Good morning, ladies and gentlemen, and welcome to AVENS Corporation webcast to discuss the company's second quarter 2026 results. My name is Michelle, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will have a question and answer session following the company's prepared remarks. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Patrick Davis from EVEN's Investor Relations team. Please go ahead.

Thank you, and good morning to everyone joining us on the call today. Before we begin, we would like to remind you that statements made during this webcast may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guaranteed of future performance. They're based on management's expectations and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statement. We encourage you to review our most recent reports, including our 10 or any applicable amendments for the complete discussion of these factors and other risks that may affect our future results. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the presentation posted in the Investor Relations section of the Aviant website where the company describes the non-GAAP measures and provides a reconciliation for historical non-GAAP financial measures to their most directly comparable GAAP financial measures. A replay of this call will be available on our website. Information to access the replay is listed in today's press release, which is available at aviant.com in the Investor Relations section. On the call today is our Chairman, President, and Chief Executive Officer, Dr. Ashish Kanfor, and Joe DeSalvo, Senior Vice President, Chief Financial Officer. I will now hand the call over to Ashish to begin.

Thank you, Patrick, and good morning, everyone. I want to begin by acknowledging the hard work of the entire AVN team and thank them for delivering a strong quarter, which was a story of successful execution, managing inflation and navigating supply chain disruptions. Our team continues to perform with discipline, poise and determination under a very dynamic and volatile environment. In the second quarter, our team delivered $0.96 of adjusted EPS, $0.09 ahead of expectations, driven by better-than-expected volume growth. Organic sales grew 4.3%, with double-digit increase in adjusted EBITDA year-over-year. By remaining close to our customers, we delivered profitable growth across the portfolio. market share gains, new product innovations, and pricing actions contributed to positive organic sales, including volume growth in both business segments. Asia was a particular standout, growing organic sales 18% over the prior year quarter, driven by secular tailwinds in electronics and high-performance computing, as well as new business gains in functional additives. Both business segments showed double-digit organic growth in Asia. Operating leverage from revenue growth, combined with our continued focus on company-wide productivity initiatives, drove Q2 adjusted EBITDA margins to a record 18.3%, an expansion of 110 basis points year-over-year. These results contributed to 20% adjusted EPS growth year-over-year, validating the success of our strategy, while also demonstrating the consistency of our team's operational execution. Strong cash flow generation in the quarter enabled debt paydown of $50 million as we continue to prioritize strengthening our balance sheet. Our first half results, shown on the right-hand side of the slide, reflect the compounding power of our business model, where 1.2% organic sales growth and 70 basis points of margin expansion generated 4.7% adjusted EBITDA growth and 9.1% adjusted EPS growth, excluding the impact of foreign currency translation. The underlying demand environment continues to vary by end market, but our strategy and execution are enabling us to outperform those conditions in many areas. Let me walk through the trends we are seeing across our businesses. Packaging, our largest end market, representing 23 percent of company sales, grew double digits in the second quarter. Along with solid pricing execution, we continue to see growth from innovation and new business wins. We are seeing strong customer interest in our non-PFAS polymer processing aids for personal health and beauty and food packaging applications, as well as continued growth in electronics. Given the strength of our project pipeline, we expect our packaging business to keep the growth momentum in the second half of the year. In consumer, demand trends are stabilizing. Sales grew mid-single digits in the second quarter, driven by the U.S. and Asia, and for both consumer discretionary and staples submarkets. At the same time, our global key account prioritization and focus on winning business with large local Asia customers continue to create share gains and business growth for us. We expect growth to continue in the second half, supported by improving market demand, ongoing share gains, and favorable comparisons as the year progresses. As we mentioned last quarter, demand in defense remains healthy, supported by a strong project pipeline spanning both the United States and Europe. After a slower start in the year in the first quarter, activity picked up in the second quarter where our defense business grew even against a strong comparison of 19% growth in the second quarter of 2025. We expect this business to grow mid to high single digits for the year. Building and construction continued its strong performance in the second quarter with double digit growth driven by share wins and new business development. This business is benefiting from data center and broader infrastructure investment trends, as well as new application development by our teams for composite light weighting for residential markets. We expect the strong momentum to continue in the second