Earnings Call Transcript - ESI Q4 2020

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Element Solutions Q4 and Year-End 2020 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 this call may be recorded. I will now turn the call over to Varun Gokarn, Senior Director of Strategy and Finance. Please go ahead.

Varun Gokarn, Senior Director of Strategy and Finance

Good morning, and thank you for participating in our fourth quarter and full-year 2020 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 express 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 Ben Gliklich, CEO of Element Solutions.

Ben Gliklich, CEO

Thank you, Varun, and good morning everyone. Thank you for joining. We had an outstanding year in 2020, outstanding on an absolute basis and particularly on a relative basis in light of the macroeconomic backdrop. We grew net sales, adjusted EBITDA, adjusted earnings per share, and free cash flow. The fourth quarter was the culmination and the capstone. It was a record quarter for net sales and adjusted EBITDA since we launched Element Solutions in early 2019. We grew the top line 10% organically year-over-year and adjusted EBITDA by 20%. This was entirely a testament to our outstanding team, who lived our culture every day and showed intense dedication to our company, our customers, and our colleagues. We're only as good as our people, and this year proved our people are outstanding. The stark contrast between our performance this year and the tragic ongoing health and socioeconomic crisis is not lost on us. We feel deeply for those who are sick, suffering, and mourning. The pandemic has touched all of us, and in that context, we are especially grateful for the resilience and persistence of our team who drove our success in 2020 while navigating the turbulence created by COVID and its ramifications. When we launched Element Solutions in February 2019, we espoused a strategy balancing operational excellence and prudent capital allocation, running our high-quality businesses better every year and deploying the strong cash flows they generate in long-term value-enhancing ways. On page three, we consider 2020 against those objectives. In the face of a dramatic economic dislocation, we grew adjusted EPS by 9% and adjusted EBITDA by 2%. This 2020 earnings growth did not come at the expense of investing in our long-term growth trajectory or in our people. We continued investing throughout the year, maintaining our prior year spending levels in both R&D and CapEx, and notably, delivering on our commitment to preserve our employee base despite the COVID-19-related shutdowns. We demonstrated the resilience of our variable cost operating model and stable cash flow profile, preserving margins throughout the year and generating robust cash flow every quarter. Free cash flow was approximately $250 million, up 5% like-for-like over 2019. We deployed that cash flow prudently with a small bolt-on acquisition that we believe creates a great long-term growth opportunity for us, a high-returning debt refinancing, and accretive share repurchases. We demonstrated a commitment to balanced capital allocation with the initiation of a $0.05 per share cash dividend in the fourth quarter, as well as the repurchase of nearly $56 million in shares throughout the year at an average price below $10 per share. Even as we invested in growth, our net leverage ratio fell to 2.9 times. It's a year we exited stronger than we entered and a year that we will be proud of. Our fourth quarter results are summarized on slide four. They exceeded our mid-December expectations as business, particularly in electronics, remained strong through what is typically a slow period at year-end. November was the best month since we launched Element Solutions until December, which was even better. Net sales of $537 million in the quarter were also a record since launch. They represented growth of 10% driven by strength in high-end electronics and the continued recovery in industrially-oriented businesses. We grew adjusted EBITDA by 20% in constant currency to a quarterly record of $126 million. Adjusted EBITDA margins in the quarter improved 100 basis points year-over-year as we saw both mix benefits and continued operating efficiencies. Adjusted EPS in the quarter of $0.31 grew 41% versus the same period in 2019. Turning to our full-year 2020 financial results on slide five, we delivered growth in net sales, adjusted EBITDA, and adjusted earnings per share in a year when several of our end markets saw marked declines. Organic net sales declined 3% for the full-year as COVID-19-driven production slowdowns heavily impacted automotive and general industrial end markets in the second quarter before recovering in the second half of the year. Strong underlying demand for next-generation smartphones, 5G telecommunications infrastructure, and data center markets supported our high-end electronics business throughout the year despite the macroeconomic weakness we saw in most other manufacturing markets. Including currency movements and the benefit from our acquisitions of DMP and Kester, net sales were up 1%. We grew adjusted EBITDA 2% on a constant currency basis and expanded adjusted EBITDA margins modestly versus the prior year. Full-year adjusted earnings per share grew 9% as our work on the capital structure and share repurchases compounded our full-year earnings performance. These results, in this backdrop, shine a light on the quality of our business and our team. Carey will now take you through our full-year financials in a bit more detail.

