ESI | Element Solutions Inc. | earnings call 2026-05-14
Verbatim transcript (source: faster-whisper-small.en)

Welcome to the Compounders Podcast, where we explore the anatomy of public company wealth creation stories. On this show, we invite you to be a fly on the wall for the actual conversations professional investors have with public company CEOs. I'm your host, Ben Claremont, a partner and portfolio manager at Cove Street Capital. In these conversations, I interview senior executives by posing the exact questions I ask as part of Cove Street's diligence process. Whether you are a professional investor, founder, or someone who is simply interested in business, we think this podcast has something for you. This season of Compounders, the anatomy of a multi-bagger, is sponsored by Teagus. Teagus is an innovative and disruptive company that is changing the way professional investors work. For more information, please visit their site at teagus.co. All opinions expressed by your hosts and the podcast guests are solely their own opinion and do not reflect the opinion of Cove Street Capital or any affiliates. This podcast is for informational purposes only. It is not investment advice and should not be relied upon for any investment decisions. We are not recommending the purchase or sale of any securities. The hosts and guests may be beneficial owners of the securities discussed. You should not assume that the securities discussed are or will be profitable. My guest on the show today is Ben Glicklitch, the CEO of Element Solutions, a $5.5 billion market cap specialty chemicals company. Element Solutions was formerly known as Platform Specialty Products and was founded by Sir Martin Franklin, Jardin Paine, with the help of Bill Ackman from Pershing Square. The company was designed to be a roll-up, but after some initial success, it was derailed by an overlevered balance sheet. Ben became CEO in 2019 and since then has overseen a process by which Element has reduced business complexity, fixed its balance sheet, and has proven out its claims regarding its resilient margin structure. Given that the company provides products that facilitate the fabrication of semiconductors, Element has a front row seat when it comes to all of the issues regarding the global chip shortage. Accordingly, I thought it would be a great time to talk to Ben about his path to becoming CEO and what he has learned about leadership along the way, how the company is navigating all of the customer destruction tied to the chip shortage, the megatrends that are poised to propel the business over the next decade, how the company is approaching M&A and leverage after the initial stumbles at Platform Specialty and where Element Solutions derives its moat and pricing power from. For full disclosure, Cofe Street is not an ESI shareholder. And without further ado, here is my conversation with Element Solutions CEO, Ben Glicklage. As always, we will start the podcast at a pivotal moment in the company's history. For people who are not very familiar with this company, he was previously called Platform Specialty Chemicals and was actually started by famous company builder Martin Franklin of Jardin fame with the support of Bill Ackman. Unfortunately, after a lot of initial excitement, investors became somewhat disenchanted with the idea of a platform roll-up of specialty chemical companies. You were not the CEO at the time, but you were with the company when the bottom started to fall out. What was it like to go through that? And how has the management team gone about turning platform into an entity that is both financially stable and attractive to outside shareholders? So Platform Specialty Products is a good place to start this discussion. Element Solutions is not Platform Specialty Products, it's a different company. And in fact, we define ourselves in contrast to platform. So it makes sense to start with what it is that we're defining ourselves in contrast to the strategy or the thesis behind Platform Specialty Products was that there are many different specialty chemicals businesses that have shared attributes, their asset light, they're very people intensive in different segments, and that we could roll those businesses up and create an exceptional, rare specialty chemicals portfolio. That thesis, one could argue about whether or not that strategy would work. It didn't work in the context of Platform Specialty Products for a couple of reasons. Went too quickly, borrowed too much. The businesses that were required were high quality businesses and that allowed for us to convert to become Element Solutions by selling a portfolio of excellent agricultural chemicals businesses and being left with a world-class industrial electronics portfolio. The work that we've done as Element Solutions really in the first year was about building our identity, shared values, a strong culture, and a vision. And it all keys off of that vision, which is a different vision than that of Platform Specialty Products. The vision at Element Solutions is one of balancing operational excellence with prudent capital allocation. But it all starts with running these incredibly high quality businesses better. The vision is articulated very simply on three metrics. We want to be the best in class, especially the chemicals company, in terms of value that we provide to our customers, the opportunities we create for our people, and in terms of the value we create for our shareholders. And we measure those three things actively. So we measure value to customers based on our gross margins, how much more are our customers willing to pay for the value that we're bringing to them, and through voice of the customer and customer satisfaction surveys, which we do regularly. We evaluate our performance around creating opportunities for our people based on internal culture surveys, which we do every two years, and based on our internal fill rate. So the percentage of positions above a certain level in our organization that are filled by internal candidates. And frankly, if you get happy customers and happy people, sharing with the value takes care of itself. But we do regularly measure that, not with intra period fluctuations in share price, because we can't control that. But based on our EPS growth, driving and compounding EPS at a high rate, and intrinsic value math, where we look at our cash flow projections based on our actions and ensure that that's going the right direction as well. And I'm interested, how did you settle on customer satisfaction and employee satisfaction as two really important things for this company? What was the evolution of either your own thinking or the board's thinking that got you to focus on those two variables? This business is incredibly customer intimate. And the customers are very, very sticky, which is great. It provides a big moat. But it also provides a moat for customer wins and conversions. And so we want to have that reputation as providing the best technology and the best service to our customers, because that's a positive fly with the larger our share, the more leadership from technology, the more word of mouth we have in the industry, the more opportunities we will have to continue to grow organically. And once you have those customers, it's very, very hard to lose them. And so that's why we started with the customers. And then, you know, it's a people based business as well. You know, this is not a conventional chemicals business with a big plant. And if you get the plant math right, and you play the cycle, right, make money, this is a business where our customers rely intensely on our people for innovation and for technical service. And the knowledge in this company, or