half of the year. Our healthcare business grew double digits in each of the prior two years. As we highlighted in our last earnings call, we are seeing some rebalancing of inventory levels by our customers, especially for drug delivery and remote monitoring devices. While this dynamic weighed on first-half results, the underlying demand and secular trends supporting growth remain intact. Our teams continue to build a strong project pipeline working closely with leading pharmaceutical and medical device and equipment companies. We expect growth to return in the second half, led by demand strength, especially in the medical devices and equipment applications. Industrial also improved in the second quarter, returning to modest growth, led by strength in Asia. With more favorable comparisons ahead, we expect that growth momentum to continue through the balance of the year. transportation demand remains soft, reflecting lower vehicle production rates and weaker demand in marine applications. We do not expect this trend to change in the third quarter or perhaps for the entire second half of the year. In energy and telecom, demand trends continue to improve, supporting our expectation for growth in second half of the year. Within telecom, we are seeing increasing activity tied to high-performance computing and electronic applications. Our energy business is expected to benefit from electrical infrastructure projects in the United States. We expect both energy and telecom to grow high single digits to double digits in the third quarter. Overall, we are encouraged by the improving demand trends across much of our portfolio. Combined with continued execution of our strategy to focus on customers, innovation, commercial excellence, and targeted share wins, these trends support our confidence in our updated full-year guidance. Importantly, much of our progress in first half was driven by factors within our control rather than being dependent on a broader macro recovery. That focus on execution has enabled us to deliver consistent improvements across the business despite a volatile operating environment. As we update our outlook for the year, we also think it is important to step back and look at the broader picture since we adopted our new strategy beginning in early 2024. This slide highlights the financial outcomes our strategy has delivered over the past three years and the progress we have made in building a stronger, more resilient business at Avient. We have systematically expanded margins, grown earnings, generated strong cash flow, and strengthened our balance sheet each year, all while continuing to invest in innovation and our prioritized growth vectors. These results demonstrate the effectiveness of our strategy, the compounding power of our business model, and our ability to drive operational performance through actions within our control, even amid volatile and uncertain market conditions. A good example is Euro, where we have been executing a focused strategy to improve profitability by streamlining structure, reducing complexity, driving productivity and operational discipline, and executing portfolio actions. As a result, EMEA adjusted EBITDA margins are expected to improve by more than 400 basis points from 2023 to 2026, reaching more than 18%, with systematic improvement each year along the way. This brings the region's margins in line with the broader portfolio and demonstrates our ability to create value even in more challenging demand environments. Importantly, these results are not driven by any single initiative. They reflect the combined impact of customer focus, innovation, portfolio management, and targeted share gains with key accounts while collaborating across our two business segments to represent one AVN to our customers. Innovation remains a critical component of our growth strategy, and we believe there remains substantial opportunity ahead as our commercialization and innovation capabilities continue to mature. The next slide highlights how we are leveraging innovation and customer collaboration to capture attractive growth opportunities in high-value applications that intersect with important secular trends across our prioritized markets. We recently launched a new range of dielectric materials under our pre-firm portfolio, specifically for humanoid robots and intelligent driving vehicles. Robots and autonomous cars are increasingly reliant on their radar systems to detect and respond quickly to their surroundings, other cars, pedestrians, and objects. Traditionally, radar housings or radomes have relied on glass fiber reinforced materials. However, these materials distort signals at higher frequencies typical of these new and emerging applications and are susceptible to warpage during manufacturing, resulting in lower yields and higher production costs. Pre-perm materials are designed to offer extremely low loss or signal distortion in higher electromagnetic frequencies and are preferred by robot and car radar manufacturers for enabling cleaner signal transmission at higher rates and low latency delays. In addition to meeting and exceeding customer requirements on performance, pre-perm materials also provide easier manufacturability with greater impact resistance, low warpage and and laser assembly compatibility. We are currently developing radome solutions for various humanoid robot and autonomous vehicle radar manufacturers, customizing properties to best fit their applications and easily adapting to their existing manufacturing processes. We continue to expand this materials platform for a variety of applications and manufacturing processes supporting this fast-growing area. Now, I would like to turn it over to Joe to cover our second quarter financial results and outlook.