Carey Dorman, CFO

Thanks, Ben. Good morning, everyone. On slide six, we share additional detail on net sales drivers in our two segments. Full-year organic growth in electronics was 2%, driven by strong growth in semiconductor and circuitry and a sharp recovery in assembly beginning in Q3, but firming up in Q4. We believe our electronics business significantly outgrew their end markets this year; semiconductor, which demonstrated double-digit organic net sales growth in each quarter of 2020, continues to benefit from growth in the advanced packaging market and general mobile phone and data infrastructure chip demand. Circuitry saw similar trends driven by 5G applications, with particularly strong growth in Q4, up 13% sequentially over Q3 as timing of high-end mobile launches were pushed to later in the year. While 5% growth is slightly above our long-term expectations for the business, we do believe 2021 should see relatively similar market trends, which will continue to support these growth rates. In assembly, the strong recovery into Q4 did not make up for the automotive electronics-driven weakness we saw in Q2 and early Q3, particularly in Asia. However, the sequential trend in both high-end mobile launches and increasing auto production supported double-digit year-over-year growth in Q4. Our power electronics business for the EV market is growing very nicely as well and contributing to our outperformance. The relative net sales growth of the three electronics businesses helped support a 40 basis point increase in adjusted EBITDA margins in the second, along with COVID-related cost management activity that occurred primarily in the second and third quarter. For the full-year, organic net sales in industrial & specialty declined 10% as a result of the weak macroeconomic backdrop. The industrial business declined 11% as production slowdowns first hit Asia in mid-Q1 and persisted in the West through early Q3 when global production returned, albeit at muted levels. About half of our industrial sales serve the auto market, which is estimated to have declined in the mid-teens globally in 2020. The recovery in the back half was strong, and we believe it should continue into 2021. Our graphics business had a strong start to the year, driven by both customer wins and COVID-driven demand. However, restrictions on consumers throughout the rest of the year dampened consumer packaging demand and impacted the launch of new products and marketing campaigns, which typically drive new sales for the business. Similarly, low energy prices and macroeconomic uncertainty led to reduced energy production rates and limited capex investments, which drove declines in our offshore solutions net sales. Given the longer cycle in this business, we do expect some additional sales pressure into early 2021. Constant currency adjusted EBITDA margins in the I&S segment declined 40 basis points in the year, primarily as a result of mix, with energy being the highest margin business in the segment. Slide seven highlights our cash flow and balance sheet activities in 2020 and expectations for 2021. We generated $249 million of free cash flow in 2020, a 5% increase over the 2019 figure after adjusting for the impact of our prior capital structure. Cash interest was $52 million in the year, a $19 million reduction year-over-year against 2019, reflecting the positive impact of our senior note refinancing. Cash taxes were $67 million, a $5 million reduction versus 2019, which reflects the successes of numerous tax efficiency activities around the globe. As Ben mentioned, despite COVID-19 demand impacts, we continued our planned CapEx in the year, spending $27 million on a net basis across the business. Working capital was an investment of approximately $30 million, driven almost entirely by the sharp net sales growth we saw in Q4. Working capital released earlier in the year as net sales declined in the midst of COVID shutdowns. However, in our business, working capital is determined by near-term sales performance, which has been strong. While we expect strong sales growth next year, we believe we can keep our working capital investment more modest than our top line growth rate would imply, given the current levels in the business. In 2021, we expect to generate approximately $275 million of free cash flow. While earnings are increasing, we expect cash tax dollars to go down by over 10% to approximately $60 million. This significant improvement is a consequence of changes to our tax profile to reflect the new structure at Element Solutions and beneficial changes to the tax code. To reflect this change in cash tax expectations, we will be reducing the tax rate we use in our adjusted EPS calculation for 2021, down to 20%. Our net leverage ratio exiting 2020 was 2.9 times. We are proud of showing a flat or declining leverage ratio throughout the volatile 2020 environment. This reduction from mid-3s to high 2s throughout the year is particularly impressive in light of the fact that we deployed more than $100 million in buybacks, acquisitions, dividends, and refinancing-related expenses. As we look at 2021, we expect to continue to deploy capital opportunistically while preserving a conservative balance sheet. With that, I'll turn it back to Ben.

