe the shortfall in automotive production relative to demand is sustainable over the long term. Our recovery is inevitable, making these markets a coiled spring, which we think will ultimately drive substantial earnings growth when supply chains improve. To wrap up, I’d like to thank all of our stakeholders for their continued support of Element Solutions and in particular express my appreciation to our talented and dedicated people around the world responsible for another quarter of growth. With that, operator, please open the line for questions.

Our first question will come from Steve Byrne with Bank of America.

This is Rock Hoffman on for Steve Byrne. My first question is how did your volumes for auto manufacturers in the second quarter compare to industry bill rates? If they were different, was it due to share gains or increased content?

Yes, I appreciate the question, Rob. So auto bill rates in the quarter were down 14%, our volumes outperformed that. Our auto business was up 1% on sales in the quarter. Of course most of that was driven by price but we clearly outperformed them from market. Hard to disaggregate between share gain versus content gain but from a commercial perspective, the team has been executing very, very well and winning big pieces of business.

Got it, thank you. And just a quick follow-up. So how flexible are the PCB and semiconductor fabs that you supply in shifting between this and market such as shifting it from products for handsets over to other markets? And how would you shift your pricing volumes?

Yes. So PCB fabs have some level of variability in terms of what end markets those were supply and PCB fabs in general have been running very close to full capacity, and we’re seeing capacity added in many markets. And that’s a similar dynamic to what we have seen in the semiconductor market.

Our next question comes from Josh Spector with UBS.

Just curious if you could kind of parse out the organic performance in the quarter and your outlook, kind of just trying to think about the buckets between volume, structural pricing, and surcharges in your second half. Are you still projecting volume growth as part of the mix?

Yes, absolutely. So in the second quarter, as we said, price was more of a driver than volume, but we did see volume growth in certain of our end markets. Particularly if you look in the circuitry business, for example, in data storage, we had a strong quarter in the American market, in the Korean market. The semiconductor business grew volumes nicely. The assembly business in Power Electronics grew nicely. The I&S business was more of a price story than a volume story. As we look out to the second half, a couple of observations. First, on a year-over-year basis, we are comping against easier comps, and so we should grow organically year-over-year in the second half. Then on a sequential basis, typically the third quarter is our biggest quarter. You see a ramp in the electronics business associated with new smartphone platform launches. That’s normally a 6% to 10% bump on a sequential basis. Given smartphone market weakness, we’re really only underwriting to a couple of percentage points of growth sequentially in that business. And then in the fourth quarter, we’re expecting an auto market recovery in line with market research, and so we should see some volume growth in Q4 in the I&S space driven by autos.

That’s helpful. I’d just be curious, I don’t know if you’re willing to quantify this, but clearly, auto production remains a headwind for your mix. And you’ve since acquired Coventya, EVs are a bit of a tailwind. How much would you say you’re under-earning at this point versus where you would be if production normalized to some level similar to 2019 plus or minus?

It's a challenging question to address. However, we've been running at about 80 million units of auto production in 2017, and it rose to over 90 million in 2018. This indicates a significant unit deficit that has accumulated over the past few years. During this time, we've invested in sustainable chemistry, which is contributing to our market share gains. We've prioritized this market, and I believe our market share is better now than it was previously, presenting a significant earnings opportunity as the automotive supply chain normalizes. Additionally, this is a down year for the smartphone market, yet we have strong confidence in the long-term growth trends driving that sector, as well as the increasing electronics content in the automotive market and the broader industrial economy. While the growth outlook for this business remains stable, we expect to start 2023 with a lower base compared to normal conditions. Therefore, there is considerable potential for earnings growth in the company's future outlook.

Just one quick thing just with that is, so if we look at auto production growing again at some endpoint, that’s a pretty 1/4 to 1/3 or so of your business. Would those margins come back significantly above your normal incremental? Or should we think about that more similar?

They would come back above the normal incrementals in the I&S segment.

Our next question comes from Chris Kapsch with Loop Capital Markets.

