Good morning, ladies and gentlemen, and welcome to the Element Solutions 2019 Second Quarter Financial Results Conference Call. This call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation.

[Operator Instructions] It is now my pleasure to turn the floor over to Yash Nehete, Senior Associate, Corporate Development and Investor Relations. Please go ahead..

Good morning and thank you for participating on our second quarter 2019 earnings conference call. Joining me this morning are CEO, Ben Gliklich; President and COO, Scot Benson; and CFO, Carey Dorman. Our Executive Chairman, Martin Franklin will also be on the line for Q&A.

Please note that 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 certain assumptions and expectations of future events that are subject to risks and uncertainties.

Please refer to Item 1A of our most recent Form 10-K for a discussion of the most significant risk factors that could cause actual results to differ from our expectations and predictions.

Please note that in the earnings release and the supplemental slides issued and posted today, 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 please refer to the release and slides, which can be found on the Company's website at www.elementsolutionsinc.com, in the Investors section under News and Events. It is now my pleasure to introduce Ben Gliklich, CEO of Element Solutions..

Thank you, Yash, and good morning, everyone. Thank you for joining. Our second quarter was much as expected. The softness we saw in the first quarter continued as anticipated as a result of end market weakness and a stronger dollar year-over-year. We continue to control the controllables and lay a strong foundation for Element Solutions going forward.

Our corporate cost savings are ahead of initial targets. Our leadership is solidly in place and our teams have settled into a healthy operating rhythm. While this year is clearly a challenging one from an end market standpoint.

Our businesses continue to perform better than the overall market that they serve and we've made significant progress from a culture and team building perspective. We believe the work we are doing today will come through and continued market outperformance in years to come.

We held our first Investor Day as Element Solutions back on May 20 and it was great to see so many of you there. We covered quite a lot that day showcasing the quality of our businesses and the depth of our leadership team.

I encourage those of you who could not attend to listen to the webcast on our website or at a minimum review the key takeaways on Slide 9 in the appendix of this slide deck. On Page 3, you can see an overview of our second quarter results. We reported net sales of $457 million and adjusted EBITDA of $101 million.

Net sales declined 6% on an organic basis year-over-year, while adjusted EBITDA declined 4% on a constant currency basis. Adjusted EBITDA margin this quarter was 22%, representing another quarter of margin expansion.

Markets we participate in, primarily automotive and electronics continue to show signs of recessionary behavior as trade tensions, regulation and software global economic growth translated to year-over-year unit declines. The first half of 2018 was strong before a back half decline and so the comps for the first half of 2019 were challenging.

We still expect our markets to experience a seasonal pickup in the third and fourth quarters and the comps should become easier, but the industry no longer anticipates a robust recovery as it was expected coming out of the first quarter.

The sentiment and the data are not indicating demand growth beyond seasonal patterns, so cost management will continue to be a focus in the second half. I'll provide a more thorough update on our outlook later in the call.

Electronics experienced an organic sales decline of 6% year-over-year, primarily due to our Asian Circuitry and Assembly businesses, especially in China and Taiwan. Despite this end market weakness, we continued to see meaningful growth in our advanced assembly products, particularly those oriented to the EV market.

As we highlighted at our Investor Day, automotive electrification is a key focus of our long-term growth strategy and we're pleased with the gains we are seeing and the continuous engagements from OEMs and Tier 1s.

Industrial & Specialty declined 5% on an organic basis year-over-year as economic weakness in Europe, especially in automotive markets as well as a customer specific issue and a particularly tough year-over-year comparison in energy impacted the segment.

Our auto business declined in Europe and Asia, the less than the overall market and grew in the Americas. Our graphics vertical also declined year-over-year on an organic basis due to lower newspaper revenues and general market weakness in North America. New graphics products continued to gain traction in other geographies.

Constant currency adjusted EBITDA margins expanded, so adjusted EBITDA declined less than net sales. Product mix was a modest headwind due to weakness in Circuitry and Energy, which have higher contribution margins. This negative mix was partially offset by margin expansion in our Assembly business.

We also continue to manage our costs footprint and execute on our corporate cost savings plan. In Q2, we realized approximately $4 million of corporate cost savings, bringing the total savings in the P&L to approximately $12 million over the last four quarters. We've now actioned the full $25 million of corporate savings on a run rate basis.

