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Michael halein, Bloomberg Intelligence Senior restaurant and food service analyst, joins us Now. Michael McDonald's down the most in twenty twenty two. What do you think of the quarter? What was the big takeaway?
Yeah, it was a weaker quarter than most expected. For sure, sales growth was kind of weak.
You know.
They cited the impact from the Israel Hamas war, and obviously that hurt results in the Middle East, but also in Muslim countries like Malaysia and Indonesia, and then also countries like France that have a large Muslim population. It may have impacted sales here in the US a bit as well. There were some calls to boycott a brand right after the start of the Israel Hamas war. Those kind of went away in December. In January, however, so there could have been a mild impact in the United
States as well. And then in terms of key takeaways from the call, you know, they don't expect their developmental markets where the Middle East is located to improve really until the war ends. And they cited some consumer weakness in the United States, which they have before, right, but it seems like it may be spreading in terms of you know, just low income consumer weakness. You know, it sounds like their customers right now are managing their guest checks.
Hey, Mike, I'm just looking at the PGeo function on the Bloomberg turbine. I see that roughly sixty percent of the revenue comes from franchise operated stores in about forty percent from company operating stores. How did they make that decision about what when they go to a particular location, whether the franchise or own it.
I think a big part of it is return on investment, right, So if the returns on the investment are very strong, they typically want to hold on to those stores or develop stores. You know, they'll they'll do some store development in the United States and in their more established markets, but it's going to be a small percentage of what
they're doing going forward. You know, most of their growth is going to be you know, done by their strong franchise partners, particularly particularly in China and some of these other very fast growing markets talk.
About the input part of the situation in terms of their costs, in terms of their labor and all that kind of good stuff.
Yeah, so come on, you know, inflation is easing for them this year, but it's still probably higher than normal.
They're looking at cows, man cows.
That's part of it, for sure. Beef and dairy costs are expected to be higher this year. So but they're looking at a you know, low single digit commodity inflation in the United States and abroad. Abroad had you know, Europe had very high inflation last year, and that that's
gonna settle down a bit. Labor inflation is going to be continue to be, you know higher, and a big chunk of a big part of that here is you know, uh, in the US, you know, their California April first puts in the twenty dollars minimum wage for fast food workers, and so that's going to impact some of their stores, primarily their franchisees. However, so so they're still seeing you know, higher inflation than you know, we had in the twenty teens for sure.
Hey, Mike, I look at the stock and you know I need to pay a twenty two twenty three times earnings for this stock. What am I really getting? Is it something more than GDP top line growth? What's really the call behind this kind of stock?
Yeah, Well, with their global growth, they should They're gonna probably grow higher quicker than GDP. Know, what you're buying with a franchise business is you know, pretty pretty stable and predictable earnings growth, free cash flow growth. There's not a lot of operating leverage in the model, and so they're asset light and so they can lever the business up and return cash to shareholders pretty aggressively. So it's definitely an attractive model, especially one with the strong top
line growth like McDonald's has. And they they're also you know, most investors can consider them slightly insulated against a recession in slower economic times, and a big part of that is that the is the value that they offer. During the Great Recession, they outperformed the quick service industry pretty significantly, acquired a lot of market share during that time, and so investors feel there's some safety investing in McDonald's versus some of the other restaurant chains out there.
But Mike, that confuses me with what you said about customers watching their checks and their items and what they're buying, because you would think if things are hard and people are struggling, that you would get more value and people would go to McDonald's. But you were mentioning how in general people are watching their money more so they're not How does that kind of square?
Yeah, So what we've seen is a lot of traffic deterioration over the last couple of years because price increases have been so aggressive and people's spending is being pinched.
Right.
But the thing about quick service, you know, they're in the lower end of the market, right, and so they'll see during an economic slowdown, they'll see higher and middle income consumers kind of fall into their bucket. They'll try they'll spend less at higher cost full service occasions, and they'll visit McDonald's more often, whereas a lot of the low income consumers will kind of fall out of that
bucket and decide to opt for the grocery store more often. So, uh, they'll lose some traffic on the low end, but they'll they'll probably gain some with some of the middle and upper income consumers.
So, like, who's really their competition these When I was a kid, it was Burger King and Wendy's, but now there's so much more out there.
How do you kind of slice it?
