Element Solutions Inc (ESI) Earnings Call Transcript & Summary

Hi, everyone. Thanks for tuning in. My name is Matthew DeYoe. I'm joined here this morning with Element Solutions company's CEO, Ben Gliklich. Ben has been CEO for -- it seems like the last 2 years, before which he was ESI's EVP of Operations and Strategy and company CEO -- COO. Ben is going to open up today's chat with a few slides, and then we'll jump into Q&A. So with that, Ben, I'll kick it over to you.

Thanks very much. Thank you, Matt. Thank you to the team at Bank of America for hosting the conference. We're really happy to be here. I spent some time with you guys on the back of reporting what were record results for the fourth quarter and for the full year last week. And I'm really looking forward to a good discussion in our fireside chat. But before that, as Matt mentioned, I'd like to spend a few minutes taking the group through a few slides on our business that should lay a good framework for the discussion. So I'll start on Slide 3 here with the basics, which is a simple company overview for those of you who are new to us and our story. So Element Solutions is a global, diversified chemical technology company that provides solutions that enable performance. Sales approaching $2 billion are split 30% in each of the Americas and Europe and about 40% in Asia. And we have about 4,500 people who are spread similarly around the world. The team is heavily weighted towards sales and innovation. The business relies very heavily on on-premise solution selling and technical service. And so we're close to our customers, both from a manufacturing and a service perspective. And like our customers, we're located all over the world. We're pretty specific in saying that we provide chemical technology-enabling performance. And so while we've been with our customers for chemicals, we're really not a materials company or a solutions company. And we provide innovation and technical application expertise that our customers rely on. Our solutions enable breakthrough technologies in electronics and automotive and other end markets. And this is our source of competitive advantage, which explains why our gross profits are as high and as stable as they are with such a modest capital requirement. The chemicals we provide are made in relatively simple manufacturing processes, so our business has light capital requirements. If you went to one of our facilities, they look more like warehouses than actual manufacturing sites. So when you combine innovation with technical service that is integrated into our customers' operations and this simple manufacturing process, what you get is sticky, high-margin sales and stable, very strong cash flow conversion. The business has solid market position in attractive niche markets. Markets are attractive because the profit pools are attractive, and the barriers to entry are very high and also because these are growth markets. We have 2 segments: Electronics, which represents about 60% of sales; and Industrial & Specialty, which represents 40%. And each of those segments has 3 different verticals, which are defined by the types of products that we make. But all of these businesses, all of these verticals share the similar high-quality attributes [indiscernible] like manufacturing, highly technical selling and support and leadership positions in their markets. So if you flip to the next slide, we summarize our 2020 results. We put them in the context of this framework that we outlined when we launched Element Solutions in early 2019. It's a balance of operational excellence and prudent capital allocation. So by all accounts, 2020 was a difficult year, not just for the globe but for participants in the industrial economy with significant economic dislocation. And Element Solutions wasn't immune from the impact of COVID-related manufacturing shutdowns. But nonetheless, the business weathered it quite well. We grew sales last year, adjusted EBITDA, adjusted EPS and free cash flow, and this despite a second quarter where our top line declined by 15%. The source of this financial resilience is really twofold: first, we have a variable operating cost model, so we can quickly trim cost to preserve margin; and second, because of the very strong secular growth trends that really took root and propelled the business forward. So our recovery in the back half was very strong, and there was underlying strength in certain of our key markets throughout 2020. Our capital allocation was certainly prudent and also high returning. We made a small acquisition that we believe could be a really large growth contributor at an attractive entry multiple. We repurchased nearly 6 million shares at an average price below $10 per share. And we executed a very attractive bond refinancing, which is going to save about $16 million a year going forward. We initiated a dividend in the midst of all of this in the fourth quarter. And despite these capital outlays, our leverage ratio declined from 3.3x adjusted EBITDA to 2.9. If you flip to the next slide. Looking forward to 2021 and beyond, it's a really exciting time for our company having navigated what were challenging markets not just in 2020 from an end market perspective, also in 2019, really well in the first 2 years. We feel that we're poised for really strong growth in the medium term here. Element Solutions is a business that is old economy, for lack of a better term, in