Element Solutions Inc.

Good morning, ladies and gentlemen. Welcome to the Element Solutions third quarter 2020 conference call. All lines are currently in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may press star 1 at any time to enter the question queue. Please note today's call is being recorded. I will now turn the call over to Yash Naheti, Associate Director of Corporate Development and IR. Please go ahead.

Good morning, and thank you for participating on our third quarter earnings conference call. Joining me are Executive Chairman Sir Martin Franklin, CEO Ben Glickwich, and CFO Kerry 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'll 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 most recent SEC filings for a discussion of the most significant risk factors that could cause actual results to differ from our expectations and predictions. In the earnings release and supplemental slides issued and posted yesterday afternoon, Element Solutions has provided financial information that has not been prepared in accordance with U.S. GAAP. For definitions and reconciliations of these non-GAAP measures to comparable GAAP financial measures, refer to the release and slides which can be found on the company's website at www.elementsolutionsinc.com in the investor section under news and events. It is now my pleasure to introduce Ben Glicklich, CEO of Element Solutions.

Thank you, Yash, and good morning, everyone. Thank you for joining. For a third consecutive quarter, the team at ESI managed a challenging environment gracefully and with resilience. I'd like to start by recognizing all of my global teammates for navigating COVID-related disruptions exceptionally well through focus, hard work and sacrifice. In a period of uncertainty, What began earlier this year with dropping volumes driving pay cuts and furloughs was followed by a sharp increase in activity this quarter. The team was consistently on task and delivered the quality products and services our customers demand, all without seeing other longer-term improvement projects derailed. We could not be prouder of our people. While COVID is still with us, in the third quarter, our most impacted end markets rallied meaningfully from the 2020 second quarter lows. At the same time, strength in our high-end electronics businesses continued to demonstrate the same macro outperformance that characterized the first half of the year. The recovery we saw in our automotive and industrially-oriented businesses beginning in June and July accelerated into August and September. Sequentially, net sales across our industrial and assembly businesses increased roughly 40% in the quarter. We ended the third quarter with our industrial vertical down 7% organically year over year, after having been down more than 40% in May. We entered the third quarter cautious about our high-end electronics businesses, given their marked outperformance relative to the broader economy. Additionally, the third quarter of 2019 was particularly strong, making a tougher comparison. Despite a lower than normal seasonal uptick from the circuitry business, our electronics business grew year over year on the back of a robust rebound in our assembly business and the continued strength in our semi business. Overall, this translated to a strong quarter. We generated $102 million of adjusted EBITDA on net sales of $478 million. Sequentially, adjusted EBITDA grew 20%, sequential net sales growth of 23%. Year-to-date, net sales are down 7% organically, and adjusted EBITDA is down 4%, which reflects a margin of 23%. Good results in a turbulent time. Adjusted EBITDA margins in the quarter declined year over year, which we expected due to the third quarter 2019 mix of business. They are flat sequentially and would have been stronger were it not for year-to-date incentive compensation-related accrual true-ups in the quarter, driven by the sharp increase in full-year earnings expectations. We expected operating costs to increase in the third quarter, and they did modestly even before the compensation true-up. We expect OPEX to decline from Q3 to Q4, and the Q4 level of spend should be more reflective of the quarterly rate we expect in 2021 as well. Adjusted EPS in the quarter was 22 cents and 65 cents year-to-date, nearly flat versus the same period in 2019. We generated $63 million of free cash flow in Q3 and $174 million of free cash flow through nine months of the year. That compares to $166 million in the same period last year on an adjusted basis. This is textbook performance from our business, showing that we can preserve profits in difficult markets and generate outsized cash flows. During Q3, we announced our acquisition of DMP Corp and the formation of a new business, McDermott & Vio Solutions. The acquisition was modest in size but not in ambition. We paid a mid-single-digit multiple for a few million dollars of adjusted EBITDA. It fits our acquisition criteria perfectly, a tuck-in transaction opening an immediate adjacency with synergy potential and available at a reasonable multiple. But we believe this acquisition also creates a pathway for terrific growth into a large and new addressable market for us. Our customers are clamoring for help managing their waste streams. We did a survey of the top 50 customers in our industrial solutions business, and 90% of them said sustainability was a top three priority. 25% said it was their primary priority. McDermott and BioSolutions through DMP and our Chemtech metal recycling business offer capabilities that will allow us to help customers with sustainability. Both businesses have good technology, but we're limited to the Americas. We believe we can bring them global and win mindshare and market share by adding to our already extensive list of critical solutions offered to our customer base. The commercial integration of this business is ongoing, and the MES sales backlog is growing fast. I look forward to providing more detail on our progress with this initiative in coming quarters. Carrie will now take you through our third quarter financials in more detail.

