Good morning, ladies and gentlemen, and welcome to the Element Solutions, Inc. Q4 and Year-End 2019 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 fourth quarter and full year 2019 earnings call. Joining me this morning are our Executive Chairman, Martin Franklin; CEO, Ben Gliklich; President and COO, Scot Benson; and CFO, Carey Dorman.

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 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 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. We’re pleased to report strong results for our fourth quarter and full year 2019 and to share our expectations for 2020. It was a good year in which we accomplished a great deal, despite a challenging backdrop.

Slide 3 shows the priorities we set at the beginning of last year and our achievements against them. It was our first year as Element Solutions, and we focused a lot of energy on laying a solid foundation to support our ambitious growth objectives.

That entails developing and communicating a shared vision, clear and cogent strategy and the right culture. These were all promptly tested as we managed through the most difficult macroeconomic environment we’ve seen in a decade. Our results demonstrate that we’re focusing on the right things.

Our team was sturdy, and our business was resilient, outperforming its end markets and growing earnings and free cash flow. We estimate that our end markets were down more than 5% in 2019, while our business declined 4% organically. This is the type of outperformance we’d expected.

Despite this organic decline, we grew our full year adjusted EBITDA by 3% on a constant currency basis and delivered meaningful increases in adjusted EPS and free cash flow. Positive sales mix, diligence on cost containment and continued corporate cost savings, all contributed to this operating leverage.

Strong free cash flow is the hallmark of our business. And despite the macro backdrop, we generated a record amount in 2019, $238 million. This, and the proceeds from Arysta sale, gave us an opportunity to demonstrate our commitment to prudent value creative capital allocation.

We took advantage of share price dislocations through our share buyback program, repurchasing 15% of shares outstanding, and we fully cash funded the tuck-in acquisition of Kester, which we announced in December. Kester is a great case study for the type of measured, strategic M&A, you should expect from ESI.

This high-quality business is middle of the fairway for acquisition criteria. It is aligned with our existing end markets, offers new interesting capabilities to our portfolio and was available at an attractive value. Most importantly, this is a business we believe will be better as a part of our company than outside of it.

We’re excited to welcome the employees of Kester as part of the ESI family. In 2019, we continued to invest in our business. We advanced multiple innovation projects, many in partnership with our customers and OEMS.

We built out additional technical service centers in certain key markets, and we solidified our new branding and commercial strategy for electronics and automotive.

Our focused R&D process, responsive customer service and reliable product development, are what drive our business forward, and we will always invest appropriately to preserve and grow that as part of our long-term strategy. Despite taking approximately $50 million of operating expense out of our business in 2019, R&D spend was roughly flat.

Moving to Slide 4, we highlight our performance in the fourth quarter of 2019. We reported net sales of $455 million and adjusted EBITDA of $102 million, largely in line with our expectations. Net sales declined 4% on an organic basis, which reflected continued year-over-year industrial manufacturing weakness, primarily in automotive markets.

We were heartened by signs of stabilization in certain important end markets, like electronics and progress in resolving trade tensions. However, Q4 activity levels were still far below levels we saw in the beginning of 2019 and end of 2018.

We believe there has been a recovery in demand, but are cautious to extrapolate our results, particularly in the context of the coronavirus that has emerged in Q1.

As the situation around the coronavirus is shifting every day, we are staying very close to our people in China and the rest of Asia and paying attention, first and foremost, to their health and safety.

To protect our people, we drastically limited travel within Asia and only have essential people working in our offices in China, Singapore and Hong Kong. All of our facilities have reopened, and they’re operating in strict compliance with increased local and national health requirements.

We still have many employees who have not returned from their New Year holiday or are under home quarantine after their holiday travel. In Electronics, organic net sales declined 4% year-over-year in the fourth quarter, largely due to electronics assembly end market weakness in both Americas and Asia.

Soft automotive-related demand impacted Circuitry in China and Europe, but was partially offset by a recovery in high-end mobile phone markets in Korea. Sequentially, underlying unit volumes for high-end electronics, the markets remain stable, which was a positive sign coming into January of this year.