Ben Gliklich, CEO

Thank you, Carey. On slide eight, we introduced our full-year 2021 financial guidance. The strength we saw in our end markets in the fourth quarter has carried into the first quarter. Our markets remain healthy and our teams are executing well. Our guidance is for full-year adjusted EBITDA growth of approximately 7%, and adjusted earnings per share between $1.10 and $1.15, representing 15% to 20% growth year-over-year. We expect net sales growth in both segments to be above their long-term average rates, buoyed by the cyclical recovery in auto and industrial end markets and ongoing strength in high-end electronics. In particular, we expect to benefit from increasing content opportunities driven by the wider adoption of 5G, increased production of electric vehicles and the broader electrification of the automobile industry. Overall, we expect adjusted EBITDA margins to be roughly flat as strong net sales growth should be offset by both a return to normal operating expense environment and gross margin mix modestly reversing the trend we saw in 2020. When excluding travel expenses, Q4 2020 was a relatively normal quarter from an operating expense standpoint. However, on a full-year basis, we are lapping temporary cost actions taken in 2020, including salary reductions, government subsidies and significantly reduced travel, most of which we do not expect in 2021. Given current exchange rates, we anticipate FX will be an approximately 2% tailwind for full-year net sales and adjusted EBITDA. 2021 growth should be weighted to the first half of the year, given the timing and magnitude of the operating disruptions in 2020. For the first quarter of 2021, we expect adjusted EBITDA growth in a range of 8% to 10% over the same period in 2020. We've demonstrated in our first two years as Element Solutions that our business is able to generate strong cash flow in all markets, and we expect this year will be no exception. As Carey mentioned, we expect to generate $275 million of free cash flow, a record for ESI, representing 10% growth over 2020. The cash we generate should create flexibility to allow for some combination of additional prudent tuck-in acquisitions, opportunistic share repurchases, and potentially increased cash dividends. Earnings growth together with free cash flow generation should create meaningful additional capacity for capital deployment under our leverage target. We remain a growth-oriented company, and we continue to evaluate bolt-on acquisitions of companies that we believe would be better as a part of ESI, bring us talent and new capabilities, represent good value and have the potential to accelerate our growth rate. Finally, on slide nine, I'd like to highlight some recent developments regarding ESG, a topic that has long been a source of commercial and internal success for Element and has become an increasingly important topic in our stakeholder engagement. First, we published our inaugural ESG report yesterday afternoon. I'm proud of this report, and more importantly, what it showcases. The intersection between sustainability and profitability is well-established in our business. This report highlights our efforts to improve environmental outcomes for our customers and support sustainability objectives across the supply chain. Our contributions to sustainable outcomes only increased in 2020 with the launch of MacDermid Envio Solutions, a modest-sized business, but one with great ambitions. This business has had better early traction than we expected to support our customers with innovative wastewater treatment and metal recycling solutions that power the circular economy. As a company, we're committed to making a positive lasting impact in the communities where we operate. We believe deeply that our business is only as healthy as the ecosystems around us. We took a big step forward in this commitment in 2020 by establishing the ESI Foundation, a Florida-based not-for-profit, which will serve as the company's charitable giving entity. As a 501(c)(3) organization with initial funding of $5 million from our company, the foundation intends to provide grants to qualified charitable organizations in the communities where our employees live and work. The foundation intends to focus on causes important to the environmental and social well-being of these communities. To wrap up, I'd like to thank all of our stakeholders for their continued support of Element Solutions. Through a challenging year, we've built a track record of delivering on our commitments in the short term and building for the long term. We're poised to do so again in 2021. This is a testament to the talent and dedication of our people around the world. We are especially thankful this year for their continued efforts. With that, Operator, please open the line for questions.

