Earnings Call Transcript - Q Q4 2025

Operator, Operator

Good morning, and welcome to the Qnity Fourth Quarter and Full Year 2025 Conference and Webcast Call. Please be advised that today's call is being recorded. I will now turn the call over to Nahla Azmy, Vice President of Investor Relations. You may begin.

Nahla Azmy, Vice President of Investor Relations

Thank you, and good morning, everyone, and welcome to Qnity's Fourth Quarter and Full Year 2025 Earnings Call. I'm joined by Jon Kemp, Qnity's Chief Executive Officer; and Mike Goss, Qnity's Interim Chief Financial Officer. Earlier today, we issued our earnings release along with a supplemental slide presentation, which can be found on ir.qnityelectronics.com. Before we begin, I would like to remind you that today's discussion will include some forward-looking statements. These statements represent our best view of predictions and expectations for the future, but numerous risks and uncertainties may cause actual results to differ. Please refer to our earnings release and SEC filings for a discussion of these risks. We will also be discussing certain non-GAAP financial measures, and I refer you to our earnings materials for information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure. With that, it's now my pleasure to turn it over to Jon.

Jon Kemp, CEO

Thank you for joining us this morning for our first earnings call as a stand-alone public company. When we launched Qnity late last year, we detailed our focus on establishing ourselves as the premier technology solutions provider across the semiconductor value chain. That means being the partner of choice to customers at every stage from chip fabrication to advanced packaging and interconnect to thermal management. And it means understanding where the market is going, so that we can stay one step ahead, delivering more innovative and integrated solutions to address our customers' most complex challenges. As the industry continues to rapidly evolve, we're proving that the next lead in AI and other advanced technologies will be powered by materials innovation, and that's where Qnity leads, with chip designs becoming more complex, materials fit smooth, shape, connect and protect are paramount as the leading pure-play provider of integrated solutions for the semiconductor value chain. This dynamic creates powerful near and long-term growth drivers for Qnity. We're leveraging three core structural advantages to capitalize on these demand tailwinds. First, the unparalleled breadth and depth of our portfolio enable us to offer end-to-end solutions to our customers. Second, our innovation capabilities have earned us a seat at the design table with global technology companies. And third, our local-for-local approach with manufacturing facilities and R&D centers located close to customers wherever they operate. Turning our attention to last year's financial results, our fourth quarter and full year 2025 performance is a testament to the strength of our portfolio, the trust our customers place in us and our ability to execute on our value creation strategy. We delivered our seventh consecutive quarter of strong organic growth, and we outperformed the market, exceeding our full year 2025 financial objectives. We grew organic sales by 10%, including strong growth in both operating segments. Reflecting a full year of stand-alone public company costs. Pro forma adjusted operating EBITDA was up 11% year-over-year with strong margins. In our Semiconductor Technologies segment, we grew organic sales 8% in 2025, driven mostly by strong demand for semi fab consumables. AI and high-performance computing drove double-digit sales growth in advanced nodes and advanced packaging, and we benefited from ongoing improvement in mature nodes and NAND. Our Interconnect Solutions segment had an exceptional year, growing organic sales 12%, led by continued AI and data center tailwinds. Our core drivers in this segment continue to be advanced packaging, advanced interconnects, and thermal management. Across the portfolio, our innovation engine remains at the heart of our growth strategy. In chip fabrication, our customers require improved performance, quality, and yield. That's because even small gains in quality or yield can create huge value. We're continuing to execute our strategy to increasingly shift our portfolio to leading-edge technology. In 2025, our advanced logic and high-bandwidth memory business grew mid-teens. And we made further progress towards reaching the 45% to 50% advanced node exposure target we highlighted at our Investor Day. Our CMP portfolio is evidence of that strategy at work. It's a structurally growing opportunity that's directly linked to advancing the AI semiconductor roadmap. In October, we introduced our Emblem CMP pad platform, a breakthrough innovation that set a new standard for pad design, defect control, and performance. These new pads address the aggressive planarization requirements of the most advanced chips, including N3 and N2 Logic and HBM3 and 4 memory. The feedback from customers has been outstanding, and the platform's external recognition underscores the differentiated value we're bringing to the market. Similarly, we're continuing to see strong growth from our CMP advanced cleans and slurries products across leading-edge logic and memory devices. By targeting specialized formulations, we're building on our leadership in CMP and extending our position in this critical manufacturing process, securing new wins across both front-end chip fabrication and advanced packaging. As you can see, our innovation approach is driven