Element Solutions Inc (NYSE:ESI) Q2 2023 Earnings Call Transcript

Element Solutions Inc (NYSE:ESI) Q2 2023 Earnings Call Transcript July 27, 2023

Operator: Good morning, and welcome to the Element Solutions Q2 2023 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Varun Gokarn, Senior Director of Strategy and Finance. Please go ahead.

Varun Gokarn: Good morning and thank you for participating in our second quarter 2023 earnings conference call. Joining me are our 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 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 & 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 Element Solutions’ CEO, Ben Gliklich.

Ben Gliklich: Thank you, Varun, and good morning, everyone. Thank you for joining. Element Solutions reported sequential adjusted EBITDA growth in what we believe is the trough of the most severe dislocation in the electronics market in recent history. Key drivers and inputs to the electronics market, such as smartphone shipments and semi-production declined more than 10% year-over-year, and this impacted our results. We believe we outperformed our markets and are pleased to see indicators of a recovery in our order book and the electronic supply chain generally as we entered the third quarter. We also took advantage of this period of dislocation to significantly improve our position in the highest value, fastest-growing subsectors of the electronics ecosystem, and did so at what we consider attractive values with significant potential upside.

Challenging economic conditions were not limited to electronics, with the broader Chinese economy soft and certain countries in Europe on the brink of recession. Nonetheless, our non-electronics portfolio is growing earnings through solid execution, margin expansion from cost deflation and synergy realization. Overall, gross margins improved over 200 basis points year-over-year despite lower volumes. Though it was deeper than expected, we believe we can call the second quarter to the trough in electronics. Our semiconductor customers are ramping activity in their fabs. We see this in our July orders. Historically, this has been a leading indicator for an improvement in mobile phone production that also drives demand for our circuit board chemistries and assembly materials.

Smartphone sell-in has been lower than sell-through for the last two quarters, suggesting channel inventories continue to be digested. These dynamics are reflected in our second half outlook. It was also a productive quarter. We completed two exciting strategic transactions that materially improve our semiconductor capabilities ahead of an expected market recovery. In June, we agreed to pay $200 million or roughly $185 million net of estimated cash tax benefits to buy in a long-standing distribution agreement for our ViaForm electrochemical deposition products from Entegris. Element Solutions has historically manufactured these semiconductor materials. And now we have complete ownership from innovation and manufacturing through to sales and support.

Early feedback from customers has been consistently positive and we’re excited to grow this high-value product line in the future. Based on its run rate as of closing, we expect to realize annual incremental revenue of $18 million and adjusted EBITDA of $15 million at current demand lows, which should reflect a low point in the cycle. This transaction should be growth, margin and CRI accretive and increase the contribution of our Electronics segment to the company’s annual adjusted EBITDA to over 70%. The purchase price implies an attractive multiple, relative to comparable front end of line semiconductor assets and off of trough earnings. We believe this is a high-quality profit stream with upside potential from commercial optimization and minimal execution risk given our deep knowledge of the technology and existing manufacturing.

We also purchased Kuprion, a developer of next-generation nano-copper technology for the semiconductor, circuit board and electronic assembly markets. The acquisition brings a highly differentiated capability to our portfolio, together with a world-class R&D and application team who developed it. Their active copper technology addresses emerging complex challenges associated with thermal management and adhesion in leading-edge electronics. This should be industry-changing technology with broad applications across our portfolio, including power electronics for electric vehicles, infrastructure to support high-frequency 5G networks, advanced semiconductor packaging and IC substrate metalization. Element Solutions is well positioned to commercialize Kuprion solutions and technical capability, given our presence across each of these markets.

We bring applications know-how and deep relationships to support the adoption of this technology in our customer base. Customer engagement and the pace of development and qualification work has already exceeded our expectations. Taken together, these transactions solidify ESI’s position as an integral partner and solutions provider to the leading electronics companies in the world. They increase our participation in compelling long-term growth markets, propelled by the proliferation of high-performance computing supporting AI, industrial automation and other emerging applications. Our perception and importance to the company’s innovating in electronics hardware have improved dramatically. As we said last quarter, periods of low demand and market uncertainty often generate unique opportunities.