Strong trends for memory disk customers in the third quarter carried over to the fourth quarter as well. Semiconductor organic net sales were stable year-over-year as a continuation of the 5G infrastructure ramped and automotive electronic content growth offset overall weakness in broader semiconductor markets.

In Industrial & Specialty, organic net sales declined 6% year-over-year as modest growth with packaging customers and graphics was offset by declines in Industrial and Energy. Adjusted EBITDA in the fourth quarter grew 3% on a reported basis and 5% on a constant currency basis.

Margin expansion of 180 basis points was primarily a result of continued cost containment and realized corporate cost savings. Year-to-date and for the full year 2019, SG&A is down approximately $50 million year-over-year, of which we consider half as cost savings, with the balance as cost avoidance.

This performance reflects the flexibility of our variable cost structure and good execution by our team to remain disciplined on discretionary cost. As we enter 2020, we will maintain cost discipline, but we do expect some cost to return to support organic growth. We reported adjusted EPS of $0.22 in the fourth quarter.

Turning to Page 5, we highlight our full year results. For fiscal year 2019, we reported net sales of $1.8 billion, adjusted EBITDA of $417 million and adjusted EPS at $0.88. Organic net sales declined 4%, and adjusted EBITDA increased 3% on a constant currency basis. 2019 was a difficult year for our key end markets.

These results evidenced the resilience and outperformance we have highlighted in the context of declines in high-end mobile phone shipments and automotive production in the midst of an overall weak global manufacturing environment.

Our meaningful year-over-year free cash flow growth exceeded our expectations with better-than-forecast interest, taxes, CapEx and importantly, working capital, which improved in the second half after having been a focus area coming out of Q2. Full year adjusted EBITDA margins were 22.7%, reflecting margin expansion of 120 basis points.

Two-thirds of this margin expansion came from cost savings and cost containment initiatives, with the balance coming from gross profit associated with mix and some improved manufacturing and supply chain initiatives.

We’ve always said that our business would maintain or improve margins and generate strong cash flow in difficult environments, and we proved this in 2019. With that, I’ll turn it over to Scot Benson, our President and COO, who will now provide more color on the market trends for each of our businesses.

Scot?.

Thanks, Ben, and good morning, everyone. I’ll start by saying that launching Element Solutions this past year was very exciting and rewarding. Even in a difficult business backdrop, our employees and our customers have really embraced the changes for the better.

I am confident that we will reap the rewards of these efforts for many years to come through market outperformance and margin improvement. On Slide 6, we walk through full year 2019 net sales drivers by segment. Both segments were impacted by soft end market demand and overall sluggish economic fundamentals.

Lower year-over-year mobile phone shipments, particularly in higher-end devices and automotive production, drove organic declines in all three of our verticals in Electronics. The first half of 2019 was particularly weak on a year-over-year basis as the demand softness that began in Q4 2018 persisted, and early 2018 was quite strong.

Q3 was bolstered by seasonal demand in mobile, and in Q4, we saw a return to similar unit volume demand that we saw in the first half. This stabilization is somewhat encouraging as we head into 2020.

With electronics hardware manufacturing declining in 2019, the printed circuit board market slowed, and our end markets spared worse as the high-end smartphone segment declined further. We continue to focus on product development and innovation-related to 5G technology, which should pay dividends this year.

The technological requirements for 5G circuit boards are far more demanding than their predecessors, which plays to our strength in complex HDI or high-density interconnect PCBs.

We are the only global supplier of both metalization and assembly chemistries for advanced HDI circuit boards, and have been actively working with OEMs to help them develop reliability and performance standards that meet the needs of next-generation products. In 2019, we also saw an increased use of HDIs in the automotive industry.

Complex electronic modules in automobiles are increasingly using similar electronic assembly and interconnect materials developed for higher-end smartphones. We expect our Alpha MacDermid Automotive Initiative to continue to drive new business wins as these technologies emerge in the development of the connected automobile.

In 2020, we expect overall printed circuit board volumes to be relatively stable, but expect growth in the more complex PCB markets tied to these emerging technologies. In our Industrial & Specialty segment, organic net sales declined 3% year-over-year, driven by weak global manufacturing.

