Element Solutions Inc Q3 FY2025 Earnings Call

Good morning, ladies and gentlemen, and welcome to Element Solutions Third Quarter 2025 Financial Results Conference Call. I will now turn the call over to Varun Gokarn, Vice President of Strategy and Integration.

Good morning, and thank you for participating in our third quarter 2025 results conference call. Joining me today are CFO, Carey Dorman. In accordance with Regulation G, web conference call. A replay will be available in the Investors section of the company's website. During today's call, we will make forward-looking statements that current views of the company's pro forma financial results. These statements are based on assumptions and expectations of future events, which are subject to risks and uncertainties. Please refer to the earnings release, supplemental most recent on our website for a discussion of the material risk factors that could cause our actual results to differ from our expectations and predictions. Today's materials also include financial information that has not been prepared in accordance with U.S. GAAP. Please refer to the earnings release and supplemental slides for definitions and reconciliations of these non-GAAP measures to comparable GAAP financial measures. It is now my pleasure to introduce our CEO, Ben Gliklich.

Thank you, Varun, and good morning, everybody. Thank you for joining. This is an exciting morning for us. When we launched ESI, we talked about a value creation model, marrying operational excellence and prudent capital allocation. Today is a solid proof point showcasing our ability to do both. In addition to reporting record results yesterday, we're also announcing the acquisition of Micromax, a highly accretive strategic transaction and a value-enhancing addition to our electronics portfolio. Before we get into that, though, I want to give proper view to our operating results. This was an outstanding quarter. We set multiple records. Despite selling our graphics business, this was our highest quarterly adjusted EBITDA since the inception of Element Solutions. Our Electronics segment posted its sixth consecutive quarter of high single-digit organic growth and achieved a record level of revenue. Excluding the impact of graphics, adjusted EBITDA growth would have been 10% despite some of our legacy end markets remaining below prior peak volume levels, a weaker EV outlook, and a soft macroeconomic backdrop in Western industrial markets. Our teams are executing well on their strategies. In our industrial segment, portfolio optimization, productivity initiatives, and high-margin wins in both verticals drove strong profit growth despite a flat top line. The segment saw meaningful margin improvement. And excluding the impact of our graphics divestiture, adjusted EBITDA growth would have been almost 30%. On the electronics side, we've built a unified platform of technologies to solve emerging customer pain points just as burgeoning investment in data centers and their associated infrastructure accelerates demand for innovative material solutions. Our portfolio is uniquely positioned to provide those solutions from metallization chemistries for high layer count printed circuit boards to specialized thermal management materials used in assembly to advanced packaging chip scale chemistries. Micromax will add to those solutions, its portfolio in electronics inks and paste with a specialization in the highest performance, most technically challenging applications such as aerospace, defense, and health care is a great fit for Element Solutions. The acquisition broadens our offerings to our supply chain and enhances our value proposition to OEMs and specifiers. In 2019, our electronics business was just over $1 billion. And with this transaction, it will exceed $2 billion. Like our business, Micromax is a leader in niche electronics markets reliant on innovation that is co-developed with customers and requires high levels of applications expertise. Its products are known for durability and performance in harsh environments and provide mission-critical solutions in highly specialized end markets. Micromax sits at the intersection of our assembly and circuitry businesses. Its metals-based manufacturing resembles assembly solutions, but its products are used more in circuit pathway applications like our Circuitry Solutions business. These products also fit our core competencies in formulation and our high-touch low capital intensity operating model. The business has a proven team of experienced, highly technical leaders who add depth and expertise to our electronics business, McDermott Alpha Electronics Solutions. The transaction meets our robust acquisition criteria and is consistent with our strategy of disciplined investment in markets we understand and in growth businesses that we believe are better under our ownership. We expect the Micromax transaction to be more than 5% accretive to adjusted earnings per share. And based on its projected 2025 results, contribute approximately $40 million of adjusted EBITDA on a full year basis at accretive metals adjusted EBITDA margins. Subject to regulatory approvals and customary closing conditions, we expect to close in the first quarter of 2026, and we're looking forward to welcoming the Micromax team into the Element Solutions family and to capitalizing on the unique value opportunities associated with this combination. Shortly, you'll hear more from Carey on our results. But to me, the most exciting thing about the quarter is what it means for our future. We've been able to generate great organic outcomes while ramping up investment in future internal and inorganic opportunities. While growing nicely in 2025, we're simultaneously building levers to accelerate that growth going forward. Those include several new product introductions in high-value categories in 2026, the accretive, highly strategic acquisition of Micromax underway, and substantial remaining balance sheet capacity to put to work should the right opportunities present themselves. The outlook is quite positive. Carey?