by listening to our customers, building on decades of experience as a partner of choice to leading fabs and OEMs, pushing the boundaries of what's possible and investing in the kind of collaborative innovation that moves the industry forward. As we continue to roll out new solutions, our Process of Record or POR wins are building meaningful long-term momentum. These wins are tied to high-growth opportunities aligned directly with our customers' technology roadmap. And in 2025, we secured POR wins across every single line of business. These wins represent early design selections that typically scale into commercial production over the next 2 to 3 years, positioning our technology to be embedded in future generations of semiconductors and other advanced electronics. This only deepens our level of partnership and expands our content with leading players in the semiconductor value chain and gives us greater visibility into future sales growth and conviction that our strategy is working. Our top priority is creating additional high-value opportunities to progress alongside customer road maps. And we're committed to making the R&D and manufacturing capacity investments necessary to support the strong advanced node ramp activity we expect in 2026 and beyond. Given this surge in activity, I'd like to share some more details on what we're currently seeing in each of our segments and how we expect our end markets to evolve in 2026. In semi, customers continue to invest in their most advanced technologies. In advanced logic, this includes the continued scaling of 3-nanometer and early production of 2-nanometer. In memory, we're seeing next-generation DRAM and HBM as well as transitions to higher layer count NAND architectures. We remain ideally positioned to capitalize on this shift through both the increased use of more complex 3D structures and the adoption of more chip layers, giving us a stable, repeatable revenue stream as production volumes increase. In ICS, advanced packaging continues to be a core theme of every recent customer conversation because of the central role it plays in unlocking next-generation technologies, including increasing chip density and performance while also reducing power consumption, facilitating the development of smaller, more efficient devices. One of the reasons Qnity is so well positioned to capture meaningful growth in advanced packaging is because it integrates solutions from both semi and ICS. In 2025, advanced packaging solutions represented approximately 10% of Qnity's net sales. From an end market perspective, our portfolio continues to evolve based on more durable structural demand shifts. Data centers are where we're seeing the most benefit from these dynamics. However, we're also seeing continued signs of increasing content and demand recovery in other industrial markets like automotive, communication infrastructure, and aerospace and defense. As these end markets start to incorporate more advanced AI-driven technology into applications, we expect meaningful opportunities to continue increasing Qnity content. On the consumer side, next-generation devices are increasingly shifting towards edge computing, meaning on-device generative AI, which is also requiring greater content opportunities for us. The significant demand for AI and high-performance computing workloads is creating additional pressure on the global memory market. We continue to watch for signs of potential downstream impacts into end market demand. The key here is that our exposure is primarily to premium devices, which we expect to be a more resilient part of the market. I also want to mention some of the trends we're seeing on the ground level, namely the ongoing improvement in fab utilization rates. In advanced logic, we expect utilization to increase from the high 70s at year-end 2025 to low to mid-80s in 2026, while mature logic will continue improving towards the mid- to high 70s. In memory, we expect DRAM fab utilization to increase from mid-80s in 2025 to high 80s, while NAND utilization is expected to reach the upper 70s or low 80s in 2026. With strong utilization rates and accelerating capacity expansion more than ever, customers are prioritizing supply security. We've spent the past several years making strategic investments in capacity and capabilities across our network to support growth in advanced logic and memory as well as advanced packaging and thermal materials. Our local-for-local model and recent expansion throughout Asia and the United States position Qnity to capture additional content and share while ensuring long-term strategic relevance. Before turning the call over to Mike, I'd like to touch on the multiyear transformation plan we're also announcing today, which is expected to deliver approximately $100 million EBITDA run rate benefit by the end of 2028. This plan, which Mike will step through in more detail, reflects our commitment to continuous improvement and ensuring Qnity remains well positioned to lead in the markets we serve across the semiconductor value chain. It's all about driving future growth and profitability by simplifying our operating structure, increasing quality and efficiency, unlocking innovation capacity, and concentrating our efforts on high-potential markets and customers. With that, I'll turn it over to our Interim CFO, Mike Goss, to discuss our financial results and 2026 guidance. Mike brings deep experience and knowledge of the business, having served as Qnity's Chief Accounting Officer and FP&A leader. I've known Mike for many years, and we've been fortunate that he was able to jump right in. Mike?