Yeah, it's the restaurant business, man. It's it's so fragmented. There's there's competition every may everywhere, man, you know, to your point, convenience stores, grocery stores, food trucks, you know, you name it. Still, primarily their biggest competition are the fast food restaurants that are located closer closest to them.
So it depends on the market. You know, California, Jack in the Box is number two, you know, on the East Coast, Yeah, you know, Burger King is number two, and in most markets, i'd say in the United States, Wendy's obviously is a big competitor of theirs, but also you know, places like Chipotle and shake Shack, you know, are also all competing for restaurant dollars with McDonald's. But you know, we don't look too closely at market share
in this business because it is so fragmented. And you know, I don't really like total addressable more getting restaurants because nobody's gonna eat at McDonald's three times a day, seven days a week, you know, so.
That who's there documentary that doing that?
There was Yeah, yes there, we gotta.
Leave it there. Mike, thanks a lot. Mike Calin, Bloomberg Intelligence senior restaurant and food service analysts, joining us.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple Car playing Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
Es Day Lauder.
The stocks of thirteen percent today, that's the short term pop well, and I guess some cost cuts. We'll get to that with our next guest. Down forty two percent on a trailing twelve month basis. That's the longer term story I want to dig into as well, and we can do it all with one Deborah Aichin. She is the senior Luxury analyst for Bloomberg Intelligence. She joins us from London via zoom You want to talk luxury, you want to talk high street shopping, talk to Debacon.
So deb let's.
Start with s day Lauder today. Good day for the company. Stocks up thirteen percent today. What's driving the stock today?
Absolutely, it's all about well, let's let's say having really impacted negatively with several earnings with earnings down grades and misses over the last six seven quarters, the company positively positively surprised. It met its organic sales decline of eight percent, not a growth, and its EPs came in slightly better, so down twenty percent. But the big thing is the restructure program. So it already has a restructure program in play that didn't seem to be deep enough, wide enough,
and have enough detail to it. And now they've raised five hundred to seven hundred million of cost on a deeper restructure program to bring up to one point four billion through twenty five and twenty six, mostly twenty five or majority twenty five weighted, so with the expectation. So that's kind of like four hundred million extra on what they were expecting before in terms of operating profitability.
What was the problem that they had to fix by doing that? Like, why is it so hard to be s day Ladder? I thought everyone would pay a million dollars for perfect skin, not talking my book or anything.
Right.
The big thing over the last couple of years that we've seen We've always known that Estill order a very premium product, and it did so well for so many years,
but it had very high exposure in Asia. So we ended up a couple of years ago with a stuffed retail, duty free travel retail area across China and some parts of Asia, which were exacerbated by South Korea also in the issues there with the Dae Goose shopper and what we found, and we'd always been saying, you know, there's supply side, the way that they organized themselves, the logistics.
They didn't have the hubs in place in Asia to do as much as they were doing, so they were caught short or caught overstuffed, so they had far too much in trade and that has taken a long long time to temper down and start to normalize. And we should return overall to growth this next quarter.
And dead let's stay with the China stories.
I know from talking to you over the years and reading your research, the China consumer is just critical for luxury shopping.
Can you give us a sense because.
I don't want to walk down Madison Avenue or Fifth Avenue. I see all the European tourists back, they're back in, you know, in size, not so much with the Chinese.
What's going on there?
The big thing. We very late in getting visas through the reopening of you as we thought from the beginning of last year reopening of travel, but the viewers that travel internationally won't come back until the second half the year. And we are starting to hear some of those luxury companies sane. We're seeing more Chinese, more Asian customers in our stores back home. There's a lot more spent in
flights are fuller. The surveys that we're doing are saying that they will travel, but a lot of that travel so far has been across Asia.
But what's interesting is that not all are created equal. I feel like you can Jerry pick a couple of luxury stocks that have been somewhat immune and I'm just wondering what those are. And I still and in the skincare world too, like what is that immune skincare high end product? That doesn't matter, We're all buying it anyway.
