Good morning, ladies and gentlemen, and welcome to the Element Solutions Q3 2023 Financial Results Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. As a reminder, today's call is being recorded. 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 third quarter 2023 earnings conference call. Joining me are Executive Chairman, Sir Martin Franklin; 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 shortly after completion of the call. 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 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 Element Solutions CEO, Ben Gliklich.

Thank you, Varun, and good morning, everybody. Thank you for joining. Element Solutions had a solid quarter as our Electronics end markets began to recover from their second-quarter trough. Easing raw material prices drove favorable margins. We continue to deliver against important strategic initiatives and generated strong free cash flow. The overall macro environment remains a challenge, declining economic activity in Central Europe, a slow post-COVID recovery in China, and the ongoing UAW strike are headwinds compounded by the once again strengthening dollar. On the other hand, the green shoots in the Electronics market are growing taller, and we have reason for optimism as we prepare for 2024. Another source of that optimism is margins. Gross margins improved nearly 500 basis points year-over-year on a constant currency basis despite lower volumes as we benefited from declining raw material inputs and logistics costs and continued synergy actions. These cost trends are encouraging, setting us up nicely as demand rebounds. On our last call, we talked about uncertainty around Q3 versus Q4 timing given the ongoing recovery in the Electronics market and what that might mean for phasing of earnings. The third quarter proved to be better than planned, and we now expect to see a more normal seasonal pattern in the fourth quarter. This means a sequential slowdown in Electronics, but we do not view this as end market softness, just ordinary course to seasonality. Demand in our industrial portfolio is impacted by the macroeconomic factors mentioned earlier, but improvement in both cost of goods and OpEx are offsetting that impact. In the third quarter, we recorded an impairment charge on our Graphic Solutions business. We've had a few years of challenging markets driven by CPG packaging trends, SKU rationalization, and stubborn raw material inflation. We do not believe our demand experience in this business diverges from the competition, and we have several work streams underway to improve its profitability in the years to come. This impairment is the primary driver of the difference between reported and adjusted EPS this quarter. We're very pleased with our progress on the transactions we announced in June to enhance and grow our high-end Electronics portfolio. The ViaForm distribution rights we reacquired are already driving deeper commercial engagement and unlocking new sizable pipeline opportunities with the largest semiconductor manufacturers in the world. We're on track to complete the integration of customer service, quality support, and inventory management for ViaForm later this quarter. We believe this front end of line offering is well positioned for growth beyond our initial expectations and have traction on both leading and legacy nodes. These products complement our back end of line advanced packaging solutions that enable the increasing complexity in triplet design, which should drive the next leg of computing performance improvement for data center, AI, IoT devices, and industrial automation. We're confident our semiconductor business is poised to deliver significantly above market growth even as the market rebounds in 2024. The customer response to the nano copper technology we acquired with Kuprion has been outstanding. Many large electronic components and semiconductor manufacturers are eagerly working with us on applications development. The team is busy driving commercialization of the technology and progress on product qualification. We're ahead of our expectations from the onset of this transaction, and the business may begin to contribute to profits as early as the second half of 2024 and should drive growth in 2025. Taken together, our Electronics businesses will bring an increasingly differentiated set of solutions to market in 2024 with a powerful and unique breadth of enabling technologies for a global semiconductor industry that is rebounding from a deep cyclical trough, experiencing robust support and investment, and has been reinvigorated by the promise of generative artificial intelligence. Looking through any near-term noise, the next few years promise profound opportunities for Element Solutions. Carey will now take you through third quarter business results in more detail. Carey?

