Awesome. Next up, we have the CEO of Element Solutions, ESI. We have the President CEO, Ben Gliklich, who I've had the pleasure of knowing for over a decade now. It's making us feel both a lot old. You know, so it's been fantastic. And speaking of, you know, that time frame, you've been fairly integral to the evolution of what now stands as Element's portfolio going back many, many years. You know, there's been a lot going on even in the last, you know, year or so, especially with graphics. You know, making a few pretty exciting acquisitions on the electronic side of the portfolio. Could you just give an assessment as CEO of, you know, where you stand today, what you're most enthusiastic about, the balance sheet's in the best place. You know, it's been in the history of a public company.
You know, how should we be thinking about the portfolio? And we can branch off from there.
Yeah, it's a great question. It's a great place to start. We've been at Element Solutions a little bit over six years at this point. The portfolio keeps getting better. Portfolio keeps getting better because of the way we've been running the business, where we've been focusing, and where we've been deploying capital. We've been refining the portfolio, moving, I think you talked about the upgrading, I think is the term you used, of our technology, moving up towards the semiconductor market, more into the semi-assembly and front end. That's gone great. We've brought new technology into the portfolio, some of which is commercialized, some of which is on the way towards commercialization. We divested of a high-quality but less core graphics business last year. As you said, the balance sheet is as good as it's been.
We're in a great position to be on the offensive and bring new capabilities to bear into the portfolio as and when they become available.
You know, there's been a lot of debate for every single person I've had on stage all day, you know, tariffs, macro noise, geopolitical risk. The tone of your first quarter call for the balance of the year was very balanced, methodical, preparing for challenges if and when they pop up. At the same time, your messaging was still pretty constructive on the electronic side. Obviously, a few puts and takes on the industrial side, still generally okay. You know, how has that evolved over the last couple of months? How are you thinking about the second half of the year? If we could do electronics versus industrial separately, let's start with electronics.
Sure. We have the benefit of a very nimble supply chain. Right? We manufacture locally, we source locally, we sell locally. That gives us a lot of flexibility to navigate trade tensions and all of the tariffs that have emerged over the past, emerged and then gone away and evolved over the past several months. It requires a lot of work internally, but we've been able to mitigate that, and we feel good about our position. That goes for the entire business. With regard to demand, right, we struck a more optimistic tone on our call because the same dynamics that have been propelling the business over the past couple of years in an environment that has not been very growthy persist. The business is migrating from having been a B2C smartphone-driven electronics business to being a B2B data center, high-performance computing business.
Those demand trends have been durable. There has been no pause in investment in data center capacity. There has been no pause in adoption of high-performance computing applications like AI. That is driving the high end of the electronic supply chain where we are focused. Our business has been outperforming MSI. Our semi business has been outperforming MSI by over 1,000 basis points over the past year and a half. Our circuit board business has been outperforming PCB square meters over the past year and a half. Those demand trends have not seemed to dissipate. We feel cautiously optimistic that that is durable in electronics. What you saw through the last year and the first quarter will continue over the balance of this year.
On the industrial side, it has been a weak demand environment, but there are things that we can do around procurement, around supply chain improvement that have allowed for us to drive profits last year in a down volume environment and should allow for us to preserve profit this year as well.
I'm going to get back to the industrial side of it. You know, income versus revenues has been an interesting story within Element. It goes right back to the portfolio evolution. Just sticking with this, just because I want to make sure everybody kind of gets the message. You know, when I think, when we think about the tariff environment, there are two things in terms of just the preparation. We're currently in the, some people will call it the eye of the storm, and some people will say, we're miraculously going to get all these deals at the last second, and who the heck knows. When you take a step back in terms of your preparation as CEO, I'd like to hit on just, are there any one or two things you're particularly paying attention on?
As it pertains to your customers and the ultimate price points of the products that your products are actually going into, are you at all concerned about demand destruction? Are you hearing that from your customers? Are people still generally in wait-and-see mode?