Thank you, Ashish. The innovation example you just highlighted reflects how we are translating our capabilities into commercial wins for value creation across the portfolio. With that context, let me walk through our second quarter segment results. Color additives and inks delivered a strong quarter, generating 5% organic sales growth and 9% adjusted EBITDA growth, excluding the impact of foreign currency translation. Through innovation and targeted new business we continue to expand our position with existing customers while capturing attractive new growth opportunities. The team also delivered excellent commercial and operational execution, remaining highly responsive to customer needs while proactively managing inflationary pressures and supply chain challenges. As a result, the combination of volume-driven revenue growth, favorable mix, pricing execution, and ongoing productivity initiatives generated meaningful operating leverage, expanding adjusted EBITDA margin 80 basis points to 21.7%, and segment adjusted EBITDA of $125 million. Specialty engineered materials delivered 3% organic sales growth in the quarter, driven by continued strength in high-performance computing, electronics, and infrastructure-related applications, all of which are benefiting from attractive secular growth trends. We also saw double-digit growth in consumer sales during the quarter, driven by stabilizing demand and new business wins with global OEMs and personal care and electronics. Defense also remained a contributor to growth, particularly in the U.S., where project activity improved following delays associated with the government shutdown earlier this year. The combination of growth in these high-value applications, contributing to favorable mix, and productivity initiatives resulted in adjusted EBITDA of $76 million, an increase of 20 percent compared to the prior year. Margin expansion of 310 basis points also benefited from lapping of approximately $3 million of planned maintenance expense incurred in the second quarter of 2025. While that maintenance expense provided a meaningful benefit to the year-over-year margin comparison, underlying profitability trends remain healthy, and we expect continued margin expansion in the second half. Turning to regional performance, I believe that the first to second quarter sequential trends provide the best indication of current business momentum. As many of you know, the first and second quarters are typically fairly comparable from a seasonal demand perspective. Against this backdrop, we delivered 8% sequential organic revenue growth globally. While pricing actions contributed to this performance, what is particularly encouraging is the growth in both Asia and United States exceeded the impact of pricing, indicating improving underlying demand and continued market share gains. Asia grew 20% sequentially, while the United States and Canada increased 7% sequentially, driven by strength in both the CAI and SEM business segments. Europe and Latin America also delivered positive sequential growth of 3% and 12% respectively. With that as context, let me turn to our updated financial guidance for 2026. We are raising our full-year guidance of adjusted EBITDA, EPS, and free cash flow. We now expect adjusted EBITDA to be in the range of $575 million to $603 million, adjusted EPS to be in the range of $3.10 to $3.25 per share, and free cash flow to be in the range of $210 to $230 million. The updated outlook reflects our first-half performance and the momentum we are carrying forward into the second half of the year. While our outlook incorporates continued macroeconomic uncertainty, including inflation and geopolitical developments, we remain confident in our ability to deliver within the guidance range based on our team's execution, customer engagement, and current business momentum. We also updated our capital expenditure outlook to a range of $120 to $130 million compared to our prior expectation of $140 million. This change primarily reflects the timing of certain capital projects and does not change our commitment to investing in our prioritized growth portfolios. Even at the updated level, our capital expenditures are expected to be above the $107 million invested in 2025, driven by strategic growth investments. In addition, our strong cash flow generation continues to support balance sheet improvement. During the second quarter, we repaid $50 million of debt, bringing our total debt reduction over the last 12 months to $200 million. Looking ahead, for the full year of 2026, we expect to repay a total of $100 to $150 million of debt, which is inclusive of the $50 million paid in the second quarter, supporting our expectation for net leverage to exit the year in the range of 2.2 to 2.4 times. Lastly, for the third quarter, we expect adjusted EPS of approximately $0.80 per share, representing growth of 14% versus the prior year quarter. With that, we will now move to the Q&A portion of today's call.