We'll continue to see the benefit from these actions in the balance of the year and into 2020. We've reduced our corporate headcount by over 35% and reduced non-personnel related corporate expenses by about 40%. At the same time, we've improved transparency into the business and our processes and controls.

Through technology and structure, we have created better quality functions at a lower cost. There's additional SG&A optimization activity occurring throughout the business this year, most of which is structurally improving our costs base through technology and process improvements.

We think about these costs activities in two buckets, cost savings, the product of restructuring to eliminate activity permanently and cost avoidance, temporary changes in behavior to spend less in challenging markets.

In the first half of this year, SG&A is down about $20 million year-over-year, which we would classify about half as cost savings with the balance as cost avoidance. We are very thoughtful about how and where we avoid cost. So that it doesn't impact our long-term growth trajectory.

Adjusted EPS this quarter was $0.21, which reflects lower interest expense and a lower share count versus the prior year. We generated approximately $86 million of free cash flow year-to-date on an adjusted basis, which assumes that the sale of Arysta had closed and the new credit agreement had been in place on January 1.

During Q2, we also repurchased approximately 1.2 million shares in the open market. The Company is on track to generate more than a $100 million of additional free cash flow this year and has capacity to continue to deploy capital opportunistically. We expect to use some of this capacity in the coming quarter.

With that, let me turn the call to Scot Benson, President and COO to provide more details around the market trends for both our segments.

Scot?.

Thanks, Ben, and good morning, everyone. As already mentioned, our Electronics segment was impacted by the same trends we have seen over the past three quarters. Automotive and high-end mobile phone markets continued to show weakness in comparison to a strong first half in 2018.

Our Circuitry vertical experienced the largest impact from weakened markets as volume reductions in China and Taiwan contributed to most of the decline. The assembly vertical was also impacted by lower volumes in Asia, but was partially offset by both in our advanced assembly products.

Our advanced assembly products are more differentiated in higher margin and we are happy to continue to see them gain traction. This helps drive our end market outperformance. We do not believe recent performance reflects a change in share in our direct markets. The entire electronics industry has been impacted by the macros we are facing.

We expect second quarter year-over-year declines in mobile unit shipments to be in line with what we saw in the first quarter of this year, which was a decline of 6% globally.

Our business including industrial was also impacted by the weakness in global auto sales, which were down about 7% in the first five months of this year, with China being down in approximately 15% year-over-year. We do not expect underlying demand in our markets to recover from current levels this year other than typical seasonal patterns.

We see reason to be optimistic about growth in 2020 that's 5G technology supply chains ramp up and new modules such as multi-camera applications and 3D camera designs are introduced. We are still very positive about our position and new infrastructure and handset designs as they continue to ramp up.

In Industrial & Specialty, the weaknesses in both automotive and industrial production in a difficult year-over-year comparison in our energy vertical explain the majority of our decline. Weak European markets primarily in Northern and Central regions impacted our industrial vertical.

We were able to offset some of the automotive related declines with share gains in water treatment products as well as pricing initiatives in various markets, particularly within the Americas.

In Energy Solutions, we experienced a year-over-year organic net sales declined due to the loss of certain business related to a specific customer, which we highlighted in the first quarter, as well as lower drill activity in the Gulf of Mexico.

The second quarter of 2018 was unusually strong with them umbilical fill activity, which skews the year-over-year comparison. Despite these temporary challenges, the Energy business performed in line with our expectations and we expect that all return to growth in the second half of the year.

Graphic Solutions was impacted by lower year-over-year organic net sales from our Newspaper business. The Newspaper business is a small part of our overall vertical as we continue to focus on packaging markets. Our Packaging business had modest growth in the quarter, but was still lower than anticipated, especially in the North American region.

Similar to the first quarter delayed advertising campaigns by CPG customers are impacting the overall market. We still expect to pick up in the second half of this year, especially in our core Packaging business, albeit at a lower rate than we expected at the beginning of the year.

Looking to the second half, our teams remained focused on market share opportunities and cost control. We believe technology advancement, enhance increasing technical requirements or secular growth trends and we should benefit from them disproportionately as long as we remain close to our customers and the leading innovator.