I think that you know there are there's some huge numbers in terms of some of the brands within the portfolio doing extremely well, lots of the brands of double digit but it's that trade that draws down. When you look at the Europe number for Estill order that's where they stock travel retail, that's where it sits in its P and L, and it's down minus fourteen. But actually Europe underline is flat and it's the same for the
North American market. Within that there are brands like the Ordinary and and several of the higher end brands doing very very well up double digit. And it's the same across if I think about the way that actually luxury and you know Lorel aside Loreal is doing phenomenally well with a high base of its product in what a classes as Lorel looks. But let's go to some of the luxury companies and the way that LVMH and others
are building sizeable scale in perfume and cosmetics. That's for growth of six to eight percent per year and very strong margin. So there are a lot of brands out there doing very very well. But in particular what has happened is and stockpicking, cherry picking. It's about the brands who've had the portfolio that hasn't had so much Asia travel retail or where it's really been able to manage that.
Because even if I think about LVMH within its selective retail and it hous dfs due to free stores and Sophora, and at one point last year they were both down and they've now fully recovered. We're starting to see if the US some robust numbers coming through even from that aspirational end across the luxury across brands. It's getting a little better, but it's going to take time.
And that's John Talker with the aspirational spend.
Do you invest in your face.
Other than maximum No? No, I invest in my face maximum strength.
You know, sunblock is basically the only thing for this Irish American.
Okay, but that's a really good thing. I mean, you're doing something, you know. I was just thinking that the only thing that I will not buy on sale is my skincare. Skincare because you just it never goes on sale. If you find something that works for you, you're sick with a certain aged woman who does media and on TV, like I will pay for it. Then that's I mean, I'm not wrong, deb right.
The other thing that you do is you actually, without realizing, you trade up and right right now at the moment, there are some youngsters who are under twenty who were already moving into antih and the market is trying to stop that so as you get older, you're trading up. My story, which I think car relate to Paula Wellbach, was late in the autumn. I was in England and Cambridge and there were three Chinese consumers who couldn't get product from La Prairie very high end skincare product which
is under the House of Biased Off. It's bigcause brand b Niveia, and they were there spending over three thousand pounds on a little gift pack. Each of La Prairie very high end eye product was way up of my price range.
And these names, these real companies, What is this?
I just used Irish spring and a wash cloth.
Kind of the lebable hurts my soul, invest in your face? This is this is a strong takeaway from that.
How are the luxury stock? What's what's kind of the luxury call here? I look at the FA function for es Day latter and it looks like for your the fiscal twenty twenty five, the June of twenty five year, the street's looking for a big pickup in revenue and profitability for Esday latter.
What's behind that?
That's that's all about that inventory. The to put that inventory in Asia into context, it's dragged down skincare in this quarter organic cells minus ten percent. It's dragged down Europe to minus fourteen, where underlying Europe was flat because it stores that travel retail. So it's about that inventory normalizing, and they're saying that that has happened right now at the end of two Q, so we head into three Q with normalized level and so therefore if that is
the case, then it's better manage. We should start to see double digit growth coming from there. And if we were looking underlying without that area, then we saw mid
single digit growth. So that's what that's about. And then also on top of this new restructuring program and with some of those benefits to come through twenty five, we've been playing around on MODL on the calculator and what we see there is around an expectation of twelve to thirteen percent uplift to that twenty twenty five operating profit to hopefully come through one consensus.
Hey, deb really appreciate it. Thank you so so much. Debora Aig and Bloomberg Intelligence. I've seen industry analyst so just releases the question at the end of the day when it's trying to wind up coming back and traveling and like that we're back to that trade, which was the trade last last year at this exact same time. And do we buy it this time? Do you think it's really.
Boy, I don't know. I think so now they're back to that. We heard from the mccow and Singapore gaming companies. The Chinese travelers are there.
Okay, let's go.
A little bit further now so they can get the visas and the flights, uh to come to Europe and to come to the US. Because again Fifth Avenue talked to merchants on Fifth Avenue and Madison Avenue.
And they're just they're waiting for that.
They thought it would be a twenty yeah, you know this year. I mean at twenty three event was not so, but they're I'm.
Going to see Paul like strolling down Fifth Avenue, like going into stores.
Like like I was into my Mega store getting some work on my watch, and I did ask that question, and I typed a deb acon right away, say here's some feedback from the store on fith Avenue coming starting to come back a little bit, starting to come back a little bit over the last three or four months. So but you know, they're just not taking over the city in the same time. Yeah, yeah, traffic they.
Did in some of these luxury shopping areas.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station just say Alexa playing Bloomberg eleven thirty.