We believe 2023 is such an environment and expect to exit this year better positioned than when we entered it. Our core electronics markets are returning to growth and we are positioned to benefit from that growth and more profitably. Our portfolio weight towards higher growth, higher profit markets is increasing and our commercial pipeline in these markets is growing disproportionately. These are very promising leading indicators. Carey will now take you through second quarter business results in more detail. Carey?

Carey Dorman: Thanks, Ben. Good morning, everyone. On Slide 4, you can see a summary of our second quarter financial results. Organic sales declined 6% year-over-year and constant currency adjusted EBITDA declined 14%. We saw a sequential improvement in both revenue and adjusted EBITDA relative to the first quarter. Our expectations entering the quarter were impacted by the softer demand environment in China and deterioration in the broader consumer electronics market. Despite a 9% year-on-year decline in organic sales, we believe the Electronics segment continue to outperform key PCB and smartphone end markets. Our Industrial and Specialty business declined 2% organically as soft industrial demand in Asia offset double-digit growth in offshore energy.

Our second quarter adjusted EBITDA of $116 million was 3% higher sequentially. In constant currency terms, adjusted EBITDA margin declined 60 basis points year-over-year. Electronics segment adjusted EBITDA margin was negatively impacted by volume declines in higher margin circuitry and semiconductor applications, partially offset by reduced pass-through metal prices. Industrial segment margins improved 100 basis points in constant currency due to positive mix from Energy Solutions as well as on ongoing synergy realization, pricing benefits and modest input deflation. Adjusted EBITDA margins improved sequentially 30 basis points from the first quarter. Lower prices on pass-through metals such as tin and silver were a tailwind to margins relative to Q2 2022.

Excluding the impact of $89 million of pass-through metal sales in our Assembly Solutions business, our adjusted EBITDA margin would have been 23% in the second quarter. On Slide 5, we share additional detail on organic net sales in our 2 segments. For our Electronics segment, mobile phone and consumer electronics demand had the most material impacts in the quarter. Our automotive electronics business remains resilient, particularly for power electronics applications in electric vehicles. Assembly Solutions grew 3% organically, driven by new business growth and traction with new high reliability alloys for use in automotive end markets. The assembly business is less driven by the smartphone market. Semiconductor Solutions declined 16% organically, reflecting reduced utilization levels at semiconductor fabs.

Circuitry solutions 23% organically as persistent smartphone weakness continued from the end of last year. Customers across the mobile supply chain saw meaningfully lower production volumes and the overall PCB market was as weak as we have seen in many years. Our second quarter performance is better than data we are seeing from several of the largest suppliers printed circuit boards are reporting greater than 30% decline in Q2. Additionally, we are comparing against a period of particularly strong performance in cloud computing and data storage that benefited our memory disk products in the first half of 2022. We expect demand from both smartphone suppliers and memory disk customers to improve in the second half and into 2024. For the second quarter, organic net sales in Industrial and Specialty declined 2% year-over-year.

Industrial solutions declined 3% organically as demand in global construction and industrial markets slowed from strong prior year levels. Our Automotive business in the Americas and Europe is relatively stable sequentially. Our participation in local Chinese OEM supply chain lags that in other regions. So we have not seen the full benefit of automotive recovery in China. We have a specific strategy associated with that supply chain and opportunities in their EV market. It is a large and largely untapped market opportunity that we intend to pursue actively. Energy Solutions remained a bright spot, with sales growing 11% organically in the quarter as production and drilling activity has rebounded and price actions continue to take effect. We expect continued growth for this business throughout the year, but at a lower rate than experienced in the first half given tougher comps.

Slide 6 addresses cash flow and the balance sheet. We generated $67 million of free cash flow in the second quarter. We invested $16 million into working capital, which reflects a modest inventory build primarily related to a large new business win in Mexico and expectations for stronger demand in Q3. Net CapEx in the first half was $22 million, which is below the annual run rate we expect for this year. This number is expected to increase as certain growth projects and integration initiatives progress, but we now expect to spend less than the $70 million we previously forecasted. Turning to the balance sheet. Our net leverage ratio at the end of the quarter was 3.7x when including the estimated full year benefit of the ViaForm product line.