We do not lose sight of this, especially in market downturn. With that, I will turn it over to Carey to discuss cash flow and our balance sheet.

Carey?.

Thanks Scot, and good morning, everyone. On Page 5, we provide an update on cash flow and our balance sheet for the second quarter. Assuming the Arysta transaction had closed and our new capital structure had been in place as of January 1. Year-to-date, free cash flow from continuing operations would have been $86 million.

This is in line with our full-year 2019 expectations and based on year-to-date cash interest, cash taxes and net CapEx of $39 million, $35 million and $11 million respectively. Our full-year outlook for these cash flow items remained largely unchanged. So we are tracking a bit ahead of our expectations.

Our working capital investment was only a few million dollars through the first half of the year as net sales decline. We anticipate building some additional working capital in the third quarter in line with our expectations for seasonal revenue growth.

Our second quarter cash flow also includes restructuring charges associated with our corporate cost savings and cost optimization activities from the past year. We expect these charges to be a modest use of cash in the third and fourth quarters as well.

Net debt at the end of Q2 was $1.35 billion with a net debt to adjusted EBITDA ratio of approximately 3.3x under our targeted ceiling of 3.5x. In May, we received a $90 million working capital true up from UPL and use the portion of that amount to pay fees and expenses associated with the Arysta transaction.

We expect to make a few payments that UPL associated with known tax liabilities in the second half of the year, all of which would be recorded at a cash outflow from discontinued operations. Net of all expenses and tax true ups, we expect to realize approximately $50 million of the $90 million.

Starting in the second quarter and continuing through July end. We have repatriated over $150 million of cash to the U.S. and primarily reduced however these cash balances enhance our overall cash balance required in the business. This action will improve our liquidity and give us additional flexibility going to the back half of the year.

As Ben noted this quarter we repurchased approximately $11 million of stock as part of our buyback program. We still have more than $300 million afford authorized capacity remaining and we expect to remain opportunistic during the remainder of the year, all while maintaining a net debt to adjusted EBITDA ratio of 3.5x or less.

With that, I will turn it over to Ben to provide an update on our financial guidance for 2019 and closing remarks.

Ben?.

Thanks Carey. On Slide 6, we discussed our Q3 expectations and our financial guidance for the full-year. The industry outlook for demand in the back half of the year has moderated and so our expectations for net sales growth have declined. We expect net sales to decline between 1% and 3% on an organic basis this year.

Nonetheless, we still expect constant currency adjusted EBITDA growth of 2% to 5%. This is in line with market expectations and the conversations we've had with our customers regarding the second half.

Though this still requires a stronger second half than first half, we believe we can deliver this outcome with the anticipated seasonal uplifts in electronics associated with new product launches and the full-year impact of cost savings implemented to date.

While this performance is well below our long-term expectations for growth, it reflects both market outperformance and margin sustainability, which we aspire to. Regarding our adjusted EPS guidance, we are tightening our full-year range to $0.83 to $0.86 and maintaining the midpoint from our original guidance.

This is driven by lower interest expense and a lower share account from our recent repurchases. Finally, I'd note that we are still expecting approximately $200 million of free cash flow on an adjusted basis this year, which represents nearly 50% of adjusted EBITDA and north of 7% of our current market capitalization.

Before opening the call up for questions, I will turn to Slide 7 to revisit our key priorities for 2019 we believe we are on track for each of these. Despite the market headwind, we are building momentum as element solutions internally and with external stakeholders. The Investor Day was a strong proof point for that.

Our execution against corporate restructuring objectives and cost has enabled us to defend our margins and continue to grow our adjusted EPS materially this year. Cash flow remains a focal point, and it should be a strong indicator of the power of our businesses.

Finally, we've demonstrated our abilities to deliver just five months into our new existence and we are pleased to have some balance sheet flexibility to take advantage of potential dislocations.

We had always planned to ramp up our repurchase activity in the second half of the year and continue to expect to be more active in the market this quarter then last given valuation and our improvement balance sheet capacity.

Though end market challenges persist, this quarter we demonstrated the resiliency of our business model and stability of our cash flows, and believe we will continue to do so in the second half of this year. With that, operator, please open the line for questions..