So Alex and I were talking earlier this morning at you know, around ten am Wall Street time. ISM released us some really good services data, So let's get right to that with Anthony Nieves. He's the chair of the ISM Services Business Committee. He joins us at via zoom. So Anthony again, the ISM Services Index came in at fifty three point four. That's the headline. Consensus was fifty two in the last period. Is fifty point six. Big jump there? Can you walk us through that?
Certainly when you look at the composite index, it was driven by new orders increasing two point two percentage points from the fifty two point eight to fifty five point zero, and employment rebounded nicely. We contracted last month in December was attributed to the pullback. The pullback was attributed to the fact that the cycle time of hiring with the holidays and vacations and whatnot, and that rebounded nicely to fifty point five, up significantly six point seven percentage points.
Hey Anthony, great to see you. We love this data. I love the ins and analysis from it. It wasn't like all sunshine and rainbows though. Walk us through sort of what areas of services did well, what area of services may be still contracting.
That's a great question. And you look at the composite index and also prices were increasing seven point three percentage points fifty six point seven up to sixty four. Food prices still remain very strong. That I feel has impacted the FED. Looking at interest rate cuts, our respondents are telling us that they'd love to see continued cuts in the interest rates. But the bright side of that, there's
capital spending, new projects of being released. When you look at the top five industries that contribute to GDP, overall, real estate rental and leasing is still contracting. The increases coming from professional, scientific, technical services as well as healthcare social assistance very strong this month.
So I mean the services is seventy percent of our economy.
I mean I can't.
See a GDP contraction scenario coming out of you know, we get data like this.
I mean, are you guys at ism or what's your economic call here?
When we look at this monthly report coupled with the semi annual forecast, what our respondents indicated to us that the first half, especially in services wasn't going to be that robust, but the second half was going to be better. I feel we're slightly ahead of the trend. And to your point about GDP growth, think what was it three point three percent last year? When we look at the composite index this month annualized, it's at one point five.
And if we see the second half as they indicated to us, being stronger, we'll have this incremental growth continue. It'll be a good story for the services sector.
So when we jump to the prices paid, though, I mean it's pretty staggering, jumped the most since twenty twelve. Was this a supply story or a demand story because we have seen a lot of supply chain snarls, et cetera.
Well, we definitely see that it's a demand issue, especially with new orders. Even though it looks like, you know, it's fifty five, it's middling as far as the growth two point two percentage points up in the fifty two point eight, but definitely it has some constraint on transportation, and that was indicated to us by our respondents. They said that there's challenges with the Suez Canal with the conflict over in the Red Sea, as well as the
Panama Canal. We're seeing the capacity has reduced to less than half of what it was based on the issues with being able to fill up the locks with the water shortage over there.
Interesting, all right, So what are you looking for going forward here? Just to kind of get a sense of the consumer. Is it the labor market? Is that the primary driver here or what else kind of from your perspective, influences the consumer?
Well, you know, the labor market and employment you look at it a fifty point five. That's a really interesting story there. It continues the same trend and pattern that we've seen. Certain industries they're still going through job cuts, whereas others are finding competitiveness in the marketplace and trying
to recruit and hire applicable workers. But overall, it's really coming down to where is it driven from, and right now it seems to be those two industries that I mentioned previously, professional scientific, technical services, as well as the healthcare and socialists.
Before you go, Anthony, before we let you go, is this an economy that has the risk of actually running hotter if you're just looking at the responding data here?
Not really, because looking at it at the fifty three point four, it's not over. It's not in any rook of overheating at this point.
Hey, Anthony, really great to get your perspective. Thank you so much. Interested in goldilocks, I mean the end of the day, like, hey, prices paid a little bit, but this is definitely a goldilocks story, Anthony Navis. He joins us chair of the Ism Services Business Committee. It's really nice to get the details of the big data.
Points at you're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station just say Alexa playing Bloomberg eleven thirty.
Is the ISM Services index really solid? Price is paid, really solid? Employment higher, new orders higher? So let's get the breakdown here on what this all means. Danielle de Martino Booth, the CEO and chief strategist of QI Research. Danielle, what do you make of this economy? I mean, it's really hard to see any kind of slowing. It's really hard to see sort of where that's going to come from.
What's your take, Well, I think of all of the of all of the indicators that we've seen in the last few days, where it's going to come from part is the most apparent at this juncture.
You know.