So had a follow-up on the business's outperformance relative to auto builds. Just curious if you've seen any evidence that if there’s been inventory building in the supply chain that you feed into that might have contributed to that. Just wondering about your confidence level that has been a contributor to your outperformance addressing that market.

Yes. We’ve been looking for that, Chris. We’re looking for evidence of that and we really haven’t found it anywhere in the automotive supply chain, that’s not something that we're particularly concerned about.

Okay. Got it. And then in your formal release, you mentioned a record sales pipeline and record new business wins. I’m just curious if you could bring some more color. You’re talking about some of these turnkey systems into the print circuit board ecosystem. Just hoping to elaborate and interpret that as some harbinger for what the future business case might look like?

Yes. I appreciate that question, Chris. It’s certainly a harbinger from our perspective. It’s something we look at in real detail. We won more business in value in the first half than we did in all of 2019 or 2020. At the same time, the ramp of that business was slower than it is in normal years, which isn’t surprising given the lockdowns we saw in China and some of the other economic conditions we’ve been experiencing. But one new piece of business is a new line, a new project with a customer. And so what that indicates to us is the momentum over the medium term in our end markets and the innovation that our customers are driving and that we’re helping support. And so it builds our conviction in the longer-term growth in our market and our ability to benefit from it disproportionately.

Yes, Chris, this is Carey. I would just add it’s spread across all of our verticals. So not just the electronics business, but all of the verticals are seeing that expansion in new wins.

It sounds good. I have one last question and a follow-up regarding the semiconductor business. Currently, there's a noticeable divide in that industry where memory units are somewhat weak, with overcapacity and some negative feedback from major manufacturers. In contrast, the big logic foundry sector is performing quite well, especially at the leading edge. I'm curious about your exposure to various chip makers, given that your plating chemistry is doing well in the fab. I'm wondering if your exposure is skewed toward one group of chip makers compared to another.

Sure. And thanks for that question, Chris. So a couple of reactions. First, our business is driven by volume, not price. And volumes remain strong in the semiconductor market. The second is that our business is disproportionately in the logic side of the semiconductor market. And so the noise in the memory market is not impacting us to the same extent as it is the overall market.

Our next question will come from Kieran De Brun with Mizuho.

I was just wondering, touching down on kind of the pricing side. When we think about the prices that you pushed throughout the last, call it, 12 months or so, and what you’re going to be pushing in the second half, how much of that pricing are you going to be able to kind of keep, let’s say, when costs subside? And how should we think about that, I guess, as we go into ‘23 and some of these headwinds start subsiding a little bit?

Yes. Good question, Kieran. So we break pricing into 3 buckets. There’s the metal pass-through then there’s commodity surcharges and then there’s negotiated price. And the first 2 of those buckets are really driven by the price of metal and where those commodities are. And so those do go away when those prices decline as they’ve begun to in some instances. The other negotiated prices, historically, we’ve been able to keep. We haven’t seen a period where we’ve had to go back for price this frequently in such a short window. But in the past, we’ve been able to retain that price. The other driver of margin opportunity is mix. And we’re growing faster in higher-margin businesses with the exception of our auto exposure, where auto is higher margin than the blended average of the I&S segment. And so mix should continue to be a tailwind in terms of organic growth and the cyclical recovery in auto that we expect.

Great. And then just a quick follow-up on China. The lockdowns in 2Q obviously impacted some of the demand that you saw in the quarter, whether that was in the assembly part of the business or other parts of the business. But when we think about 3Q and maybe even just the second half in general, are you seeing any pent-up demand and kind of demand pickup from what you didn’t see in 2Q kind of pushed out toward the back half of the year? And maybe how we should think about that driving your results?

The Electronics business was not as significantly affected by the lockdowns compared to the automotive sector and other areas of our exposure in China. Therefore, we do not anticipate a major increase in the electronics business as we move past the lockdowns, while the automotive market has been slower to recover. The expectation is for a stronger fourth quarter in the auto sector, partly due to developments in China, and we have factored that into our plans.