Michael Goss, Interim CFO

Thanks, Jon, and good morning, everyone. We had a strong finish to the year with fourth quarter net sales of $1.2 billion, up 8% year-over-year as we continue to capitalize on key growth drivers, namely advanced nodes, advanced packaging, interconnect, as well as thermal management solutions. We delivered this strong performance even as $40 million of sales shifted from the fourth quarter to the third due to our spin-related transition as discussed on our last call. Adjusted pro forma operating EBITDA was $349 million, and adjusted pro forma EPS for the fourth quarter was $0.82. For the full year, we grew net sales by 10% to $4.75 billion and achieved adjusted pro forma operating EBITDA of $1.4 billion, resulting in adjusted pro forma operating EBITDA margin of 29.5%. Margins reflect segment mix dynamics as the strong growth in ICS influenced our overall margin profile. Adjusted pro forma EPS for the full year was $3.35, equating to a 12% year-over-year increase, including adjustments for investments. In Interconnect Solutions, we delivered net sales of $2.1 billion with organic growth of 12%, led by advanced packaging, advanced interconnects, and thermal management, all of which increased more than 20% for the year as we sealed several exciting wins at leading fabs and OEMs. As a reminder, these are the fastest-growing solutions in our ICS portfolio, which led to significant operating leverage for the year. Segment adjusted pro forma operating EBITDA margin was just over 25% as strong growth more than offset strategic investments driving margin expansion of over 175 basis points year-over-year. For the full year, we generated $706 million of adjusted pro forma free cash flow, equating to 15% of net sales, reflecting strong operating performance, disciplined execution, and favorable working capital following the spin. At year-end, our total cash balance was over $900 million. This healthy cash position enhances our overall financial flexibility, enabling us to fund strategic investments and maintain a balanced return-focused capital allocation framework. At our Investor Day last fall, we outlined a clear and comprehensive set of capital allocation priorities. Our first priority will always be organic reinvestment into the business to sustain above-market growth. We anticipate elevating CapEx investment in 2026 to 9% of sales, driven by investments to strengthen our local-for-local footprint in key geographies and our transformation initiatives. Consistent with our midterm financial objectives, we expect CapEx to return to our normal run rate of roughly 6% of net sales in future years. As Jon highlighted, the industry is continuing to see advanced node ramp activity in 2026, supported by substantial global investment. Over the last 3 years, we've added new capacity in all of our semi businesses, and we'll continue to invest in growth to keep pace with the industry. Importantly, as these near-term investments moderate, and CapEx returns to our normalized run rate, we expect free cash flow margins to be in the mid-teens as a percentage of net sales. With our strong financial position, we have the optionality to explore selective accretive M&A. The industry is growing rapidly, and we view acquisitions as a compelling use of capital to bolster our trajectory. We're actively pursuing a robust pipeline that would further enhance our portfolio and will remain disciplined in evaluating any potential transactions. We're also committed to capital returns. In December, we declared our first quarter dividend. In addition, today, we announced that our Board of Directors approved a $500 million share repurchase authorization. This program is designed to provide flexibility for opportunistic purchases depending on market conditions. Finally, we have the option to voluntarily pay down debt to continue strengthening our balance sheet. We ended the year with net leverage of approximately 2.2x, well below our long-term target of less than 3x. I'd now like to share some additional details on our transformation plan, which we expect to further improve our growth potential and financial strength. Our actions will focus on three key areas: first, commercial and innovation excellence to enhance speed and sales effectiveness, deepen our foothold with customers on the cutting edge of technology, and continue spurring innovation within our powerful R&D engine. Second, driving productivity and quality improvements across the company through operational automation and tailored AI applications. This work will be further enabled by our ongoing IT systems independence effort. Finally, strengthening our local-for-local operating model by streamlining our supply chain, simplifying our legal entity structure, and optimizing our footprint to more effectively leverage our scale. We expect these combined actions to deliver approximately $100 million in EBITDA run rate benefit by the end of 2028 with approximately $140 million in cost to achieve over the next 2 to 3 years. We will pursue long-term structural investments, executing against three key areas during these early phases of the program, resulting in a majority of these one-time costs occurring in 2026 and 2027. Now I'd like to talk about our financial guidance for 2026. Overall, our strong financial performance in 2025 positions us to enter the year with solid momentum. Looking ahead, our competitive advantages and consistent execution give us confidence in our ability to continue driving growth as we capitalize on the demand trends we're seeing across end markets, fueled by AI, high-performance computing, and advanced connectivity. MSI wafer start data remains a good indicator for Qnity's overall demand, and we continue to expect MSI to grow approximately mid-single digits this year. For full year 2026, we expect net sales to be in the range of $4.97 billion to $5.17 billion. Adjusted operating EBITDA to be in the range of $1.465 billion to $1.575 billion, adjusted EPS to be in the range of $3.55 to $3.95, and adjusted free cash flow to be in the range of $450 million to $550 million. Looking ahead at the first quarter, momentum from AI-led demand continues across high-performance computing and advanced connectivity with notable strength in the ICS segment. Overall, we expect sequential net sales growth of high single digits with a similar margin profile to the fourth quarter. Our team continues to be focused on keeping pace with customer demand and delivering solutions for the most advanced technologies.