One of the things that we noticed when the ISM Services report came out in December was that the employment component had dropped to forty three and change. We went, oh, my gosh, that's absolutely the worst we've ever seen.
Hurse.
This morning it rebounded back above the fifty line that separates expansion and contraction. All good and well, you say, right, well, you look under the hood. ISM Services covers eighteen industries. In November, there were ten that had rising employment. In December there were seven of those eighteen with rising employment
in seven sectors. In January there were three. And so I think we have to be very careful with the data about getting too excited about any one headline, you know, One of the things that came out on Friday in the employment report was that the headline employment had increased by three hundred and twenty five thousand. You peel the onion back a layer and you find out then since the month of February, since February, we have been at a single full time job created in the United States.
In fact, it's been negative ninety seven thousand since then. So the reason I think markets are a little bit schizophrenic is because you have to keep looking left and right or you're gonna get run over.
Yeah.
One of the many reasons I like Kevin Danielle on the show because I like to just take the headline number and run with it. She doesn't do that. She doesn't allow me to do that. She says, I got to peel back lets and onions and things like that. So, Danielle, I think if I kind of read your very good social media profile, you're not in the soft landing camp, are you.
What's your call here?
I sense you're more cautious and you think the market should be more cautious.
Yeah, I do think the market should be more cautious. We have we have several sign posts that show that October is probably when the National Bureau of Economic Research is going to go back and backdate the recession. We actually have one of their main indicators that they follow UH, which is income X transfers ex Government transfers, adjust it for inflation. That's negative. If you if you look at in adoption production, one of the huge arbiters of recession for
the nb ER, it also UH is negative. And in fact we're starting to see problematic inventory build in autos. We had that we had at auto sales come in at fifth teen point zero million seasonally adjusted annualized rate they were expected to commit at fifteen point seven. That was a quiet report that kind of went by the wayside last Thursday. So there are so many revisions going on.
Goldman SAX did a huge report at the end of the year that said every single month of retail sales in twenty twenty three had been revised downwards and that retail sales were flat on the year. I think we're having such an issue with statisticians in Washington, DC because so many of their seasonal analysis modeling is based off
of and includes the pre pandemic era. So the time the dust settles are like, oh, wait, wait, now that we've got everything in or maybe we've got the smallest sample size in the history of say the non farm payroll survey. Once we get all of the data in hand, we were incorrect, We're going to go back and revise that down.
That's a lot of Danielle. This makes your job difficult, our job difficult, and the Fed's job even more difficult. So we're now looking at a little over four cuts priced in for this year. What do you think is legit, particularly with all this uncertainty and revisions that you're talking about, and when would it start.
Well, had it not been for the very strong tone that Chair j. Powell voiced on sixty minutes last night, I would be more in the camp of saying if they do start to cut rates, they will do so at every meeting beginning in May, so May, June, July, and September. But Chair Powell seems so adamant in communicating that he will be the apolitical FED chair. He will be nonpartisan, he will not be viewed as being political.
In an election year, it's a toss up fifty to fifty whether or not the Fed historically has cut rates or raised rates. May taken any action in the FMC that immediately precedes the election. That would be the September, the eighth, eighteenth FOMC. I wouldn't be surprised to see three rate cuts May, June, and July and then a pause.
Interesting.
So, from your perspective, Danielle, the data you look at, which is not necessarily the data that lay people like me look at, which is basically how much does it cost to fill up my car with gas? Is inflation whipped in this country or no?
You know, it's interesting you asked that question because recently true inflation truflation, which a bunch of bond traders introduced to me. They actually gave me the raw data. We ran a quick correlation. It's got a point ninety seven correlation with headline inflation, the headline CPI. Two times ago, true inflation hopped down underneath the FEDS two percent target. I said, well, what happened there? And it was mostly
led by hotels. It was one sector. Last week it dropped down to one point four one point four percent YEP, And so I reached out to the founders of trueflation, I said, what gives what was that huge swing factor? Did I miss it did I fill up at the gas tank for a lot less and they said no, Danielle, ten out of twelve categories had appreciably large declines, meaning the disinflation that was a one off here or there
has become extremely widespread. If you've got ten out of your twelve major categories more than three hundred million real time prices feed this monster model per day, with again a ninety seven percent correlation with headline CPI. I think that Pal's bigger impediment going into the second half of twenty twenty four might be larger rate cuts than he anticipates or would like, if inflation's coming down as quickly as it is.