a good way, right, in that it has a very strong brand in its markets, strong market position that is well supported with customers. And it has a history of strong, stable cash flows in many different market environments and strong stable margins going back many, many, many years. But it's an old economy business that is being propelled driven by new economy drivers, like 5G and vehicle electrification and sustainability. So we're going to benefit from these trends. We're going to benefit from the penetration of electric vehicles. But unlike some of the newer new economy businesses in the space, we're going to generate cash flow to deploy in interesting ways along the way. We've demonstrated in the first 25 months of this company the quality of our team in the field, the resilience of our business model, preserving margins, generating cash flow. And we're really just beginning to see these really powerful secular trends that will drive our growth taking hold. And in 2020, these growth drivers really accelerated. And so our outlook for 2021 reflects this inflection point, and the future is bright. If we go to the next slide, I'll double-click on a few of these trends that we just called out. First, on this Slide 6 is 5G adoption, right. And so the introduction of 5G technology, which has really been expected for many years prior to 2020 began in earnest last year. New mobile phone models began to include 5G capability. Infrastructure to support 5G applications ramped significantly, and we see a multiyear runway here with both increasing mobile units being sold and increasing content for us as more of those mobile units have 5G capability. So we have unit growth as a tailwind and about a 15% content premium as -- on a 5G phone relative to a legacy technology phone. And those 2 things together will compound to support the top line in our Electronics business. 5G infrastructure investment will only be additive to the growth from 5G adoption. The other area in Electronics and related to this, where we see a surge and industry participants clearly are seeing a surge is the semiconductor market, which represents about $200 million of sales for us, but it's growing at a very fast rate. You can see that on the chart in the bottom right. We've made investments in the past several years in this business, and they're really paying off. On the next slide, Slide 7, we touch on the opportunity in the automotive industry. And this is similar to what we just covered in mobile. We expect increased penetration of electric vehicles, just like increased penetration of 5G phones for many years, which translates to increased value per unit. So you've all seen the headlines. Most major automotive OEMs are committing to significantly grow their electric vehicle offerings in the coming decade. And really, all across our portfolio at Element Solutions, we're an integral enabler of electric vehicles. So despite the fact that we sell into the tier structure at OEMs, we've become truly a partner to major OEMs through this evolution, solving critical problems as they transition from combustion engines to electric vehicles. And we have an important seat at the table that's going to translate to share and opportunity for us. If you look at the power electronics market, where we have really a market-leading, best-performing and, in fact, product-enabling assembly solution technology to what we do in the circuit board market and our technologies there that are supporting high reliability, advanced driver assist systems, to our surface treatment capability, which improves weight and the aesthetics of vehicles, we're truly a differentiated supplier in the market. And that translates -- or the transition from ICE to EV translates to 1.5, 2x the content. And so as EV penetration inevitably ramps, we're going to be the beneficiaries. The last of these trends worth touching on is a powerful one, and that's on the next slide, which is the growing focus on sustainability in many pockets of the economy from investors to regulators, to OEMs. One could have imagined a world where in the midst of COVID, long-term important topics like sustainability were dismissed while handling, while attacking the more urgent issue of the pandemic, but this was clearly not the case. Engagement with stakeholders of all varieties around sustainability really ramped up in 2020, which is a great thing. It's a great thing for the planet, and it's a great thing for our company. The more counterparties focus on sustainability, the more that they're going to choose to work with us because we're leading the chart in our industries to provide sustainable solutions for our customers. We have products and even full businesses that help improve our customers' environmental footprints in terms of recycled inputs, cleaner outputs and less energy and water-intensive manufacturing processes. So our business benchmarks from an internal perspective, also our metrics compare favorably against our industry peers in terms of emissions, water usage and energy use. And you'll see, if you've had a chance to look at our ESG report, our inaugural ESG report which we published last week, something we're really proud of, more than 20% of our sales are tied to sustainable products. So a stronger push for sustainability should drive organic growth for our company. If you go to the next slide. Element Solutions has a portfolio of great businesses that we are making