This sequential increase was driven by the ViaForm transaction, which we primarily funded through the issuance of $150 million in term loan A. The new term loan is floating rate at SOFR plus 1.75%. However, we have swapped it into 4.6% euro fixed through its January 2026 maturity. Our net leverage ratio was temporarily elevated above our targeted ceiling of 3.5x, but we expect to be back below this level by year-end. We believe this modest uptick is appropriate for a short period of time, given the unique capital allocation opportunities in the second quarter and the continued strong cash flow generation we have seen and should continue to see. As a reminder, the swap maturities on our term loan B are evenly 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.

Ben Gliklich: Thank you, Carey. Our first half does not reflect the long-term earnings power of our business. We’ve seen the trough and are beginning to recover from it. The self-help steps we are taking around cost and ongoing investment in technology should drive incremental earnings acceleration through the recovery. The pace of that recovery is uncertain as we sit here today, but we have conviction it is underway. Our Circuitry business is on track for 10% month-over-month growth in July, and our semiconductor orders appear to reflect the utilization increases we’re hearing about it fact. For the third quarter of 2023, we expect adjusted EBITDA of approximately $125 million. This sequential improvement assumes a pickup in our semiconductor business, modest sequential gross margin improvement from raw material deflation and continued commercial execution.

We should also begin to see impact from ongoing cost actions. We expect our Electronics business to grow about 10% sequentially second half over first half this year. This is only modestly lower than our expectation entering the year. However, we’ll be growing off a lower baseline. This translates to an updated full year 2023 adjusted EBITDA guidance range of $490 million to $500 million. Given some favorability on CapEx and cash taxes that partially offset the lower level of adjusted EBITDA, we expect to generate roughly $265 million of free cash flow for the full year. In 2023, even with the expected second half recovery in Electronics, semiconductor production and units in high-end electronics will be far below their long-term averages, let alone more recent peaks.

With emerging applications for computing power, expanding vehicle electrification programs, our continued commercial execution with large wins converting to revenue as new fabs come online and the full year benefit from our cost program, we’re confident that Element Solutions is positioned for strong growth in 2024 and beyond. In that context and in closing, despite a challenging quarter and first half, we remain enthusiastic about the future and have evidence that the growth we have come to expect from our businesses is returning. The potential for our business resides in the people in our business, and I’m grateful for their energy and effort this quarter and going forward. With that, operator, please open the line for questions.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Josh Spector with UBS. You can go ahead.

Josh Spector: Yes. Hi, guys. Thanks for taking my question.

Ben Gliklich: Good morning, Josh.

Josh Spector: So looking at the cadence – hi, good morning. So looking at the cadence into 3Q and 4Q, I mean, you talked about order books for Circuitry up 10%. I think smartphone sell-in looking about up 10%, gross margin benefits, ViaForm layers on. I guess, with what you laid out there, less than 10% sequential growth? What are some of the offsets in your mind that we should be considering or it’s just the fact that the recovery has been more slow and there are some conservatism and pushing that further back?

Ben Gliklich: Yes. Thanks for the question. Look, phasing in the second half of the year is difficult to call in most years. And so the guidance assumes a continuing ramp in the second half, both in the semiconductor market and in the Circuitry market, smartphone units will still be down in the third quarter year-over-year. And it also has incremental cost actions that will contribute more in the fourth quarter than in the third quarter. We have additional cost levers at our disposal should we need them that are not fully contemplated in the guidance and which we could potentially use in both quarters. So as we think about the back half of the split could be more equal or it could be more fourth quarter weighted. And we took a more conservative position on Q3, given that we’re still early in the recovery.

When you compare the third quarter of 2023 guide to the third quarter of 2022, it’s important to note and we called this out at the time, we took a $12 million bonus accrual reduction in Q3 of 2022. And if you adjust for that and look at currency, we’re actually showing underlying growth in adjusted EBITDA year-over-year.

Josh Spector: Okay. Thanks for that. That’s helpful. And just with ViaForm and that acquisition, just – can you quantify what you’re layering in this year versus what flows into next year? And just you continue to talk about that as a way to deepen customer relationships. So just how is that going so far? And how do you think about what that has been to the rest of ESI’s semis or broader electronics portfolio?

Ben Gliklich: Yes. So there are two questions in there. The first is the current year impact of ViaForm. Given timing and inventory builds, we’re expecting, call it, $4 million impact in 2023. And unfortunately, a lot of that’s been eroded by FX headwinds, incremental FX headwinds over the second quarter. So it’s about net to the 2023 year. With regard to the longer-term opportunities here, the customer reception to this development has been very, very positive. And we’ve gone from a more modest player in some of the front end of line customers to a very important one. And our engagement with those customers has rapidly accelerated. The roadmap exchanges we’ve had have increased and the seniority of the people at the customer level involved in those roadmaps has increased.