the learned knowledge is incredibly valuable. And a large part of our moat is associated with the experience that our customers have or that our people have. And that the relationships our customers have with our people. So being that destination employer, and being able to retain and grow people is a success factor for us. So you talk about a moat and given that this is a podcast called Compounders, you can imagine we talk a lot about moats. So I'm interested you talk about people and your relationships being a moat, but what what other intrinsic natures of the of the business, whether it's some kind of stickiness or barriers to entry, make it so hard for element to be dislodged once you've won a customer. Our customers rely on our people and our technology for their manufacturing processes. And so if you look at our cash flow, capital is less than 2% of sales. And so our factories are not where the magic happens, or magic happens in the labs at the customer site. As an example, our circuitry solutions business provides the chemistry that's used to turn a laminate, a small piece of plastic into a printed circuit board. It's a series of chemical processes. Our customers are very good at manufacturing processes, but they're not chemists. And the series of processes that that piece of plastic goes through to become a printed circuit board is comprised of aqueous chemistry with many, many different components, all of which can fall out of balance if it's particularly hot, or required tweaks if the rate at which the plastic goes through changes. And so our customers rely on our people to help them manage the chemistry to ensure they get the high value outcome from that printed circuit board. Our cost is a fraction of the overall cost of high end electronics, but it's absolutely critical to the performance of those devices, whether that's the chrome plating on the grill of a car, or the electronics in a smartphone, or other type of high end device. So the moat is the people and the innovation. Every next generation of technology requires just modest incremental tweaks to existing formulas. So a new entrant would have to overcome hundreds and hundreds of years of incremental development in order to bring a product to market that could meet this generation's need. And even still, they wouldn't have the technical service capability and know how and relationships on site to service that customer. So the moat is wide and it's growing as we continue to innovate, we continue to gain share and build market leadership and train our world class team at the customer side. And you talk about gross margins being a barometer of your pricing power and you present a situation in which there's a fair amount of stickiness and customer lock in when you start a new customer. But how is this environment different, given the rapid pace that you're seeing in terms of raw materials rising across the board, in-restrictory shortages, logistics costs going up? How have you seen your pricing power play out in very difficult circumstances? Yeah, the past nine months have been an incredible challenge in global supply chains. And we have a global supply chain. Our customers are all over the world. Our raw materials are sourced from all over the world. And navigating that has been an incredible challenge and a real testament to our team that we've been able to continue to supply and keep our customers going. We have been in a position to increase prices where our prices have increased. And that's something that we've said we've been able, we would be able to do and indeed we've been able to do that. In some instances, we've contractual pass-throughs tied to raw material price fluctuations. In others, we have surcharges. And then in others, it's negotiated. And clearly, we're an environment that's inflationary. Our costs are going up and our customers are taking price as well. And so we've been able to take price and protect margin because of it. Compounders is brought to you in partnership with TIGUS. We created Compounders to uncover the lessons and frameworks of the best capital Compounders in the world. And if you are a professional investor, VC, or operator, and you appreciate the deep research into the businesses explored on this podcast, check out tigus.co compounders. With TIGUS, you can learn about any company directly from former execs, current customers, and industry experts, all of which are in position to offer unique insights into company's growth, its customer value, and its competition. What makes TIGUS different is that you don't have to lead your own expert calls. The platform offers instant access to the world's largest collection of investor-led call transcripts on companies such as Compounders, Guests, Viasat, Element Solutions, and Avid Technology. All you have to do is log in and you'll get instant access to nearly 25,000 expert call transcripts. And the best part, the TIGUS collection grows larger with each investor and company that joins. Still want to do your own expert calls? TIGUS is the right solution. Experts that are just as good or better than what you'd find on other networks, but starting at just $300 per call, not the $1,000 or more others charge. If you're ready to go deeper on the next compounding business, head to TIGUS.co.com for a free trial. I can personally say that having access to the TIGUS platform and Rolodex of experts has fundamentally changed the quality of due diligence COST Street does on both new and existing ideas. I recently did a presentation where I made the bold claim that especially in consolidated industries, companies are going to have a lot of pricing power and maybe not have to give back pricing. So I'm interested as you look out to a 2022 period where raw material prices may indeed start to fall. In the situations where it's a negotiation as opposed to a surcharge or pass-through, how do you assess your ability to maybe even maintain some of that pricing even as raw materials come back down? Yeah, I would expect our pricing to be sticky here. We are, as we went through earlier, embedded into the manufacturing processes of our customers and the switching costs are high. You need to stop producing, change out some of the equipment, re-qualify all to save just fractions of the cost to the end customer. But we can't be overly aggressive. We don't want to give customers the reason to change because of how sticky it is. And so that's a balance that we walk and we've been able to retain customers through our pricing actions over the course of this year. And I do expect we should be able to retain pricing or we've negotiated new prices for the most part. And when I think about a company that's involved in electronic chemicals and companies that help regarding the fabrication of semiconductors, I immediately think cyclical. And so I think that was one of the perceptions of your business when a platform was put together was that this side of the business was really cyclical. Where has that been? And you've been through 2020, so you can see a lot of potential cyclicality. Where has the kind of that cyclical characterization been accurate when in terms of understanding the company? And where do you think it hasn't been accurate? So we are tied to units. The number of units drives the volumes for our business. And we have an adder that there's increasing content per unit, whether that's next generation automotive or next generation smartphones. So we should outperform units. And you mentioned semiconductor as an example. Semiconductor as an industry has been perceived as cyclical because back capacity comes in and prices decline. But we're not tied to the price of the end unit. We're tied to the volume. And so