Despite this muted demand picture, we have been making good headway on key strategic initiatives relating to sustainable solutions and our automotive OEM initiative. Sustainability is an increasingly critical concern in the global manufacturing supply chains.

Recycling, reducing carbon and energy footprint, and elimination of hazardous chemicals are becoming key commercial issues for our customers as regulation and OEM requirements become more stringent. We have the tools and know-how to help our customers meet new standards.

Our evolved product line, for example, which is the first reach compliant decorative chrome plating process, has seen significant interest, not only in Europe, but also from OEMs looking to drive compliance with reach globally.

Lightweighting materials, such as aluminum, magnesium and carbon fiber, are also seeing increased adoption from OEMs, looking to achieve emission targets or increased EV range. These are all exciting growth areas for us, which we are continuing to prioritize.

In Graphics, growth in our flexible packaging business did not fully offset lower year-over-year newspaper and screen printing sales. Delayed marketing campaigns by CPGs led to a slow start in 2019, though we did see some recovery in the third and fourth quarters.

We expect convenience packaging especially in emerging markets as well as corrugated packaging associated with a growing e-commerce industry to be growth drivers going into 2020. In Energy, we experienced stable growth from Europe and Asia throughout most of the year and expect that trend to continue in 2020.

In Latin America, we expect to lap the partially loss business we discussed throughout 2019, and we should see growth there as well. Overall, we left 2019 with a general feeling of stability in our key end markets and encouraged about our continued ability to outperform in all market environments.

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 7, we provide an update on our balance sheet and cash flow for the fourth quarter and full year 2019. We generated $72 million of free cash flow in the fourth quarter, driven by increased earnings as well as sequential improvement in net working capital.

This led to full year adjusted free cash flow of $238 million. This equates to 20% growth on 2018 free cash flow, if you exclude the impact of Arysta and our soon – our new capital structure have been in place as of January 1 of both years. I would add that this is on a base of 15% fewer shares outstanding.

So on a per share basis, free cash flow growth was far greater. This is a strong performance that reflects the defensibility and underlying quality of our business. Uses of cash in 2019 included $72 million for cash interest, $71 million for cash taxes and $25 million for net CapEx.

We released cash from working capital in both the fourth quarter and full year 2019. As we look to 2020, we anticipate slightly lower cash interest year-over-year. We expect to continue to repatriate cash to help fund capital allocation priorities rather than draw on our corporate revolver as our first funding source.

In addition, we should see the full year impact of our recent term Loan B repricing, which will save us about $2 million this year. Based on our current full year 2020 adjusted EBITDA guidance, which Ben will take you through shortly, we expect our cash taxes of approximately $80 million in 2020.

2020 CapEx should be in line with historical trends, which is approximately 1.5% of net sales or roughly $30 million. As we have demonstrated, we do not need to spend significant CapEx to grow or sustain our business. Finally, we expect modest working capital investment in 2020, in line with the organic net sales growth that Ben will outline.

There can be regional and end market variability that impacts working capital. But overall, it should grow in line with our sales. Net debt at the end of the fourth quarter was roughly flat versus the prior quarter, and our net debt-to-adjusted-EBITDA ratio decreased to 3.2 times on a trailing 12-month basis.

We use essentially all of our fourth quarter free cash flow on capital allocation activity. This included the acquisition of Kester for $64 million and repurchase of about 1 million shares at an average price of $11.16 per share.

While the purchase price of Kester is reflected in our net debt figures, its full year adjusted EBITDA is not included in the trailing 12 months. If we had not acquired Kester in the fourth quarter, our net debt-to-adjusted-EBITDA ratio to end the year would have been 3.1 times instead of 3.2 times.

For the full year, we repurchased approximately 45 million shares or 15% of our shares outstanding at an average price of $11.33 per share. We have $243 million of remaining authorization under our current share repurchase program, and we’ll continue to be opportunistic about capital allocation decisions in 2020 as we were in 2019.

With regard to share count in 2020, our founders and their affiliates converted their preferred shares into common stock in February of this year. This eliminates the future prospect of a founder preferred share dividend and has further simplified our capital structure.

With that, I will turn it over to Ben to provide an update on our 2020 financial guidance.