The floor is now open for questions. [Operator Instructions] We'll take our first question from Steven Byrne with Bank of America. Please go ahead. Your line is open..

Hi. This is actually Luke Washer on for Steve today. Thanks for taking my question. I wanted to touch on….

Good morning..

Good morning. I just wanted to touch on kind of the economic situation. We appreciate the color there.

But looking further in the year, are you seeing any green shoots right now that provide you some more optimism besides the demand – a seasonal demand pickup you're seeing? There was another company that talked about the potential for 5G to sort of pickup in the fourth quarter.

Do you see any tailwinds from that?.

Yes. Thanks for the question, Luke. What we would say in that regard is that, our guidance and our outlook is based on stable demand, right. So we are not anticipating a robust recovery in our end markets over and above the seasonal pickup that we're expecting. But to that end, we are starting to see some of that seasonal pickup here in July.

Sequentially, the biggest steps on a month-over-month basis we see between the first half and the second half or June to July and then September after August, August is usually a little slow and July is demonstrating at least the seasonal pickup. We can't speak to a broader recovery in end market demand.

With regard to 5G, it's a very compelling opportunity for us, but we're really not counting on that in any material way in 2019. We are expecting some real uptick in demand in 2020 from 5G infrastructure and handsets..

Great. Thank you.

And the last one here, can you also address how are your adoption rates in your chrome plating product progressing?.

It's still early stages in that regard, but we feel very good about the technology and the response from our customers to that technology.

Scot, I don't know if there's anything you'd add to the chrome-free etch products class and how customers are reacting and its contribution?.

Yes. I would just confirm what you said Ben that we've had extremely positive feedback from our customers and have numerous opportunities for adoption for that technology around the world and anticipate that driving some growth for several years to come..

We'll take our next question from Jon Tanwanteng with CJS Securities. Please go ahead. Your line is open..

Good morning. It's Pete Lucas for Jon. Just two quick ones from me.

Can you talk about the impact of further potential tariffs and tensions with China, including Huawei? And if that's been included in your updated outlook?.

Sure. Thanks for the question, Jon. So tariffs are unhelpful, right. They have not had any impact on our margins specifically, but certainly they're impacting the overall economic climate and demand for our customers, and in some cases, our customer’s, customer’s products.

We believe that's reflected in our guidance, which is not counting on a demand recovery. And so far as markets get materially worse, we could come in towards the lower end of our guidance. We are not counting on a recovery. We're not counting on things getting worse.

Our guidance is based on the environment we've been operating in year-to-date, and not much changing other than the seasonal pickup, which as we noted, we began to see already in July..

Helpful. Thanks.

And just can you update us on the pipeline for potential M&A deals and you touched on buybacks in your prepared remarks, but how they stack up against what you're seeing M&A-wise?.

Yes. So we're spending some time looking at modest bolt-on acquisitions, right. So we've talked about from an M&A perspective is we're going to be focused on small transactions that are middle of the fairway, businesses that align with what we know and what we do already, high-synergy content and generally quite small.

And so we are spending some time on that. Obviously in today's environment, buybacks are a very, very attractive and that's where we've been allocating capital in the second quarter on modest basis. And we'll be a priority as we go back into – as we look into the second half. I don't know, Martin, if there's anything you'd add to that..

I mean very simply, we look at our stock today against the performance of our business for this year was where stock was trading directly south of 9x. I'll rather buy our stock; see us buying our stock than buying other people's companies with these multiples..

We'll take our next question from Josh Spector with UBS. Please go ahead. Your line is open..

Yes. Hey guys. Just a question on the industrial margin side of things.

So I understand the year-on-year comp, I was wondering if you could add a little bit more color on sequentially for why margins went down and why your expectations that that margins would increase in the second half?.

Sure. So we talked about a customer specific issue in the energy business both in the first quarter and again here. The offshore business has higher margins in the average over the industrial business and we saw the full impact of that in this quarter. And so that's what's driving that margin performance.

As we look forward, we think we can remediate that issue over the next 12 months. And again, we talked about the comp, Q2 2018 over Q2 2019 and the impact that that would have had, we see the offshore business performing well through the back half and the rest of the business picking up modestly as well..