Thanks, Ben. Good morning, everyone. On slide four, you can see a summary of our third quarter financial results. Net sales declined 3% on an organic basis, primarily reflecting continued year-over-year Electronics softness throughout Asia, where most of the business resides. Reduced commodity costs and stable pricing drove significant gross margin improvement, leading to constant currency adjusted EBITDA growth of 2%. Excluding the impact of a sizable bonus accrual reduction in Q3 2022, adjusted EBITDA growth would have been 8%. Relative to the second quarter, our reported revenue improved 2%, while adjusted EBITDA improved 16%. Though there were pockets of improvement in the Electronics segment compared to the particularly weak end market in the first half, overall consumer electronics demand in Asia was still weak relative to the prior year. This drove a 5% year-on-year decline in organic sales. Our Industrial and Specialty business declined 1% organically, seeing soft industrial demand in Asia and Europe offset double-digit growth in our offshore energy business. In constant currency terms, adjusted EBITDA margin improved 110 basis points year-over-year or over 250 basis points sequentially. The Electronics segment adjusted EBITDA margin benefited from lower pass-through metal costs and mix within our circuitry business, driven by sales from the higher-margin smartphone supply chain. The industrial segment margin improved 70 basis points in constant currency due to positive mix from Energy Solutions, as well as ongoing synergy realization, pricing benefits, and input cost deflation. Excluding the impact of the $94 million of pass-through metal sales in our Assembly Solutions business, our adjusted EBITDA margin would have been 27% in the third quarter. Adjusted EPS was flat year-over-year with the graphics impairment Ben mentioned being the primary driver of the year-over-year difference in GAAP figures. On slide five, we share additional detail on organic net sales. Our Electronics segment results were driven primarily by mobile phone and consumer electronics markets in Asia. Consistent with the first half of the year, our automotive electronics business remained resilient, particularly for power electronics applications and electric vehicles. Assembly Solutions sales were flat organically, as new business growth and traction with new higher reliability alloys for use in automotive end markets were offset by soft consumer electronics. Semiconductor Solutions declined 6% organically, better than recent trends for semi MSI. Circuitry Solutions declined 12% organically, as China consumer electronics activity remains subdued, and some commodity-related surcharges rolled off. The overall PCB market is improving sequentially but remains soft in comparison to prior year activity levels. We believe our third quarter performance outpaced the broader PCB market and are heartened by supply chain commentary of much improved inventory levels. Our business with memory disk customers was notably weak and drove a significant portion of the organic sales decline. For the third quarter, organic net sales in Industrial & Specialty declined 1% year-over-year. Industrial Solutions declined 2% organically as demand in global construction and industrial markets remains soft and commodity-related surcharge revenue for palladium fell versus Q3 of last year. Energy Solutions remains a bright spot with sales again growing 11% organically in the quarter despite challenging comparisons from Q3 of 2022. Production and drilling activity have sustained their rebound, and price actions continued to benefit sales. We expect continued growth from this business throughout the year and into 2024. Slide six addresses cash flow and the balance sheet. We generated $75 million of free cash flow in the third quarter. Working capital was relatively flat sequentially, reflecting increased sales that were offset by modest inventory improvements. Net CapEx year-to-date was $35 million, and we expect our fourth quarter investment to be approximately $20 million for certain growth projects and integration initiatives. We now expect to spend approximately $55 million on a full year basis. Turning to the balance sheet, our net leverage ratio at the end of the quarter would have been 3.6 times with the estimated full year benefit of the ViaForm product line, for which we reacquired distribution rights in June. We continue to expect to be below our targeted ceiling of 3.5 times by year-end. As a reminder, the swap maturities on our term loans are split over the next three years, and our capital structure is 100% fixed until 2024 and more than 80% fixed until 2025. We have no debt maturities until 2026, and our liquidity position remains strong. And with that, I will turn it back to Ben.

Thank you, Carey. We're pleased our results have inflected positively here in the second half. We've seen what we consider the trough and are beginning to recover from it. We didn't know what to expect in terms of the slope of the recovery, and the sequential seasonal slowdown we expect in Electronics in Q4 suggests that while we will not see a sharp immediate recovery, we will continue to improve from the cyclical trough. Against our last guidance, we've seen an incremental $5 million of FX headwind to adjusted EBITDA due to the strengthening dollar. Slightly less than half of that headwind was in the third quarter. That, together with timing of sales associated with our ViaForm transition, lead to a modest reduction in our full year adjusted EBITDA guidance of approximately $485 million. The ViaForm impact is timing related to idiosyncratic customer ordering and inventory management around the transition. Given this timing impact, we now expect a greater contribution from this transaction in 2024 on a year-over-year basis. Gross margins for the company are back over 40%, and cash flow conversion remains very strong. Even with the second half recovery, we're seeing in Electronics, semiconductor production, and high-end electronics markets remain far below their long-term averages. Overall, we've seen soft volumes across nearly all of our businesses for over a year. This is not a reflection of share but of inventory destocking and economic malaise. The current situation suggests substantial room for margin accretive growth in the years to come. However, we're not waiting idly by for that broader recovery. We've identified an action of $10 million of cost savings to impact next year, and we've invested and gained real traction in the technologies and market niches that we expect will propel market growth: event packaging, new semiconductor node transitions, expanding vehicle electrification programs, and thermal management. We believe it's reasonable to expect the business to deliver adjusted EBITDA growth of over 10% in 2024 and to continue to grow from there. As you can tell, we're enthusiastic about the future and have evidence that the growth we've come to expect from our business is returning. Our team is doing a terrific job navigating the complicated macro environment and continuing to deliver reliable high-quality solutions for our customers' existing and newly emerging needs. I'm very grateful for their energy and effort this quarter and going forward. With that, operator, please open the line for questions.