Operator, Operator

We'll take a question from Rob Koort of Goldman Sachs. Your line is open.

Rob Koort, Analyst

Thanks very much. Good morning.

Ben Gliklich, CEO

Good morning, Rob.

Rob Koort, Analyst

I was wondering if you could talk a bit about the challenges in the semiconductor industry going on right now, both for your electronics business and then for the auto exposure you have as well. What are you seeing, what are you hearing on the ground, and what's the prospect for alleviation of those shortage challenges?

Ben Gliklich, CEO

Yes. So, you're referring to the chip shortages that have been slowing down production of automotive. The headwind associated with that is some pockets of reduced automotive units in the near-term, and we're seeing that. Not seeing a huge impact from that. It's pretty spotty, but we are seeing that in the industrial business. But I would really point to two silver linings associated with this and what we think are long-term positives. The first is the demand for those automotive units is there. And so, in the fullness of time, those cars will be made, and our content will be on those cars, and so we won't lose that revenue opportunity. It may just move a little bit. The bigger positive is what's driving this chip shortage, which is the proliferation of electronics in many markets and huge demand for chips and electronics, and that's good for our business, right? The strength we saw in the fourth quarter is you can draw a line from the strength we saw in our electronics business in the fourth quarter to what's happening in the chip market and with these cars. And that's a long-term trend that is bullish for our business, and we're seeing day-to-day right now in our operations.

Rob Koort, Analyst

Thanks for that. If I could follow-up on your margin guidance, I think you've talked about your revenue growth being fairly robust, but no material margin improvement. I understand some of the cost-outs of the COVID peak in 2020 return. But why is there a little bit more fixed cost or unit cost leverage rather to that strong revenue growth this year? Or maybe talk about the cadence of returning those costs. Is it higher growth in the first-half margin-wise and then you curate as some of the costs come back? Or why don't we see a little bit more ambitious expression of EBITDA growth?

Ben Gliklich, CEO

I appreciate that question, Rob. Let's discuss the factors affecting our growth and margins. Our guidance indicates a 7% increase in EBITDA, which we expect to achieve with a corresponding 7% increase in revenue while maintaining stable margins year-over-year. If, for any reason, revenue doesn't meet expectations, particularly in the latter half of the year, we have alternative strategies to reach that 7%. Conversely, if the positive momentum from the first half continues, we might exceed that 7% EBITDA growth. Most of our expected EBITDA growth for the year relies on the first half. The positive impact on margins comes from increased volumes and operational efficiency. However, we are facing some challenges, particularly the normalization of operating expenses. We reduced about $20 million in operating expenses last year, but we anticipate that some of those costs will return, including government subsidies and salary adjustments, alongside an expected normalization of travel in the latter half of the year. Additionally, we are noticing some inflation in raw material costs this year, and while we successfully passed much of that on to our customers, we may not capture every dollar. We are also experiencing logistics disruptions and rising freight costs. These factors are incorporated into our margin guidance. It remains uncertain whether these issues will resolve in the coming year or persist, but our guidance reflects several ways to reach our targets. If the positive trends we've noticed in the first half carry into the second half, we should be able to do even better.

Operator, Operator

We'll take our next question from Josh Spector of UBS.