better. As I said in the introductory remarks, and some of the statistics here support that, these are great businesses because niche market leadership; strong and stable EBITDA and cash flow margins, which are supported by excellent gross margins; the highly variable operating cost structure and a really low level of CapEx, less than 2% of sales. So free cash flow conversion from our businesses are truly best-in-class. And we've improved margins by making the businesses more efficient from a supply chain perspective, with regard to G&A and by driving outsized growth in our higher-margin segments. So our margins have been trending positively since we founded the company. And even with the volume pressure we saw from COVID last year, EBITDA margins in 2020 improved year-over-year, and cash flow grew as well. And the chart on the bottom of this slide is the one that I may be most proud of in this deck, and the takeaway is pretty simple. We've talked at length about outperforming our markets, about generating sales in excess of our market growth. And here, we quantify it. We look at unit growth in automotive and smartphone shipments, which are 2 of the biggest drivers of our business, together accounting for nearly 70% of sales. And you can see in difficult markets and in the recent recovery, we've outperformed. And that's something we're very proud of and believe we can continue. On the next slide, just a bit of benchmarking. You can see how this asset-light manufacturing and strong and stable earnings and cash flow profile translate to leading cash flow and returns metrics in the specialty chemical space. What you see here is our benchmarking against U.S. specialty chemicals companies. And you can see EBITDA less CapEx margins is third in our cohort. And I'd note that this is a stable metric for us. CapEx is not lumpy. It's steady at less than 2% of sales. And EBITDA margins, similarly, are stable and improving. So we've got room to improve this -- to improve our standing here, but we're already top quartile. And then the returns metric that we look at, at Element is EBIT over tangible assets because we've got quite a bit of goodwill and intangibles on the balance sheet associated with the recent acquisitions of these businesses. And unsurprisingly, our model translates to leading returns metrics. And again, these are metrics that should improve over time as growth in our business really doesn't require -- growth and sustaining margins don't require significant capital investment. Wrapping up here on the topic of capital on the next slide on capital allocation, the framework you see here is a framework that we've shared previously. We're opportunistic about capital deployment when our shares trade at a discount. To our view of intrinsic value, we're more likely to repurchase shares and that makes our hurdle for M&A higher. As our valuation improves, the shares become less attractive, and the hurdle for M&A is a bit lower, but it never really drops below an absolute threshold. And in ESI to date, capital allocation has reflected that approach. We leaned into share repurchases. We repurchased 17% of shares outstanding over the past 2 years at very attractive levels. We bought -- we deployed about $75 million in tuck-in acquisitions. All that really fit our criteria, businesses that fit well within our existing businesses, synergy content, available at highly attractive multiples. I talked about the bond refinancing as well, which was another area where we deployed some capital last year, significantly reducing our interest expense, about a 2-year payback associated with that, so again, a very high-return on that capital that we deployed. And we instituted a dividend in Q4 of last year. Leverage, despite the significant capital deployment, were at 2.9x at the end of last year. We started at the end of 2018 at 3.5x. So in choppy markets, with capital allocation, we've delevered by more than half of a turn. Finally, I'll conclude on the last slide with what you should expect from Element Solutions. And importantly, this is also a slide that hasn't changed, and so you've likely seen it before. Our goal is to drive intrinsic value per share, running these high-quality businesses better every year through strong execution, operational excellence and continued prudent capital allocation. These are things that we've done, and we're happy but not satisfied with our progress in our first year as Element Solutions. We should have and have outperformed our end markets, continue to drive strong margin and cash flow performance, invested the cash that we generate behind our businesses in prudent and accretive ways, keep leverage conservative below 3.5x and deploying capital to return to shareholders but also -- which we've done in the form of buybacks and dividend, but also a proven way to drive EPS. What it translates to is doubling EPS from the $0.68 we started with at the end of 2018 to $1.36 by 2023. And as I mentioned, the macro conditions in the first 2 years for this company were difficult, but we're tracking ahead of the implied 15% CAGR that accomplishing this objective requires. And so the macro has become more benign and supportive, and we are well on track to delivering on this objective and, in fact, exceeding it. So with that, that's -- thank you for your time and attention. I'm really looking forward to the discussion and answering any questions from you guys. Matt, let's...