Thanks, Ben. Good morning, everyone. On Slide 4, you can see a summary of our third quarter financial results. Organic sales grew 5%, and adjusted EBITDA would have increased 10% when adjusting the graphics business out of both the 2024 and 2025 periods to account for that divestiture. Adjusted EBITDA was a record $147 million and exceeded our initial guidance for the quarter of $140 million to $145 million. Electronics organic growth of 7% was driven by solid performance in semi and assembly and exceptional volume growth in Circuitry Solutions. Through economic and industry investment cycles, we benefit from diversification within the electronics supply chain. This quarter, our circuitry business was a primary beneficiary of AI-related investment as our market-leading pulse plating products are used to support fabrication of high layer count server boards. This demand, along with the sequential ramp in smartphones, allowed us to deliver high single-digit organic growth for the segment even as customer-related volume weakness weighed on power electronics growth in our semiconductor business. The addition of Micromax should further enhance end market diversification and increased opportunities to deliver on customer-led growth across the broader manufacturing landscape. Our core industrial surface treatment business has demonstrated stable or growing adjusted EBITDA for several quarters, even as volume has been under pressure. This quarter, underlying volumes improved as a result of strong growth in Asia and new business wins ramping in the Americas. At the same time, margins benefited from improved fixed cost absorption, portfolio optimization, ancillary business lines, and favorable product mix. ESI's adjusted EBITDA margin improved roughly 20 basis points year-over-year in constant currency terms and was negatively impacted by higher pass-through metal prices. Excluding the impact of roughly $125 million of pass-through metal sales in Assembly Solutions, our adjusted EBITDA margin would have been 28%, a 100 basis point improvement year-over-year. Foreign exchange provided modest favorability of about $3 million in the quarter, and at current rates should provide a similar level of year-on-year benefit in the coming quarter as well. On Slide 5, we share additional detail on the drivers of organic net sales growth. Starting with electronics. In assembly, the third quarter saw an increase in China volumes associated with smartphone activity as well as continued growth from customers serving the high-performance computing and telecom infrastructure markets. Advanced solder paste volumes for various computing applications continue to grow as well. Circuitry Solutions sales grew 13% organically. This was driven by continued demand for data center applications, a seasonal ramp in mobile phone activity, and circuit board demand in the Asian EV market. Data center growth is also increasing demand for data storage, which drove sequential acceleration in our memory disk business that should continue through year-end. Semiconductor Solutions organic net sales grew 5% as continued double-digit growth in wafer-level plating was offset by lower power electronics sales from a softer EV market. Copper plating products for foundry and Tier 1 OSAT customers continue to see sustained demand. We also saw a rise in products with high precious metals content such as gold and palladium in our semi business, which drove a negative mix impact to margins overall. While we saw a year-on-year decline in power electronics from EV demand dynamics, we continue to win business with new customers, and the outlook for this business remains compelling. Industrial and Specialty organic net sales were flat year-over-year. Underlying chemistry volumes for the Industrial Solutions vertical were up mid-single digits as we saw strength in Asia, modest improvement in Europe, and a roughly flat end market in the Americas, which grew due to the contribution of new account wins. Reported revenue growth in this business was impacted by a large customer equipment deal in the third quarter of last year, which is tied to a high-value multiyear chemistry contract. Excluding this impact, organic sales would have been up 4% year-over-year. And finally, the offshore business continues to grow nicely on the back of market strength pricing and competitiveness. Slide 6 covers cash flow and the balance sheet. We generated $84 million of adjusted free cash flow in Q3. This included a $22 million investment in working capital, primarily driven by accounts receivable on the back of sequential revenue growth and slightly higher inventory values driven by metal inflation. Our days of inventory continued to improve, reflecting progress we have made to drive efficiencies in inventory management after several years of supply chain disruption. CapEx in the quarter was $17 million, primarily going towards compelling growth investments such as our first manufacturing site for Kuprion. We expect to invest roughly $65 million on a full year basis, in line with our prior forecast. Now turning to the balance sheet. Our net leverage ratio at the end of the quarter was 1.9x, and our capital structure remains fully fixed at an effective interest rate of roughly 4%. We expect to fund the Micromax transaction with a combination of cash on hand and modest incremental debt. Assuming no further capital deployment this year, pro forma net leverage at year-end would be roughly 2.5x. This is comfortably below our 3.5x long-term target ceiling and leaves us with plenty of further financial flexibility to continue deploying capital should the right opportunities appear. And with that, I will turn the call back to Ben.