Carrie? Thanks, Ben, and good morning, everyone. As Ben mentioned, our performance in the quarter was quite strong when viewed through the lens of the macroeconomic backdrop of COVID-19. We exceeded our revised adjusted EBITDA guidance for the quarter as September ended well ahead of plan. On slide four, we share additional detail on net sales in our two segments. In electronics, we grew organic sales 2% year over year, which is a sharp reversal of the 6% decline reported in Q2. Semiconductor, again, was the best performer. Proliferation of sensors and computing power are long-term trends that should continue to propel this business. The automotive recovery drove Q3 assembly net sales to just about flat organically year over year, a sequential improvement of 36%. For the first time this year, Circuitry experienced a modest decline in organic net sales, despite a sequential improvement of 6% in that business as well. Circuitry, which is exposed to high-end mobile PCBs, had a strong Q3 in 2019, creating a tough comp for the quarter. Adjusted EBITDA margins in the segment were down approximately 300 basis points in the quarter, driven by negative mixed contributions from assembly, higher metal sales prices that passed through at little to no margin, and the year-to-date variable compensation throughput that Ben mentioned earlier. Electronics adjusted EBITDA margin would have been down by only 100 basis points versus Q3 2019 if we exclude the negative impact of the variable compensation changes. Organic net sales and industrial and specialty declined 10% versus the same period last year, but improved sequentially by 24%. All three verticals experienced continued pressure this quarter on a year-over-year basis due to COVID-19 and its various impacts on supply chains, oil prices, and consumer buying patterns. The industrial solutions vertical was down mid to high single digits, but up 41% sequentially as the COVID-related automotive shutdowns reversed course. Both offshore and graphics experience mid-teen organic sales declines. Graphics continues to experience softness in the non-core newspaper business, which, though a small percent of overall vertical, was the primary driver of the decline in sales. The core flexible packaging business also continues to see the impact of delays in CPG marketing initiatives, which we expect to see resume to some degree in the fourth quarter. Sustained low energy prices are the primary driver of declines in offshore, with slower drilling activity resulting in little new production coming online. Adjusted EBITDA margins for INS decreased year-over-year by almost 500 basis points, of which approximately 300 basis points was driven by the compensation accrual true-ups. This was partially offset by continued underlying off-ex savings. The sequential adjusted EBITDA margin declines were about 200 basis points, driven almost entirely by mix, as both offshore and graphics are higher margin businesses than industrial. On slide five, we cover cash flow in the balance sheet. We generated 63 million of free cash flow in Q3. Year-to-date, we have generated almost 175 million of free cash flow, which is about 10 million better than our adjusted 2019 year-to-date free cash flow. Working capital only grew modestly due in part to decline in inventories as we continue to work down safety stocks we had built at the peak of COVID disruptions. We expect working capital to be flat to modestly improved in Q4, though ultimately this will depend on demand patterns towards the end of the year. This quarter we opportunistically took advantage of our strong business execution and a recovering market backdrop to refinance our senior run secured notes. Our 3.875% coupon set a recent record for high yield chemicals and reflects the improvements we are making across our business. We extended our maturity by three years to 2028, and reduced our interest expense by 200 basis points, or $16 million annually, of which we expect to realize $5 million this year. Our cash flow this quarter was burdened by approximately $10 million of accrued interest paid in conjunction with our refinancing. While this interest amount was paid earlier than expected December coupon, we will see the benefit of this refinancing in Q4, as our next bond coupon is not to occur until March of 2021. Next year, our full-year cash interest should be closer to $50 million, a 30% reduction as compared to the 2020 initial expectations that we had. Cash taxes in Q3 remained lower year over year, in line with lower earnings. Our full-year cash tax expectations are now approximately $70 million, a $5 million reduction from our prior outlook. CapEx is trending roughly in line with our expected $30 million level. We continue to invest in our business as we would in a normal year. For the full year of 2020, we expect to generate approximately 215 million of free cash flow. Net leverage at the end of Q3 was in line with previous quarters this year at 3.2 times adjusted EBITDA. Our strong cash flow generation and prudent balance sheet management largely mitigated the effect of COVID-related declines in earnings on our leverage ratio. We restarted our share repurchases in late Q3, purchasing about $3 million worth of stock over only a few days in September. Our buying window was limited due to the financial guidance revision we released in September. In October, we also repurchased an additional $17 million, or 1.5 million shares. As we enter Q4, we believe we have more than adequate capacity to invest in growth and return capital to shareholders. Ben will touch on this shortly. And with that, I'll turn it back to him. Ben? Thank you, Kerry.

