Element Solutions Inc.

Good morning, ladies and gentlemen, and welcome to the Element Solutions Q1 2023 Financial Results Conference Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, you must press star 1 again. Thank you. I will now turn the call over to Varun Gokarn, Senior Director of Strategy and Finance. Please go ahead.

Good morning, and thank you for participating in our first quarter 2023 earnings conference call. Joining me are our Executive Chairman, Sir Martin Franklin, CEO Ben Glicklich, 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 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 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 investor section under news and events. Today's materials also include financial information that has not been prepared in accordance with the 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 metrics. It is now my pleasure to introduce Element Solutions CEO, Ben Glicklich.

Thank you, Varun, and good morning, everybody. Thank you for joining. In the first quarter, Element Solutions delivered on its financial commitments. We grew adjusted EBITDA sequentially and reported results in line with our guidance, despite continued softness in electronics end markets and Asian economies more broadly. Portfolio diversification and cost containment softened the impact of decline in key end markets like mobile. Our organic sales performance reflects the consumer electronics malaise that began in the middle of last year and has driven broad-based volume declines across the industry. Organic sales were down 7% over the first quarter of 2022. Notably, that quarter was our largest for sales and EBITDA since we launched ESI. This quarter's sales results include an 11% decline in Europe electronic segment that was partially offset by 2% organic growth in industrial and specialty. The INS segment was buoyed by resilience in Western automotive markets and a solid recovery in offshore energy production. Demand in the Americas and Europe, while soft, is playing out largely as we expected entering the year. However, recovery in China post-COVID reopening and Lunar New Year has been slower than expected. When demand will recover in Asia and in electronics markets remains uncertain, but there are good reasons for second-half optimism. Semiconductor customers expect increased utilization rates in late Q2 and into Q3, and related sectors should follow. While only a portion of our electronics sales go into front-end-of-line semiconductors, they are a leading indicator. There were bright spots in Q1. Our power electronics offerings continue to perform very well as EV production rates accelerated and customer traction for certain new electronics and industrial applications bodes well for outside growth when markets recover. Our energy solutions business is also growing ahead of our expectations. Commercial and technical execution has been solid. On the cost side, we're beginning to benefit from a normalization in logistics prices and deflation in certain raw materials. driving a sequential improvement in gross margins that we expect to continue through the remainder of the year. We're also enforcing tighter control on discretionary spending and driving process efficiencies through our supply chain and in G&A. This is not coming at the cost of long-term growth. We're still investing in strategic focus areas and maintaining the resources needed to support the market recovery when it arrives. Given the variable cost nature of our business, we have additional levers to reduce costs in the second half should expected demand not fully materialize. Commercially, our teams remain focused on delivering exceptional products and services. Our customers and technology support attractive markets such as electric vehicles, 5G-enabled electronics, and sustainable chemistry solutions, markets that will grow. We've also continued to deploy our capital effectively into high returning investments that we believe will continue to compound per share earnings. Periods of low demand and market uncertainty often generate unique opportunities. We believe 2023 may be such an environment and expect to exit this year better positioned than when we entered it. Carrie will now take you through our first quarter business results in more detail. Carrie. Thanks, Ben. Good morning, everyone. On slide three, you can see a summary of our first quarter financial results. Organic sales declined 7% year over year, and constant currency adjusted EBITDA declined 18%. The disproportionate reduction in profitability reflects a tough comparison against last year's record sales and profit quarter. In Q1 2022, carryover strength in the high-end smartphone supply chain contributed to significant high margin sales. Those same markets experienced substantially reduced demand in the first quarter, of 2023, driving 11% organic sales decline in our electronics business. Our net sales in adjusted EBITDA were also both impacted by a strengthening US dollar by roughly 4 percentage points. Our industrial and specialty segment grew sales organically 2%, primarily due to improved activity in the offshore energy business and new customer ramp up in graphics, which offset weakness in our industrial surface treatment business in China.