Yes. Thanks for that, Ben. Thank you again for joining us. So we're happy to have you fresh off of what would have been a very strong fourth quarter result even in a more normal backdrop; with COVID, obviously, even more impressive. But so the industrial business seems to have recovered off the lows, but what really struck us was the momentum in Electronics. And one of the topics, which has been kind of a constant point of discussion is the 5G rollout. We've had a hard time quantifying it, timing the impact, but it seems like maybe 3Q, 4Q this year, we're starting to see that come through your numbers. So it's a big boost. Things did really well. I don't want to carry that into the future per se at these rates. But what inning are we in, in the 5G rollout comms, infrastructure and associated smartphone refresh? And should this be a consistent driver over the next few years? Or is this kind of like a refresh done, new glide path is a little bit higher? How do you think about the trajectory there?

Yes, it's great. So for starters, the benefit of -- from 5G was a recurring theme in 2020, but it absolutely gained momentum in the back half. Over the course of 2020, we were wondering when there would be a convergence between the strength in our Electronics business and what we were seeing across the rest of the economy. When would the Electronics business sort of revert or feel the impact from the devastating effect of COVID? And it never happened because there was such a strong demand, not just from 5G applications, also from peripherals and tablets and computers and data center and network storage associated with work from home. But we are in the early innings with regard to 5G investment. The infrastructure required to support global 5G capability is going to take billions and billions and billions of dollars from carriers, and they are in the early innings with regard to that investment. And 5G phones are only about 10% of smartphone [ units ], maybe less, and smartphone units declined year-over-year in 2020. So the number of units sold were down. So [indiscernible] that in 2021, the forecast is for smartphone units to increase, or penetration to increase of 5G capability, but not close to the majority. [indiscernible] of 5G smartphone units will be 5G in 2021. So there's a multiyear-long runway here associated with 5G. And once we crest that, once the replacement cycle has come through and everyone who wants a 5G phone has one and the infrastructure is in place, we're talking many years from now, that's not the end of what 5G connectivity will enable. That level of bandwidth and connectivity will accelerate what we've seen, which is the proliferation of computing power and electronics across the industrial economy. And so there will be new applications for high-performance printed circuit boards and chips in areas that we haven't seen before. And so we could say that we're in early innings of 5G, but we're -- the game hasn't even started with what 5G will enable, which gives us a lot of confidence, not just in the medium-term runway but in the fact that our business enabling high-performance computing applications, we've got many, many years of runway in front of it.

That's helpful to put that into context. To, I guess, take things back a little bit to the near term, I mean we had been a bit nervous about the implications to ESI of the semiconductor chip shortage that we're currently seeing is driving down the auto market a bit or at least slowing build rates. But you had an interesting kind of comment or approach to the problem. You put it in context in an interesting way, which is -- I'll let you expand upon it a little bit. You talked a little bit about it on the call, but I think it's helpful for investors who were a little apprehensive about chip shortfalls, it's stunting organic growth.

Yes. Yes. So chip shortages are impacting our business, right? And this is -- as cars have more computing power, they require more chips, and chips are in really high demand. And in fact, the shortage of chips is slowing down and stopping production of some -- from some automotive OEMs. And we're seeing that. And we sell a lot into the automotive supply chain. And so when production rates slow down, which they are in sort of a spotty fashion, it's not a huge impact to date, that does impact sales for us. What we've seen -- this has primarily been in Europe, and we've seen that our customers and the tiers are not really slowing down commensurately because they've had such stop-and-go manufacturing. Given COVID, they want to keep folks in the facilities where they can. But it is driving volume to some extent and a bit of a headwind. But there are really -- there's 2 silver linings: The first is the economies in the West and around the world are generally pretty healthy, and so these are units that we have full confidence these cars will be sold. And so in the focus of time, we'll realize the value associated with demand for automotive. So it might have a phasing impact but not an absolute dollar sales impact. But more importantly, the bigger silver lining is what's driving these chip shortages, and you can draw a straight line from the strength of our Q4 performance in Electronics to this chip shortage. And so the electronics market, a higher-margin, higher-value market for us, is really at full gear right now. And so what we're sort of sacrificing in the short term from an automotive perspective, we're recouping in the near term from the strength of the electronics market, and that's a fine trade for us. So we see this generally as a positive for us and for our business.

To, I guess, jump back a little bit towards kind of mid-cycle, or even more normal 2022-plus growth as things kind of settle out following what's expected to be a pretty strong growth this year. So I want to attack both the top line and the margin commentary. Maybe first on the top line, so our smartphone handset team and autos team are expecting strong rebounds in 2021, but volumes to moderate, in some cases, fairly significantly in 2022. So you talked a little bit about penetration rates and things like that as far as 1.5 to 2x content EVs. But can you elaborate a little bit more on organic growth opportunities at ESI? And can you keep things moving in this mid-single-digit range if the underlying slows to a low single-digit-type environment? What your organic growth should look like?