For Q4 2020, we expected just the diva da of $90 million to $95 million, a slight increase to the quarter relative to what was implied by our updated financial guidance in early September, and a more significant increase to the back half of the year relative to that guidance. Built into these figures is the expectation that our auto and industrial end markets do not improve much beyond the recovery we experienced in the third quarter. They are about 5% to 10% below prior year, which is where we think they will stay through Q4. We expect the higher-end electronic strength to continue, albeit sequentially lower given fewer operating days and the typical calendar year seasonality that we see in that business, with the third quarter generally stronger than the fourth. The top line will therefore decline sequentially, as usual in Q4 in our business. However, OpEx should also decline sequentially given the variable compensation accrual true-ups recorded in Q3. Overall, adjusted EBITDA margin in Q4 should be roughly the same as in Q3. At current FX rates, we expect a modest year-over-year translational tailwind for the first time since late 2018. We've demonstrated in our first seven quarters as ESI that our business is able to generate strong cash flow in different types of markets, and we are proud of our track record of capital deployment over that period. We've spent approximately $75 million on acquisitions, and these investments are on track to generate more than $13 million of adjusted EBITDA this year. In addition, we've repurchased 5.5 million shares so far this year. So while our end markets have been weak and currency is expected to be a full year headwind of $5 million, leading to a decline in adjusted EBITDA of about 6%, our adjusted EPS this year is expected to be approximately flat versus 2019. Our cash flow deployment since founding ESI has driven strong earnings per share performance. We expect earnings growth to accelerate our deleveraging into next year, and together with free cash flow generation, create additional capacity under our leverage target. We remain a growth-oriented company, and we continue to evaluate modest bolt-on acquisitions of businesses 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. We view our own shares as an attractive acquisition alternative as well when trading below what we believe to be intrinsic value. As indicated earlier, we began to repurchase shares again modestly towards the end of the quarter as our salary restrictions and furloughs rolled off. Our business generates far more cash than it needs to invest internally to fund CapEx and more than we normally expect to deploy into acquisitions that fit our criteria. In that context, we believe it makes sense to institute a regular cash dividend to return some of that strong cash flow to our investors. We believe we can do so without materially impacting our ability to compound earnings and without reducing our flexibility to opportunistically invest in inorganic growth or to delever. Although the actual declaration of any future cash dividends, as well as their amounts and timing, will be subject to final determination by our board, we expect a dividend to be initiated in the current quarter of $0.05 per share and to continue at that level into 2021. We've deployed capital prudently as ESI, and this step would further support our balanced approach. Between the megatrends driving our end markets, and our ability to outperform our markets through sound execution and strategy, we remain committed to our target of adjusted EPS of $1.36 per share by 2023. Before turning the call over to Q&A, I would conclude by noting that our results this quarter underpin two facts about our business in which we are gaining conviction every quarter and building a track record of delivery. First, we have a first-class operating team driving businesses with stable, defensible margins and robust cash flows that we are making better every day through strategy implementation and process improvement. Second, these are businesses in growth markets, and ESI is providing enabling technology and service to end markets with exciting demand drivers that are the product of trends which we believe are just beginning to impact our top line. With that, operator, please open the line for questions.