Ben?.

Thanks, Carey. On Slide 8, we introduce our financial guidance for 2020. Entering the year, we saw certain pockets of growth, particularly in Electronics, driven by demand for 5G applications, and certain areas of weakness, particularly in Western auto.

2019 saw material sequential declines in all of our businesses, with a slight recovery in the back half, so our exit run rate reflects an activity level below the average of the year. Coming into the year, we expected slight organic growth on the top line, offset by FX translating to roughly flat sales.

We expected constant currency EBITDA growth of 2% to 4% on the back of continued mix improvement and carryover impact from cost actions. Assuming some modestly accretive capital allocation, we expected adjusted EPS of $0.93 to $0.97. January was relatively strong with the pickup we saw in the electronics market carrying into the new year.

We were nicely ahead of plan in the month. The outbreak of the coronavirus and its impact on our supply chain was unexpected. Its overall impact remains unquantifiable at this time.

What we can say is that, as of today, our facilities are all open, that we are continuing to supply, and that we have a breadth of facilities in the region to absorb demand and meet customer needs. Very few of our competitors are in this position.

And between tariffs and now this, we believe our broad geographically diverse supply chain is becoming more and more important and will drive business our way.

While our facilities in China are operating at lower volumes, we have anecdotal evidence that other regions are seeing increased production to compensate for some of the lost capacity in China. In February, we expect the impact of coronavirus to net sales for the month will be about $15 million relative to our budget.

Our current expectation is for the impact in March to be less than that, with any further impact depending on the eventual duration and potential further spread of the coronavirus. Before opening the call for questions, I’ll turn to Slide 9 to introduce our priorities for 2020. The first is execution and operating rhythm.

The launch of Element Solutions has been successful. We’ve established a strong performance-based, people-centric and customer-focused culture with our key internal and external stakeholders.

Now we must continue to hit our strides to deliver on our growth potential, execute on our strategic projects and generate the results we know this business and team are capable of.

The rest of our priorities are the dominoes that fall as we execute, delivering on our commitments, generating the strong cash flow that is a hallmark of our businesses and deploying capital in value-creating ways to compound earnings.

To wrap up, I’d like to thank all of our stakeholders for their support in establishing Element Solutions, and most importantly, our people all over the world. We’re only as good as our people and we’re very thankful to have such good people. Operator, please open the line for questions..

The floor is now open for questions. [Operator Instructions] Our first question will come from Bob Koort with Goldman Sachs. Please go ahead..

Thank you. Good morning..

Good morning, Bob..

Ben, I’m curious what the strategy or philosophy is [Audio Dip] balance sheet. I think you mentioned you’re 3.2 times levered. So with the free cash flow, that shouldn’t be a problem, but maybe the optics of that are sometimes a challenge or hurdle for some investors.

And at the same time, you’re in a cyclically weak period in your end markets, which might make share repurchase quite opportunistic.

So how do you think about balancing those conflicts or those tensions?.

That’s a good question, Bob. Thank you for that. Look, to start, we think the capital structure is appropriate for our company. We continuously look for ways to optimize that balance sheet, and we’ll remain opportunistic with regard to deploying the cash that we generate.

And some of the balance sheet capacity that we have as we’ve come nicely inside of our 3.5 times ceiling. That having been said, if opportunities aren’t there for us, we’re not in a rush to deploy capital. And you could see leverage coming down from where it is today.

And if opportunities are exciting for us, we could take leverage up just a tick, but always within the leverage ceiling we’ve set of 3.5 times net debt to EBITDA..

Can you, maybe use Kester as the example, but talk about how you see in terms of bolt-ons or strategic acquisitions.

Where are the greatest opportunity? Is it maybe globalizing some regional products? Is it may be getting more products to same customer base? So what – you mentioned it’s down the fairway, but what are sort of the optimal parameters for deals for you guys?.

Yes. So the last two acquisitions we made, Kester and HiTech, are really exemplary of the way we think about bolt-on M&A, right? So Kester, it’s just a – it’s a great case study. It’s a business that’s in an existing market. We understand it really well.

It has adjacent technologies that will allow us to grow into some adjacent markets, some very exciting capabilities in things like thermal interface materials.