Thank you. to ask a question, please press star one one on your telephone and wait for your name to be announced. And if you need to withdraw your question, please press star one one again. And our first question will come from David Begleiter with Deutsche Bank. Your line is open.

Good morning. This is Emily Fusco on for Dave. Maybe just if you could have the organic growth, how much was volume versus price and just kind of give some more color by segment.

Yeah, so, Emily, the growth was at 4.3% organic growth total, and about one-fourth of that was volume and three-fourths was price. But I think the more important thing is as we go from Q2 to Q4, that ratio of volume to price goes to flip-flops to almost 70% volume and 30% price in Q4, and then Q3 is somewhere in between. So we are seeing good volume growth coming through, and obviously, as we said earlier in our first quarter earnings call, we will be net price benefit every quarter, and that continues to be the case on the price side.

Got it. Okay. And on pricing, once RAWs come down or maybe return somewhere near a pre-conflict level, how much of that price do you expect to retain?

Yeah, I mean, our teams have shown that we can keep the price longer and retain it. You know, this happened after COVID situation and we don't, you know, there's always some cases where the pricing plays a role in business negotiation, but we don't expect any material amount of price to go back and we try to, we will, we have confidence we can maintain You know, we do see still a lot of uncertainty, and some RMs are still moving, and so things haven't really changed so much from a certainty point of view, and our customers understand So we have pretty high confidence we can keep the price. Again, we work with our customers not, you know, not to take any extra price, but also I want to make sure that we are able to pass on any case of inflation that we are seeing through and hopefully do a little better than that perfect thank you thank you and our next question is going to come from frank mitch with fermium researcher lines open thank you good morning and a nice result she's given the order of the magnitude of the upside that you posted here in the second quarter.

A lot obviously went right since we spoke on May 7. I was wondering if you could let us know what the two or three biggest surprises that led to that big upside for the second quarter.

Yeah, Frank, I think the biggest piece was the volume growth. If you remember, there was a question in our earnings call which asked about Q2 volumes, and we were projecting between one to two percent volume negative in the quarter, and that turned out to be more like plus one percent positive, more or less. So essentially, that was the biggest reason that gave these results.

The pricing came out exactly like our teams had projected and what we had thought we would execute. So not much surprises there.

And FX was just a little bit favorable but not as big as the volume part so i think those were the two biggest things if you say uh volume and a little bit of fx okay great and um on the volume side um did you get any sense or do you have any sense that the second quarter might have benefited from pre-buying um as price as pricing went up is there any sense that uh the underlying or do you believe that uh the demand you saw in the second quarter was underlying demand and no sense of any inventory building by your customers.

Yeah, Frank, we don't think there was much pre-buying, and we're pretty confident of that. If anything, it will be very minuscule, which is always within error bars, two, three million or something like that. Hard to say that part, but at a big level, we are not seeing that. And actually, we just got our July results, and we started the quarter as we had projected and pretty strong, actually. So I think we don't believe there was any pre-buying, or at least to the level, that would influence any results going forward.

Terrific. Thank you so much.

Thank you. And the next question will come from Pete Osterlin with Truist. Your line's open.

Hey, good morning. Thanks for taking the questions. I just wanted to start with the margin growth in engineering materials. It looks like very high incrementals there, even excluding the maintenance impact you called out. So I was just wondering, could you give us a sense of how much of that margin growth was end market mix versus productivity versus pricing? And where do you see segment margins going from here?

Hey, Pete, thanks. This is Joe. Thanks for the question. So the planned maintenance that we talked about had about 100 basis points benefit for the quarter. So the remaining 200 basis points is split between price mix favorability in the quarter as well as net productivity gains. As we kind of get into the back half of the year, what we've assumed or modeled out is that the segment will expand margins around 100 basis points in the second half.

Very helpful. Thank you. And then, you know, just wanted to ask, you know, considering what looks like some moderation of expectations in certain growth vectors like health care, but then you've got strong momentum and data center infrastructure. I'm just trying to figure out overall, how is your end market mix expected to impact margins in the second half and then maybe in the next year?