Your first question is from Bhavesh Lodaya with BMO Capital Markets.

Thanks for taking my question. So, in the third quarter, we saw a nice margin expansion across both your segments. There appears to be a case of you holding on to price as your input costs or logistics, some of those have moved lower. So can you help us provide more color on what's driving the success there? And how should we think about your EBITDA margins as you see volume growth come back in next year?

Thanks for the question, Bhavesh. A few things contributed to the margin expansion: price relative to cost was a big one. We've always said that this is a business that has sticky pricing actions, and that's been made manifest in the quarter. We have not seen real price asks as our raw material prices have come down, which is what we would have expected. Another large contributor is just mix. Last year at this time, with high metal prices, a decent portion of sales were coming from surcharges, which are much lower margin than we’ll call it proprietary chemistry sales. And so those surcharge sales of metals have fallen away as metal prices have come down and have been replaced by higher-value sales of proprietary chemistry. So, that explains a chunk of the margin expansion that we experienced in the third quarter. As we look forward, volumes are still low. Year-over-year volumes are down. And as we see volume growth, we should get greater facility utilization and see incremental margin expansion. Our metal adjusted EBITDA margin in the quarter was 27%. It peaked at 30% in 2021. We see room for margin expansion from here.

Got it. And as a follow-up. So, I believe you mentioned EBITDA growth of 10% for 2024, it is possible next year 2024. Given what we saw in the third quarter and your implied guide for the fourth quarter, would you say analyzing the second half of this year is a good baseline for the business? Or are there some other puts and takes maybe around ViaForm?

Yes. So, the simple rule of thumb, right? It's early to give guidance. It's a short-cycle business, and visibility especially into the second half of 2024 is limited. But historically, we've said that the second half of the calendar year is a pretty good indicator for the first half of the subsequent calendar year. And that remains to be the case. The timing of the second half ramp is unpredictable, as we saw this year. So, starting with annualizing the back half seems reasonable. We do get a contribution from ViaForm which is an incremental $10 million going into next year. There's a little bit of an FX headwind. We've talked about some cost actions we've taken and those are the puts and takes as we start plotting 2024. But there's a case to be made for 10%-plus EBITDA growth as we said in our prepared remarks.

Your next question is from the line of Jon Tanwanteng with CJS Securities.

Hi, thank you for taking my question. First what's driving the ViaForm Entegris inventory dynamic and the reduction this year? And how does that set up your positioning going into next year with pricing and service levels and just the demand recovery that you probably could expect to see in semiconductors?

Yes. So, we reacquired the distribution rights for this product line, and we reacquired them from Entegris, and they were holding our inventory. We took the decision to stop selling during this transition period. It just simplified logistics. And so those sales basically stopped for several months, and that's not lost sales. It's just delayed sales. The customers expect us to hold a certain level of inventory, and we will, and we are in the process of rebuilding that inventory now that we're in that transit now that we own it, we're just not realizing the value for it in this calendar year. So that's really what's driving it. It's a decision we took and it's deferred revenue. It has no bearing on our expectations for this business frankly our expectations for the business for the product line are higher today than they were when we announced this transaction.

Okay. Got it. And then just a question on inventories versus demand. Are you shipping to end demand levels now in Electronics? Or is there some element of restocking going on industry after inventories are troughed? How should we think of that dynamic and where you're actually at versus what is being sold through?

Yes. So, sell-in was lower than sell-through through the first half. Units of smartphones are down year-on-year still in the third quarter, and our volumes are down still in the third quarter. There is, as our customers begin to ramp for production, there is a restock, but it is not what's driving the performance in the business. It's units. If you look at smartphone units in the third quarter, they were still down mid-single digits year-over-year but they were up sequentially, and the forecast is mid-single digits. Our Circuitry business was also up mid-single digits. So this bump in performance, the ramp in performance is not an inventory restock. It's driven by underlying demand.