It’s a business that is better as a part of our company than outside of it, which is a way of saying their synergy content, right? So we have some real synergy opportunity from integrating that business and its brands, though it has a very strong brand, and we’ll retain its brand in certain aspects.

And finally, it was available at an attractive valuation, right? And so we were able to get it at a reasonable value before including the benefit of those synergies and a very compelling value with the benefit of those synergies. HiTech is another good example. That was more of a technology acquisition in Korea. Great technology for Korean customers.

Didn’t take those technologies internationally. And we’ve got 1,000 salespeople calling on customers that look similar to the customers that they have in Korea, all over the world. And so we’ve been able to build a pipeline for that business after owning it for 18 months.

It’s larger than the sales of that business that had been around for over 20 years. So again, that’s an example of the type of M&A. Again, available at attractive values, better inside of our portfolio then outside of it, and we’re not going to stretch our leverage to pursue those acquisitions.

And we’re going to remain opportunistic with regard to other areas to deploy capital, for instance, buybacks, which we did last year..

Our next question comes from Josh Spector with UBS. Please go ahead..

Yes. Hi, guys. So just a question on – in terms of the EBITDA guidance, the 2% to 4% constant currency growth. Curious how much of the cost avoidance you’re planning on coming back into 2020? So that if I think about ex that, the growth, obviously, would have been higher.

So just trying to think about what’s in there or maybe if you’re considering keeping those costs out, given markets remain kind of weak here in the near term?.

Yes. Thanks for that question, Josh. So as you guys would have seen from 2019, the power of our variable cost model, right? We were able to take $50 million of cost out in the year, about half of that was cost avoidance.

And the way we think about cost is that the top line comes back to support the addition of costs, some of that cost will come back, if the top line isn’t there, that cost stays out. Importantly, none of the cost avoidance impacts the long-term growth trajectory of this business. As we noted, R&D dollars spent were roughly flat year-over-year.

It’s really discretionary things like travel and expenses and trade shows and variable compensation. With respect to our guidance, specifically, we’re expecting a roughly flat, modestly-higher top line. And so some of that cost, mid-single digits, would come back in that context.

The top line isn’t there, that cost will stay out, and that allows us to get to our guidance in other way..

Great. Now, that’s helpful context to think about that. And so just in terms of what you’re seeing in China. So I understand your plants in the region are operating still, what are you seeing at the customer level? Are they operating still? Or is there [Audio Gap].

Yes. It’s a good question, Josh, and we’re expecting a comment or a question on coronavirus. So a few additional thoughts to put its impact into context. I think the place to start is that the coronavirus has had a greater impact on our supply chain and our customers than on us directly. And that’s for several reasons.

The first is that our manufacturing processes are less labor-intensive, and one of the biggest disruptions has been availability of workers for our customers, and they have much more people-intensive manufacturing processes.

The other reason for the disruption being less for us than for some of our supply chain partners is because our sites are more located on the coast as opposed to Central China, where the outbreak has been more concentrated. So as we said, all of our facilities are open and we’re supplying to customers. We’re at lower production levels.

We have some customers that never closed, and we have some customers that are still closed. Based on today’s facts, you would have heard us say that we expect the impact to be less in March than it has been in February. And that’s based on the fact that our customers are beginning to reopen, and we are seeing some momentum in China.

And to date, we haven’t seen any impact – direct impact, that’s to say, in South Korea or Italy or anywhere else in the world. All of our factories are open, and we have availability of labor. So that’s a rough way to putting context around the coronavirus impact to date.

Coming back to our goals, what we’d say is that we believe we can outperform our markets – in all markets, like we did in 2019, and through that lens, we believe the coronavirus is going to impact our results less than it will our competitors. And that’s based on the fact that we have a more globally diversified supply chain. We have greater scale.

So we have more flexibility in terms of procurement of raws and in terms of absorbing demand that – and we say anecdotally, has developed in other regions around the world, too, as supply chain seek alternatives to China.

And we have more sophisticated logistics capabilities and competitors to enable – in terms of being able to get our product to customers. We’re in an advantaged position. And so we think that we’ll ride through this better than the market..