All right, Danielle, thank you so much for joining us. We always appreciate getting your input. Danielle di Martino Booth. She's the CEO and chief strategist at QI Research, joining us via Zoom from Big d Dallas, Texas. She was on the Fed Dallas fed down there years past. A great perspective there. We appreciate chatting with her.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa playing Bloomberg eleven thirty.
Just talk about the real company out there, Element Solutions. Ben Glicklich joins us. He's the CEO of Element Solutions. He joins us live here on our Bloomberg Interactive Broker Studio. We appreciate you're based done in Fort Lauderdale in Miami.
Nice.
Why are you here?
Yeah, well in Miami because everybody's is it going crazy down there?
What is it?
I mean, is it just nuts with all these people coming down.
There's a ton of energy.
It's a great place to live and work.
For better or worse. I'm on the road three months, three weeks out of the month because the business is very global.
Just for background. Paul wants to be there, like he wants to move to Florida. He wants to do the show from there.
Exactly. I talked to us about Elements Solutions. I know you guys are in. Just tell us about your company, what you do, and then we'll go from there.
Great. So.
Element Solutions is a provider of chemical technology that enables high performance applications so our materials and process solutions are used in manufacturing high value products from semiconductors to smartphones to high performance autom So.
Your customers are technology companies primarily.
So our customers are technology supply chains. Technology supply we're we're selling to printed circuit board manufacturers, semiconductor manufacturers, it's very fragmented below the original equipment manufacturers that make the smartphones in the cars. So we're a critical enabler of their technologies, but we're not selling directly to them.
So you're not making like plastic for the end user kind of thing either, because usually, like what I love about chemicals is that is that really closed early cycle read on the global economy, right, like what air Products is doing when relationship telling me about China, that's not you, guys.
So we're selling critical components that enable performance of high value products. So we do have a read on what the next generation smartphone is going to look like. We have a read on trends in automotive and other electronics and markets.
How did you find yourself to this business. It's a fantastic business.
I'll take your word for it, but I mean it's not something I would have thought about just off.
You have to been dropped in there somehow.
So better lucky than good, I would say. I partnered with our chairman, Sir Martin Franklin, who's been very successful building multiple different businesses, and together through acquisitions, we've built this portfolio of market leading companies.
Doesn't when I think chemical company, I don't think South Beach, true, I think like Cleveland, What are you doing in South Beach?
Not that?
Or Miami? What's no reason not to be there? Everybody else is.
So we are there because it's as good of a place as any, and our business is very dispersed. We have one hundred and sixty locations in over thirty countries, more than sixty manufacturing sites, and so my job is to make sure that our folks are working on the right things with the right incentives. And so I'm traveling as chief cheerleader to visit our people all over the world most of my time, and coming home to Florida is in such.
A bet that's not a bad thing.
And so public and traded company EESI is the ticker for those playing at home, it's up. I guess it's got a market cap about five and a quarter billion, dollars on a trailing twelve month basis up at about two percent, and you're to date off about six percent. What's the message you bring to your shareholders? You're in New York, I'm sure you're seeing some shareholders as well. What's the message for your company?
So this business has come off of a difficult demand environment in twenty twenty three, Electronics markets drew down significantly, the global industrial economy stuttered a little bit. And as we enter twenty twenty four, we manage twenty three well, preserve profits, made some great capital allocation decisions to position the business well for growth, and our end markets are
getting better. Semiconductor markets are improving, Electronics markets are improving, So we're well positioned for you know, several years here of above cycle above cycle average growth.
Is that an inventory thing or is it an end user demand thing? I mean just restocking inventory At this point.
It's an end user demand thing.
We did have a drawdown of channel inventories post COVID. There was a bullwhip effect. Electronics were overbought by the supply chain in twenty twenty one into twenty twenty two. There was a big inventory clearance in twenty twenty three, and now we're starting to see semiconductor production increase. We're starting to see new smartphone models gaining traction. Our story is not just one of units, it's content per unit, and so the more technically challenging, the more robust the application,
the more value for a company like ours. And so we're going to grow over and above units through the cycle, and unit growth is poised to recover nicely here.