Jon Kemp, CEO

Thanks, Mike. I'd like to briefly recap a few key takeaways from today's discussion. First, we sustained our strong organic growth momentum in 2025 and delivered on each of our financial objectives for the year. Our newly introduced full year 2026 guidance reflects our conviction that we can continue building on this momentum. Second, we've established ourselves as a partner of choice to customers in the semiconductor value chain, and we are relentlessly focused on investing in cutting-edge innovation and capacity to create high-value growth opportunities alongside our customers. Finally, as we look ahead, we're taking decisive steps to create even more value for shareholders, including our transformation plan and share repurchase authorization, providing avenues to increase returns. In short, our team is focused on delivering on our strategic priorities. We have strong confidence in the strength of our platform and our ability to capitalize on the opportunities ahead. Thank you again for joining. Operator, we can now open the line for Q&A.

Operator, Operator

And we'll go first to Bhavesh Lodaya with BMO Capital Markets.

Bhavesh Lodaya, Analyst

Semiconductor trends are pretty strong here. I appreciate some of the color you provided on your prepared remarks. As we look at your EBITDA guide, can you provide some thoughts on what you're building into that, maybe perhaps on MSI, PCBs, or any of the key metrics that you would like to touch on?

Jon Kemp, CEO

Yes. Thanks, Bhavesh. I appreciate that. And when we think about it, we're expecting MSI, as Mike indicated in his prepared remarks, we're expecting MSI to be mid-single digits, not terribly different from what we saw in 2025. And I would say on the printed circuit board side, we believe MSI is the best overall indicator. But if you look at the indicators around PCB, they're kind of in that same ballpark, kind of that mid-single-digit range. So there's not a lot of spread between some of the broader macro indicators, which is really kind of why we've anchored our guidance to kind of right down the fairway towards where the market estimates are, plus our outperformance content advantage, which is kind of how we got to the midpoint of the guidance range that we gave today.

Bhavesh Lodaya, Analyst

Got it. If I understood your remarks correctly, for the first quarter, you're expecting high single-digit top-line growth sequentially and similar margins to the fourth quarter. Could you elaborate on how you envision your quarterly cadence for the year?

Michael Goss, Interim CFO

Yes, thank you for the question. Generally, since we emerged from the downturn in 2023, we've experienced reduced seasonality in our business. As we approach 2026, our guidance for the first quarter indicates high single-digit growth. We anticipate consistent and steady performance throughout the year. While we usually observe a slight peak in the third quarter, our overall expectation is for stable performance throughout the year, which is reflected in our first quarter guidance.

Jon Kemp, CEO

And I would say that's not terribly different from what we saw in 2025. But keep in mind, as Mike alluded to in his prepared remarks, we had a little bit of a timing swing of some sales in the third quarter, which created a little bit of an elevated peak in the third quarter of 2025 because of the IT system cutover. But if you strip that out, we expect a very similar seasonal pattern in 2025, 2026.

Operator, Operator

Thank you. And we'll go next to John Roberts with Mizuho.

John Roberts, Analyst

The base tax rate in 2026 is low 20%. That's a nice improvement from the initial pro forma rate, but it's still above many of our other companies. Do you have a long-term rate target? And how much further reduction in tax rate do you think you can do?

Michael Goss, Interim CFO

Yes. Thanks, John. It's a good question. At a high level, we've seen nice improvement, obviously, from '25 versus what we're forecasting for '26. Over the medium term, I expect we'll continue to work through that and eventually get into place consistent with our peers in that high-teens percentage.

John Roberts, Analyst

Great. And then is CMP used in advanced packaging as well? Is there a planarization step before the devices are directly connected to each other?

Jon Kemp, CEO

Yes, John, great question. So at a high level, yes, the CMP processes, including pads, slurries, and cleans are used in advanced packaging. It's one of the fastest growth areas within our advanced packaging portfolio, and that continues to increase over time as you get into taller, more complex structures. The planarization to ensure that really efficient copper-to-copper bonding, whether that's in traditional formats or even going to hybrid bonding format, that planarization step is critical for advanced packaging.

Operator, Operator

And we'll move next to Christopher Parkinson with Wolfe Research.

Christopher Parkinson, Analyst

I'll keep it simple. Now that you're a fully independent company and you've completed the CMD along with the outlooks, we have a good sense of your algorithm in relation to your market expectations. How should we approach operational leverage throughout the year in both semi and ICS, considering where you've been in the last couple of quarters, where you expect to be, and what the market should be observing to evaluate that aspect of your business?