Yes, I appreciate that question. So we rolled out our 2021 guidance on our earnings call last week, and it's for 7% EBITDA growth. And what we said is that there are multiple ways for us to get there. But our base case is that it's a 7% top line. How do we get comfortable with that? Our first quarter guide is for 8% to 10% EBITDA growth. There's continuing momentum. So the market conditions we saw in Q4, that drove such a strong result, are persisting today. The year is off to a really good start. And that 8% to 10% growth is off of what was a somewhat inflated Q1 of 2020 because there was a lot of prebuying in the supply chain associated with COVID shutdown preparation. So 8% to 10% is quite strong, reflecting what I think is greater market growth on a like-for-like basis if you didn't have that pre-buying. And then, of course, in the second quarter, we'll be lapping the most severe COVID impact in 2020, so we'll have really strong growth there. And so the growth in our base case is front-half loaded. That's not to say that these market conditions couldn't continue through the second half, and a lot of forecasters suggest that, in fact, the recovery will be even stronger in the second half, and that would be upside to our plan. We are a company that's very focused on delivering its commitments, and we can't touch and feel that market health in 2H. And so we're not really giving ourselves the full credit or taking the full credit for that in our guide. Getting to your comment about margins. 7% top line, 7% EBITDA would suggest flat margins. And the reason for that is we call it a normalizing year. Last year, the businesses that were most impacted by COVID were our lower-margin businesses. So a disproportionate amount of the growth this year is from those businesses as they recover, and so there's a bit of negative margin mix. And also, we pulled a lot of leverage around costs. And so we should expect some OpEx to creep back in, all of that being offset by greater volumes and operating leverage associated with that, which is how we get to a roughly flat margin profile. But in the future, our growth algorithm converting sales growth at 1.5 to 2x on the EBITDA line, that [indiscernible] and at the end of this year, we should be -- we should have a more normal year with that operating leverage really to take hold in 2022, supported by growth in our higher-margin businesses, which have the stronger secular trends and a more fully invested OpEx environment in 2021 after the belt tightening we did in 2020. Going to your question about the top line into 2022, we have greater conviction than ever in the secular growth trends that are driving and propelling our businesses forward. Secular growth isn't always linear. There can be some lumps. So we're not quite ready to give 2022 guidance here in early March of 2021. But we're very enthusiastic about units as, we talked about, the content and opportunity as penetration of next-generation technology accelerates. And so there's real runway, as I was saying earlier, for these businesses to continue to grow at above-average rates. Our -- we talk about our growth algorithm being 4-ish percent top line, 1.5 to 2.0x that on EBITDA. I would expect this business to continue to be outperforming those growth rates certainly this year, as our guidance implied, and into next year.

That's helpful. And that kind of checked off an inbound investor question that we have as well on incremental margins, so I appreciate it. Turning to the operating environment that we're currently moving through. So the consistent theme we've heard from companies throughout this earnings season was just logistical constraints, shipping cost inflation. How are you navigating these issues? And do you expect trends to normalize? Are you planning on it? Is that kind of within your guidance? And is it creating a lead time issue with customers? How are you navigating all of this?

Yes. The ramifications of COVID are far reaching, and we have seen a lot of idiosyncrasies from a logistics perspective. Rates are higher. Container availability is challenged. Brexit threw this for a loop in the customs clearance associated with getting product. We manufacture quite a bit in the U.K. and so out of the U.K. We've navigated it all relatively well, albeit at some cost. So there are some products that we've had to air freight. There are some logistic lanes that have gotten more expensive. That's all included in our guidance and also accrues to the notion that margins in our base case are relatively flat. We have got an advantage relative to our competitors in these markets in a global supply chain, the ability to manufacture products in multiple sources, in multiple places with multiple sources of raw materials. And in general, what we've been able to do is pass through inflation in our costs to our customers. And we've got a long history of that, which is maybe manifested in our gross margin. If you look back decades, they've been north of 40%. And raw material prices have certainly fluctuated and trended positive, trended up in that period of time. So where there's a case to take price to reflect increases in our costs, we've done that effectively. And I would expect we'll have to this year. In some cases, it's contractual. In other cases, it's negotiated. But we're prepared to do so in 2021.