Certainly. At this time, if you would like to ask a question, please press star then 1 on your touch-tone phone. You may withdraw your question at any time by pressing the pound key. Once again, that is star and 1. And as a reminder for today, we do ask that you please limit your questions to one question and one follow-up. We'll take our first question from Steve Byrne with Bank of America. Please go ahead.

Yes, good morning. I wanted to drill in a little bit on this new business unit of wastewater treatment and more specifically on the acquisition of DMP. What is particularly proprietary or there are areas of expertise at DMP? For example, is this primarily about recovering metals out of wastewater, or is this removal of organics as well?

Yeah, so we have two businesses within McDermott and BioSolutions. The first is ChemTech, which we acquired over a year ago, and that's the metals recycling business. That's a piece of equipment that we attach onto customers' production lines, and it reclaims metals, whether it's nickel, chrome, from depleted baths. And so our customers are able to take that metal in solid form and resell it, reclaim some value, and that metal is no longer in their waste stream. It's an incredible offering that has very fast paybacks for our customers and is proprietary in its nature. What DMP does is equipment and chemistry at the end of the line for separation of solids and water at the end of production lines. So it cleans water, eliminates some of the solids that would be in typical discharge, with the Holy Grail being a circular line and a no-discharge line, recycled water, which is something that we've been able to provide in some instances. So what differentiated about this business is its engineering capability. And it's really been focused in the U.S. It's got very happy customers in the U.S., many of them, and we can leverage that engineering capability internationally, and that's the plan for this business. We tell the folks at DMP that they were acquired by a 4,500-person lead generation engine because our customers could benefit from their technology, and we're already seeing the benefits of that.

Would you see the value proposition of your owning DMP to globalize it or more to... capture more wallet share of your existing customers?

Yeah, there are two ways to win with this. The first is to grow the business by bringing it to existing customers who are looking for help in reducing their environmental footprints. It's an existential issue for the owners of our customers. The second is to offer this technology to grow our mind share with those customers and convert or win more market share of future manufacturing lines by having more solutions. Package isn't the right word, but we can offer the equipment in conjunction with a new line where we're getting the chemistry business. We view this as both a growth business from an envio solution standpoint, but also a market share driver for our chemistry.

Okay, and just if I could, just curious about your outlook for this newfound dividend policy over time. Is this something that you think you would likely grow annually, or is this more opportunistic over time?

So the plan with the dividend is to start at $0.05 a share, and I think as we indicated in our comments, keep it there going into 2021. It's not a hard and fast percentage of free cash flow, but as free cash flow grows, we would expect the dividend to grow as well.

Thank you, Ben.

Thank you.

And we'll take our next question from Josh Vector with UBS. Please go ahead.

Yeah. Hey, guys. Congrats on a good quarter. I just want to ask, if I look at the second half and try to think about all the moving parts from a cost perspective, I want to see if you could kind of bridge your second half cost structure into next year and think about the OPEX puts and takes, but also some of the temporary cost reductions on the travel and maybe other sides that we should be considering as we start to look towards next year's cost base.

Yeah, thanks for the question, Josh. Clearly, there are several moving pieces. We took $16 million of cost out in the second quarter. We expected that to rebuild with government subsidies rolling off, with some of our salary cuts and furloughs ending. Coming into the third quarter, and that did happen, as we said in our prepared remarks, OPEX increased modestly going into the third quarter, and then we had this accrual reversal, which was a year-to-date true-up is the way to think about that. That was one time in nature. You know, call that high single-digit million dollars. As we roll into Q4, therefore, you should expect to see that – you should expect to see OPEX decline from the Q3 level, and we expect that to be roughly the right number for the first half of 2021 from an OPEX standpoint. And so, you know, think about where we landed this quarter, less 10. There is still some travel that we're not doing that will build back, hopefully, as we return towards normal. And think about that as, you know, a few million dollars a quarter as well. But we wouldn't count on that coming back in the first quarter of 2021 based on what we see right now.