Combine that with Kuprion and our engagement at the leading edge has really accelerated, and the perception of our company has radically improved. And as we said on the call, that’s a leading indicator for longer-term growth and wallet share.

Josh Spector: Okay. Thanks, Ben.

Operator: Your next question comes from the line of Kieran de Brun with Mizuho Securities. Your line is open.

Kieran de Brun: Hi. Good morning.

Ben Gliklich: Good morning.

Kieran de Brun: I am just wondering if you can dial in a little bit more into the industrial segment. I know that China has particularly been weak on the construction side, but automotive seems to have been trending, I think, ahead of expectations during the first half of the year. So any color that you can give us in terms of what you’re seeing globally from an automotive perspective and from like an industrial constructive perspective and how you’re thinking about that in the back half of the year would be helpful.

Ben Gliklich: Yes. Thanks for the question. So the Industrial business, the largest exposure is automotive, followed by construction. The construction market has softened in Europe and remains quite soft in China. And the automotive recovery hasn’t been equal on a regional basis. The Chinese market has seen more of an increase and that increase is coming from local Chinese OEMs, where we’re underpenetrated, right? We’ve always been more heavily weighted towards Western OEMs, both in China and in the West. And so taken together, we saw a modest organic decline in IS in the second quarter. That’s been offset by pricing actions and synergy realization. So from a profit perspective, that business has actually had modest growth in the second quarter.

And we’re not anticipating a dramatic change in those dynamics in the second half. We expect the second half to be comparable to the first half with some incremental margin improvement from raw material deflation, logistics deflation and so forth.

Kieran de Brun: Great. Thank you. And then maybe just a quick follow-up. You mentioned additional potential cost levers that aren’t currently in the guidance that you could pull in the back half of the year. Can you just dial in a little bit more into what those might be and how we should think about that impact if you were to have to pull those levers? Thank you.

Ben Gliklich: Sure. So as one of the hallmarks of the businesses are their variable operating expense models. And the buckets are things like T&E and marketing and then incentive compensation. And when the company is not growing, all of those levers are at play. And so we have plans around cost containment some of which are temporary around travel and so forth. And then there’s a modest cost program, which will be permanent cost savings that will accelerate earnings growth into 2024. Think about the order of magnitude combining those two things is around $20 million in the back half.

Kieran de Brun: Great. Thank you.

Operator: Our next question comes from the line of John Roberts of Credit Suisse. Your line is open.

John Roberts: Thank you. I just have one. Are your backlogs improving equally across assembly, circuitry and semiconductors? Normally would think of semiconductors being upstream of the other businesses. I don’t know whether the backlog there is increasing first or talk about any unevenness you might be seeing between the different parts of the supply chain.

Ben Gliklich: Yes. So our semi-business, we talked about it being down 16% organically year-over-year in the second quarter. If you take out the precious metal impact there, it was down about 9%, which is outperformance relative to the circuitry business, which was down below the impact of smartphone units driven by some of the inventory build, particularly in local Chinese smartphones. So the room for recovery, you could say, is greater in the circuitry business. The semi business is recovering earlier as one would expect. But the circuitry business, as we said, in July, that business looks to be up 10% over June. So there isn’t a huge lag. A bright spot across the whole portfolio is the assembly business, which has been really resilient from a high-end electronics perspective given its penetration in vehicle electrification, some of the innovation we’ve had around higher reliability alloys, which are gaining share from more legacy technologies, particularly in automotive applications.

That’s a business that’s been stable and we expect it to grow nicely in the back half.

John Roberts: Okay. Thank you.

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

Bhavesh Lodaya: Hi. Good morning. Thanks for taking my question.

Ben Gliklich: Good morning.

Bhavesh Lodaya: Maybe one, Kuprion acquisition, you noted you are working towards getting product qualifications in place around the nano-copper technology. Clearly, in early innings today, can you comment on the timeline it would take for earnings to show up in this platform? And is this thermal management a decent technology is something that you can use in your existing offerings in the semis of circuitry solutions?