Josh Spector, Analyst

Yes. Hey, guys. Thanks for taking my question, and congrats on a solid 2020 and end to the year here. I think a lot of the focus over this past year has been on the volume dynamics within electronics and industrial. I guess now we're at the point where volumes are strong here. Last quarter, you expect that to persist in the first quarter. What are pricing dynamics like? Is anything different where you guys can take advantage of some of this tightness and perhaps have pricing being a bigger part of the organic story over the next couple of years?

Ben Gliklich, CEO

Yes. Thanks for that question, Josh. It's a good one. Where we've been taking price and our position to continue to take price is really where raw material inflation has impacted us. So we have passed through dynamics in our assembly business and some of the metals that aren't on a direct pass-through basis we're surcharging for. We don't have a plan to be aggressive from a pricing perspective. We're in nice markets, and we've got nice market positions in those markets. But it's not the type of market where you can take annual price hikes without any fallout from that by and large. And so we aren't counting on significant pricing here. From a go-forward perspective, there may be some opportunities associated with that. But we're not counting on that. It's really a volume story from here.

Josh Spector, Analyst

Okay. Thanks and just a quick one on the free cash flow side, pretty impressive step down in the tax rate year-over-year, both on cash and book basis. Is that sustainable? Is that something we should be considering on a forward basis? Can that get better? Or does it step back up longer term?

Ben Gliklich, CEO

Yes. So I'll turn this to Carey in one second. But I would say that the team has done a really good job working on structural changes from a tax perspective. As Carey mentioned, we're reducing the tax rate that we're using in our adjusted EPS calculation from 26% to 21% this year, which you should interpret as a permanent change for the time being. I do believe there's some upside. Carey, you want to talk a little bit more about that?

Carey Dorman, CFO

Yes. I think you hit the big points. We do believe this 20% rate is sustainable. On back of the launch of Element Solutions, the tax team spent a good chunk of time sort of reallocating profits to better align with the assets and risks in the business. Along with some favorable changes due to tax reform, we're in a position that we're much more pleased with than we were historically. So I think there's a little bit of upside still from this rate, but this range of cash tax rate should be sustainable for the next couple of years, at least.

Josh Spector, Analyst

Okay, thanks.

Operator, Operator

And we'll take our next question from Chris Kapsch of Loop Capital Markets.

Chris Kapsch, Analyst

Good morning and thank you. In your electronics business, it appears that you are outperforming the end markets, which is expected due to the increasing content per item for advanced platforms in both automotive and smartphone applications. Additionally, it seems you are also surpassing relevant competitors in the same markets. I would like to know if you agree with this observation and if you can provide any explanation. Do you believe you have gained market share, or have you simply achieved greater commercial traction with the right customers or platforms? Any insights you can share would be appreciated.

Ben Gliklich, CEO

Yes. So, thanks for that question, Chris. The smartphone market in 2020, from a unit standpoint, is forecast to be down mid-single digits, and our results in the high-end electronics business and the circuitry business clearly far, far superior to that for 2020. Some of that performance in our circuitry business in 2020 was with product that's going into 2021 units. The forecast for units in 2021 is for pretty significant growth. So, I think that you can attribute some of our outperformance to that relative to competitors, it's a healthy market, I'm sure our competitors are also seeing nice growth. We've been investing in people and technology on an ongoing basis going back many, many years. We haven't had any disruption from integration or so forth for five years at this point. I think commercially, our teams are performing very, very well, and you're seeing that in the results. I can't speak to specific market share dynamics, but we feel very good about our performance, the products we're bringing to market, and the service we're bringing to our customers.

Chris Kapsch, Analyst

Thank you for that. I'd like to follow up on the margin question regarding the initial expectations of flat margins. There seem to be both positives and challenges affecting margins. I'm curious about your overall perspective on the full-year mix, especially with the recovery in industrial businesses following the COVID impact in the first half of the year. This recovery suggests that there could be a positive mix, but I'm wondering if you anticipate any adverse mix effects in the second half. Do you view the mix as a potential driver for positive outcomes if the demand strength you mentioned in response to Bob's question continues into the second half?