Thanks. That's helpful. And also just kind of looking at electronics and you know, the growth outlook there. I mean, you've had pretty strong growth in the semis business all year, and now you have, you know, some recovery in the other businesses as well. Just thinking around semi-growth into 4Q and even into next year, you know, just trying to think if that presents a tougher comp for you to grow off of or if there's enough green shoots there that you see kind of a continued path to growth over the next year or two years kind of down that line. Yeah.

Thanks for the question, Josh. The semi-business has been a highlight throughout the year. you know, several consecutive quarters of near 20% top-line growth. You know, it will remain a growth business for us. We expect it to grow into Q4 as well and into next year. I'm not sure I extrapolate 20% growth every quarter, you know, for multiple years, but the drivers of that business are real. We see them every day. Our customers are demanding more. sensors, more computing power, and that's going to stay. And so we would expect that business to grow nicely next year and for several years beyond that. Okay. Thank you.

And we'll take our next question from Chris Katch with Leap Capital Markets. Please go ahead.

Yeah. Hi, good morning. Um, so in your formal presentation materials and, um, looking at the electronics segment, uh, and regarding the circuitry business specifically referenced share gains from, um, sorry, share gains as well as recovery from COVID weakness in China. And I'm assuming those are mutually exclusive, but so the question, Ben, we we've, we've chatted, um, and you've discussed that, you know, the dynamic that during the dynamic, your, your company, your firm, was able to demonstrate the ability to provide technical support to your customers during the worst of the disruption. So that intimacy was unaffected and suggested that that superior service may have manifested itself at least in a tactical advantage in addressing some of your key end markets and customers. So in connecting the dots, I'm just curious if that played out in some of these share gains that are referenced as a tangible example, or maybe you could just elaborate and Maybe the share gain sort of predated COVID.

Yeah, look, it's hard to attribute specific share gain to specific dynamics, right? We try to lead with best-in-class service, best-in-class supply chain services. reliability, and best-in-class products. And that's hitting right now. The high-end electronics business has been very resilient throughout COVID. You're seeing new product introductions, consumer electronics side of things and mobile phones. That requires new production coming into service, and we're winning that business. And so that's what those comments in our prepared remarks or in our presentation are referring to, we continue to win business at the high end and continue to, you know, meet customers' needs for innovative products. And, you know, that was not disrupted by COVID where I think some of our competitors were, and that helps.

Got it. And your response to that first question sort of gets at my second one, but let me frame it up anyway. The So obviously the circuitry for consumer electronics, particularly next generation consumer electronics, continues to get denser, more complex, and with that density comes more challenging interconnect applications where you're seeing more content per unit and hopefully you're gaining share in those applications as well. But can you just remind us where your positioning you think is with these advanced smartphones specifically, and are you starting to actually see this increased content per unit per advanced smartphone starting to play out at this juncture? Thank you.

Yeah, thanks for that question, Chris. And, you know, it is something we're excited about and we've called out in the past. You know, our estimate is that a 5G phone has about 15% more of our content than a 4G phone. And so that's something we're excited about, and we are beginning to see come through the P&L. I would note, though, that this year, you know, mobile phone units are forecast to be down, right, down 10 to 15%. And our circuitry business hasn't shown that impact. If you look at it year to date, it's been growing. Some of that's driven by data storage, where there's been a big investment there. But as we look into next year, we expect mobile phone units to grow, and that should be compounded by increased content per unit. So we see a nice growth tailwind for several years going forward in our circuitry business.

Thanks for the caller.

And again, just as a reminder, that is SCAR and one for any questions today. We'll take our next question from Bob Cort with Goldman Sachs. Please go ahead.

Thank you. Good morning. Good morning, Bob. I think you reaffirmed a commitment to an EPS target a few years out that My state college math suggests maybe 18% annual EPS growth from this year's number. So just curious, in light of some of the shifts in telecom and infrastructure, electronics infrastructure, sort of things you just mentioned, give us a sense or maybe an update on what that algorithm is through the income statement that gets you to that kind of bottom line growth. What do you see in a normalized world for EPS growth? How do you leverage that at the EBIT line? And then how does that come to that sort of 18% EPS growth over the next several years?

