Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Element Solutions Inc (ESI, Financial) reported a strong second quarter with adjusted EBITDA margins expanding by 250 basis points.
- The Electronics segment saw more than 10% volume growth in the Circuitry Solutions business, driven by demand from HVCAIEV and certain mobile markets.
- Adjusted EBITDA grew by over 20% year-over-year on a constant currency basis, with both segments growing by double digits.
- The company experienced robust incremental margins due to mix impacts and pricing stability amidst deflation in certain commodities.
- Energy Solutions business grew net sales by almost double digits at high incremental margins, contributing significantly to profitability.
Negative Points
- Soft demand for power electronics and electronics assembly materials, particularly from certain EV customers, moderated overall strength.
- Industrial and Specialty segments faced softer automotive demand in Europe and lower revenue from metal price surcharges.
- The smartphone market remains well below long-term average units, impacting overall electronics demand.
- The company anticipates lapping the benefits of lower raw materials and some supply chain actions in the second half, which may affect margins.
- Soft automotive demand in Europe continued from the first quarter, posing a headwind to growth in the Industrial and Specialty segments.
Q & A Highlights
Q: How important are smartphones to your business, and can you remind us about the second half outlook seasonality compared to normal seasonality before the pandemic?
A: Historically, smartphones have been a strong indicator for our Circuitry business. However, new sources of demand are emerging outside of the smartphone market, driving the business forward. While smartphones remain important, we have a path to achieving our guidance midpoint without a strong recovery in this market. Typically, the third quarter is our strongest, with the second half usually being 5% to 10% stronger than the first half. This year, we expect around a 5% uplift due to a less robust smartphone market.
Q: Has anything been pulled forward in Q2, or is there more uncertainty around production plans in Q3?
A: We don't see Q2 as a pull forward. New emerging sources of demand for our electronics business are driving growth. The uncertainty in Q3 is due to large OEMs not knowing how many smartphones they will sell in the back half of the year. This accounts for the range in our guidance. We feel confident about reaching the higher end of our range if smartphone units grow beyond low single digits.
Q: Can you talk about the growth in your semiconductor business, particularly in wafer-level packaging and assembly?
A: Our semiconductor business has two components: wafer-level packaging and semi assembly. Wafer-level packaging had a strong quarter with high single-digit growth, driven by share gains and vehicle traction. Semi assembly was softer due to the electric vehicle market but is expected to accelerate in Q3. We have been winning power electronics business outside of our core OEMs, and the long-term outlook for semi assembly is very strong.
Q: Can you provide insight into your discretionary CapEx spend and the highest priority initiatives?
A: We are investing in areas where our customers are going or in capabilities they are pulling from us. This includes doubling capacity in power electronics, building a research and development center in India, and other strategic capacity expansion projects. These investments are not huge but are managed to support customer innovation and build proximity.
Q: What gives you growing confidence for several years of record earnings ahead?
A: Our confidence is driven by both cyclical recovery and secular growth. Despite a subdued industrial market and a closer-to-trough electronics market, we are on track for record EBITDA this year. Emerging sources of demand, such as AI, high-performance computing, and electric vehicles, are growing quickly. Recovery in the broader electronics market and potential recovery in the industrial market also contribute to our positive outlook.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