Thank you, Carey. As you've heard, our strategy and execution are driving record results at Element Solutions, and we're nicely ahead of our plan for the year despite real end market volatility over the course of the year. We now expect full year 2025 adjusted EBITDA to be between $545 million and $550 million, at the high end of the guidance range we provided last quarter. This translates to fourth quarter adjusted EBITDA of roughly $135 million to $140 million. This quarterly expectation incorporates lower EV volume, the end of the seasonal smartphone ramp, and targeted incremental OpEx investment in support of high-growth initiatives like Kuprion. We expect leading-edge electronics driven by high-performance computing and data centers to remain robust and have assumed stable industrial demand through year-end. We're pleased to have found a solid outlet for some of the balance sheet capacity we've been building. Micromax meets our high bar for acquisitions. It's a growing business that matches our asset-light customer intimate people-intensive attributes. It will be a great addition to our portfolio and reinforces our conviction that we can continue to find high-value inorganic opportunities to accelerate per share earnings growth. We have capacity for more, but we'll continue to be disciplined about quality and fit. I'll close, as always, by thanking all of our stakeholders for their continued support of Element Solutions. Most importantly, let me express my deep gratitude for our people around the world for their effort and commitment. Our combination of strong positioning, thoughtful strategy and solid execution is entirely a product of our team and our exceptional people continue to deliver for us. With that, operator, please open the line for questions.

Our first question comes from Bhavesh Lodaya from BMO Capital Markets.

Congrats on multiple fronts. On Micromax, could you share some thoughts on how you expect this platform to perform under the ESI umbrella just compared to your prior ownership, maybe opportunities with your existing customers? And how should we expect the growth and synergies starting from that $40 million EBITDA mark?

Yes. Thanks for the question, Bhavesh. We're really excited by the opportunity to bring Micromax into the ESI family of businesses and make it a part of our Electronics segment, McDermott Alpha Electronics Solutions. This is a business with a market growth algorithm in the mid-single digits. And just like with all of our other electronics businesses, we think we can outperform the market. The benefit of having this business inside of Element as opposed to where it's been most recently is the depth of our connectivity in the supply chain, in particular, in the circuit board supply chain. This is a product category that really fits right in between our assembly and circuitry capabilities. There's a modest amount of customer overlap and there's a great deal of OEM and specifier overlap, and our relationships can help accelerate that growth. From a cost synergy perspective, we would expect those to be modest because we're going to run it from a functional perspective and a supply chain perspective separately. But we do believe we can accelerate the growth here and the value proposition to our supply chains, which should translate into value creation from a margin perspective and profit perspective for the company.

Can you provide an update on the commercialization activities at Kuprion? Are we on track for the start-up that was planned for this quarter? Additionally, do you have any initial thoughts on the expected earnings or EBITDA contribution from that next year?

Yes. So Kuprion, there are two major thrusts, I would say, commercialization and supply chain. Our mid-scale site, where we ramped up investment meaningfully in the third quarter is on track to be operational at the end of the year, which will provide more product to both qualify and sell. And so we should have some meaningful sales and profits into next year. Commercialization is really qualifying this product with our customers and the specifiers, and that also continues at pace. I would say that there's a handful of very compelling commercial opportunities that are working their way through the different layers of approval required to sell something into this high-value, high-performance supply chain. And so we should be getting some qualification milestones here in the fourth quarter.