from where we sit today, you see a huge surge in capacity in semiconductor fabs. That will drive volume for us, regardless of what happens to semiconductor shape prices. So there is some cyclicality, particularly look at automotive, for instance, where we've seen some cyclicality. And that has driven the P&L. It has driven the top line. Where we are from an electronics industry perspective is one of significant secular growth, whether it's new mobile device technology, both units and infrastructure associated with that. One of the very early innings of what should be tremendous growth, not just in terms of units from a new replacement cycle on the handset side, in terms of content, you get about 15% more content on a 5G phone than on a 4G phone. But also on the base station side, where infrastructure for this new generation of mobile technology investment, that investment has just begun to pick up. And that's a multi-year cycle. We play a critical role in enabling next generation electric vehicles. And electric vehicle penetration of the automotive fleet remains very, very low. I think we can all sit here with high level of confidence that that's going to increase. So those are the secular trends. And sustainability is another one where we're really enabling our customer sustainability, removing hazardous chemicals, improving water treatment technology. Those are the secular trends that are going to drive this business independent of cycles. The automotive business is clearly near a trough, and there's a significant amount of demand. It's just a supply chain constraint that's been preventing that demand from being met. And so we see a cyclical recovery in the auto space in the years to come as well. What I'd note though, is that while we are driven by units, and there is a level of cyclicality associated with this, the margins in this business and the cash flow in this business are very stable. We don't have significant fixed assets to service and maintain. So when we're not selling, we're not buying. And so the gross margins are very, very stable, even when asset utilization declines because of units. And similarly, as we got through earlier, this is a people based business. And a lot of that people based expense is variable, whether that's travel, marketing, incentive compensation, that all goes away in periods of weakness. So we can sustain strong EBITDA margins, and we generate more cash in a downturn, all the working capital release. We used to say that about these businesses, but we didn't have a proof point because of this business in its current configuration didn't exist in a period of decline until COVID. And our results in 2020 clearly underpin those points. We sustained margins. We generated very stable cash flow. And then we generated strong incremental margins on the way up, which folks were concerned about because of all the objects we took out. So we're demonstrating these attributes that yes, while there is a level of cyclicality in some portions of our business, the cash flows are stable, the margins are stable. And then there's the secular growth that we're going to benefit from for several years to come. You talked in that response in detail about some of the mega trends that you're seeing that behind you that are tailwinds for this business. What do you have to do to position yourself to benefit from them? Is that continued R&D? Is it Opex of other kinds? Is it M&A? How do you feel like you see where the puck is going? Do you feel like you're ready to participate in that and it's just upside? Or do you continue to have to invest to be able to capitalize on that? So we're the market leader in the niche markets in which we participate. And we have a seat at the table, not just with customers to do technology roadmap exchanges, but with the major OEMs for whom our technology and solutions are critical to the performance of their end products. And so we don't just have a sense from internal work of where the puck is going, but we have it from customer engagement. And because of our scale, because we're market leaders, we believe we've got a better seat at that table. Because we've got a broader set of touch points in our customer supply chains than any of our competitors, we believe we've got a preferential seat at that table. So we see where the puck is going and we make investments behind that. Importantly, those investments are incremental. This isn't blank sheet of paper, whiteboard R&D. This is incremental developments based on existing technologies to meet that next generation need. So we will make investments, but they will be very high returning because we're not developing products looking for a market. We're developing products where the market need is well-established. An important characteristic of a company with a moat is exactly what you're saying, the ability to reinvest at high rates of return, because you understand the market, you understand what your customers are looking for. How do you decide where that capital should go? I mean, you have a number of megatrends that are behind you. I mean, this company doesn't have infinite capital and the returns can't be exactly the same across this basis. What processes are there internally to figure out where that incremental op-ex or R&D dollar should go? It's a great question. It's one of the things I've been working on most over the past year and a half, which is the power of focus. And we spent a huge amount of time working on identifying those needle moving commercial opportunities in each of our markets, which is empirically based, deeply detailed, and focused really oriented towards prioritizing. Where is the deepest pool of profit coming from? And what do we need to win? And let's drop that list of opportunities. Let's align our resources against them. The constraint is less on capital and more on capable, experienced team members. It's an HR constraint, more than a dollars and cents constraint. Let's align our resources against those highest returning commercial opportunities establish what it takes to win, develop the milestones that are proof points to us that we are winning or that we're making progress because these are long lead time activities. This isn't a six month project. This is a three year opportunity. And then not doing the other stuff. That's as hard as identifying and building the plans for the highest returning opportunities, getting the teams to deprioritize that long, long list of other things they could be working. I love that answer because I'm going to push back on you. And I think it's going to be an interesting because you have to have a balance. So let's just say, the way this doesn't work for you is if you have customer stickiness and great margins and great cash flows, and it breeds complacency of some kind where you're just skating to where the buck is and not where it's going, and so I'm interested in how you get people to think dynamically about what else you could possibly do for your customers maybe three years from now, even with what you just said about focusing in clarity on where the biggest profit pools are right now. This is a materials based business. So the breakthroughs and disruption don't happen from one day to the next. And the incumbents from a hard electronics hardware perspective or even automotive OEM perspective, we know who's working on one. And so I believe we've got better visibility towards trends that are developing than you would in a technology company or a software company. And deep, deep relationships with the technical experts at the customer site and at the OEM site that enable us to have that level of visibility. The way you don't allow for complacency is through incentives and