Jon Kemp, CEO

Yes, I think that overall, we are pleased with our performance in 2025. The 29.5% overall margin performance and 40 basis points of margin expansion year-over-year is a positive result, especially given the strong operating leverage within the ICS segment. In the semi segment, margins were in the mid-30s, aligning with our expectations amid the intense activity around scaling advanced nodes. We've made some additional investments in our R&D and engineering teams to support this scale-up. While there is some fluctuation in product mix from quarter to quarter, that is what's driving the dynamics in that segment. In the ICS business, growth continues to be driven by advanced packaging, advanced interconnects, and thermal management, all of which grew more than 20% in 2025, representing the highest value areas of our business. This contributed to significant volumes and a favorable product mix, resulting in 175 basis points of margin expansion. I anticipate similar dynamics next year. We've mentioned before, during our Capital Markets Day, that the Interconnect segment has the potential to grow margins faster than the semi segment, but I believe there are opportunities for improvement in both segments over time.

Christopher Parkinson, Analyst

Great. And as a quick follow-up, can you once again speak about the various factors affecting the balance sheet, including the $500 million share repurchase? In terms of the outlook for free cash flow, could you give us a brief overview of where you currently are and where you expect to be throughout the year, along with your thoughts on how things will ultimately play out?

Michael Goss, Interim CFO

Yes. Thanks. Great question. Yes, we've ended the year with obviously a real strong cash position and strong cash flow generation in the $700 million range. And as you said, in the guide for '26, we are guiding to about $500 million of free cash flow on an adjusted basis. And that's really driven by the main updates that are accelerated or elevated rather, CapEx to around 9% of sales, and that's driven by the continued ramps that we're seeing in node transitions. And so we're accelerating our elevating that CapEx to support our local-to-local investments. We also have the IT independence work that we're continuing through as well as the transformation program that we've announced today. And so that really drives an elevated CapEx in '26. And that's the main driver versus what we talked about back at Investor Day and puts us in that $500 million range of free cash flow for the year.

Jon Kemp, CEO

What I would add, Chris, there is the way that we think about it is this business really kind of generates cash flow on an annual basis in that mid-teens percentage of sales, right? And so that's really kind of as you think about us over time. Mike said, we've got some of these one-time items that will influence kind of the cash flow in 2026. But over time, we should be generating cash in that mid-teens percent of sales.

Operator, Operator

We'll go next to Jim Schneider with Goldman Sachs.

James Schneider, Analyst

I was wondering if you could maybe address specifically how you expect the Internet connect growth to play out over the course of 2026, whether that's sort of higher or lower than the overall corporate average you outlined? And the reason I ask is because as you talked about the memory pricing seems to be generating some demand destruction in the consumer electronic supply chain, particularly in China. So maybe can you talk about whether you baked in any kind of material headwind in ICS for this year? And then related to that, can you specifically talk about your China sales in the quarter and what you're expecting for China over the course of this year?

Jon Kemp, CEO

Jim, I need your assistance. I think there were three or four questions mixed into one. Let me address some of those points. I’ll begin with the current dynamics we’re observing in the memory market. After that, I’ll hand it over to Mike to discuss the ICS segment and how we view the differences within the segments this year, and then I’ll return to your question about China. From a growth standpoint, we’re optimistic about the progress in the memory market, particularly in next-generation DRAM and HBM, as well as the shift to higher layer count NAND architectures. We have seen significant growth from the increasing content in these advanced technologies, and utilization rates remain strong. There are some capacity concerns that have been widely discussed recently. It’s important to clarify that the memory market represents about 20% of our semiconductor portfolio, while approximately 80% is in the logic sector. Within memory, our exposure mainly pertains to unit-driven consumables, meaning that pricing is less of a factor; it’s primarily about the volume. Our focus is mainly on premium devices, and in any constrained environment, we expect these devices to be more resilient in the overall market, which helps mitigate our exposure. We are closely monitoring the situation and maintaining ongoing discussions with our customers. Additionally, considering where these chips are being utilized, whether in data centers or consumer devices, we are well-positioned to meet that demand regardless of the end market. This is why we feel confident about our growth prospects for the year. Mike, it’s your turn.

Michael Goss, Interim CFO

Thanks, Jon. To recap, we've projected a high single-digit growth for the total company in our first quarter. For the full year, we anticipate an implied midpoint of just over 6.5% growth year-over-year. This includes contributions from both segments. We finished the year strong, with ICS showing significant strength and slightly outpacing the semiconductor growth. We expect this positive momentum and similar mix to continue throughout the year, with ICS likely performing a bit better than the semiconductor segment.