Our next question comes from Josh Spector from UBS.

Congratulations on the Micromax deal. I wanted to ask about that first. Could you provide more detail on the growth of that business from both the top and bottom line over the past couple of years? Has it contributed to ESI’s growth during that time? Additionally, in terms of the stability of that growth, does it enhance the overall stability of ESI’s growth in your opinion, or does it exhibit slightly more volatility? Any insights on this would be appreciated.

The top-line revenue analysis should exclude metals. Of the approximately $300 million in revenue, around two-thirds comes from metal value. There has been notable volatility in metal prices, which has affected the SEC or GAAP revenue, but profits have remained stable. In 2022 and into 2023, we experienced a significant decline in the electronic ecosystem, although this business performed better than our electronics segment during that time. The product portfolio is quite resilient, which helped avoid the same downturn, and there is a price lever that has been effectively utilized with associated opportunities. As we recover from the drawdown, growth has generally matched our assembly business and may have been slightly faster in recent years. This sector certainly adds stability, particularly when excluding metals from the analysis and looking at profitability. We anticipate opportunities for accelerated growth moving forward. The products sold by this company are highly specialized for demanding applications, with strong representation in aerospace, defense, low Earth orbit satellites, and healthcare. We are beginning to see increasing demand in the data center market, and our position within Element provides access to this market, which should contribute to accelerated earnings growth.

That's helpful. And just as a quick follow-up. I mean, you made comments in the release about still having capital flexibility. So I mean I think your 2.5x is pro forma for the deal closing. I guess, at first blush when that closes without those numbers, that leverage will go higher. So can you just talk about your ability, I guess, over the next 6 to 9 months to deploy cash to the extent that there's maybe a bigger opportunity in your stock and a drawdown or otherwise, how high would you be willing to bring leverage in that scenario?

Yes. So we think about things on a pro forma basis. And so the 2.5 we have is pro forma for the contribution of the expected contribution of Micromax and taking into consideration the full purchase price of Micromax. So 2.5 would be the number at year-end. Given the cash flow characteristics of our business and the growth opportunity we see into 2026, that number will be closer to 2 again by the end of 2026, barring any further capital deployment. We've always said that our long-term target ceiling for leverage is about 3.5x. So we see plenty of capacity even in the near term should something interesting become available to deploy incremental capital.

Our next question comes from Chris Parkinson from Wolfe Research.

Great. Ben, considering Micromax's background with DuPont, how would you respond to someone who questions the decision to divest from it initially? What changes have occurred in the past 5 to 10 years, and what makes Element Solutions the most suitable owner for the platform today?

Thank you for the question, Chris. We can't comment on DuPont's decision-making because we weren't involved in it. However, if I had to speculate, I would point out two things. First, the SEC or GAAP margins of this business are lower than those of some of our other businesses and some of DuPont's. Additionally, DuPont does not have other metals-related businesses where they would make an ex metals adjustment as we do. On an ex metals basis, this business has margins exceeding 40%, highlighting the high value of these materials to the supply chain. This business is highly specified by its customers, involves significant switching costs, and has long qualification cycles, making it very sticky and high-value, even if the GAAP margins seem lower at first glance. Another reason may be that when DuPont decided to divest this business, the recent surge in innovation in the printed circuit board market, which has shifted focus from chips to packaging and circuit boards, hadn't begun yet. Currently, there is considerable innovation and technology moving back from chips to circuit boards, and these materials play a crucial role in that transition. Lastly, in the short time since we announced this transaction, I've received numerous messages from DuPont and former DuPont employees congratulating us on the acquisition and expressing regret that they no longer own it. This business is strong, a market leader in a high-value market, with advanced technology, solid growth potential, and excellent cash flows. We have various avenues to enhance it further as part of Element Solutions, fitting well within our cohesive portfolio that supports high-value electronics.

That's great color. And just as a quick follow-up, Ben, as we start thinking about on a preliminary basis about '26, how should we think about the semiconductor growth side of it and the comments in the PowerPoint about softer power electronics, was that a singular customer that caused an issue? I mean, how should we think about the momentum into year-end and ultimately over the next 12 to 18 months?