culture. You can see behind me the first C of the five C's of our culture is challenge. And the idea behind that is this is a challenging but rewarding place to work, and complacency has no place at all in its wishes. Since you mentioned the five C's, right? You mentioned the five C's. Maybe talk about that. Walk us through the other four, and how did you settle on these as you were taking what was good about this company and when it was platform and turning it into what it is now? How did you settle on these five? In the open, I talk about our vision, establishing our vision when we became element solutions. That first year was really all about building the identity for this company, becoming one company, an operating company, eliminating the levels associated with the corporate holding company and platform and the operating unit inside of what is now element solutions. But that identity building is not something that we took lightly. We spent a lot of time studying the artifacts of the legacy cultures of the businesses we brought together, doing a detailed culture survey, asking all of our employees in all of their languages, what's a good culture? What is our culture? What culture should we aspire to? That was the baseline for the culture surveys for that second point of our vision about police satisfaction. In that exercise, we came up with five C's that we believe are the behaviors that we want to be embodying every single day. Challenge is the first, a challenging or rewarding environment. People derive a lot of value from their profession if they're fulfilled, if they're being asked to do a little bit more and improve upon themselves. And that's what challenge is about. This is a company that challenges people to be their best selves and rewards them for that. If you don't have the rewarding on the side of challenging, no one wants to work there. But if you have the rewards without the challenge, that's not particularly fulfilling either. It's not a good way to run a business. The second C is commit, which is a way of saying this is a company that takes its commitment seriously and we deliver on our commitments. When we launched Element Solutions, we talked about being in credibility building mode after coming from platform specialty products. And I found that we're permanently in credibility building mode. This is a company that delivers on its commitments and a committed employee thinks like an owner, not like a manager. And that ownership mentality associated with commitment is what we're trying to drive with that second C. The third C is collaborate. This is a business where no one can be the hero and do it all. Whether it's, you know, the business starts in the lab with scientists performing R&D, goes to the pilot line, goes to manufacturing, it goes to the customer, it goes to financing collections. People are such an important part of the business. So HR plays a critical role. We're enabled by systems and IT. No one can do all of that. It's just impossible. So a success factor is good collaboration. We have to work well together in order to deliver on our challenging commitments. We have to collaborate. The fourth C is maybe the most idiosyncratic and it's choose. The idea behind choose is that every employee makes choices every day. And we recognize that, right? Choices not just at the customer side or in business, but around energy and integrity and attitude. We empower people to make choices. As a global business, if decision making were central, we wouldn't be responsive enough. And the business is incredibly local. So we need to give people the ability to make choices to meet that customer need on the site. The center of gravity in this company needs to be in the lab at the customer site, not at the corporate headquarters. So in recognizing that people make those choices, it has to be part of our culture. And as a company, we make the choices, we choose to reward people who exercise good judgment. This is a company where every employee has the ability to make the business better any given day. And so we recognize that and encourage that. The fifth C is care. And it's a broad C. It's a broad care. It's not just we care about our people or we care about our customers. We care about our place in the world at large. We believe that as a people-based business, it's more than just our own people. It's the communities in which they operate. The thriving community enables people to thrive at work. And so we set up a foundation last year with $5 million, and it matches employees' donations around the world. So we care about what our people care about. And so importantly, I read somewhere the other day, the samurai saying that culture is not words, it's actions. So these are actions, they're behaviors, more than just values that we aspire to every day. When I listened to that articulate response and description of the five C's, I think to myself, these are the words of someone who's been in the business for 40 years. And as an elder statement in the industry, but that's not the case. And in fact, when you and I met in 2014 at a sell side conference, I mean, you were not the CEO of this company. I think it'd be really interesting for people to hear about your path to CEO and your progression as a leader over that time and how you've come to have all of these very co-parent and valuable thoughts about culture and leadership. I've been really fortunate to have terrific mentors and to learn from a lot of experiences, not all of them good. I joined Element Solutions, the head of M&A, or I joined Platform Specialty Products, the head of M&A. So I was responsible for that frenetic, or I was empowered with that for that frenetic period of acquisitions. I got to know the businesses really well. I got to know the people really well. It was very quickly apparent to me that businesses are just people. And having come from having been an investor and a banker, it's very easy to get lost in spreadsheets and things make sense at your desk, but it's all about the people who are executing at the line face. It became very apparent in the integrations associated with those acquisitions at Platform Specialty Products. And when the first CEO platform left, because I knew the business as well, our chairman, Martin Franklin, asked me to be the chief operating officer, which I did for several months before the next CEO, Rakesh Seshdev, who I succeeded at Element Solutions, came on board. And so I was thrown pretty quickly into the deep end. And it wasn't a particularly easy time. We bought great businesses, but there were some risks associated with those businesses we didn't fully understand. And we had to work our way out of the levered balance sheet, very international business, very quickly had to develop an appreciation for delegation and trusting people in the field and getting a sense for what the right incentives are, what the right strategies are to get people working and aligned on the right types of activities. I became the CEO in February of 2019. We had that first year of building that identity, working through corporate cost, and then COVID happened. And so quickly thrown into the fire and nothing allows, creates a burning platform like a global pandemic. And that really allowed for our leadership team to coalesce. And so the mentors and leaders I've learned from aren't just former CEOs, they're the people on my team right now. And we had to have an incredibly productive working relationship with trust and self-learning in order to have been as successful as we were. And so that's been terrific. Martin Franklin, our executive chairman, has been an incredible mentor for me. And I've learned a huge amount from him about running global