Jon Kemp, CEO

To wrap up on your question about China, it is an essential market for us due to its significant role in the semiconductor value chain and as a large domestic market. In 2025, we experienced high single-digit growth in China, which exceeded our expectations. China represented just over 30% of our total sales, aligning with what we anticipated. On the ground in China, particularly in the latter half of the year, we noticed a normalization in buying behavior similar to other regions, where customers prioritize performance, quality, and supply reliability. Our local-for-local operating model is advantageous in China because we have a robust local infrastructure to meet market demands. From a growth viewpoint, while China had a high single-digit growth rate, we're observing even faster growth in all our other regions, including the rest of Asia and the Americas, both of which saw double-digit growth throughout the year, and we expect this trend to continue into 2026.

Operator, Operator

And we'll go next to Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan, Analyst

I wanted to ask about the guidance. At the low end, I believe you're anticipating around a 4.5% increase. What factors might lead you toward that end? On the other hand, the high end indicates considerable growth. Could you help us understand those two ranges better?

Jon Kemp, CEO

Yes, Arun, thanks for the question. When you think about the guidance range and some of the puts and takes, obviously, I characterized it before with Bhavesh's question on kind of what got us to the midpoint of the guide. When you think about kind of the low end of the range, what would have to happen for that to happen, it would be kind of more constraints really coming from the memory market and if that started to see kind of significant demand destruction that's outside the parameters of how we think the year is going to unfold. If you go to the high end, a lot of the growth expectations that we have this year, given the strong utilization rates and the most advanced technologies across our portfolio, it's really tied to capacity expansions at our customers and their ability to scale new node transitions and bring that capacity online. Obviously, there's a significant amount of global investment in those most advanced technologies, and we're working closely with our customers to help them scale up that production as effectively as possible. If we can get some of that incremental capacity online, we've got a lot of really nice content growth connected to those transitions and that capacity. So as it comes online, we'll benefit not just from the volume growth, but from the increased content coming off of those advanced nodes.

Arun Viswanathan, Analyst

Okay. Regarding the transformation plan, is there a framework for how it will unfold over the next three years? Do you expect those gains to come in gradually? Could you detail some of the initiatives you are pursuing? Are they primarily focused on footprint optimization and SG&A reduction, or is there more you can describe as part of the plan?

Michael Goss, Interim CFO

Yes. Thanks for the question. The transformation initiatives are in a couple of big buckets, as I said in my prepared remarks, really around productivity efforts, commercial and innovation, and our local-for-local model. And I'd say roughly of that $100 million benefit for EBITDA, we'll expect to see that come roughly half in the productivity space. And then the other half is split equally across commercial innovation as well as that local-for-local model. As far as what's in our guide for '26, I do expect we'll have a small amount of that benefit, and that's reflected in our guide. And then ultimately, the remainder of that benefit comes in the 2027, 2028 timeframe.

Jon Kemp, CEO

Maybe just to give you a little bit of specifics on some of the things we're excited about as part of that within the productivity space, we're excited to really go aggressively after deploying some of the automation and tailored AI applications that we believe will help unlock incremental capacity strengthen our quality and ultimately improve our supply resiliency for our customers. That's a nice lever there. Some of the procurement benefits and there's also some simplifications in our supply chain, around optimizing our warehouse presence and how we're positioned around the globe to better serve our customers. If you think in some of the other categories, particularly on the commercial and innovation excellence, it's really about how we're driving the right level of attention to each of our customer segments. Obviously, historically, we've had a really strong focus kind of on our top 10, and we've talked about that in the past. But there are a lot of folks in the middle and maybe at the lower end that we can still do better with. And so taking advantage of digital tools to make sure that we can serve the customers more effectively and accelerate and on the innovation side, deploying some of those tools to increase the clock speed and the pace of our product development, which ultimately will give us an opportunity to work on more engagement with our customers. Over the past few years, we've seen a steady increase in the number of engagements that we have with customers and OEMs, and we want to unlock the innovation capacity to support as many of those as possible. So those are some of the bigger items inside this transformation program.

Operator, Operator

We'll go next to Melissa Weathers with Deutsche Bank.

Melissa Weathers, Analyst

I wanted to, I guess, first, talk a little more high level on the ICS business. It seems like there's a lot of innovation happening over the next 2 years on the packaging side, on the thermal side. The thermal side is the piece that I understand the least. I think a lot of semiconductor investors don't really get that part of the story. So can you talk about as we think about the next 2 years, like which parts of this ICS business should we be excited for? What kind of content increases should we be expecting maybe on a per-device basis?