Ben Gliklich: Yes. It’s a great question. We’re really, really excited about Kuprion. It is industry-changing technology and the reception we’ve had from existing customers and even new customers has been outstanding. The number of projects we’re working on qualifications around is huge, north of 30 opportunities have been created just in the first couple of months here. They’re all at the leading edge. And so, it’s long qualification timelines, but they’re big revenue opportunities. The earn-out attached to this business is capped at $100 million of revenue, right? So we pay a multiple of revenue. It translates if we hit it and the margins we expect to about 4x EBITDA. And we’ve got, at this point, about 5.5 years to get to $100 million of revenue.

We fully expect to pay all of that earnout, which would make this an outstanding transaction because it would contribute tens of millions of dollars of EBITDA, all incremental growth. The other thing that’s great about this is the applications for this material span all of our existing electronics verticals and into new verticals. So it’s got applications in IC substrate metallization, get applications and die attach. It’s got applications in package attach. And we’re working with customers in each of those areas, existing customers and new ones, as I said. It’s got – the outlook is very bright.

Bhavesh Lodaya: Got it. And then a question on your balance sheet. Your leverage went higher following ViaForm transaction. You’re targeting reaching 3.5 by year-end. Assuming we are there, what comes next for you? Do you believe you have invested what you want during this draw of the cycle? Or is the philosophy to continue investing as long as the right assets come along? Just wanted to get a sense of your priorities once we reach your leverage targets.

Ben Gliklich: Yes. Our priority at the moment is to get inside of that leverage ceiling, and that’s where we’re going to be – that’s what you should expect in the back half of the year, and then we’ll remain opportunistic going forward from there.

Bhavesh Lodaya: Fair enough. Thank you.

Ben Gliklich: Thank you.

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

Chris Kapsch: Hi. Good morning. So one question was a follow-up to some of the conversation around these copper acquisitions. So it sounds like the engagement with the ecosystem has been vitalized. I’m curious if that engagement has – is it more focused on solely next-generation technology nodes? Or is it also a play here for your materials with a more focused and direct approach commercially to display some alternative suppliers in legacy nodes where interconnects were definitively copper? Or is it really across the board in terms of technology nodes?

Ben Gliklich: Are you referring to ViaForm or Kuprion, Chris…

Chris Kapsch: Well, I guess, I was thinking more ViaForm, but I guess that Kuprion, I think, is more next gen.

Ben Gliklich: It’s relevant for both. Kuprion could display some of the current technologies used for lower-end power electronics, where some of the lower end of the users are using legacy assembly products, given that it’s less expensive than Argomax and has better thermal management capabilities and adhesion capabilities and legacy side of products. ViaForm is an interesting situation where we do believe we have the opportunity to win existing business and displace existing vendors. That’s upside to the plan. So there’s really three avenues for growth versus increasing utilization with existing customers. Second is wins at new nodes that are coming online, and third is displacing competitive material. And we’ve got a good shot, we believe, at all three of those, which translates to significant incremental earnings contribution from this acquisition.

Chris Kapsch: Okay, got it. That’s helpful. And then just a follow-up on, you called out sort of semiconductor fab utilization rates recovering exiting second quarter. I’m just – can you just confirm – my understanding is your deposition materials into chip makers is more relevant with logic foundry fabs. And if that’s the case – is this – could this be looked at as a harbinger for pronounced improvement in PCB activity at some point? Just any color on that on how you see that kind of thing.

Ben Gliklich: Sure. So yes, our semiconductor materials skew towards logic applications. And as folks in our supply chain like to say, chips don’t flow. So the more chips that are being made, the more PCBs need to be made to – for the electronics hardware they’re going into. And so yes, we do believe it’s a leading indicator for the circuit board industry and that’s contemplated in our guide and evident in our July numbers.

Chris Kapsch: Right. Okay. And then finally, is there any visibility in and around any sort of inventory build or destocking activity for your materials feeding into this ecosystem? Or has that not really – I don’t know if you have visibility, but I’m just curious if the overall demand weaknesses could be tied to that at all. Thank you.

Ben Gliklich: Sure. And so our materials are not stocked at the customer level. Some finished goods from our customers have been stocked at the customer level. And we’ve been digesting that. We saw that in the third quarter last year in our industrial business. And over the past two quarters, sell-in has been less than sell-through of smartphones. And so finished goods, right, smartphone inventories were elevated and they’re starting to be digested. And that’s why – if you look at the large PCB fabs, for example, in Asia, they were reporting numbers down 30%, 40% in the second quarter because of that inventory dynamic. We believe that inventory dynamic is largely is very much improved as we enter the third quarter.