And I was -- I guess you tipped on it a little bit, but so -- if I think about the business in general, volumes are robust, metal prices are increasing, logistics costs are up. And if we think about the specialty nature of your product and your cost, cost of your product to a customer represents a pretty small portion of an overall PCB deliverable. And so -- but at the same time, drives a significant portion of functionality. One of my favorite quotes from a CEO was my customers love my product. They just hate paying for it. And so the comment was we can twist levers on price. You have a fairly oligopolistic structure to your business. Why shouldn't prices increase just as we think about ratably or not -- yes, I'll leave it there and happy to kind of engage if the discussion goes that way.

Sure. So we've talked about greater growth coming in our higher-end Electronics businesses than in other parts of the business. And margins are higher there than in other parts of the business because where we're introducing new technology that is enabling next-generation applications, there are fewer folks who can do it, and our pricing is better. And so we improve our margins by innovating and enabling our customers' innovation. Our markets are generally rational from a pricing perspective. We don't have price pressure every year. The business is sticky. And -- but it's not a business where you want to give our customers a reason to look for an alternative. And so we are able to pass through price when our price goes up. We're able to take price when we innovate and provide solutions to new problems. And in some of our businesses, we're able to take price on an annual basis, but not in all of them. And we're cautious about that. And I think, as you rightly pointed out, we are integral to our customers' manufacturing processes, but this isn't an industry where there are no competitors. We've got strong competitors.

Okay. This is kind of an inbound question, and it's one we've been having with a lot of investors and internally. BofA people are looking for ways to kind of play the theme of reshoring, right? The Biden administration even came out the other day with some directives and some executive actions on trying to address this chip shortage domestically. We've seen other companies in the semi fab space talk about moving production onshore. Do you expect this to translate to PCBs as well? Would this be additive to your growth? Or do you still think that you're primarily going to be Asia? What are your thoughts on this trend or hot-button topic, I should call?

Yes. So we've got a great business in the circuitry space in North America. And circuit boards that go into certain aerospace and defense applications in particular are generally still made in North America. And so we have the capability from a supply chain perspective, from a technical perspective to meet the need for chemistry in this market for this market to continue to grow. And so that's a positive for us. But at the same time, the business is, particularly in the high-end Electronics business, is primarily an Asia-focused business with a great deal of the supply chain in China, but also in Korea and Taiwan, especially for higher-end applications, and moving into Southeast Asia, Vietnam and Thailand. And those are great opportunities for us. And the more that the supply chain moves out of China, where there is more local competition, the better the margin opportunity for us is and the market share opportunities for us. So -- and we're seeing that already. We're seeing assemblers and circuit board shops opening in India at an accelerated rate. We've got a great presence there. So in general, as things move out of China, which I think they inevitably will at a reasonable pace -- it's not to say that the Chinese market won't remain a dominant one and still an attractive one for us, which it is, the better off we will be.

Okay. Appreciate that. We've spoken a lot about the electronics and tech side of the business and maybe rightfully so because it's been growing quite well. But industrial demand has started to accelerate. We're now returning to growth -- or you returned to growth in 4Q. What is the growth outlook for that business in 2021? And what do you expect kind of mid-cycle growth to be proxy-wise? Is it industrial production? Is it GDP globally? What do you look to when you think about forecasting the industrial business?

So in 2021, the industrial business, this is the industrial surface treatment business. Within our Industrial & Specialty segment, we've got 2 other smaller businesses, one in graphics and one in offshore energy. But the industrial surface treatment business, which is about at 70% of our I&S business, should have a strong growth year in 2021 as we recover from the impact of COVID, and it's off to a great start. Beyond 2021, as we roll into 2022, the market growth there is automotive units, so low single digits. But there's a lot of opportunity in what we do today to grow our share through execution and in some interesting adjacencies. And so our goal and commitment is to outperform our markets. And we believe we've got the opportunity to do so in that space.

And don't want to ignore the energy and graphics components. They are smaller to what you mentioned. And I know the discussion was energy is coming back a bit. Oil prices are up. But it seems like, correct me if I'm wrong, maybe a rebound in the energy-specific offshore component of your businesses may be more of a 2022 story. Maybe we can start there. And then on the graphics side of the equation, what does it take there to get a business kind of growing again more consistently?