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

Yes. Good morning. Good morning, Ben. So it sounds like a key part of the story in the third quarter is a subtle inflection more about the cyclical recovery than the secular story and drivers. So I guess my first question is that a fair characterization? And then more importantly, if I revisit to your early 2022 Investor Day event, a key theme there was of course the secular drivers. So I'm just curious how you see these opportunities developing against the backdrop of a world that's changed since then. Are those still valid drivers for a multiyear progression for ESI? I know in your formal remarks you highlighted advanced packaging. So maybe that's where visibility is greatest. But maybe you could touch upon 5G and the automotive electrification back to those growth vectors and just your competitive positioning generally addressing those secular drivers. Thank you.

Thanks for the question, Chris. It's a compound question. So first with regard to the cyclicality versus secular growth, we've always said that secular growth isn't linear; there's volatility around the upward trend. And that's clearly what we've been living through for the past 18 months or so. The recovery we saw in the third quarter was a recovery in high-end electronics. Volumes are still down. We are way off of peak. So we're still in a recovery. And that recovery will take us to a higher-value end market because of the secular growth we're seeing from trends around artificial intelligence and vehicle electrification and all the things we called out earlier. So I do think the third quarter is more of a cyclical recovery but the longer legs in this end market are from secular growth from new market and new technologies, right? And advanced packaging is a great example of an emerging application where Element Solutions brings a really differentiated breadth of capabilities. Those capabilities come from the legacy businesses that Element has owned and has been investing in innovation around, and also from new things like what we're bringing to market in Kuprion. Most of the engagement that we've been talking about with Kuprion is for next-generation artificial intelligence applications, and customers are spending a lot of time on it. The order quantities today are small from a volume perspective but growing incredibly quickly, and that shapes our perspective on the contribution from Kuprion both the speed at which it will contribute and the potential sort of medium-term substantial earnings that that technology will bring, in addition to the existing high-quality offerings that we're already providing in advanced packaging applications.

That's helpful. And maybe just if you could touch on how the competitive positioning has evolved, if anything has really changed there in addressing some of the secular drivers? Thanks.

Yes. So the core of our business in Electronics is stable from a competitive perspective. The things that have worked continue to work; as we get to some of these leading nodes, we are starting to see exploration of new materials. Kuprion really helps with that. ViaForm and some of the innovations that we've done there are improving our competitive positioning as new nodes come online. And we have a real expectation that we will be gaining share in copper deposition and in IC substrate markets, because of the new technologies we're bringing to bear. This isn't a market where share shifts radically from one year to the next; the way that we grow our shares is by getting a disproportionate amount of emerging applications. We feel very well-positioned for that, and those emerging applications are going to be coming online in 2024 and 2025, and that speaks to our ability to continue to grow well above market in that time frame.

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

Hi, Rock Hoffman on for Steve Byrne. In terms of ViaForm, do we think it has potential to drive cross-selling of other products to semiconductor fabs?

It's a great question. Thank you for it. And the answer is absolutely yes. We've been really pleased to see the change in engagement level with the front end of line technologists at the largest semiconductor fab since we completed this transaction. And so we have ongoing, more robust dialogues than we did before.

Understood. And just to follow up, what are the growth opportunities for you in electric vehicles that are different than internal combustion engine vehicles? And any update on the flexible circuit technology that you've had in development?

Yes. Really good question and a really exciting area for us. Electric vehicles have a lot more electronic content than internal combustion engines, and we have some really special capabilities in power semi applications. These are the materials that are used in the power semiconductors that regulate the flow of energy from the battery to the motor. What we provide in that market is enabling technology to the high-end electric vehicle supply chain. We've got differentiated technology that is currently in use in a very large portion of high-end electric vehicles, and the traction for that technology is growing in the automotive supply chain both in the West and in Asia. We see about 1.5 to 2 times the value in an electric vehicle versus a conventional internal combustion engine. The business is driven by units, but there's a content story over and above units, and that's one of the key levers that's giving us incremental content and incremental growth relative to unit growth in the automotive supply chain. With regard to the flexible, formable printed electronics business, that is a nascent technology that we've had some really interesting breakthroughs and have a lot of hope for in the medium term. It's not a material contributor to profits today but it's an emerging frontier for electronics hardware and one where we believe we've got a right to play and win.