businesses, about strategic capital allocation, how to prioritize and how to deal with people. One of the greatest attributes I've learned from is being direct and antif towards hierarchy and going to the source, treating people like people. And similarly, my father, who's a physician, works at a hospital and regularly wins the award from the staff, being the friendliest, kindest doctor in the facility, has deeply ingrained in me to treat people like people and the value of people. And that has been the thing that has allowed for our company's success, I believe, that general sentiment across this organization through a difficult time. The idea of caring as the fifth C and then treating people like people, are very valuable cultural elements that probably are a little too rare among public companies, I think in general. What was missing and what maybe was not maybe broken, but maybe missing a part about the culture at platform when you inherited it that led to the five C's being so important? There just wasn't a platform didn't have a stated culture or vision. We built a portfolio of really great businesses. There was a holding company level that was focused first on growth and then on fixing the balance. And so there wasn't as much energy from the senior most leadership at platform on running businesses better and spending time with all of the people all over the world because there was so much to do from a balance perspective in those last several years. I think that in the absence of a stated culture, a culture does just develop, but we want it to be explicit about it and we want it buying. And so by doing that culture survey and impressively 85% of the people all over the world completed that survey. And benchmarks suggest that 60% is a high level of participation. So people were looking for that. These were companies that were great companies and they still were great companies. They were just hidden, I believe, under the platform umbrella and that's not a bad thing. They performed very, very well all throughout that period because they're great businesses with great people in them. But just by adding that additional focus and soliciting input and reinforcing it and increasing communication and becoming one company as opposed to a holding company with portfolio companies, we've been able to throw gas on the fire and really accelerate performance. I think it's a good segue to talk a little bit about as you think about not just maybe fixing and upgrading what you inherited, but adding to it. So you just announced the closing of an acquisition of a company called Coventia. Platform was designed to be a roll up machine. How are you thinking about M&A and the future of M&A at ESI? And then how important is the cultural integration associated with that? So we talked about Element Solutions being a company that's oriented towards and focused on operational excellence and prudent capital allocation. And they go hand in hand, operational excellence takes the lead. The better you run these businesses, the more capital they generate, which allows for you to reinvest and at higher rates of return. So this is an operating company and we're focused on running the businesses that we have in our portfolio today better more days than not. When we think about deploying that capital, we talked about this is a business generates a lot of cash and we're looking for the highest returning avenues for that cash. We generate more cash than we can reinvest internally by far. We struggle to spend $35 million of CapEx because the projects are small because the asset intensity is modest. And so we're generating several hundred million dollars of free cash for a year and we're opportunistic about where we deploy that capital. In the first several years as a company, we were buying back shares primarily. This year, we deploy capital towards acquisitions. Those acquisitions need to fit a very strict criteria. They need to fit behind our businesses within our existing portfolio. If we're buying businesses, we deeply understand businesses that are better inside of our company than outside of our company, which is to say we can add value through synergies. Businesses that allow for us to add more value to customers. We're coming back to that point in the vision. We want to buy the most value in our industry to customers. So if it's not a direct product overlap, it's an adjacency. It's something that a customer would be interested in buying from us where we can broaden our portfolio of solutions for them. And businesses that are available at reasonable prices with great people. So we found several of those. They're really compelling. And we've been executing against them. We always compare M&A to a share bottleneck. And so we look at free cash flow yield of our company. The free cash flow yield effectively, the equity return, the cash return to equity of an acquisition. We risk adjust them. And that's the calculus that we do. And this is an industry or our business rather has enough surface area around it. But there's almost an indefinite, long list of small bulldog opportunities that fit the criteria and that we can action two, three every year. And you mentioned the buyback. It was really interesting for me to note when I was looking back at this company's history that the company basically bought Bill Ackman out in 2019 at about $11.72 per share. And that took his stake down from 13% to 1%. In my experience, very few companies are willing to allocate that much capital to a single repurchase. Can you talk about the conversations you were having internally regarding that decision to buy 12% of your stock back in one single deal? We had just completed the sale of Arista. We had a huge amount of confidence in the quality of our businesses, which we thought was deeply misunderstood by the market and wasn't reflected in our share price. We had balance sheet capacity to deploy. We had our hands pull operationally with not integration, but becoming one company and handling corporate costs and adding efficiency to the business. And so we wanted to take advantage of that opportunity. Going to the market to buy those shares would have taken months and months and months and would have driven the share price higher. We also understood that Pershing Square was considering an exit and that was likely overhang at some point. And so it was a win-win. And we were able to buy back a significant portion of the shares outstanding at a fixed price at market in one go. And eliminate that overhang. And so we had a lot of confidence that that was the right thing to do at the time. And as an investor, sometimes a buyback that big, obviously you're not bringing in an EBITDA like you would in an acquisition. So it's basically just cash out. And leverage profile of a business can kind of get stretched in certain situations. How have you thought about leverage and being willing to lever up for M&A, especially you're given your experiences at Platform? Yeah, well, we've learned from our experiences and we've been very, very clear, high conviction that you've got a leverage ceiling at this company at three and a half times dead to EBITDA. And why is that the right number? It's a business that generates very significant cash flow. It can support that leverage profile, our credit ratings, and the credit and market, appreciate the cash flow characteristics of this business. And the cost of debt is low, even in excess of three and a half times, frankly. But it's the right ceiling from an overall cost of capital perspective. The equity gets penalized, even if the debt doesn't. If we go above three and a half times, that doesn't mean we want to live at three and a half times. Again, we're