Every year, we do not have great visibility. Right? The large smartphone handset manufacturers do not know how many units they are going to sell six months out. How does their supply chain know how many circuit boards they need to make? How do we know what our volumes are going to be? That is normal. Sitting here today, the question of will there be demand destruction, we cannot answer that because our supply chain cannot answer that. It is not as though we are operating in a very different visibility dynamic, per se, than normal. We thought there could have been some pull forward in the second quarter. April was really strong. The quarter has remained reasonably strong. We have no indication of demand destruction today, right? Just as we said on our last call. We are paying a lot of attention to these vectors.
By the way, our customers don't stock our products. It's not as though there'd be an inventory bubble of our material. It would be downstream from us if there were one. We have no indication of that to date. The things that we're watching around tariffs are really around flow of goods. For the most part, we're local for local, but there are certain things that move over borders, and we need to be ready to move production as best possible to avoid painful tariffs for ourselves or our customers.
Taking a step back, and let's go to the heart of the electronics business and the portfolio, which is now, I think, just based on my model, like 64.7% of the portfolio and hopefully growing even more depending on what you do with the graphics proceeds. When I take a step back and I look at this, you know, and I define it slightly different, but fear not. I look at semi, I look at data center. Obviously, we get into some circuitry and everything else. Then I look at some of the new technologies like K uprion. It's kind of have to advance in that. Sticking with the semi/advanced packaging side of the business, what have you been seeing? Perhaps for the generals in the crowd, just maybe hit on just exactly what you do here.
We get a hit on the trends and how you expect that to evolve over the next, you know, I've been saying six to 18 months to give everybody a little leeway given the environment.
We have a limited time. I could go for a very long time to explain the technology here, but put very simply. F or the history of the semiconductor industry, the way innovation was in size, so getting more transistors into the same space. We have gotten to form factors that are just too small where it is not economic to go smaller. The way people are getting more computing power into the same spaces is by architecture, so putting multiple chips together. That is effectively what advanced packaging is. It is the way that the chips are put together. It is a very heterogeneous pursuit. It was homogeneous around scale. Let's get small. Now everybody has their own packaging designs and architectures.
Element, somewhat intentionally and somewhat just by chance, is very, very well positioned to solve packaging problems for our supply chains because we speak to all of the interfaces, whether that's the very high-end circuit board that has multiple chips attached to it, whether it's the way the chip is put into the package, or whether it's the way multiple chips are attached to one another. Our product, our solution set speaks to the system around a package as opposed to a product. We compete with many different companies, but none of the same company. In other words, there's no one who can offer the breadth of what we do in the advanced packaging market like we do. The market's coming towards us in that regard. You see it in the P&L already.
You see the acceleration in our semi business, which is driven by what we do in copper deposition, which is effectively the back end of the front end, what we do in semi assembly, which is die attach and package attach, some of the innovation we've brought to market in the assembly business, and our circuitry business, which is selling more and more into these very, very high-end printed circuit boards that are somewhat of a hybrid between a semiconductor and a circuit board. The market's coming towards us, and our solution set is highly differentiated, which gives us a better seat at the table to speak the language of the OSATs who are driving this packaging. That's not something that shows up in one quarter. The product cycles, the innovation cycles, the technology roadmaps are many years long.
We're just starting to see the fruits from this evolution.
I want to hit on that for a second, and forgive me for using the sell-side buzz terms. I hate doing it, but it's kind of necessary in this case. When I think about the growth there, you mentioned something very important. You said the growth's coming to you. You and I have discussed this before about the evolution of the portfolio and it's really only a matter of time.
Now, even when the environment's been pretty choppy, you've still been showing very good results because, as you pointed out, you could make an announcement, say, "Oh, we're going to slow data centers in 2027, 2028." You're like, "Yeah, I'm going to slow down in 2025." When we think about the buzz terms, whether it's HPC or hyperscalers or AI and everything in between that your customers are constantly, obviously, evolving their own portfolios for, has that growth, I mean, it seems like you have "a right to win." Can you just hit on kind of the key factors of where you were positioned, where you are positioned, and whether or not you consider yourself to be in the position to have "that right to win" on a go-forward basis?