Our next question will come from Jon Tanwanteng with CJS Securities.

My first one is just maybe high level for ‘23. I was wondering if you could give your view on how easy it would be or hard it would be to grow in the event of an actual recession? It sounds like you have a lot of irons in the fire with customer business with auto markets, smartphones having a, I guess, a stronger on-off year. Just help me understand how sensitive you guys are to a consumer or a wider recession at this point?

Yes. So it’s a good question. And look, our business has proven an ability to grow in mixed markets. I think we’re demonstrating that this year. One of the big assumptions we have to make is around what happens to the auto market, where we’ve built a 30 million unit deficit between supply and demand. And if production continues at these levels, if it ramps up, if supply chains improve, that will be a big driver of demand for our business. The secular trends propelling this business were very durable during a period of significant economic weakness are encoded, right on the electronic side. The need for 5G infrastructure for data storage has not slowed despite an economic slowdown that we’ve seen in the period year-to-date. And the smartphone cycle, as we said earlier, it’s a weak year. So there are reasons to believe this business could continue to grow in an economic slowdown. And we’ve proven an ability to preserve profit when demand does slack in.

Got it. Okay. And then just a more short-term question. How confident are you in your smartphone customers’ orders for the rest of the year if demand does continue to fall? I mean, obviously, we’ve seen it in China and like you said, the white types of products. Is there any wiggle room in the guidance you provided?

Yes. As mentioned earlier, we expect a slower increase in smartphone sales and electronics in the third quarter due to a decline in the smartphone market. This has been factored into our guidance. Additionally, we have various strategies to meet our guidance. If demand decreases, we have the ability to adjust costs to ensure we meet our profit commitments.

Our next question will come from Angel Castillo with Morgan Stanley.

So maybe just to follow up on that last discussion around recession. I think as you mentioned, you have a lot of cost levers and a number of your end markets are maybe closer to trough. So maybe could you just maybe break down for us if we do go into a recession, what’s the kind of downside in terms of EBITDA that you would anticipate with the portfolio that you have today, given that you’ve done a number of positions and maybe the past is not as apples-to-apples.

Yes. So you need to make an assumption around top line performance in John’s question just a minute ago, we talked about the reasons why the top line could be resilient in a time of a recession. But what we’ve proven is an ability to preserve profit, as we said before, if you look at COVID, EBITDA was down, the same percentage as the top line was, which is the most recent example. If you go back to the 2008, 2009 period, these businesses didn’t exist in their current configuration. But top line was down 12-ish and EBITDA was down just a little bit more, maybe 15% in the full year period of the GFC. So we have a highly variable operating cost model. And if demand isn’t there, cost comes out. But we have reason to believe demand should be resilient in a period of economic weakness because of the secular growth trends that are propelling the business and the dislocation between supply and demand in the auto market that we’ve lived through over the past couple of years.

That’s very helpful. As we look at some of the metals prices, whether it’s palladium, nickel, we’ve seen move over, and I think you kind of highlighted in your prepared remarks that some of this is maybe part of the second half. So could you just quantify for us, I guess, what’s kind of the impact of some of these things coming out in terms of maybe the margin and how we should think about just the flow through?

So for the most part, these are not drivers of profit dollars. They’re just drivers of percentage margin, right? So we have a direct pass-through. So the price of metal goes up $1, we sell 1 more dollar. And so they sort of negate one another on the profit line, but it has an optical impact on percentage margin. On a year-over-year basis, there shouldn’t be an incremental headwind as metal prices have declined. On a sequential basis, there should be a tailwind to margin percentage going into the third quarter. But the magnitude of that tailwind will depend on where metal prices settle over the next several months.

Thank you. This concludes today’s Q&A. I will now turn the program back over to Ben for any additional or closing remarks.

Thanks very much for joining, everybody. We are looking forward to see many of you in the near future. Have a great day.

Thank you, ladies and gentlemen. This concludes today’s event. You may now disconnect.