going to be opportunistic. And so we've been running the business around three. And what operational excellence and proven capital allocation at Element Solutions looks like is the ability to make a $500 million acquisition in the early, in the middle of 2021 and have leveraged below three times by the end of the year. We should de-lever half a turn to three quarters of a turn a year between the cash flow and the earnings growth in this business. One of the more interesting concepts I always like to talk about is that when you have a customer relationship, our capital customer is adding more things to the bag. You're already doing this for the customer. Why can't we do that? So I mean, you guys have talked a little bit about getting deeper into water treatment as an example of an adjacency that makes sense. Is that greenfield? Do you need to make acquisitions? How the return characteristics in your mind compare to just continuing to invest in R&D to keep your company focused on your core services that you're providing? Yeah, the water treatment acquisition we made last year is a case study for how we think about these bolt-ons into adjacencies. This was a business, a fine business, a domestic US company that made water treatment equipment and sold some chemistry into a multitude of markets. One of the big ones was the plating market, which is where we sell our chemistry. We were able to buy it on a negotiated basis for a single-digit multiple. So the margin of safety here was good. This is a business that's going to grow because there's a secular trend around water treatment. It's got good technology. And so if we didn't do anything with this business, it was still an attractive return. But the reason we went into it, because it is an adjacency, and it might seem far afield adjacency, is that our customers are incredibly focused on sustainability and particularly on water usage. And our chemistry goes into a series of tanks, and then it goes into a water treatment plant. So if we, having sold them the chemistry, can offer this value-added water treatment, they know us, they know our chemistry, we know the chemistry, we can be a partner to support their growth, as opposed to a general water treatment company that's selling water treatment equipment to the food service industry, in this industry, in that industry. So we're focusing on our existing customers, and we have deep relationships, where we understand the chemistry. And it's not just driving growth in equipment sales, which is less interesting to us. But it's intended to be another arrow in the quiver to convert those sticky customers. So we'll sell you a piece of proprietary water treatment equipment if you convert the line next to ours that's using competitive chemistry to our chemistry. So it's the tip of the spear for chemistry sales. What we've done with that business is we've stood up manufacturing and sales in Europe and Asia. And we are able first to prove to ourselves that we can make this equipment in other places. So we can transfer the technology, the manufacturing know-how, and that's happened. And can we sell? And indeed we have, we've proven an ability to sell equipment in Asia and in Europe within a year. So it's a market share driver, and it's helping solve an intractable, huge issue for our customers that gives us preference and mindshare. So we should be able to grow it organically, and it should grow our chemistry business. If we can get confidence that it's a business that can grow organically, maybe an area where we could pursue internet growth. It's a gigantic addressable market, but we're still in the early innings. Thus far, the proof points are positive. And earlier you briefly mentioned a flywheel. And I don't know if, I think the flywheel term is so overused and it's probably mostly associated with technology companies that have large network effects and things like that. But you describe a situation in which your customer relationship can turn into a flywheel. Maybe spend a little time explaining what that means and why in this industry does that actually occur relative to maybe what people's perceptions may be. Given how sticky the customer is, it's really hard to dislodge competitors. Our market share in any given one of our businesses is between 20 and 30%. And the way we grow market share is when new lines come. So customers adding capacity, they do it one line at a time. Maybe they'll build a new site and there are three or four or five lines in it. The way we grow market share is by getting more than 20 or 30%, getting more than one or two out of the five lines. And if our customers are happy with our performance, we get more lines. We grow share. That allows for us to invest more in technical service. It allows for us to invest more in customer relationships, which bring ideas and technology roadmap exchanges. That allows for us to grow share. That's the dynamic that we're talking about. The larger our seat at the table, the better quality and scale we're perceived within our supply chain, the more share we have, the more opportunities we have to sell. And it appears, at least from the stock's performance, that people are starting to appreciate all of the things, whether it's the resilient margins or the lack of cyclicality or the flywheel you're building. I'm always interested in obviously negative issues, as you mentioned through COVID, where it were like a very nice test of this company, but also success, especially in a company that's had some ups and downs. Success can be something that's interesting to manage. So how do you avoid some kind of a letdown after everyone comes together to create ESI? And then everyone comes together during COVID. But over time, especially as a company does better and better and stock does better, there's an inevitable letdown. How do you think about that? And how do you try to mitigate that from happening? So a couple of things. We talk about being pleased but never satisfied. Challenge is one of our Cs. We're continually challenging folks. We maintain really high standards. What the saying is, when you accept something below your standard, you set a new standard. You have to maintain really high standards, particularly in times like this. And so in a good time, when we're after a recovery and we're getting some credit for what we've been able to do, your standards have to go up. If you expect better performance, you can't do that with the same standards. You have to increase your standards. And similarly, I talked a little bit about focus and our strategy implementation process. We don't play for six month or one year wins. We're participating in markets that have huge long term secular trends. So we play for three to five year wins. And when we do our strategy planning, we're not looking at our goal in one year. We have a milestone in one year that's on the track to accomplishing our goal in three to five years. And those goals are breakthrough strategic objectives, what we call BTSOs. And so that's not just participating in market growth. That's delivering above market growth and breaking through into a new market, into a new profit pool. And there are plenty of those around our business and in our existing business. So if you're focused on those, whatever you want to call them, BHAGs or BTSOs, near term wins are just proof points on the way to long term success. And so, you know, that doesn't allow for folks to get to complacent. Another thing that I'm sure is keeping people pretty busy is that your customers are having issues. Obviously, it's been in the news everywhere that there's a distinct shortage of microchips. How has the chip shortage impacted this company to date? And how do you pivot? How