Yeah, the term we use is incumbency.
That's a simple one.
Incumbency, which is to say this is a market that has incredibly high barriers to entry from a technical perspective, from a technical service perspective. The supply chain works with the existing partners, not just for their current production, but to meet their future needs. We do these technology roadmap exchanges with our customers, with our customers' customers to understand where they're going because they need us to meet them to enable their next generation capabilities. The more value you capture, the more technology you can bring to bear, the more roadmap exchanges you get, the more incumbency you have. Today, we are providing the best-in-class capability for the big server boards that are going into data centers.
We have a seat at the table to understand what the next board designs are going to look like and what the requirements of those board designs might be. We might even help our customers define what the qualifications will be. We have that level of incumbency, and that is in the core markets that are driving the overall ecosystem forward.
One more on this, then we can switch over to circuitry assembly. Going right back to the portfolio evolution, K uprion.
I know, sorry, I should talk into it. K uprion, obviously something you're, correct me if I'm wrong, you're particularly enthusiastic about. What is it? How can it help customers? And when can the financial community expect at least preliminary results in terms of the tangible, addressable market?
Sure.
It's the future of materials or materials of the future conference.
Correct.
I think that Active Copper, which is the product associated with K uprion, certainly qualifies as such. Very rarely in our supply chain do you see material science breakthroughs where you're using a fundamentally different material. We believe Active Copper, K uprion, is one of those. It's a new-to-the-world technology that has attributes that solve emerging pain points for the fastest-growing, most technically challenging applications in the electronics ecosystem. That's around filling very small holes through substrates to get finer features, more computing power into a circuit board. That's around plating very big vias, which allows for more current, more voltage to go through a circuit board. That's around thermal management, managing the heat created by these high-voltage, high-performance circuit boards. The breadth of applications associated with this material is incredibly wide. The demand signal from the market is incredibly strong.
The bottleneck is our ability to make the product at high volumes and qualifying the applications that our customers are going to use with OEMs. We have been on this timeline, which is to say we will have some manufacturing capability online in 2025, and we will have some profits in 2026. The outlook from there is pretty steep and positive. That timeline remains the case. When you are bringing new material to market. T here are unknown unknowns. We have crossed a few of them off of the list, I would say, over the past 18 months. I am sure we will confront more. We remain incredibly enthusiastic about this technology. Our conviction in demand is as strong as it has been. We are chopping the wood to get it to market. The margin profile, because we are bringing so much value to the supply chain, is very strong.
It remains a great sign of, again, our ability to bring value to our supply chains, to be a great partner in the ecosystem, which has a whole bunch of other ancillary benefits when you think about the incumbency I was just talking about.
Every time I meet with you, I find myself back in my office going through definitions and products. And for what it's worth, last night, late night, this is the last one I was preparing for, and I found myself on their website and going through all this back to the products versus what some of our other analysts were saying in technology. And it is, in fact, pretty fascinating. So looking forward to hearing more about that. Switching over to some of the circuitry assembly, I mean, we were talking about PCBs, and we could talk about assembly kind of in the middle and get into some EV stuff, perhaps. But it seems as though, I mean, you've been gaining a decent amount of share. I previously, perhaps incorrectly, Ben, kind of viewed you as more of a Western OE exposure.
It seems like you've gained a lot of exposure, and some was direct and some was not with the Chinese OE. When you've looked at handset demand and consumer electronics, I mean, it seems like you've been performing pretty well in the context of what has been a fairly choppy market. Would that be a correct assessment? How would you assess the market from here? Perhaps just focusing longer term in terms of AI-enabled phones. We're already at 5G. What are the key drivers of your business that we should be monitoring? Can you perhaps even further position yourself to gain share?