Okay, great. And then Scot mentioned that you didn't grow market share in Electronics. In your release, you talk about how you expect to outgrow the end markets by maybe 2% over the course of this year, maybe not explicitly electronics, but elsewhere. I was just wondering where you're seeing the outperformance.

I guess the outperformance in the water business, to me it doesn't seem big enough to pull the whole portfolio up.

So are there any other places where you think you're starting to gain share relative to competitors?.

Yes. So share in our business is a tricky thing to talk to given how many niche markets we participate in. I think that we've demonstrated outperformance in the Industrial & Specialty business because our industrial surface treatment business has certainly done better than the automotive market year-to-date.

And the Electronics business as well, if you look at mobile device shipments for example, relative to our electronics, topline weakness, we think we've outperformed there as well. So, we do believe that year-to-date, we've held our position and grown our position in certain instances.

And we can talk about some of the niche markets in more detail if you'd like to get deeper in the weeds on a follow up..

Okay, all right. Thanks, Ben..

We'll take our next question from Aleksey Yefremov with Nomura Instinet. Please go ahead. Your line is open..

Thank you. Good morning, everyone. You mentioned I think an instance where pricing has gone up.

In general, in the electronics and market, have your prices been stable or has competitive pressure or competitive environment changed in anyway so far this year?.

Yes. So in the Electronics business, we've had a strong performance, I would say from a price perspective. Obviously, we participate in somewhat competitive markets, but we've held price nicely. When we talked about pricing increases, we were talking about the industrial business in Europe in particular.

Scot, do you want to give any color around price dynamics in the Electronics business beyond the fact that we're, being – we're holding crisis steady in the market and we haven't seen too much pressure?.

Yes. That's right, Ben. In spite of the – just a tough overall conditions, we've not seen any unusual pricing pressure across any of our markets really. And we've been able to, as you said, take some pricing action in some parts of the world actually to help mitigate some of the other things that are going on.

So we haven't had anything unusual from a pricing standpoint..

Thank you. And going back to tariffs, I think the last time we had around of tariffs announcements in May or so.

How did your customers react? Did you see sort of immediate drop-off in orders and then coming back or was there no, sort of specific impact to the announcements in the past?.

Yes. Aleksey, it's really hard to disaggregate underlying demand and tariff impact. I would say the second quarter had some stronger months and some weaker months, and it's hard to really triangulate how tariffs were driving that versus how underlying demand was driving that.

As we said, they're not helpful, but they're not impacting our margins directly. And thus far, we've seen a continuation of what happened in the back half of last year through this year. So it's hard to really say that this is being driven specifically by any specific tariff actions..

[Operator Instructions] We'll take our next question from Jim Sheehan with SunTrust. Please go ahead. Your line is open..

Thanks. Good morning. You're talking about possibly seeing it pick up in the Energy business in the second half.

If you already seen an inflection there and what gives you the confidence that think that might be sustainable?.

Yes. So the Energy business, we have seen some increasing orders and it is a very, very sticky business. The Energy business pickup isn't specifically what we're counting on when we think about our guidance and the seasonal uptake in the back half of the year. That's driven more by the Electronics business.

But we feel good about our position in the Energy business and we do have visibility into that.

I don't know, Scot, if there's anything you'd add over and above that?.

Yes. And we have started to see a pickup in drilling activity, which is encouraging. So that that leads to some of the recovery comment we were talking about in that space..

Thank you.

And what's your outlook for working capital management in the second half?.

So we've seen a modest investment in working capital in the first half, despite a sequential decline in sales. And so that obviously is not the sort of performance we're hoping for from this business. As we see a pickup in the back half of the year, we should offset some of that by better working capital management.

So you shouldn't expect to see a continued large investment in working capital.

Carey, I don't know if there's anything you'd add?.

Yes. Jim, I think I've said it in my prepared remarks that we do expect to make some investments sequentially as the sequential revenue pickup occurs. On a full-year basis, I would expect the investment that there'll be modest. It will be large – we expect it to be larger on a full-year basis and it is year-to-date, but not materially..

And we'll take our next question from Chris Shaw with Monness, Crespi. Please go ahead. Your line is open..