Jon Kemp, CEO

When considering the ICS business, the main drivers are advanced packaging, advanced interconnect, and thermal management. In the advanced packaging area, we have introduced new technologies in copper interconnect chemistry, which enhance surface uniformity and purity, ensuring that advanced packaging maintains strong signal integrity and reliability. This technology is being widely adopted by our key fabs and OSAT customers, contributing significantly to growth in advanced packaging. We are also making progress in the advanced interconnect space by upgrading circuit board technology from traditional designs to high layer count and HDI circuit boards. This transition allows for finer lines and tighter spaces, which improve signal reliability, particularly in data centers. The technology advances we are applying now are reminiscent of what we used in the semiconductor sector 10 to 15 years ago, demonstrating a beneficial overlap with high-density interconnect and high layer count circuit boards. On the thermal management front, all three of these areas experienced 20% year-over-year growth in 2025 and are expected to continue driving growth in the future. We have launched innovative technologies, including new thermal pads, gap fillers, and phase change materials, and we are eager to collaborate with our OEM partners on further innovations. This is especially crucial in the data center segment, where we have observed rapid adoption by numerous cloud service providers and OEMs. We are enthusiastic about our ongoing partnerships to deliver next-generation thermal solutions to the market. This all ties back to my earlier comments about the increasing number of POR wins across all sectors.

Melissa Weathers, Analyst

If I could squeeze one more in. Regarding the mainstream nodes in foundry logic, it seems like you're anticipating utilization to gradually improve throughout the year. We've heard some mixed perspectives from the analog or power semiconductor sectors on the demand trends you're observing. Can you provide more insight into what you're experiencing in mainstream nodes, perhaps across various end markets? Any additional information would be helpful.

Jon Kemp, CEO

Yes, I'm happy to provide that update. Overall, we are encouraged by the ongoing recovery in mature logic. We believe inventories are in a relatively healthy state, and customers are experiencing small sequential improvements in utilization rates, which we've observed from several companies during this earnings season. However, we anticipate that the recovery will likely be modest in pace due to its connection with the global memory market. From a utilization perspective, we expect rates to steadily improve through 2025, moving from the low 70s into the mid-70s range. Our expectations for 2026 suggest a similar recovery pace as seen in 2025, potentially progressing from mid-year to high 70s depending on availability and the overall state of the industrial economy. Key drivers include strong performance in the data center markets, and there remains significant opportunity in the broader industrial economy, particularly in communication infrastructure and automotive sectors, which could lead to additional successes. This growth is essential for the semiconductor segment to return to a more normalized growth rate.

Operator, Operator

And we'll come next to Aleksey Yefremov with KeyBanc Capital Markets.

Aleksey Yefremov, Analyst

I wanted to come back to your first quarter comments. I think you talked about high single-digit sequential growth. It does seem quite a bit above your normal seasonality, if I look at the history. Is there anything unusual in Q1? And as a result, are there any consequences or how should we think about second quarter? Is kind of second quarter being flat versus Q1 the bad gas for us at this point?

Jon Kemp, CEO

So I'll maybe start there, Aleksey, and then ask Mike to comment further. So when we think about the first quarter, we are seeing some different types of behaviors. Usually, there would be a little bit of a seasonal decline kind of third quarter to fourth quarter and then fourth quarter into first quarter. I think I'll go back to what I mentioned in my prepared remarks around some of the structural demand shifts that we're seeing in some of our end markets. A lot of the strength in the current market environment is really driven by data center, the high-performance computing. And the benefits that we're seeing there are overshadowing any normal seasonal weakness that we would see from consumer electronics. And I think it's a testament to the strength of our portfolio that we're really well diversified and positioned across different end markets to be able to pick up those benefits. And so the same type of trends that we saw in the fourth quarter results is continuing into the first quarter with that strength. And all things being equal, that's kind of the state of play in the different end markets right now. As we get through the year, going back to the previous question, to the extent that we start to see opportunities in some of the other parts of the industrial markets, whether it's automotive, communication infrastructure, aerospace and defense, all of those represent nice content as you start to get AI capabilities moving from, say, cloud computing and data centers to edge computing kind of at the point of interface, whether that's in the car, the factory, or with the consumer as we start to see more of that AI capability diversified into different end markets, we expect that will continue to drive fairly robust growth rates. Mike, anything else to add there?

Michael Goss, Interim CFO

Yes. Thanks, Jon. I think the thing I would add to that is, as I said before in one of the earlier questions, would you expect to see the steady demand through the year with a little bit of a peak in the third quarter. I'd say the other color I'd give is on the back half of the year, we do expect some scale-up on node transitions, as well as the ongoing evolution in the memory market dynamics. And so as you'd expect, we'll continue to provide additional perspective and information on what we're seeing as the year progresses.