Yes, absolutely. So within the semi business, there's really two prongs, their semi assembly and our wafer-level packaging business. The semi assembly business has a strong capability in power electronics, and we've all seen what's happened in the EV market and certainly, with some of the larger participants in that market, and that's what weighed on the Semi business in the third quarter. The wafer-level packaging business continued to grow in the teens and has a pretty compelling growth runway ahead from here. And in the power electronics business, even with a weaker EV market, we see substantial customer wins as we gain share with our material over competitive, more legacy technology materials for power semis and power modules. And so there's a growth vector there as well. The semi business will continue to grow certainly above market and healthily as we get into 2026.

Our next question comes from Frank Mitsch from Fermium Research.

Congrats on Micromax. I'm assuming that given the quick time to complete the deal, looking at the first quarter of '26 that you're not anticipating any antitrust issues in terms of government approvals?

Yes. So as we've said, this is a complementary capability. While there's some customer overlap, there really isn't a technology or market share overlap. And so we don't anticipate substantial regulatory hurdles going forward.

And nice job on the third quarter upside. What most positively surprised you relative to the guidance? And how is that trending so far here in the fourth quarter?

Yes. So the Industrial Solutions business had a really strong third quarter even if you don't necessarily see it in the organic sales. But we were lapping a period where we sold a big piece of equipment in Q3 of 2024. And so when you adjust that out, which was a low-margin sale, when you adjust that out, we actually had volume growth and organic growth in that business which was mix favorable and positive. I think entering the third quarter, our expectations for Industrial were probably weaker than what we ultimately delivered. So if I had to call out one surprise, it would be that. And as we sit here in the fourth quarter, right, we're almost through October, the momentum in the electronics side of the business has been a positive surprise thus far. And so we're seeing real strong continued momentum in electronics. And that's a positive indicator as we move into 2026.

Our next question comes from Aleksey Yefremov from KeyBanc Capital Markets.

Ben, I realize you already talked a lot about Micromax, but I was hoping to give you an opportunity to talk about growth synergies here, either on the commercial side or technology or anything else?

Yes, I appreciate that. A significant portion of our business, about 70%, is focused on the electronic supply chain, with our team dedicated to enhancing value for our customers and specifiers. We have introduced a new strategic capability that positions us as a market leader in a high-value area, adding to the range of resources we offer our suppliers. We are conducting technology days with major OEMs and key players in the supply chain, showcasing all our capabilities, including Micromax, which was not available under previous ownership. I believe this will result in increased commercial momentum. Additionally, the technologies we offer are becoming more crucial as the requirements for printed circuit boards, semiconductors, and chips continue to evolve. This presents a growth opportunity that will allow us to support this technology leader, granting them access to influential platforms that were previously unavailable. This positions the business for growth beyond market rates, and we already have a strong growth forecast.

Thanks, Ben. And then hopefully, I was hoping to look a little bit into '26. On your electronics side, how do you feel about just volumes in general, given there's been some destocking that occurred this year across sort of several key products. Do you see generally volume growth accelerating next year about the same or slower?

We believe that the growth in high-end electronics will continue into 2026, and our performance in this area so far this year has been very strong and significantly above the market. We expect to maintain this momentum. The outlook for automotive units, particularly electric vehicles, is challenging to predict at this moment, and making any claims would be speculative. However, we have substantial market share to pursue on the Power Electronics side, which should enable us to grow faster than that market. As we entered the third quarter, we had some uncertainties around smartphones, but the current smartphone market has been healthier than anticipated. It’s difficult to forecast how this will translate into 2026. Overall, we are looking forward to another solid year of organic growth next year, complemented by significant inorganic opportunities. Therefore, we are quite optimistic about 2026 and beyond.

Our next question comes from Pete Osterland from Truist.

First, just following up on Micromax. Do you view these assets as historically underinvested in? I mean do you see the need for any elevated capital spending initially in order for the business to reach the full potential you're looking for? And could you share what you're expecting in terms of onetime costs to stand up and integrate the business?