Ben Gliklich, CEO

Yes. It's a good question, Chris. Mix in the first-half is a modest negative, because if you look at the two businesses that were most impacted by COVID, it's the industrial surface treatment business and the assembly business. Those are two more industrially oriented sizable businesses. And they're going to show the most growth, particularly in the second quarter, and those are lower-margin businesses relative to the average. And so, we'll have a bit of a negative mix effect. If the strength we're seeing in circuitry persists into the second-half, which is not baked-in into our guidance, then we'll have a positive impact relative to the margin guidance we've given. Thanks, Chris.

Operator, Operator

Our next question is from Duffy Fischer of Barclays.

Duffy Fischer, Analyst

Hey. Good morning, fellas.

Ben Gliklich, CEO

Good morning, Duff.

Duffy Fischer, Analyst

First question is just around inventory. So, your inventory, your products, and kind of where your customers' inventory, do you think any of the strength we've seen in the last quarter is people building inventory? Or do inventories still feel very low to you?

Ben Gliklich, CEO

Yes. Thanks for that question, Duffy. The answer is a little different by business. But by and large, we don't see this as inventory built. The sales that we had in Q4, as I talked about earlier, in the circuitry business and in the high-end electronics business, those are going into units that are being produced and sold in 2021. We all see how well the economy is performing in Asia, in the West. And, so, we expect those units to be built and sold. So, we don't see a big inventory issue on the auto side of the business, as I mentioned earlier. The demand for units is there. And, so we expect to recapture some of the sales into that market that we may be missing in pockets associated with the chip shortages that have led to production shutdowns. So, we don't see a big inventory stock issue right now in the business at all.

Duffy Fischer, Analyst

Okay. And then just second one, could you talk a little bit about the M&A environment? Obviously, multiples for publicly traded companies have moved up a lot in the last year. Business is very strong across a lot of the businesses that you would like to acquire in. So maybe just go through, what does that do to a seller's mindset? Did that push multiples too high for you? Does it incent people to want to sell what maybe they think is a top or at least a better business condition we've seen over the last couple of years? Just how does that look multiple? And opportunity set wise for acquisitions this year?

Ben Gliklich, CEO

I appreciate your question, Duffy. The M&A market is very active right now, and we are well-positioned to pursue opportunities. We have reduced leverage and are generating significant cash flow, which allows us to look for acquisitions that meet our criteria. One of our key criteria is value, and we will be disciplined in that regard. The types of targets we are currently considering align with our recent acquisitions. We believe there are opportunities that will satisfy all our criteria. There are some modest acquisitions that can enhance our business, available at reasonable multiples, and the market is favorable for these. We will not rush into overpaying, as there are many options where we can offer fair prices in the current market. Martin, would you like to discuss capital allocation in more detail?

Martin Franklin, Executive Chairman

Yes. I mean, I would say a few things. First of all, with the benefit of hindsight, I'm very glad that we had the posture that we had in the past, which was to aggressively buy back our shares where we thought they were considerably below value. I still think that our shares aren't fully priced or anything close, particularly when we look at our own outlook. But we've got three levers: We've got tuck-in acquisitions; we've got the potential to buy back shares; and also to increase our dividend. I think we're going to look holistically at all three. But I think there are opportunities, frankly, on all fronts during the course of even this year.

Duffy Fischer, Analyst

All right, thank you, guys.

Martin Franklin, Executive Chairman

Thanks.

Operator, Operator

Our next question is from Jon Tanwanteng of CJS Securities.