Yeah. So the way that we think about the growth algorithm for this business is that our markets through the cycle grow you know, low to mid single digits. We can grow a point or two faster than that. We can convert that top line at one and a half to two times. Business generates a lot of free cash flow and we can deploy that in interesting ways as we've demonstrated. Clearly we're coming off trough earnings and we should see growth above and beyond sort of through the cycle rates as we come into 2021 and hopefully beyond that. We're making the business better, adding efficiency, taking cost out. So that one and a half to two times should play out on the EBIT or EBITDA line. And we're improving our balance sheet, which you've seen, which should translate to outsized EPS growth. We're improving our tax footprint, which should also contribute to EPS growth. And even with this modest dividend we're talking to, we're going to be generating north of $150 million of free cash flow a year to go compound earnings. And over three years, that can be very impactful. And so it's through that combination that we remain committed to that target.

Gotcha. And if I could ask a couple more recent business questions. One, you guys noted the flexible packaging market was maybe soft from product delays from the consumer products companies. Can you describe exactly what it is you sell to those companies that makes it sort of on a campaign basis with new packaging introductions and not an ongoing continuous sales cycle there?

Absolutely. So our graphics business has three components to it. There are two small components, and those have been the ones that have been creating the bigger headwind in the third quarter. One is a newspaper plates business and pagination. The number of pages being printed has fallen off very significantly recently. The other is a screen printing business, which has been under pressure because it's got industrial exposure. But the core of that business is a packaging business where we sell flexible plates that are used in the printing of flexible packaging. And when a consumer products company rolls out a new chip bag or bottle wrapper, they need a new plate because that plate has the design for that wrapper. If they're not introducing new packaging, they can use old plates. And so demand is driven by package redesigns, branding and promotional campaigns, and so forth. And you've seen that that has dropped off significantly this year. The packaging business, nonetheless, is still growing this year. So it is a growth business as demand for packaged goods around the world increases. And even despite a slowdown in package redesign, that business has grown. That's the core of the business. It's growing as a percentage of the business. And we expect that business to grow nicely into next year.

Got it. Well, thanks very much.

We'll take our next question from Duffy Fisher with Barclays. Please go ahead.

Yes, good morning, guys. A question just around the free cash flow. So with the dividend taking 20% now, you know, a helpful chart to kind of picturize it, you know, that leaves about 150 that grows over time. If I give you a long enough time horizon to take the lumpiness out, Is thinking about like a 50-50 split above the dividend, half going to buybacks, half going to M&A, is that as good a guess as any that we would have today?

So we're never going to be prescriptive about what we do with that surplus cash flow because it's opportunistic in nature. As you've seen over the past year and a half, more of our capital has gone to buybacks than to M&A. We believe there's an almost indefinite list of opportunities that look like the M&A we've done to date. small to mid-sized tuck-ins that align with what we do with synergy content available at reasonable multiples. As and when our shares become less attractive to repurchase, we could ramp up the M&A aspect, but again, doing things like what we've done to date. And we're not afraid to de-lever. So if there isn't anything to do, the cash can go to the balance sheet and our leverage multiple will go down through that in addition to earnings growth. So I'm reluctant to be prescriptive about that. I don't know, Martin, if there's anything you'd add around capital allocation beyond that.

No, I think that, as it's always been for us, it's windows in time. Um, but I think that, you know, our, our goal obviously is we continue to try to get to what we would consider fair value on, on the equity, um, will depend on a number of factors. And one of them is getting, you know, I think our leverage ratio is we bring it into the twos during the course of next year. Um, you know, that will be perceived as a plus, but at the end of the day, as Ben says, he's absolutely right. It depends on the share price, share prices, uh, you know, strengthens, then we'll, uh, We'll focus on paydowns and acquisitions. But if our shares stay low, we're going to keep on buying back our stock. That simple. Fair enough.