Maybe I'll take that. I think, first of all, we expect margin growth for aviants, you know, for total company, but also within each of the two business segments. So you should see that. And, you know, in the first half, we are, as a company, up 70 basis points on margin year over year. So that's one data point. And we expect that we will, you know, finish positive margin, both the business segments, in the end of the year. With respect to the end market segment, just a little bit of flavor for you guys. We grew organic growth in seven out of the nine markets we play in Q2. and we expect eight markets to grow in Q3. So we are seeing good demand coming from markets. It's volume-driven demand. As I said, our volumes will continue to increase as the quarters progress, so we are seeing momentum. But also some of our innovation and our share wins are part of that story as well. So it's the demand coming back, but also our team's winning new business and also the innovation part getting us into new areas, especially for these growth vectors that you mentioned. So last year we finished our growth vectors in high single digits while the rest of the business was flat to slightly negative. And I think this year, again, we expect the growth vectors to outperform the business, especially on the volume side, we will see because we are getting into new business wins and new markets with these growth vectors. So we are pretty bullish with respect to our margin expansion story, but also growing the business on the top line and the bottom line.

Excellent. Thank you.

Thank you. And our next question will come from Lawrence Alexander with Jeffries. Your line is open.

Hi, everyone. It's Dan Rizzo on for Lawrence. So you did ROIC was up to 9.6%, which is great. I thought a few years ago you guys gave ROIC target. I don't know if that's true or not, but if it's not or even if it is, is there a target of what you think you can get to if things keep going the way they're going?

Hey, Dan, Joe DeSalvo. We gave a target probably back in 2018, which would have been a much different portfolio at the time. So prior to the Clarion acquisition and the Avian Protective Materials acquisition and the divestiture of two segments. So that was quite a while ago. We have not given a target. We've been reporting on it as it's the focus of the companies. We want to continue to expand it and grow that. After doing the two acquisitions in 2020 and 2022, that took a step backwards. And so we've been focused on expanding, and you see that consistent performance over the last few years.

Okay, sorry. I just really dated myself I didn't realize it was that long ago um but anyway um industrial was was up and you saw some some some volume improvement I was wondering if that's more from from new winds and and and and and just kind of more market penetration or if there's some restocking going on just after some some softness I guess my real question is is how sustainable it is beyond maybe a Yeah, so industrial was largely a story out of Asia for Q2, but as we go into Q3 and Q4, the comps become very favorable from last year, and so the growth that we are projecting is both comps-related but also volume-related.

In Asia specifically, we saw a lot of demand in, you know, 3D printer business and things like that, which are newer trends. And also areas like smart glasses, which is, you know, again, upcoming trends. Our team are winning new businesses in these areas. But also, you know, as we look into the second half of the year, we are expecting industrial to grow in the United States as well. EMEA remains challenged still on the industrial side, but USAC is showing good growth in that area, and our teams are winning business there. So I think, but the comms, for example, industrial was down 8% in Q3 of last year, So comps are very favorable, and that's the reason giving us confidence that year-over-year we'll grow that business.

Thank you very much. Thank you. And our next question is going to come from Mike Harrison with Seaport Research. Your line is open.

Hi, good morning. Ashish, you called out the non-PFAS polymer processing aids as an important innovation in your packaging business. It sounds like you're getting some more commercial traction there. I'm just curious, what portion of your customers are looking to move in this direction to remove PFAS? And are there any regions where there either currently is some regulatory push to make these changes or an expected regulatory change that would take PFAS out?