Jon Tanwanteng, Analyst

Good morning, guys. Thank you for taking my questions and really nice quarter in guidance. Ben, your energy business is one of the higher-margin businesses in the stack. I know it's relatively small as a percentage of revenue. I was just wondering how much EBITDA impact did it have in 2020? And how much do you have coming back in your guidance in '21, now that crude is $20 or more higher than it was for the whole year last year?

Ben Gliklich, CEO

Thank you for the question, Jon. The offshore business is relatively small and faced challenges last year due to volatility and a significant drop in energy prices. This business typically lags behind energy price changes, so the effects are felt a few quarters later. We don't expect substantial growth from that segment in 2021. If growth does occur, there could be some upside, but it's difficult for us to plan for that. Energy prices have been unstable, and we need not only higher prices but also stable higher prices for our customers to resume drilling activities and capital expenditures. Therefore, this segment is not a major contributor to our growth outlook.

Jon Tanwanteng, Analyst

Thank you. You mentioned that the assembly and industrial businesses are strengthening into the second quarter. Could you share some insights about the electronics and automotive sectors? Are you seeing continued demand while speaking with clients about the second quarter? Are there any headwinds or slowdowns anticipated in your forecast? Additionally, regarding the top line, are there increasing challenges on the bottom line related to input prices or logistics? Any details on these points would be appreciated.

Ben Gliklich, CEO

Sure, Jon. The comment about negative margin mix and the strength driven by strength in industrial and assembly was more of a year-over-year comment than a sequential comment, right? Because it was in Q2 of 2020 that we saw the biggest impact from COVID, which was on those two businesses. Those two businesses, they recovered nicely in Q3. We had growth in Q4, and we would count on growth in Q1 of 2021. Those end markets, in general, are very, very healthy, and we expect them to continue as such in the second quarter. Our outlook is for a continuation of the trends that we're seeing today into the second quarter. But because we can't touch and feel, given the visibility in our business, that continuation into Q3 and Q4, we're just a little bit more cautious. That's not to say that it won't happen, but we can't underwrite and commit to this continued strength in the back-half, and that's why there's a bit of cautiousness.

Jon Tanwanteng, Analyst

Understood. Thank you, guys.

Operator, Operator

Our next question is from Neel Kumar of Morgan Stanley.

Neel Kumar, Analyst

Great. Thank you for taking my question. Based on your free cash flow and EBITDA guidance, it suggests free cash flow conversion around 60% in 2021. Is that a reasonable level to think about going forward? And are there any other opportunities to improve free cash flow conversion even further? And then just also in terms of your EPS guidance, what does that assume in terms of share buybacks in 2021?

Ben Gliklich, CEO

Thanks for the question, Neel. So, we've done a lot of good work on the balance sheet, on taxes. I wouldn't expect them to creep up interest and tax significantly as we grow earnings. I would expect our cash flow conversion to improve as earnings grow from here. So, I don't think that 60% is a ceiling by any means. With regard to our EPS guidance, at the high end, there's a little bit of capital allocation. At the low end, there's very little. So it doesn't necessarily mean buybacks, but it means that we've deployed some capital in an accretive way. I don't know if there's anything more you'd add, Carey?

Carey Dorman, CFO

No. I think that's right. I would just point out on the interest specifically that we have fixed rate on all of that debt through the end of 2024, so that certainly should not be going up.

Neel Kumar, Analyst

Okay, great. That's helpful. And then how are you thinking about the contribution of 5G to your longer-term growth expectations for the electronics business. I think in the past you talked about electronics being primarily GDP-plus markets. You think that will move upwards over the next two years because of the acceleration of 5G?