Chris Kapsch: Thank you.

Operator: Your next question comes from the line of Jon Tanwanteng with CJF Securities. Your line is opened.

Jon Tanwanteng: Hi, good morning. Thank you for taking my questions. I was wondering if I could dig a little bit more into your confidence on the sequential improvement you expect in Q4. And I guess you do have some – the cost cutting in your pocket and then maybe some more accretion from the ViaForm business. But I was looking more at the demand side. Is that based more on the leading indicators that you’re seeing on the semi business maybe firm orders in hand or direct forecast from your customers? I’m just trying to get a better sense of demand as you head into Q4 and into 2024 as well.

Ben Gliklich: Yes. So, thanks for the question, Jon. It’s a short cycle business, right? So our visibility to Q4 right now is limited. But we’re comfortable with our second half. And in all years, it’s hard to be concrete on what’s going to fall in the third quarter and what’s going to fall in the fourth quarter, and we’ve basically taken a more conservative approach to the third quarter with knowledge that the semi ramp isn’t going to be an elevator. It’s going to be a slope. And that the cost actions we’re going to be taking will impact the fourth quarter more than the third quarter. And that’s basically the framework for the second half guide.

Jon Tanwanteng: Okay. Great. Thank you. And then just more specifically on the ViaForm business, how quickly do you expect that to grow in the coming years? Do you have maybe some internal targets you can share? I know that there’s probably a lot of opportunity out there with the new foundries that are going up. But maybe just help me understand what Entegris maybe wasn’t doing that you can do to help you in sharing that business and maybe some of the product development and other marketing stuff that you can do?

Ben Gliklich: Entegris was a great partner for us for many years and really grew this business nicely over a 20-year period. The most immediate growth will come from increased fab utilization. The incremental opportunities are from new fabs coming online, which should happen in 2024 into 2025 and then our ability to display semi competitive material, which is 9 to 12 months cycle. And so – and then there’s incremental innovation where we have been innovating around this product and should have new technology to bring to bear to the market. So in 2024, we should see the benefit of the increased fab utilization driving earnings contribution growth and some of the new fabs coming online and then beyond that, it should be from competitive wins and technology introduction.

Jon Tanwanteng: Okay. Great. And then we’ve talked about this before, but I was wondering at a high level, could you just give us an update on the long-term EPS goals that you’ve put out there? What needs to happen for you to hit that, just given the environment we’re in today and kind of what you’re seeing over the next couple of years or so?

Ben Gliklich: Yes. So obviously, the earnings power in 2023 is behind the straight-line trajectory from when we introduced that goal back in early 2022. But what we’ve seen from this business is that it can recover very rapidly. And from a capital allocation perspective, very interesting things can become available. So we’re going to have opportunities to deploy substantial cash flow over the next three years and participate in recovery from a cyclical trough that should contribute at attractive incremental margins and drive the bottom line. If we look back to 2020, we thought there was very little chance we were going to hit our goal sitting in the middle of the year, and we did so 18 months later. So we have not lost hope or confidence in our ability to deliver, even though the slope is a little steeper from where we stand today.

Jon Tanwanteng: Great. Thanks, Ben.

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

Rock Hoffman: Hi. This is Rock Hoffman on for Steve Byrne. I wanted to go back to your assembly business and just see if I get a little more detail on your penetration and vehicle electrification.

Ben Gliklich: Sure. So we provide materials used in power electronics, both for die-attach and package-attach for very high-performance electric vehicles. And we’ve got a world-class material for that application that improves reliability and performance, speaking to range for those vehicles. Our penetration in that market is actually still modest because legacy technologies are still being used. When you look at some of the emerging electric vehicle providers in China, they’re not using this material. We just opened an applications development lab in Shanghai to much fanfare and have really strong engagements with most of the leading electric vehicle companies in China and around the world. And this acquisition of Kuprion brings to bear another lower cost, slightly lower performance, but still much improved performance relative to legacy technology product to meet that growing need.