Yeah, so the business has outperformed the demand indicators that we look at, whether it's for our semi business, we look at MSI. For the circuit board business, we're looking at printed circuit board square meters production. Last year, it was a mid-single-digit number, and we grew high single-digit for the circuitry business. The assembly business, a little bit more industrially oriented, we look at electronic systems growth. It was not a great year for electronic systems growth. Our assembly business still had a pretty good year. Obviously, our semi business had an outstanding year last year. The drivers are what we've been talking about. We play in the most advanced segments of each of those markets. The most advanced segments, the most technically challenging applications are growing, and the value associated with them are growing faster than units.
As we look at this year, we used to look at smartphones, and now we're talking about PCB square meters. Why is that? Smartphone market has been weak. It's dislocated from trend. It's way off of peak. It may not get back to peak of 1.7 billion units, but 1.2 billion units, 1.3 billion unit is quite low. And you could say that the replacement cycle has been extended, yet our business has been growing because of that shift towards B2B. So what would we suggest people look at as an indicator for our business? PCB square meters for the circuitry business is a good one. We should grow faster every year because there's a lot of old technology that has a lot of square meters associated with it. This screen right here is a very big printed circuit board, right?
It has far less capacity than the smartphone in my pocket, but it has a lot of volume. We are going to be looking at the high-density interconnect, the flexible, the 18+ layer boards that are going into really high-performance applications. Those segments of the circuit board market are growing a couple points to double the rate of the average circuit board market. Just by virtue of keeping our share in those markets, we are going to outgrow the market. Of course, we want to do better. The exciting thing as we sit here today is that market research suggests that the printed circuit board market will accelerate over the next four or five years because more of the market is being driven by data centers, high-performance data centers, right?
The amount of circuitry that's going into the data center market last year and this year is much less because it's growing 30%-40% than it will be in four or five years. The percentage of the business that's attributable to the faster growing parts of the business is growing, and therefore, the average of the market is growing. We feel very well positioned for the medium-term acceleration in circuitry. The semi business has been performing, and we've articulated our long-term growth algorithm, and our semi business should be growing in the double digits go forward. The assembly business won't grow as fast, but it should get to the mid-single digits if you get any sort of industrial recovery over the next couple of years.
We talked about the exposure on EVs just while we're kind of transitioning business and somewhere between electronics and industrial, given assembly. Can you talk about your business there? What trends are you currently seeing? Exposure to EVs? Is it a Tesla story? Is it a Chinese EV story? Is it somewhere between? Probably most importantly, Ben, I'd really like to hit on your market share potential. Just given where we could probably triangulate the market growth, I'd once again like to focus on the market outgrowth opportunity.
Our capabilities in EV are broad, right? There are the same things we sell into the industrial market and ICE vehicles, which are decorative and functional surface treatments. There are more sensors. There is more computing in EVs. The real power alley we have in electric vehicles is in power electronics. It is a pun. Unintentional. We have, similar to what we have with Active Copper and K uprion, we have a really differentiated technology that we built internally for Sintered Silver, nanoparticulate silver that can be used to put power semis together and power semis into power modules. This technology is differentiated because it allows for higher voltage to go through the power module, so you need fewer of them, and less heat to escape the system. The battery converts into power for the motor more efficiently than using other materials.
It is a very value-add capability that is only in the early innings of adoption in the EV supply chain. Our business has been vastly outgrowing EV units because it is growing share of the OEM ecosystem. It was highly concentrated in an American EV OEM up until about two years ago, a year and a half ago, and it started winning some of these new platforms, particularly in China. In China, it was a race to market at first, and now it is a race to quality. In the race to quality, they are adopting this technology. We had a weak first quarter with that American EV OEM, but the business grew because of penetration of the Chinese EV supply chain. What is ahead of us for this business is the West because the non-EV-centric OEMs have very long production life cycles, right?
They're working on model years three, four years out, and they're still grappling with how they're going to make EVs. Are they going to make the electric motor themselves? Are they going to use their electronics tiers to make them? As those questions get answered, they'll start using our technology. They're already beginning to with the tiers today, but that's only on the highest performing selected units. The EV opportunity for us is more than just unit growth. It's ecosystem penetration, very high value, high margin capability, very differentiated with a wide moat around it. It's an exciting space for us.