Ben Gliklich, CEO

Yes, absolutely. 5G has both immediate and long-term implications for our business. In the short term, it requires significant infrastructure investments, which will lead to more smartphones and increased content in those devices due to the technical demands of 5G compared to older technologies. This trend will not be short-lived; it will extend over three to five years or more. The demand for our technology driven by smartphone replacements will align with this timeline. As we look beyond the medium-term, we will experience faster connectivity and greater bandwidth, which will enable distributed computing power in previously untapped markets. The current chip shortage marks only the beginning, and the semiconductor industry is ramping up investments to boost capacity in anticipation of not just 5G infrastructure and smartphones, but also the broader impact of 5G technology on the industrial economy. This will significantly enhance our performance for many years. In summary, we expect a long-lasting medium-term boost for our high-end electronics business.

Operator, Operator

We'll move next to Matthew DeYoe of Bank of America.

Matthew DeYoe, Analyst

Thanks for taking my question. So, what's next for the water filtration business, should we just expect things to grow organically? Or are there moves you need to make to increase scale or product offering?

Ben Gliklich, CEO

We are actively working to expand our scale and product offerings through organic growth. This business has gained traction more quickly than we anticipated, and we had expected it to grow rapidly. We have invested in enhancing our manufacturing and commercial capabilities internationally. Currently, we are manufacturing in Europe and preparing to start production in Asia. We are also developing commercial teams in both regions. Last year, this business generated sales between $20 million and $25 million, and we expect it to reach $100 million within three to four years, all through organic means. Our customers are eager for the customer service and technology that they have come to expect from us in other sectors, particularly for their water treatment needs. This presents an exciting opportunity for us, and we are making significant progress.

Matthew DeYoe, Analyst

Thank you. I saw the ESG report that came out. I haven't had time to dig through it as much as I would have liked to. But part of it was talking about the circular economy and there's obviously a lot of value to the metals you use. I'm just kind of wondering what opportunities there are ahead for ESI in that regard.

Ben Gliklich, CEO

Yes. I appreciate that question. We published our inaugural ESG report yesterday. There's also a website that captures the tops of the waves from the report. It's something we're very, very proud of. This intersection between sustainability and profitability is something that has been well trafficked by our businesses for many years, but not something that we've sort of brought together in one document and communicated externally in one place as we did with this ESG report that we published. There's a huge opportunity for our company to continue to help our supply chains improve their environmental impacts. It's an area where we have quite a bit of sales already and quite a bit of technology underway. It's doing well by doing good. If you go through the report, you can see the many products and services that our company offers across just about every one of our businesses that align with that theme and will be a growth driver going forward. It's something that is existential for our customers and another example of our businesses providing great solutions to our customers.

Operator, Operator

We have a follow-up from Josh Spector of UBS.

Josh Spector, Analyst

Hey, guys. Thanks for taking a second one here. Just on electric vehicles, I mean you guys have been pretty clear in highlighting your content opportunity there. In some cases, you highlight potentially double the amount of content. I was just wondering if you could give some context if there's any region or battery or build type that would give you that higher leverage exposure that perhaps we should pay more attention to as EVs continue to ramp more strongly here over the next few years.

Ben Gliklich, CEO

Thank you for the question. We see an incredible growth opportunity for our business in the electric vehicle market. While I can’t disclose specific customer names, we are supplying key materials for power electronics and inverters in this rapidly growing sector. Our established presence in the market has led to discussions with new OEMs and tiers exploring ways to engage, and they are utilizing our materials. This market is on the verge of significant expansion for us. I can't specify whether it will take off in 2021, 2022, 2023, or 2024, but it will significantly contribute to our above-market growth. As automotive and electric vehicle penetration increases, we will benefit from additional growth driven by the content we've discussed. We anticipate a favorable trend as more vehicles transition to electric, as we play a vital role in enabling this technology.

Josh Spector, Analyst

Okay, thank you.

Operator, Operator

And that concludes our question-and-answer session. I'd be happy to return the call to management for any concluding remarks.

Ben Gliklich, CEO

Thank you very much for your questions, for participating in the call. We look forward to seeing you in the near-term. Stay safe.

Operator, Operator

This does conclude Element Solutions' full-year 2020 earnings conference call. You may now disconnect your lines, and everyone have a good day.