do you be a better partner to your customers when they're struggling to get their supply chains back up? The chip shortage is obviously having a material impact on the automotive sector. It's had some impact even on the handheld device sector. But you can draw a straight line from the chip shortage to the strength in our electronics business. The chips, the supply shortages, demand crisis, people want more than folks can make. It's not that supplies come off, it's that demand has strengthened and we're benefiting from that demand more than we're suffering from it in the automotive sector. That having been said, the chip shortage has become a shorthand, I believe, for broader logistics and supply chain disruption. And that is impacting us because there's an incredible scarcity of raw materials globally and we're not immune from that. And so our supply chain team has been working heroically to procure raws when it looks like we might run out of something, we've been able to pull it in. It's interesting, our team in supply chain, our folks at our sites are and were essential workers. So they were showing up every day in 2020, it was a heart of COVID. They believe 2021 was harder than 2020 because of the constraints in supply chain. And we've been fortunate that an inability to supply hasn't been a material, hasn't had a material impact on our top line. We've been able to provide continuity to our customers. I think you use the term that you were thrown into the fire pretty early. I mean, not only being a new CEO, then COVID, now supply chain disruption, I mean, I'm sure it's been a fun time. But I think, especially as an investor, it's great to be thrown into the fire because you learn the fastest. What skill sets have you developed over these last three, four years that you think have been the most helpful? Focus, communication, and the ability to rely more and more on, you know, I too strive every day to live up to the five seats. And so let's go through each of those. Collaboration is critical. And I've got a wonderful, wonderful team, Element Solutions, leadership team, and management is, has the right mix of deep experience and hungry, curious newcomers to challenge each other and drive really great outcomes. There's this tension with folks who are willing to, you know, question a lot of assumptions and a leadership team with 30 years average experience that is willing to have those assumptions questioned and know when to push back all in the pursuit of, you know, greater performance. And so being able to rely on that organization more and more is something that's been learned. Communication is an ongoing permanent journey and making sure that people understand our culture, our vision, and how they can contribute to our shared success is something we're doing every day and not something I had to do a huge amount of previously. And so working on my communication skills and modes of communication and being in front of people virtually in person increasingly now, written communication, something that has been incredibly helpful as part of this journey. And finally, focus, big business, intensely global, fragmented supply chain, fragmented customers. There's an urge to put out little fires and to focus on each little thing that crosses your desk and, you know, spend more and more time realizing that they're just a handful of things that I can directly impact, that each of the people on my team can directly impact, and it cascades down. And if your organization from the top to bottom is focused on those few right things and not distracted, they can do incredible things. And so helping through communication, right, people understand what those few things are and empowering them to work on those is the game. And, you know, driving this organization's focus has been something we've been working on a lot. Now that we've established our identity and vision, you know, what are the few things each person can do to deliver on that, getting that well-versed in the organization? It's where we've been spending our time this year. And it's a skill I've been developing and we've been encouraging the organization to develop with, you know, notable success. What you're saying really resonates with me because within our investment process, we always identify three or four key variables for each company. Like, what, over the next three to five years, what are the things that are really going to determine how well this company does? So I want to turn that around on you and say, what do you think are three or four, I mean, you talked about playing to win in three to five years. So if you're looking longer term, what are the three or four things you think this company absolutely has to get right, you know, for the stock to be a good investment for both your employees and your shareholders? So it's a terrific business, but there's an opportunity to make it better. And that's strategic execution, right? That's converting the biggest accounts, that's being present for our customers as they introduce new technologies, whether that's electric vehicles, next generation, wireless technology, or sustainable solutions to help them with the elimination of hazardous materials or waste treatment. You know, not just identifying those as opportunities, it's the easy part. But actually having the organization there with the solutions that are best in class, that's execution, right? So strategic execution is a critical success factor to allow for us to outgrow our markets, right? The wave is very strong, the wave itself, the secular growth is very strong, but to do even better requires strategic execution. And the second thing is capital allocation. It's a business that generates substantial cash. And how we deploy that cash will be a determinant of our ability to compound our earnings per share, which is what we're incentivized and driving. I believe we'll have a robust opportunity, set of opportunities to deploy that capital. We're demonstrating a track record of doing so nimbly, whether it was buying back our stock at $10, making these bolt-on acquisitions that are proving to be successful and enter in the JSON markets. But we need to continue to do that. And if we do, we should be able to compound earnings in the teens, which is our goal. You've had to make a lot of decisions in a very short period of time. In fact, I would say you've had to make cultural plus business decisions that other CEOs would probably have a 10-year window to make. So I'm interested, as you look back on things, decisions you've made and paths that you guys have or haven't taken, anything that you look back on and say that was either an error or omission or commission that you can learn from? For the most part, the feedback loops are pretty long. And so it's a hard question to answer. In some instances, act more quickly is one thing that I've learned. We have a bias towards action. And we have taken decisions very quickly, whether it was around COVID safety protocols, building safety stocks. But there are a handful of issues I can think about where we probably could have been more decisive. I think that we missed an opportunity last year to buy our own shares. From a values perspective, we said we won't buy back our own shares if our people are on reduced salaries. It's just not the message we want to send to people. If we're not paying people full freight, we shouldn't be taking capital to retire shares. But that was a really robust opportunity. We caught the tail end of it. But there was a window in there where from a long-term value creation perspective, we could have done some real powerful, retired, significant portion of shares at very attractive values. As I think about what