So I'm just looking at the FA function on the Bloomberg terminal financial analysis. It looks like the street's got kind of mid single digit kind of revenue growth over the next several years, mid teens EPs growth. So it some operating leverage in your business model? Is is that what you're telling investors to buy or do you also say, hey, this is also a fragmented business and if we see things out there to buy to maybe goose our growth rate, we'll do that.
How do you think about that?
So the answer is yes, in the first instance, the business's asset light. It generates incredibly strong cash flows. So our moat isn't in manufacturing process, it's in technology and people, and so we don't have to invest a lot of capital in order to drive the business's growth, and then we're able to find very interesting things to do with that strong cash flow. So we've been very inquisitive in our history, and we doubled our adjuster learnings per share
in our first three years as a public company. We set a goal to do that in five years. We set another goal to double it again in five years, and we're in the middle of that process right now. The goal is to compound EPs in the teens.
So what about the what about the input side? Like it sounds like you're trying to run pretty lean, but we still definitely see inflation kind of all around. Any kind of manufacturing is going to get hit by that. And I appreciate that you're sort of on a different scale, But what do you see.
So we've had inflation over the past several years, started to stem big inflation, and logitition copper to stop a little bit of both. So logistics have plateaued. They're starting to come in a little bit. But with some of the disruptions in global supply chains, we're starting to see a bit of pressure there. Raw material price inflation has
slowed down. We're starting actually to see some deflation. As a company we're able to take price from customers when our costs increase and typically able to hold that and so margins have gotten better in the back half of twenty twenty three and we expect that to continue in twenty twenty four.
So you recently acquired a company, a new science, a new copper science company.
What is that?
So this is a really exciting opportunity. There aren't big step change breakthroughs in material science in our markets. What used to work typically works with small modifications. Okay, we acquired a business called Couprion that has a product called active copper, which is nano particular copper. That is a
new mechanism to enable next generation electronics. If you think about your smartphone, it's computing power is getting greater through smaller lines on the circuit board and smaller holes connecting the layers of the circuit board, and conventional material science struggles to deal with those technical challenges. Coupriyon is a solution for that. So it's got huge potential. We've got great customer engagement. It's a very very exciting story, not just for our company, but for our customers.
In a broader sense. The smartphone trough like the electronics trough you were mentioning, sort of we had a lot of buying and then that came down during the pandemic. Now and then we're sort of have we troughed? Are we going to see a meaningful acceleration over the next say, eighteen months? So yeah, cause it is Paul going to buy a new phone. That's twelve physicists, I'm an eleven. Yeah, it's fine, okay, so speak to me about.
Yeah, there's so the smartphone mark we call the bottom in broader electronics in the second quarter, and we saw recovery in the back half. The slope of that recovery is uncertain, but the long term legs of increased technical requirements for electronics are very very long running, and the smartphone replacement cycle has extended, and smartphone saturation of the
market is getting there. We troth from a unit's perspective, in twenty twenty three, we'll see unit growth in twenty twenty four, we expect that, but we're starting to gear up for.
The next thing.
The next thing is enabled by AI, right, so more computing power proliferating around the edge of the network has very very high technical demands and We're not capacitated by the number of people on Earth when it comes to AI, right, the number of smartphones is kind of driven by the
number of people walking around AI. You know, Industrial automation is not capped by that, and as we get autonomous factories and autonomous cars, there's just more and more application space for high performance electronics, which is great for our company.
Thirty seconds, who you compete with?
We've got great competitors, but diverse competitors. We're the only company in our market that can speak to the breadth of electronics applications that that we have in our portfolio. So we compete a bit with DuPont. We compete with a company called at Tech that's part of MKAS Group. We've got local competitors and markets like Japan and China. It's a competitive market, but our ability to provide value to customers through materials compatibility and a broad product offering is unrivaled.
See I was trying to figure out how he got to where he is now. I figured it out and investment banking to private equity. Then he says, screw this, I'm going to go and do it myself.
And he went to like a real industry and get a real job that makes stuff.
I've seen that route before. A lot of success.
Industry is really fun.
Yeah, really like I'm not just going to bank these people. I'm gonna go do it.
Ben Glicklich, CEO of Element Solutions, appreciate you coming in here into our studio. It's a fascinating company. Never would have thought about it. I learned something new today Element Solutions. You need all the chemical stuff for the tech and the chips and all that kind.
Of stuff, and there are people that do that for a living. That's good.
Up.
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