Aleksey Yefremov, Analyst

And I think you said that you had 20% growth and 20% plus growth in both advanced packaging and thermal management, EMI shielding. Kind of a two-part question. Should we think about those types of growth rates as sort of achievable in your thoughts for '26? And also, it seems to me that thermal management growth has accelerated? I recall you've been talking about kind of growth there in the teens now. It's in the 20s. So is it the case that thermal management growth has accelerated?

Jon Kemp, CEO

Yes. Great question, Aleksey. It's obviously a dynamic that we're watching closely, and we're in constant conversations with our customers. If I take a step back and I think about kind of what happened in 2025 and how that plays forward into 2026. In 2025, the ICS business broadly kind of the custodian of those key technologies benefited from a lot of available capacity that was able to rapidly scale up in 2025. And what we're seeing as we go into 2026, obviously, a lot of our customers and folks throughout the industry are making significant investments to expand the capacity for both advanced packaging as well as kind of the place in the manufacturing process where the thermal materials would get added. A lot of the pacing and the growth rates that we expect in 2026 are largely driven by the incremental capacity that our customers are able to bring online. So demand is strong in those areas. So it's not a matter of demand. It's really a matter of how fast can we get that incremental capacity online. And then we'll work with our customers as we make those we're pretty consistently getting increasing content wins with the customers in both of those areas. So as that incremental capacity comes online, we're confident in our ability to sustain that growth.

Operator, Operator

And our last question comes from Edward Yang with Oppenheimer.

Edward Yang, Analyst

Jon, nice quarter, and thanks for the time. I just wanted to come back to the level of conservatism that's embedded in the 2026 revenue guide around 6.5% or so. And again, if we step back, you did 10% growth in 2025, it looks like according to the first-quarter guidance, up high single digits sequentially, that would mean you'd be growing more like mid-teens year-over-year growth in the first quarter. So is it just conservatism? Mike talked about, again, steady growth throughout the year and even possibly a second half, I guess, inflection, which would be consistent with what we're hearing from the rest of the semi food chain. So just some additional color to tie everything together, I suppose.

Jon Kemp, CEO

Sure, Ed. I would like to start by revisiting how we arrived at the midpoint of our guidance. The midpoint is primarily based on our expectations for the MSI and PCB markets, which are our key market indicators, both projected to grow in the mid-single-digit range. Additionally, we believe we can perform better than that. We had strong performance in 2025, and I am optimistic that we can maintain that momentum. However, this will depend somewhat on acquiring the additional capacity for our most advanced technologies. The dynamics in the memory market are also influencing our decision to adopt a cautious wait-and-see approach as we progress through the year. With respect to the first quarter, we are very confident in our position. We will offer further insights as these trends develop leading into the second half of the year. Mike, do you have anything else to add?

Michael Goss, Interim CFO

Yes. I think the other thing I would add is just anchoring back to our overall midterm framework with sales growth in that 6% to 7% range, and that's part of what drove the midpoint of the guide that we have this year. Obviously, we're continuing to see, as Jon said, the mix dynamics between the two segments, and we'll obviously continue to strive for opportunities to drive margin expansion from volume and product mix enhancement as we continue to serve and see growth in the most advanced technologies. So over time, I would also expect the transformation program that we're launching to help drive that enhanced performance as we move through the year.

Edward Yang, Analyst

Okay. And for my follow-up, I just want to come back to this, I guess, your leverage to the memory cycle and the various puts and takes. And obviously, we understand what the upside is from your exposure to the memory cycle. And Jon, you touched on, again, maybe there could be some potential offsets. But I think during the call, you also mentioned you do expect to grow stronger than semi in 2026. So I guess the base scenario, is it fair to say that you're not really seeing any offsets necessarily from the higher memory cycle? But again, just to be conservative, you are baking in some potential impacts that may or may not occur.

Jon Kemp, CEO

Yes. I think, Ed, the way that we think about it is, as I said, when I was talking a little bit about the specifics in the memory market is that wherever those memory chips are going, we're going to pick up the benefit of that demand. So it's not so much of some of the reasons why we're confident in that ICS growth is if we're getting growth in the consumer electronics devices, that's great. We've got great content, a lot of that, especially on the premium side of the market, which we expect to be more resilient. If instead, those chips are being allocated more to serve the needs of data centers, I might argue that's slightly even more favorable because we're going to pick up probably higher content in data centers and margin than we will in the consumer electronics side. So we're really well positioned from the diversification of our portfolio to be in a position that no matter where that growth comes from, we're going to be able to pick it up with kind of premium content.

Operator, Operator

Thank you. At this time, we have reached our allotted time for questions. This does conclude today's question-and-answer session as well as Qnity's Fourth Quarter and Full Year 2025 Call and Webcast. You may now disconnect your line at this time, and have a wonderful day.