And then maybe one, just two things around the deep water fluid business. So one near term just has the volatility in the oil price this year done anything to current business? And then with kind of the focus on, you know, decarbonization and stuff like that, very big capital projects is what you're good at there. Over time, do you think that means this business atrophies as, you know, again, if I'm in the oil industry, I'm probably going to put my capital to smaller projects, less risky projects than, you know, these multi, multi-billion dollar, you know, deep well projects. So kind of what's the long-term view for that business?

So our offshore business is a really excellent business, leading market share in what is absolutely essential to the functioning of offshore drilling vessels and production of offshore energy. That business has been under pressure as drilling activity has slowed down, as energy prices have stayed low. And production, you know, new production coming online has slowed down as drilling has not created new wells. What we saw when we last went through a period of low energy prices is that the offshore operators took a ton of cost out and improved the break-evens. I have a reasonable amount of confidence that that will happen. The other thing that we've done in that offshore business is we acquired a technology earlier this year, we talked about it on a prior call, that is really a benchmark technology from an environmental standpoint. Even though we've got a good market position there, this technology should allow for us to increase our market position and take share on new drilling activity and on new wells that are coming online. And so growth here isn't just going to be driven by the market. I think we can grow our position. But it is a tough year for that business and next year we'll likely continue to have a headwind because of the lack of drilling activity this year. As I look out and in reference to your comments about decarbonization, that's a very, very long-term dynamic and not something that we're worried about in the short to medium term or even in the short to long term. And I'd note that this is a business that is our smallest vertical from a top-line perspective, and as our other businesses are growing, it's becoming smaller. Fair enough. Thank you, guys.

We'll take our next question from John Tanuanting with CJS Securities. Please go ahead.

Hi. Good morning, guys. Great quarter. Thank you for taking my question. My first one is, Ben, last quarter you had a reasonably cautious view based on your thoughts around channel inventories and restocking and all that of your customers. I'm wondering if your outlook for Q4 has a similar kind of view in it or a level of conservatism related to it. How do you see inventories in the channel and clients' views of keeping that full and refilling it?

Yeah, so last quarter when we were giving our guidance, it was a really tough time. Our crystal ball was far less transparent than it is today. Our guidance was based on a plateauing at the level of recovery we saw into July. And clearly, we saw a real acceleration in August and September. And we revised our guidance on the back of that in September. At this point, there isn't that same level of conservatism by any means. We are assuming roughly a plateauing from an end market perspective and adding in what is less than normal seasonality to get to our guidance range. So I don't see the same lack of clarity around this number, and I wouldn't say there's the same amount of conservatism. Obviously, we hope to do better, but based on prior periods, when you look at Q3 to Q4, EBITDA is normally off 10% to 15% just from a seasonality perspective, given new builds from new product introductions in Q3 and fewer operating days in the quarter, and our guidance is for less than that level of So I think it's not as nearly as cautious an outlook as we spelled on our second quarter call.

Understood. Thank you. And then as we look at the 21, I know it's a bit early and, you know, you've got the specter of COVID and elections and whether stimulus is coming or not, but can you kind of help us understand what kind of improvements you're looking for on a year-over-year basis if it's possible to get to 19 levels of profitability? Just how you're thinking, how you're positioning, and how your strategy changes according to these factors as we go forward.

Yeah, so it's early to speak to 2021, but a few comments. The growth trends that are driving the high-end electronics business this year will persist into next year, and so we should continue to grow that business. Obviously, it was a lumpy year in our industrial businesses. which makes for an easier set of comps. And so we should see growth in those businesses as well. We have an FX tailwind at the moment for the first time in several years, which should contribute to dollar realized earnings growth. And we're making these businesses better. We've taken cost out permanently this year. And so I view those things as contributing to a pretty nice year for earnings growth in 2021, but it's a little early to put orders of magnitude around that. feel good about our trajectory entering the year based on what we see today.

Thank you. Great job again.

There appears to be no further questions. I will turn the call back over to Benjamin Glicklis for any closing remarks.

Thank you very much and thanks to everybody again for joining. We look forward to speaking with you in the coming days and please stay safe. Take care.

Thank you. And this does conclude today's program. Thank you for your participation. You may now disconnect.