Yeah, so Mike, in Europe, especially in August of 2026, the expectation, or maybe it's mandatory now, is that anything that is used in food packaging would be non-PFAS. You know, there should not be any PFAS added to that thing. You know, inherently there is always some PFAS because of, you know, it's hard to get out of everything. but that you're not adding any PFAS to the processing of the material and so on and so forth. So that's a regulation. And so that's driving our non-PFAS business, especially for flexible packaging for food contact. But also we are seeing, you know, broader based trend, even when, although it's not mandatory, but a lot of our, especially multinational customers, multinational companies which are doing global businesses, they are walking away or finding ways to get away from PFAS as much as they can ahead on their own. And so we are seeing non-PFAS getting traction. For example, we highlighted an example last earnings call in personal beauty and healthcare business where it was being utilized in packaging some of the personal beauty products or personal care products. So not only food packaging, but also other forms of packaging, depending on the standards set by the companies, and regulation and non-regulation are both driving the business. You know, with respect to the number of customers, we are in trials with a whole bunch of customers. These things and qualifications take a long time, as we have been highlighting. And, you know, the change of this magnitude is not trivial. you have to run this material for months on their production line and so it's a big investment from the customer's point of view as well and they want to be sure but once you are in then you are qualified and then you can keep retaining that business the moat is stronger for switching so we are gaining business with customers it's a small business right now a few million dollars this year but it is our first brand-new business in this area, and we expect it to continue to grow because of the trend size that I just mentioned.

All right, that's very helpful. And then I was just curious on the U.S. and Canada. You noted that organic sales were down 2% year-over-year. I assume the volumes were a little bit worse than that, but it sounds like maybe the sequential trends are improving. So can you help us understand? And I don't know if you can provide a look on kind of the May, June, July timeframe. You know, what kind of improvements are you seeing and any color on what markets specifically are improving would be helpful?

Yeah, so you're right. Volumes were down, you know, more than 2% in U.S. You know, it was like almost 4% volume down for USAC in Q2. But as we are looking into Q3 and Q4, we expect volumes to be in the mid-single-digit range positive. And I think, so obviously the trend, as you said, it has been a trend that has been improving, and we are already seeing those results in July come through. So we expect pretty healthy volume-driven growth in the United States and Canada in the second half of the year. All right, thanks very much.

Thank you. Thank you. And our next question is going to come from Gansham Panjabi with Bayard. Your line is open. Yeah, thank you.

Good morning, everybody. Ashish, can you just give us a sense as to where you are in your pricing initiatives, you know, in context of the ROM drill spike earlier this year? And then specific to 2Q, how did that net out for price cost in total? And the reason I'm asking is, you know, obviously EBITDA margin stepped up quite a bit at plus 110 basis points in 2Q, and it was, you know, 20 basis points in 1Q. and I'm just curious as to whether price cost favorability was a big differential between the two quarters.

Yeah, I mean, you're right, Ghansham. I mean, you know, we gave the price increases around March time frame and our teams moved fast on it, and so we started seeing results of it. So Q2, we were net price positive already, and, you know, almost the growth, you know, almost 3%, 3.5% came from price. So price was a significant, as we said, one-fourth of the growth came from the volume and three-fourths came from the price. As we go into Q3, we will see higher inflation play through the raw materials because of the timing of raw materials, but also higher price come through. So net-net, we would still be price positive in Q3 as well. And in Q4, the pricing effect will subside a little bit, but the volume part will take a bigger piece, as I mentioned earlier. So overall, for each of the quarters, we expect it to be net price positive for each of the quarters for this year. But the price volume makes changes with price being the dominant growth driver in Q2 to volume being the dominant growth driver in Q4.

Okay, that makes sense. Obviously, very complex, you know, operating backdrop. And then, you know, going back to 4Q guidance, you know, you're being very specific with 3Q guidance as you have, as you were for 2Q as well. But it's a very wide range, at least on an implied basis for 4Q. What's underlying that is just, you know, you're in an inventory de-stocking, your view on volumes, but what's driving that big range for 4Q?

Hey, Ganshan, this is Joe. Good question. So, first of all, the Q3 guidance is an approximate 80 cents, so I wouldn't say that that's locked in. It's based on our visibility for the quarter now, so we have the highest degree of confidence in this quarter out in front of us, but I'd still say there's a range associated with that, approximate 80 cents, plus or minus a few cents either way.

And so I wouldn't put the entire 15 cent adjusted EPS range all in the fourth quarter for one point for starters, I guess.