we missed, those are the two things that popped to mind. But if you ask me the question in three more years, maybe I'll have more. Hopefully not too many. Yeah, hopefully none, actually. I'm always really interested in someone who comes from the investor side and the banker side to being an operating CEO and dealing with supply chains and all that stuff. What do you think you've learned or what do you think people who sit in our seat at 18,000 feet really misunderstand or should understand better about what it's like to be in your seat as someone who's focused a lot on execution and culture? In a business like ours, which is, as I was explaining before, requires a huge amount of collaboration. The process from the lab to the customer to the collection touches so many people. An appreciation for the people and the culture is essential. The culture is what drives that marginal decision. And that marginal decision can create or destroy a huge amount of value. And so that's why we prioritize upfront getting the culture right, getting people the deep understanding of what it is we're working towards. And so that's probably the first thing and the most important thing. And as we're getting close to our favorite question, I do like to ask people about important things that they've had to rethink as far as either the industry or leadership. Anything that you kind of had this in your mind, like this is how the world works or this is how business works or this is how companies work. But now that you're in the seat, it's like, yeah, I really didn't understand that. And this is, I've had to evolve my own thinking in this way. There are countless opportunities where a company, a corporate leader can either can create an impediment to execution and success. And so what leaders do is either put up or break down barriers to performance. And there are so many things, as I think about the way we did business, that it didn't make sense intuitively, but because I'm not sitting in the seat at the plant or in the collections department or in the R&D department, I don't feel that. And so we've created mechanisms for feedback, idea chests in the office where everybody at this company, we talk about other decisions, can improve the business and the day-to-day outcomes, but they can actually improve the processes. And so soliciting, we solicit feedback all the time from people. They have many different avenues to suggest process improvement. And sometimes you get a comment like, you know, the bathroom needs to be cleaned up, in which case we clean up the bathroom. But sometimes you get really powerful insights. And so we're incredibly receptive to, you know, from the cult, from the mind face feedback on how to do things better. And when you accumulate those across a 5,000 person organization over years, you can get significant process improvement. So there are many things we've rethought in terms of day-to-day execution. The other thing that is incredibly intuitive is the Pareto principle in 80-20. And the fact that 20% of your customers, 20% of your products are driving at least 80% of your profits. And how you allocate resources to that in an organization that's so customer centric is something that as an organization, we're trying to rethink to ensure that, again, we talk about the needle moving handful of things, those handful of customers and products are getting the necessary focus, because those are the drivers of growth. And getting to our last question, I think you constantly allude to the fact and joke that this company has just been in credibility building basically, you know, for years now, because of maybe some of the legacy things that happened. So there's an opportunity, I think, for this business to be and maybe the structure of the company to be misunderstood. So what would you say, and we've talked about a bunch of things, but what would you say are the most misunderstood or underappreciated aspects of your business or company? There are two that come to mind. The first is, we've got 60% of our sales in the electronics industry, which is growing very quickly, has very exciting secular trends behind it. And 40% of our sales in our industrial and specialty segment and people don't fully appreciate the quality of those industrial businesses. While they may not have as much of a secular trend behind them. These are market leading, incredibly sticky, incredibly high returning assets. And they are very, very high quality from a return on capital perspective. They are industry beating. And so people say, well, why just don't you become an electronics company? And that's missing, clearly missing the unbelievable cash returns of our industrial business and significant growth that we have to drive those businesses forward. So I think that the quality of our industrial business is misunderstood. The second is the cash flow characteristics of this business. Investors, analysts, I'll talk about EBITDA multiples. Maybe higher quality businesses get a higher EBITDA multiple than lower quality businesses. But what's that quality measurement associated with? Our business turns EBITDA into cash more efficiently and more steadily than other chemicals companies. And that manifests itself in a free cash flow yield. So even though our EBITDA multiple has, you know, has trended in the right direction on a free cash flow basis, on an EBITDA less cap X basis, it still trails the median of chemical companies, which is odd when you think about the stickiness of the customer relationships, the stability of the margins, the variability of the operating expenses, the lack of lumpiness and cap X. It should be in our in our perspective, it is an above median chemical business. But investors don't seem to focus on cash. They focus on EBITDA. While EBITDA might be a proxy for cash for many companies, it's a worst proxy for cash for our company. I think people don't fully appreciate the cash flow characteristics of this business because we've only been around in this configuration for a couple of years. But it was tested and the stability of our cash flow characteristics were tested last year. And the cash flow growth in front of us is robust. In the meantime, that misunderstanding represents an opportunity for us to deploy capital very compellingly at times in our own shares. Well, you clearly have honed a skill of talking to people like myself, who really care about free cash flow and you know, and all of, you know, and cash flow conversion, all those things that maybe other people don't talk about. But you know, Ben, this has been incredible. It's great to hear about your own journey about, you know, the cultural transformation that you've helped lead. And I think, you know, people can learn a lot from, you know, what you've been able to build, especially from a people side in just a few years. So thank you so much for this time. It's been really great. Thanks very much, Ben. It's a complete testament to the excellent people, not just in my leadership team, but across all of the elements. Thank you. That's it for our show today. We hope you enjoyed the conversation. We recognize that you we recognize that you have a lot of different podcast choices and we appreciate you spending the time with us. We are continually working to make the show better and we would love your feedback. The more candid and honest the better. And if you have any suggestions for public company CEOs you would like to see on the podcast, please let us know. And of course, warm intros are always appreciated. Please feel free to email us at podcast at co street capital.com with their comments or suggestions. Thanks again. And stay tuned for the next episode of compounders anatomy of a multi-back.