Sure, Pete. So this business is just like our businesses. It's a people-intensive technical applications-oriented employee base, customer-facing type of business and correspondingly, it's asset-light formulation. And so I would think this is about a 2% of sales capital business just like ours, and it's got the capacity it needs to support substantial incremental growth. So we don't see this driving an uptick in CapEx across Element and nor requiring significant investment in physical assets. There is a stand-alone cost dynamic, which is burdened, which is in the approximately $40 million that we've communicated as the full-year contribution for this business of a few million dollars. We'll see synergies could come from that over a 12- to 18-month period, driving the earnings here higher.

Very helpful. And then switching gears. On the IMS business, the margin performance in the third quarter was very strong despite kind of continued challenges in the overall industrial operating environment. So my question is, where can margins go in this business? I mean in a more normalized demand environment, is there room to move margins meaningfully higher from the almost 24% that you put up in the third quarter?

Yes, is the short answer, Pete. The industrial business, while it had modest volume growth, is still very far dislocated from its prior peak volumes. And so the productivity and procurement we're driving to drive those margins higher will contribute, I would say, a very strong incremental as and when volume growth recovers, we get better absorption through our sites. The offshore business also continues to be strong, and that's mix positive. So there's room for further margin expansion. And I'd note that when you look across the ESI complex, our ex metal margins were 28% in the quarter. That's only 100 basis points off of our prior peak. And we're continuing to invest in OpEx in anticipation of and in support of pretty significant margin accretive future growth. So across all of Element, we see material opportunity for incremental margin expansion from here.

Our next question comes from John Tanwanteng from CJS Securities.

Congrats on a nice quarter on the Micromax deal. I was wondering if we could drill down to the offshore business a little bit. How sustainable is the strength there? I think you mentioned that there are some good tailwinds, but I'm wondering were there any first fill programs there that might tail off and kind of what the demand outlook is as we go off into next year?

The offshore business operates on a longer cycle, and its performance is largely influenced by stable energy prices that encourage drilling activity, leading to the development of new wells. When a drill is finished, we receive recurring monthly orders for the fluids used in each well, resulting in significant sales from fills. Currently, drilling rates are strong, but a slowdown in activity is anticipated as we approach 2026. It might be surprising that our fastest-growing segment is offshore drilling, considering that we primarily focus on electronics. However, I don’t expect this growth to continue at the same pace into 2026. Despite this, the market remains healthy, and we have a compelling pricing strategy in place. We anticipate steady growth through 2026, although not at the same levels we see now.

Got it. And then maybe a similar question, but focused on just the margins in the electronics side and the EV specifically. Do you expect that headwind from, I guess, the larger customer there to continue for the foreseeable future? Or is that something you expect to reverse out at some point? And kind of how do you think about that market overall?

Look, I think it's safe to say EV volumes are likely to be down again year-over-year in Q4 globally. I think that the worst of it is passed, and I see opportunity for, again, this power electronics business to continue to grow. We see a compelling growth opportunity in power electronics going forward into 2026. And it's not just actually for EV applications. We're starting to see pull for these materials, these high thermal materials into other applications, network infrastructure, and data center applications as well. We see a very strong pipeline for Argomax into 2026 and beyond.

Our next question comes from John Roberts from Mizuho.

MKS has decided to exit the Atotech industrial metal plating business as the main competitor, was part of your volume pickup share gain opportunities as they go through that process?

Really can't speak to that, John. I would say that our industrial business has been growing really nicely, executing very well. And we've outgrown our market for sure. So there has been some share gain, but I don't think it's appropriate to speak about any specific competitors. We've got great capability there and a really good value proposition of the supply chain, and the team has been executing really, really well.

Okay. And then maybe I missed this, but you described Micromax as fitting between assembly and circuitry. Will it be reported in either of those two subsegments? Or will it be reported standalone?

I don't expect it to be reported in either of the segments. I think it will be standalone. And I would note that we will report this business ex metals to give a better picture on organic volume and appropriate margin.

That concludes the question-and-answer session. I would like to turn the call over back to Ben Gliklich for further remarks.

All right. Great. Thank you very much. Thanks to everybody again for joining, and we're looking forward to seeing many of you in the days and weeks to come on the road. Have a great day.

This concludes today's conference call. Thank you for joining. You may now disconnect.