Element Solutions Inc.

Dear Director of Strategy and Finance, please go ahead.

Good morning, and thank you for participating in our fourth quarter and full year 2023 earnings conference call. Joining me are our Executive Chairman, Sir Martin Franklin, our CEO, Ben Glicklich, and our CFO, Kerry Dorman. In accordance with Regulation FD, we are webcasting this conference call. A replay will be made available in the investor section of the company's website. 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. These materials can be found on the company's website in the investor section under news and 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 our CEO, Ben Glicklich.

Thank you, Varun. Good morning, everyone. Thank you for joining. Element Solutions had a productive 2023. We improved our businesses across multiple vectors while demonstrating our hallmark stability in a challenging backdrop for several key end markets and geographies. Positive price and mix impacts from emerging high-value offerings together with disciplined cost management preserved profitability. Adjusted EBITDA margin was flat despite a high single-digit decline in volumes and an even greater decline in our higher margin verticals. 2023 was arguably the biggest electronics market dislocation in a generation. and ESI emerged improved. Gross margins are climbing back towards their historical levels. We took out costs both permanently and temporarily while improving the long-term growth profile of our businesses. While organic net sales in our electronics segment declined last year, we exited 2023 with the circuitry and semiconductor businesses returning to organic growth in Q4. One of the hallmarks of our business has been steady cash flow across a variety of operating environments. This year, Element Solutions generated record annual free cash flow of $282 million. Our consistent cash flow generation affords us significant flexibility to deploy capital, whether that is through M&A, debt reduction, or returning cash to shareholders, all of which we did opportunistically in 2023. The results from our M&A in 2023 continue to look promising. Two transactions last year. Viaform and Couprion strengthen our high-end electronics value proposition just as those markets are poised for a recovery and improve our ability to participate disproportionately in significant long-term growth tailwinds. The Viaform distribution rights we reacquired are driving deeper commercial engagement and unlocking sizable pipeline opportunities with the largest semiconductor manufacturers in the world. We completed the integration of customer service, quality support, and inventory management in the fourth quarter, And our front end-of-line offering is now well-positioned for growth beyond our initial expectations, with traction on both leading and legacy nodes. In January, Viaform sales increased significantly from the monthly run rate seen in the fourth quarter of 2023. And some of our back-end-of-line wafer-level packaging products generated their highest sales month in over two years, as the semi-supply chain continues to ramp utilization up. Together, these products enable the increasing complexity in chip design, which should drive the next leg of computing performance improvement for data center, AI, IoT devices, and industrial automation. The customer response to Couprion and its active copper technology continues to be very enthusiastic. We have many active applications and qualifications projects underway with large electronic component and semiconductor manufacturers. This technology is truly differentiated and solves major customer pain points with ever-shrinking feature sizes and growing thermal management requirements. We expect significant progress in 2024 on commercialization, product qualification, and building internal manufacturing capacity. In addition to value-enhancing M&A activity, we made significant progress this past year on improving our gross margins and streamlining costs. Positive product mix, sustained pricing action, and some raw material and logistics cost deflation within our supply chains resulted in over 200 basis points of gross margin expansion year over year, despite unit volume across our business declining in the high single digits. We also maintained adjusted EBITDA margins of approximately 21%, similar to the prior year. As we enter 2024, our markets are going the right direction, our technology position has improved, our team is focused, and as you'll hear from Carrie, our balance sheet is strong. Like volumes and margins, the company-wide trend and outlook are positive. Kari will take you through the financials in more detail. Kari? Thanks, Ben. On slide four, you can see a summary of our fourth quarter results. Adjusted EBITDA grew 11% year-on-year, and margins expanded 210 basis points. We benefited from return to growth in our high-end electronics verticals, and easing raw material and logistics costs for most of our business line. For ESI overall, Net sales declined 3% organically, primarily driven by a softer volume environment across most of Asia and in our industrial markets globally. Demand across the electronics ecosystem continued to improve, with organic growth declining 1% compared to high single-digit year-over-year declines earlier in the year. Our circuitry business grew 2% organically in the fourth quarter, and our semiconductor vertical grew 7%. This trend tracks shipment growth for global handsets in Q4, though we think some of that benefit accrues to us in Q3, given the production timeline. Nonetheless, this inflection is a positive development as we enter 2024. Our assembly business experienced volume weakness in circuit board assembly products that primarily serve industrial and automotive customers. This softness was regionally concentrated in Europe and China at the end of the year. Despite the muted volume backdrop, improving mix and cost management drove 16% higher constant currency-adjusted EBITDA for the electronic segment as a whole, and margins improved by 230 basis points. Our INS segment declined 7% organically in the fourth quarter, as industrial surface treatment volumes softened in Europe industrial and Chinese automotive markets. Net sales in industrial solutions declined 9% organically in the quarter, with volume declines in the mid-single digits. a reduction in commodity-based surcharges driven by lower input prices contributed to the rest of the organic sales to come. These commodity-based price fluctuations did not meaningfully impact profit dollars as the surcharges in this business are at low margins. Energy Solutions grew 11% organically on the back of continued increase in offshore drilling activity and pricing action, while the Graphic Solutions business declined 7% organically, driven by the closure of a key customer in our small newsprint business, an ongoing slowdown in new designs in the consumer packaging market. Across the business, material and logistics costs improved, and that trend should carry into 2024. Constant currency adjusted EBITDA in the INS segment grew 3%, with a roughly 190 basis point improvement in margin versus the fourth quarter of 2022.