Our next question comes from Neel Kumar with Morgan Stanley. Please go ahead..

Hi. Thanks for taking my question.

Can you talk about what kind of contribution you expect from the Kester transaction? And what’s the business been growing at organically? And how do you – how do margins compared to your Electronics business?.

Yes. So the Kester acquisition is going to contribute high single-digit to low double-digit millions of EBITDA this year. Call our acquisition price roughly one time sales ballpark. Again, we’ll have lower margins than the average of our Electronics business because it has a metals component. It fits into our assembly business.

And it has slightly lower margin than our assembly business, but we should be able to bring that up through synergies..

That’s helpful.

And can you just give a sense of what level of share repurchases is embedded in your adjusted EPS guidance of $0.93 to $0.97? And generally, how should we think about the cadence of the remaining $240 million – $243 million left on your authorization?.

Yes. So very good question, Neel, and thanks for raising that. It’s an important point with regard to our guidance, which is that at the midpoint of our EBITDA guidance, we don’t get to the midpoint of our EPS guidance. There is an assumption of a level of capital allocation, right, a few pennies of smart capital allocation.

But we’re going to be opportunistic about that. We don’t know what the market opportunity will reveal for us over the balance of the next 10 months. At these levels, we’re buyers of our own shares, but there’s a lot of days between now and the end of the year, and we’re confident we’ll find a way to deliver that EPS accretion in the coming months.

I don’t know, Martin, if there’s anything you’d add around capital allocation and compounding earnings..

I like buying our own shares, Ben. That’s very simple. And we generate a lot of free cash flow. I think, as it looks today, unless things change for the worse from the current status of this outbreak of coronavirus, our intention will be to take advantage of what is becoming a dislocation again in the market and go back to buying our own shares.

We’ll buy, obviously – we have $240 million or $250 million worth of availability on our current program, and we fully would intend to use it as things stay as they are..

We’ll take our next question from Mike Leithead with Barclays..

Thanks, guys. Good morning. I guess, first question on the Electronics business. I appreciate some of the secular drivers you called out in your 2020 guidance slide.

But when we think about the three businesses you talk about within the segments, so Assembly, Circuitry and Semis, how should we think about each one of those performing in 2020 versus this past year? And we can hopefully set coronavirus aside for a second, I guess..

Yes. So as we talked about, we’re – we came into the year much more optimistic about the electronics space relative to where we were coming from in 2019, albeit the activity levels at the end of 2019 were below the average of 2019, because the activity levels declined through the year.

A lot of that optimism is driven by 5G, where we’re seeing increasing investment in 5G infrastructure markets, and we expect that to continue. And even with coronavirus, we’re seeing stimulus that’s driving even more of that. So our guidance didn’t come into the year assuming exceptional growth from 5G. It assumes a reasonable amount of growth.

And as we made the comment earlier in January, we were ahead of our plan nicely because of 5G investments. That impacts the entire Electronics business from Circuitry, Assembly and Semiconductor in a relatively similar – to a relatively similar extent..

Got it. Okay. And then I think you guys have done a pretty solid job this past year or so driving EBITDA, while maybe sales or end market trends have been weak.

So I guess, just curious how you think about the incremental cost opportunity, if markets do remain weak? Is there any way to quantify or scope that incremental cost opportunity in front of you, if we sit in this end market malaise for a bit longer?.

Yes. So I think the place to start is that if we’re in a flat market, you should expect some additional cost opportunities, just from execution, and we have a program to add efficiency in G&A, which is a multiyear program. We’ve gotten the low-hanging fruit from corporate costs thus far.

And then there’s still more costs that we could take out on a year-over-year basis from SG&A because we weren’t at the same level of cost containment in the beginning of last year that we were at the end of the year. So there’s a modest opportunity around cost that gives us confidence that in a flat market, we can still deliver EBITDA growth..

And we’ll take our next question from Jim Sheehan with SunTrust..

Good morning. Thanks for taking my question. What’s your outlook for working capital in 2020? I think you made some comments there.

Do you see any potential for efficiency gains compared to last year?.