So vehicle electrification will be a significant tailwind, and we’re in the pole position to benefit disproportionately from that as units grow. And I’m just talking about the assembly business. I’m not even talking about our other businesses. But as units grow and as our technology is better understood and therefore, deployed.

Rock Hoffman: Thanks. And then in regards to your progress on the internal initiatives to accelerate growth and cut costs. I wonder if you could provide any updates there.

Ben Gliklich: Yes. So this is the appropriate activity in all times to manage cost. The variable cost nature of the business is something that has been unchanged. And then there are some other ongoing actions to reduce OpEx and accelerate growth going into the 2024. Our view is if one of our businesses is impaired, we will reduce significant costs, but our view is that none of the businesses are impaired. And therefore, our cost actions are around the margins opportunistically. We feel strongly that we have to retain our very talented people all over the world to benefit from the recovery that’s inevitable. And so the cost actions are targeted, the permanent cost actions are targeted and the temporary ones are formulaic, frankly. The cost just falls out of the business when we’re not growing.

Rock Hoffman: Got it. Thank you.

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

David Silver: Yes. Hi, good morning. Thank you. So there has been a lot of discussion about the ViaForm acquisition. And to me, it looks like a very attractive strategic addition. A couple of questions. But firstly, I’m just wondering how replicable this might be across your portfolio. In other words, are there other distribution agreements or other relationships where maybe you could bring high-value maybe front end of the line products into your full control as you did with ViaForm? And then maybe more broadly, these last couple of transactions here kind of point to, I guess, the convergence between the chip, the wafer and the circuit board, maybe with advanced packaging as the intersection. But how do you think your balance is right now in that regard versus where you’d like to be, I don’t know, 3 to 5 years from now?

Ben Gliklich: So thanks for those questions. So the arrangement around ViaForm was a unique legacy situation where we had split responsibility, if you will, and a predecessor company to Element sold the distribution rights to that product line in 2003. So I don’t see more opportunities like this because typically, we go direct for applications like this. That having been said, there have been opportunities where we’ve identified great technology that we believe can leverage our leading commercial technical teams and supply chain to help commercialize and so there may be more opportunities to engage with emerging technology companies and provide the value that our footprint and capabilities bring to them to create win-wins. That’s something that we have been looking at.

With regard to this next-generation electronics convergence, it’s a very powerful, very powerful trend in our end markets and one that we’re benefiting from. And we sit really nicely between in that bull’s eye, right, where we have capabilities and circuit board capabilities in semiconductor, both front end of line and packaging and capabilities and assembly. And so when we bring the breadth of our product portfolio to bear at the largest OSAT and semi fabs and OEMs, electronics OEMs, they’re stunned by our capabilities. And we’re seeing it in the P&L already. If you look at the numbers in our semiconductor business, we’ve said for a long time that it will outgrow our other businesses than it has been. And it’s just emerging. It’s a unique set of capabilities that we have at Element Solutions that are increasingly appreciated by the supply chain.

And the future is very bright in that regard.

David Silver: Okay. Thank you for that. I appreciate it. Just one more on the Kuprion purchase or acquisition. But not your last Analyst Day, but I think two Analyst Days ago, you talked a little bit about how your company with its global footprint and leveraging your strong customer relationships. You’d be an attractive partner for attractive, but emerging technologies that could use your company’s assets as kind of a gateway to commercialization? And greater success together than apart. Is the Kuprion transaction, an example of that? In other words, have you been working with them for a while and kind of complementary skills that work here? And then it got to the point where it made sense to bring this technology in-house? Or is this something where maybe they were shopping around to a number of buyers?

Ben Gliklich: Yes. Kuprion is a case study in that. And it’s – Kuprion chose to work with us. They had alternatives, and they chose to work with us because we were the only company. We are the only company that has a capability in the preponderance of their applications, right? So we’ve got capability in circuit board where their material can be used for IC substrate metallization. We’ve got capability in die-attach and assembly materials, power electronics. The things that their potential customers were looking at were all things that they are potential customers for the most part were buying from us already. And this was just a new capability for emerging needs. And so we were a perfect match, and it’s a case study for that type of investment.

Operator: There are no further questions at this time. I’d like to turn the call back over to Ben Gliklich for closing remarks.

Ben Gliklich: Thank you very much. Thank you to everybody for joining. We look forward to seeing many of you soon, and hope you have a great day.

Operator: This concludes today’s conference call. You may now disconnect.