Your next question is from the line of Josh Spector with UBS.

Yes. Hey, everyone. I wanted to ask about your earlier comments regarding the positive developments you see for next year. Although the seasonality in the second half has shifted somewhat, it seems largely unchanged. What looks more promising to you now compared to a quarter ago, and how confident are you in outlining what 2024 might entail?

So we're pretty transparent about the fact that it's a reasonably short cycle business. And so it's not an order book, but it's tone from the supply chain. It's tone from large semiconductor fabs, who remain bullish about 2024 market research who are pointing to mid-single-digit growth in smartphone handsets and general industry expectations for a recovery next year.

Yes, I appreciate that. And I actually wanted to follow up on advanced packaging and how to think about what that means for you. So, I mean, you're talking about some of the newer smaller businesses, but there's also some impact on your existing business. And if I think if I look at your different opportunities, we can kind of size the content opportunity in smartphones, EVs, etc. Advanced packaging is a bit harder. So I don't know what you think that does in terms of industry growth excluding MSI growth and your content growth as a result of a shift in this technology. Is there any way to quantify that so we can better incorporate that into our models?

Yes. It's a difficult thing to parse out because we've got technology in all of our electronics businesses that supports advanced packaging applications whether that's in our circuitry business, IC substrate markets, in our assembly business, some of our advanced interconnect materials, and of course, in our semiconductor business in multiple areas. So there's not one line I can point you to. The simple way I would characterize it is, we say we can grow 1% to 2% faster than our underlying markets. We believe that we're investing both dollars and R&D to grow our leadership from a technology perspective in these markets. That plays into the underlying growth algorithm we've talked about, call it mid-single-digit growth through the cycle on the top line; this is contributing to it.

Your next question is from David Silver with CL King.

Okay. Good morning. Thank you. I'd like to go back to, I guess Ben your comments about your front end of line opportunities. And I believe the quote was growth beyond initial expectations. So, just a couple of things. But keeping with that theme, I'm just scratching my head, and I'm wondering if you could maybe discuss, I guess in regards to ViaForm where that incremental growth might be, now that you've brought the distribution rights in-house. In other words, was the original arrangement kind of suboptimal in terms of exploiting the full potential of ViaForm? And then secondly, maybe a little bit more speculative. But if I understand you correctly, you're talking about meaningful commercialization on Kuprion maybe being advanced a significant amount of time from what we heard last quarter. And regarding that, I was wondering if you could just discuss a couple of things, maybe your intellectual property position there. And then is this a product that is best exploited by developing it or by handling the upstream in-house or to accelerate the deployment, would you contract the manufacturing or other aspects of commercialization of Kuprion to others; just how best to exploit that opportunity? Thank you.

Absolutely. Thanks for the question. So, the partnership and distribution agreement we had with ViaForm was a very productive one. It's a product line that grew massively in the 20 years during which we were partners with Entegris and its predecessor organization. Since we now control that product line from manufacturing R&D through to the customer, we do believe there are incremental opportunities, and our partners also sell that and understood that there would be an opportunity for one party owning everything around that product line. What we found when we say opportunities in excess of our initial expectations, is one, a lot of new semiconductor fabricators are coming online; new fabs are coming online, and we believe we've got a real opportunity to convert that at a higher rate than our current share of that market. And two, we're having conversations about backwards integrating our technology on existing lines which is not something or in existing fabs to displace competitors, which is not something that would have been in our base case at all. The qualification process is expensive and time consuming and not something that we typically see. But because of our technology and service levels, it is being considered, which would absolutely be upside. With regard to Kuprion and the second part of your question, this is really special material. We acquired a technology and materials technology and great people who know how to work with that material and nascent applications for that material. The work we've been doing has been refining that applications technology to meet specific customer needs to commercialize that technology, and the receptivity from our customer base has been really great. These are products that we know how to make already. They're not vastly different from the manufacturing technology that we have in-house. Our IP, we have an IP position there, but there's also speed and customer intimacy that we bring to the table that is differentiated and solving an urgent customer need frankly. We are going to manufacture this product ourselves most likely. The investment required to manufacture the product is not that substantial, such that you see a big lump in CapEx next year associated with it.

At this time, there are no further questions. I will now hand the call back over to presenters for any closing remarks.

Great. Well, thank you for joining. Thanks for your questions, and we look forward to seeing many of you in the weeks and months to come. Have a good day.

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