Hi, Jim, this is Carey. Thanks for the question. So as we mentioned in the prepared remarks, we saw a build in working capital in excess of what we would have expected in the first half of 2019. And we worked quite hard around the world to bring that in over the second half and actually landed quite well and ahead of expectations for the full year.

If we look at the working capital percent of sales on 2019 versus 2018, we’re only up very marginally year-over-year. We expect, when our business grows, to invest in working capital.

And so as we talked about, a modest organic growth expectation for 2020, you should expect some working capital investment to fund that, I think, in line with that sales growth, so call it, $10 million plus or minus would be our expectation.

But as a percent of sales, we are – we still see opportunities to improve that and perhaps have it come in inside of that $10 million growth..

Thank you. And given your exposure to automotive, maybe you could comment on the automotive cycle. I think production’s been down about six quarters in a row.

Do you think that this cycle – this down cycle is going to last longer than usual cycles? Or maybe you can give your – some thoughts on that?.

Sure. I’ll have a first swing at that, and then, Scot, if you have anything to add. I think the place to start is, while we were more optimistic about Electronics, we’re more cautious coming into this year about Automotive, particularly in the West. We didn’t expect material growth. We expected flattish auto in our guidance.

And that’s been playing out, although we’re only two months into the year. And so we don’t expect an inflection. Certainly, we’re not counting on one as we think about our financial outlook.

Scot, anything you’d add about auto in the cycle?.

Yes, I would concur, Ben, that we’re fairly cautious on the overall automotive production across the globe. This year, we didn’t come in with a tremendous amount of optimism. Again, thinking flat in terms of number of units.

However, we do see continued growth in the EV space, where we’re very well positioned with some very high-technology products that we’re doing very well in. So growth in some key areas, but overall flat units..

And we’ll take our next question from Jon Tanwanteng with CJS Securities..

Good morning. Really great job closing out the year, and it’s nice to see that kind of confidence in the outlook relative to everything that’s going on.

So I was just wondering how much offset are you actually seeing from regions outside of China at the moment? And additionally, if you have any color on how cash flow might be impacted in Q1 by the effects of the coronavirus? That would be helpful as well..

Good question, Jon. And it’s very hard to disaggregate what we considered anecdotal evidence that demand has increased in other markets. The way we think about that is we had a plan coming in, and we were doing better than planned through January and into February in certain markets in Europe and other parts of Asia.

That was a slight offset, to be clear, a modest offset to the headwind we saw in February from coronavirus. So you can’t say specifically it’s driven by supply chain seeking alternative sources, but that’s our best feel thus far.

And we see that continuing to an extent in March, while we also see our Chinese business recovering from the impact we saw in February. With regard to cash flow impacts, phasing is clearly off relative to our plan for the year.

Carey, you want to add anything?.

Yes. I would just add, obviously, a portion of the cash flow we see in a quarter relate to the business we are doing in the prior quarter. And so the phasing of our cash flow, I think, as we look to the full year, we don’t see it too different as a percentage between the different quarters.

There’s not a ton of CapEx or other working capital investment associated with what’s happening with coronavirus. So it’s really just a question of the earnings phasing. And again, Q1 is going to be impacted by Q4 2019 earnings. So I wouldn’t expect a material change there.

As we go to Q2 and beyond, we’ll see what happens with our top line and our EBITDA..

Okay. Great.

Can you remind us how much more cost savings you’re expecting on the SG&A side, aside from the cost avoidance that you’ve been talking about? How much of that do you expect to see this year incrementally?.

Yes. So Jon, we haven’t quantified the further, let’s call it, G&A opportunity from optimization of corporate costs, right? As we said earlier, we hit the low-hanging fruit over the end of 2018 and into 2019.

There’s a few million dollars of costs that we should be able to get and there’s some investment to get that cost that we should also – we also are expecting. The overall cost opportunity, if the business is flat, as we said, we can continue to drive EBITDA growth, but more modestly..

And there are no further questions at this time. So I’ll turn it back to Benjamin Gliklich for any additional or closing remarks..

Thanks very much, and thanks, everybody, for joining. We look forward to seeing you soon. Have a good day..

This does conclude today’s program. We appreciate your participation, and you may now disconnect..