Yes. So these are 2 businesses that altogether are about [ $100 million ] of sales, so about 10% of sales across the company. The offshore business provides really essential production and drilling fluids to that industry. And there's a lag in sales in that business relative to the energy price. When the energy price goes down, it takes a while for us to feel that. It takes a few quarters because in general, the exploration and production companies will finish projects that they're working on that are close to completion. And so -- and there's a recurring revenue piece on producing wells as well. So last year, we didn't really start to feel the impact of the lower oil price until the third quarter, but it had a negative trend from Q3 and Q4. And similarly, now that the energy price is a bit higher and the breakevens are north of certain breakevens in the offshore space, we do expect some recovery there but to lag. Our expectation of that business is that it's roughly flat, high-margin, high-cash flowing business, relatively flat in 2021 with growth coming in 2022, assuming stability in the energy prices. The graphics business is actually 3 small businesses, one is -- the core of which is being -- it's flexible printing plates for the packaging market. And then we've got 2 smaller businesses, quite small one, one which is using screen printing applications and one which is using newspaper printing applications, 2 markets that suffered pretty significantly last year. The core packaging business actually grew last year. And that's the core of the business, and that's where the growth will come. And we've had great sales execution in that business. There's a secular tailwind driving that business as the wealth effect translates to folks wanting more packaged food in emerging markets. We feel great about that business and it will overwhelm the impact of those 2 smaller businesses, which are in a bit of decline. So we should grow our graphics business in 2021, and we should see that growth accelerating into 2022 and beyond, driven by some new wins, by the market tailwind we talked about.

Okay. I do want to switch to free cash flow because free cash flow generation is a hallmark for the company. And as we look at the deployment options over the next 12 months, I mean, you highlighted rightfully so at the beginning of the deck, dividend initiation, acquisition, buyback, probably one of the debt -- and you still were able to pay down debt. And so you have a lot of guns at your disposal. Are there any assets you covet? You seem maybe open to further buybacks. Is that right? How do we think about the inorganic overlay?

Yes. So you borrowed a word there or you used a word I like to use, which is cash flow is the hallmark of this business, right? This has absolutely outstanding cash flow characteristics, as has been demonstrated in our first 2 years, where we grew cash flow despite a somewhat challenging macro backdrop. And we're going to grow cash flow again this year as our guidance implies as we ramp back up into growth mode. And we've got quite a bit of capacity to deploy capital given those cash flow characteristics. Leverage is under 3 relative to our ceiling of 3.5x. It doesn't mean we're going to run the business at 3.5x, as we've demonstrated for the past 2 years. That gives us some balance sheet capacity, compounded by $275 million of cash, which we guided to in the year. So we've got an opportunity here to deploy capital to compound long-term intrinsic value per share. We intend to do so in a prudent, measured way, as we have in our first 2 years, to go through options that you talk through, Matt. We still believe our shares are reasonable relative value. We're trading at a north of 6% free cash flow yield relative to the market, which is a 4% to 5% range. And so you should expect us to buy back some shares opportunistically using some of our capacity for that. You should also expect us to look for bolt-on acquisitions that fit our criteria. And our criteria are very clear. These are businesses that fit well within our existing portfolio, so we really understand the business as well. They make our business better, and we [ think these ] businesses are better as a part of our portfolio than outside of them, meaning there's synergy. They are available at reasonable valuations, and we've got a returns criteria that we stick to. And we've demonstrated an ability to find these assets at attractive valuations and deliver on the synergies that make them better inside of our company and subject to our leverage threshold as well. We, to date, have worked on smaller type bolt-ons that bring interesting capabilities. We acquired Kester from ITW. We acquired DMP last year, which formed MacDermid and BioSolutions. The type of things that we're looking for, that make our business better, are either overlapping or adjacent to what we do today. They bring capabilities that our customers are interested in, that we can bring more broadly if they're regionally focused or bring our products into a region where they have strong -- or these targets have a strong presence. They tend to be smaller. There's almost an indefinite list of these small tuck-ins, sub-$100 million. And there is a much, much smaller list of larger acquisitions, and nothing larger is imminent or likely as we look out at the horizon right now. But of course, that's subject to change. The other 2 options are increasing the dividend. And based on our capital allocation history to date, we should have capacity to do so as we look out over the next several quarters. And building cash on the [ balance ] is something we haven't been reluctant to do to further delever. And so we're going to be opportunistic in that regard. And I think that we've got plenty of alternatives and an ability to do all 4 of those things that I just went through.

