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    Element Solutions (ESI)

    ESI Q3 2024: $310M Graphics Sale Fuels Buybacks and M&A

    Reported on Oct 29, 2024 (After Market Close)
    Pre-Earnings Price$27.69Last close (Oct 29, 2024)
    Post-Earnings Price$27.96Open (Oct 30, 2024)
    Price Change
    $0.27(+0.98%)

    What went well

    • Advanced Packaging Growth: ESI is capturing robust demand in its advanced packaging segment—estimated to be around $200 million in revenue—which is driving share gains across multiple electronics sub-segments as customers increasingly pursue nonstandard, innovative designs.
    • Accelerating Electronics Segment: The company is shifting focus from legacy drivers to emerging growth areas, setting expectations for mid- to high-single digit growth in 2025. This acceleration is supported by strong traction in high-performance computing, data centers, and diversified electronics applications.
    • Outperforming Power Electronics: ESI’s power electronics business is poised for significant expansion, with a current run rate of approximately $75–$100 million. Its strong pipeline and market share gains, coupled with applications extending beyond EVs, position this segment to significantly outstrip overall EV market growth.

    What went wrong

    • Reliance on emerging technologies carries risk: The executives highlighted a shift toward advanced packaging and new product lines (e.g., Kuprion) to drive growth, but these trends remain in early stages with uncertain scale and timing, which could undermine revenue expectations if customer adoption falters.
    • Weakness in industrial end markets: Several Q&A responses indicate softness in traditional industrial and automotive segments—including challenges from fluctuating metal prices and cyclical demand—that may continue to pressure margins and overall performance.
    • Uncertainty in new product commercialization: While promising initiatives such as Kuprion are underway, management’s cautious remarks and lack of definitive revenue targets suggest that delays or execution issues in commercializing these innovations could pose downside risks.

    Q&A Summary

    1. Margin Outlook
      Q: Margin prospects versus prior peak?
      A: Management noted margins ex–metal were at 27% versus a prior peak of 29% and they expect a pathway into the 30s over the next couple of years.

    2. Electronics Growth
      Q: Is electronics accelerating into 2025?
      A: Leadership sees emerging technology trends offset a weak base with forecasts of high single‐digit to double‐digit growth in 2025.

    3. Capital Redeployment
      Q: Plans after graphics sale proceeds?
      A: They intend to use the $310M+ in proceeds opportunistically for buybacks and M&A, leveraging an exceptionally strong balance sheet.

    4. Power Electronics Outpacing EV
      Q: Will power electronics outgrow EV market?
      A: Management expects the power electronics segment to significantly outstrip EV unit growth, with current run rates between $75M and $100M and broad future applications.

    5. Power Electronics Evolution
      Q: How will power electronics evolve?
      A: The team reported a rebound from a soft Q2 with new wins, yielding a robust pipeline to drive growth despite a weak EV market environment.

    6. Electronics Guidance
      Q: Is next year’s electronics growth similar?
      A: They are cautiously optimistic, aiming for mid-to-high single-digit growth as emerging trends lift the segment and offer durable earnings improvement.

    7. ViaForm & Kuprion Progress
      Q: How are ViaForm, Kuprion progressing?
      A: ViaForm is delivering double-digit EBITDA growth with a pipeline tripled year-over-year, and Kuprion is nearing product qualification, with commercialization expected later this year.

    8. Resource Allocation
      Q: Where will growth resources focus?
      A: Key investments are targeted in applications labs and local talent, notably in Vietnam, Thailand, and India, to support long-term earnings growth.

    9. Advanced Packaging Capacity
      Q: Need additional capacity for advanced packaging?
      A: Management clarified that existing capacity is sufficient, with scaling efforts like enhancing Kuprion manufacturing underway, and pricing remains healthy.

    10. Advanced Packaging Momentum
      Q: Is advanced packaging customer base growing?
      A: They observe strong momentum with both existing and new customers amid heterogeneous design trends, enhancing their mind share in the market.

    11. Electronics Returns Evolution
      Q: How are electronics returns evolving?
      A: The shift to higher-margin emerging technologies is expected to gradually improve overall business returns despite cyclicals in legacy segments.

    12. Circuitry Performance
      Q: How will circuitry impact Q4?
      A: Circuitry solutions outperformed, notably in China EVs and high-performance compute, setting a promising tone despite seasonal deceleration.

    13. ICE Auto Business
      Q: How is the ICE auto segment performing?
      A: The ICE auto business isn’t directly unit-driven; rather, it’s achieving share gains in niche areas, though subject to trends like replacement of chrome with paint.

    14. COGS Inflation
      Q: What drove the COGS increase?
      A: The primary driver was metal price inflation, partly mitigated by improved procurement and facility rationalization initiatives.

    15. Portfolio Adequacy
      Q: Is the current portfolio sufficient?
      A: Management feels the portfolio is well positioned with key core assets and sees no immediate need for additions, although they remain open to strategic opportunities.

    16. Advanced Packaging Scale
      Q: How large is advanced packaging revenue?
      A: It currently accounts for roughly $200 million in revenue and is growing rapidly as part of the broader electronics strategy.

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