Yes. Good morning, everyone.

How are you doing?.

Good morning, Chris..

Going back to the Investor Day of the target to double EPS by 2023, I was just curious that you remind me what sort of – what part of that would be in your model was going to be attributed to sort of a share buybacks and is that something like we consider like sort of toggling about, not just based on sort of the free cash flow, but just based on sort of earnings, any given year that if things are coming a little under sort of plan? Would you buyback more shares or is it going to be strictly based on cash flow availability?.

Sure. Thanks for the question Chris. The doubling of EPS as we talked about it during the Investor Day requires both organic growth and smart capital allocation. We don't have a crystal ball that can see through five years of capital allocation and how we're going to get there, in the current environment will be buying in shares.

We also will rely on earnings growth and we've talked about how this business should grow mid single-digits on the topline and the high single-digits EBITDA to help us get there. With regard to how we prioritize capital allocation, as we've been very clear and Martin said earlier in the call, at these levels will be buying in shares.

We also are building a pipeline of bolt-on M&A that we think we can do every year, small quantum, highly accretive transactions, staying within the middle of the fairway of what we do right now. But the priority here clearly is M&A excuse me share buybacks.

And there are other alternatives we thought about from a capital allocation perspective as well I don't know, Martin, if there's anything you would, you'd add..

No, I think the – as management organization, our goal has been set to achieve, I think it's the way the math looks organically, and I think we can get that organically.

The capital allocation is opportunistic and we've been opportunistic in the past and I think that opportunities exist today, which we’ll act on and continue acting on until that window closes.

And this is a very steady business and as I think everybody knows, that generates a lot of free cash and allocating it in the way that drives the most value for shareholders over the long-term and the medium-term is our priority. So we're just going to continue doing what we're doing..

Great. Thanks..

We'll take our next question from Neel Kumar with Morgan Stanley. Please go ahead. Your line is open..

Great. Thanks. Just given that market organic growth is coming a little bit lower versus expectations. I was just curious if you can elaborate on some of the cost levers you have at your disposal to contain margins..

Sure, Neel, I appreciate that question. So as we talked about on the call, we've taken about $20 million of cost out in the first half this year versus the first half of last year. And about half of that is what we call cost savings.

These are permanent changes to the business restructuring where the cost will not come back and about half is cost avoidance. We talk about the variable cost nature of this business as being a strong attribute. And that's a demonstration of that. So cost avoidance is things like internal travel tradeshows.

These are things that we don't believe will change the long-term growth trajectory of the business and so we can tighten the belt. And so we've been doing that rather aggressively, on a year-to-date basis. And we'll continue to over the back half of the year.

We've also actioned through this month; some more what we consider cost savings, which are permanent restructurings of the way we do business, primarily in the functions where we talked about how we've gotten more efficient in our functions and how we do the business of being a business.

And so we'll get an added benefit from those savings over the back half of the year. We noted that we've taken out the full $25 million on a run rate basis from our corporate cost activity. That's a little bit ahead of schedule and so that should also be contributing to earnings growth in the second half..

Great. That's helpful. And in electronics, I was wondering if you could just give some additional detail about some of the new product launches and the magnitude of the impact in the second half of the year..

Yes. So I'll turn this to Scot in one second. What I would say is that the new product launches aren't our product launches. There are customers and in some cases our customers, customers product launches, these are new handsets and new electronics technologies.

When it comes to real new step changes in technology where we're not counting on that this year, we're counting on that more next year we talk about 5G and new camera modules and so forth. But there is always a ramp up as we get towards the second half as new products are beginning to be stocked for their launch.

Scot, anything you'd add to that?.

No, Ben, I think you explained it well or this is all about major phone makers launching new products this time of year in the build for those running into the holiday season.

We also see some additional demand in some of our advanced assembly materials businesses to fill demand that we notice coming in EV space as production EV vehicles continues to grow and we do see some of that happening in the second half of the year as well..

Thanks Scot..

And there are no further questions on the line at this time. I'll turn the floor back over to Benjamin Gliklich for any additional or closing remarks..

Thanks very much and thanks to everybody for joining. We look forward to seeing you in the months to come and appreciate your support. Thank you..

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