Yes. So maybe not on the -- well, I'd like to address, if we have some time, the acquisition of DMP and maybe the switch into the wastewater. But before that, on the topic of spending and capital deployment a little bit different at least on the R&D side. And so one of your peers or 2 of your peers kind of in the electronic chemical space seem to spend about 4% of sales on R&D. You're a little lower, closer to 2.5%. Are you comfortable with your R&D spend? Is this something that we should think moves up over time? Yes, maybe you can expand around innovation as it relates to what you bring to your customers.

Yes. So innovation in our business is incremental in nature. We are not going to a blank sheet of paper or a blank whiteboard coming for the next big thing. We're working with our customers to understand where they're going and what they need and making modest incremental improvements on existing products. And our R&D has met that need, and our products have met that need going back decades, and they continue to. So we certainly are spending adequately, and we've spent consistently. In years like 2020 when we tightened our belt, we spent the same amount of R&D as we did the year before. R&D on the P&L is not a full reflection of our develop -- product development and -- of our product development spend. Our technical service teams that are working on tweaking applications for in-facility, local use are also working on product development. That's captured under the selling and technical line. So if you add those 2 things up, our R&D spend as a percentage of sales increases more towards that 4% level, which we think is more than adequate. The other thing I'd note is that not all of our businesses have the same level of R&D intensity. And so if you looked at our circuitry business, our semiconductor business, for example, the R&D spend as a percentage of their sale is greater than in some of our other businesses that have less innovation requirements. So the comparison isn't quite like [indiscernible], and our spend is more than adequate.

Fair enough. Circle then around on the DMP side. Caught us a little bit off guard, but you seem very encouraged as it relates to the growth that you've already seen and the interest you've seen from the customers. So why are you the best owner of this business? It's probably where we start. And then how do you get to that first $100 million of sales? Then where do you go from there?

Yes. So this is a really exciting opportunity for us. It may be a step away from the core in that it's an equipment business in the first instance, and 99% of our sales are consumables. And we like being in the consumable business. Where we want to be in the equipment business, where it can give us an edge and drive market share and mind share towards Element Solutions and its businesses. We're not getting into the water treatment -- wastewater treatment business broadly defined. Our focus is on solving problems, providing solutions to existing customers. So you're not going to see us in municipal water or power plant water. You're going to see us in water treatment primarily for plating industries, whether that's industrial plating or circuit board plating. And there is a screaming need from our customers to improve their environmental footprints, to reduce wastewater discharge and to improve what's in that wastewater that they are discharging. That is in places like China. Water usage and discharge limitations are the governing factor on production volumes. So if we can go into our customers and reduce their water usage and improve their discharge streams, we're actually creating value for them because they can produce more volume. And so this is -- DMP was a relatively small business in North America specifically, great technology but subscale in an industry that has some very big players in it. The first thing we did is we introduced the technology to our sales force in North America in the industrial side, and we started getting rapidly inbound from our customer [indiscernible] this was a burning problem for them. We have scaled such that we can manufacture this equipment locally in Europe and in Asia right now. And we have sales teams and product teams that are educating those sales forces to drive inbounds in those regions. So if we're doing $25 million of sales in North America historically, primarily from DMP's legacy customer base of which there is some overlap with our customer base but not a tremendous amount, it's just simply by recreating that model in Europe and in Asia, where the market is even bigger, you see a line of sight to this being a $75 million business. And then by gaining penetration within our existing customer, you make that jump to $100 million. And I think we can do that 2024 time frame. The sort of great opportunity associated with this is that if we can solve customers' burning issues with regard to wastewater treatment, we're solving a problem that the owner of the facility deeply cares about because of the risk associated with this, we can get more market share of the chemistry business. And so for sure, when we sell a piece of equipment, we're going to be locking up chemistry business and growing market share associated with that. So this is an equipment business. It is a little bit of a deviation from the core of what we do. But if you think about what we really do as being a solutions provider to our customers, this is middle of the fairway and is going to be a driver for the chemistry business. We're very, very excited about the opportunities associated with it.

All right. Thank you, Ben. I realized I went over. This little window in the bottom right-hand corner is covering my countdown clock, so I totally missed it. Thank you so much for joining us today. I appreciate you going long. Hopefully, you can scoot over to your meetings from here, and thank you for joining us.

Really appreciate the time and everyone's interest. Have a good day.

Thank you. Bye.