And then the second thing is, you know, as you get into the fourth quarter, we do have less visibility, as I said, for sales in the order book at that point. And you also have year-end seasonality with holidays and how things could play out, as well as the potential for, you know, narrowing or maybe normalizing of the net price benefit as we get into the fourth quarter.

So, we're leaving ourselves a little bit of a range there to ensure we account for that makes sense thanks so much thank you and the next question comes from abigail eberts with wells fargo your line is open hi there thanks for taking my question um you call that data center is the tailwind across both telco and building and construction can you give us a feel for the size of this opportunity for you yeah abigail um you know uh for for us the um The SAM or the actual addressable opportunity with our current portfolio, that is, it's close to a billion dollars for the data center and electronics part. That's just from high performance computing and electronics. And then there's another billion dollar that is from an infrastructure piece, which is wire and cable and other pipe and fittings kind of businesses where we sell some of our products. So I think it's overall, we like to see, rather than breaking it as data center, we see this more of an electronics, digital play, and it manifests everything from making the silicon chip all the way to showing up in data centers, in servers. So across that value chain, it's about $2 billion directly addressable opportunity for us. Our businesses right now, this year, will finish close to $100 million. We just started focusing in this area, but it's growing very fast. So, for example, we have doubled our electronics business over the last three years, and this year the electronics part is expected to finish close to $60 million. So we expect similar kind of doubling in the next two to three years, but also assuming that those kinds of growth rates of the industry sustain. As you may, you know, I know there's a lot of CapEx being put into this area, but we are a little bit behind in the value chain, you know, further back up in the value chain, so we don't see that whole pie of trillions of dollars of CapEx being put into data centers, but we are trying to get a big piece of, as big a piece of that as possible. And we are also trying to make our portfolio more relevant for that area and we'll continue to grow more portfolio either organically or inorganically in that area in the future.

Got it. Thank you very much for the color.

Thank you. And our last question will come from Vincent Andrews with Morgan Stanley. Your line is open.

Hi. Good morning. This is Turner on for Vincent. Joe, you mentioned SEM should expand margins by 100 basis points in the second half. Is this half over half or year over year?

And do you mind talking a little bit more about underlying assumptions between price-cost, mix shift between different applications or end markets and volume leverage yeah thanks Turner so the hundred basis points is year-over-year is what I was referring to for the SEM segment and it's going to be primarily driven from mix as well some of productivity benefits that we've been executing over the last year and a half or two years and so if you look at their demand trends in the defense business so defense was up low single digits here in the first half of the year, but lapping tough comps, where defense grew strong double digits last year. As we get into the back half of the year, we'll see a little greater growth year over year from defense, as well as the continued momentum we talked about with electronics and high-performance computing, which are also higher margin parts of the portfolio. So a favorable mix and productivity benefits will continue to help the margin expansion trend, but at a lower degree, as I mentioned, about 100 basis points for the segment in the back half.

Awesome. Thanks for the color. And as a follow-up, you all have previously said net leverage below 2.5 times opens the door to buybacks and potentially M&A. Now that you're guiding to 2.2 to 2.4, how are you thinking about the go-forward capital deployment between further debt paydown, buybacks, or acquisitions?

Yeah, so, Vincent, I mean, as you mentioned rightfully, we have been prioritizing debt reduction and strengthening our balance sheet, and we are getting close to the target range that we wanted that, and especially in this high interest rate environment. And so, also, I see is getting, you know, in the right direction, moving in the right direction, and we have fair confidence we can continue to improve that. So we have been making organic growth investments. As you know, in our growth portfolio, we have been paying dividends, which have been priorities as well. And now I think as we get closer to our target leverage, we have more optionality and flexibility. We can continue to pay a debt. We can buy our stock if we think it is undervalued. But we have started thinking and looking at what we could add to our portfolio to become more relevant, especially to drive more growth and margin expansion. So all those three things become options right now based on where we are in our journey and how the business has gotten healthier, and we'll continue to do that. So, at this point, I would just say that everything is on the table. We have started processes on all things, but nothing imminent that you can model right now.

Thank you, Ashish.

Thank you. This does conclude today's conference call. Thank you for participating, and you may now disconnect.