One of the things I've argued transitioning further into the industrial business is that as sluggish as the macro has been, you've still been growing top income. I think you and I have had this discussion for probably two, two and a half, three years now. Is that still probably the best way to think about it? Has the market shown any signs of life in terms of coming back? I mean, auto numbers are coming a little bit better, at least for the first half. Obviously, we could debate the second half implied to USR, but I mean, China has been better. How should we think about that? I have a longer-term question on your other core industrial businesses.
Yeah, so the industrial business has grown profits while revenues and volumes have been soft. That's because we've been driving better procurement. We've had raw material deflation. We've been driving productivity. We had done some consolidation in the industrial business. Very hard to close sites and rationalize supply chain in this market broadly. It's taken us time, but we're getting there. The current environment is more of the same. We're seeing some green shoots in China and Asia. The West has been pretty mediocre. Our offshore business is well positioned for the year, but there have been some potholes along the way just driven by timing of orders. There are reasons one could be optimistic about the industrial business. You look at Germany getting rid of the debt ceiling and starting to invest in infrastructure. That could be a tailwind for us. We haven't seen it yet.
This has been the most extended industrial recession we've seen in the West in a very, very long time. If you believe in reversion to the mean, at some point, it'll get better, but that's certainly not baked into our guide for 2025.
One question, quick question on the guide, and then I'll ask a longer-term question. FX is looking a little bit better. Auto, as of right now, perhaps looks a little bit better. General industrial activity is still a little choppy. It seems like semi is okay. I mean, what have been the, are there two things you're still pleasantly surprised in? And are there still two things you're closely monitoring into the back half, just given the macro situation we're still in?
Look, I think the one overarching question is pull forward and potential demand destruction. The impact of tariffs and geopolitics on industrial activity. On our Q1 call, we talked about April having been strong. We've been surprised by the strength of electronics. Whether that's pull forward or not is hard to know, again, talking about the visibility in the business. How does the consumer fare in the back half of the year? They're all related to that one issue around industrial activity. That is very hard for us to get a signal for sitting here today.
Two-part question, one short-term, one long-term. FX, just as a tailwind, plain and simple. Also, once again, for those that perhaps are a little bit more unfamiliar with the story, you mentioned Germany infrastructure spending. Everybody thinks about that business as, oh, it's just that auto business that Element Solutions has because everybody's so focused on the electronics business, which is a good thing. Could you just hit on kind of some of the German announcement? Yes, of course, we know it's 2027, 2028, 2029, but it seems like there's perhaps an emerging opportunity there that a lot of people don't have in their models.
Our industrial solutions business is about 50% auto and 50% other. The other is construction, building products, heavy machinery, and it is almost 50% Europe, the industrial solutions business, right? If you see an increase in spending, there is a trickle-down associated with that, right? If conditions improve in Europe around industrial productivity, that will be a significant demand driver for our industrial business.
Electronics seems like it's still doing pretty well. Industrial choppy, but well within the expectations, balance sheet in the best place since the IPO of the former companies, former parent. What's the one thing the investment community is missing? What are the two things? I asked the CEO before you. I said, what are you wondering after they're in couple of years? Varun, why am I not getting asked this? Why is nobody writing about this? Is there anything that's top of mind there?
Capital allocation is the framework we established when we launched Element was operational excellence and prudent capital allocation. I think that we've demonstrated an ability to execute well and drive margins and above market growth through a period that has been very choppy. Capital allocation has been more limited in the past two years. We're sitting here with a great balance sheet, and the flexibility to drive value from the balance sheet today may be underappreciated go forward. I'm excited about what the future holds as we continue to execute and build capacity to do interesting things, bringing our management technology to bear on businesses we bring into the fold. The cash flow characteristics of the business and stability of the business, I think, is still something that people could benefit from studying.
Thank you very much for taking the time. I always appreciate your enthusiasm and your candor, and I'll look forward to hosting you again soon. Thank you so much.
Thanks, guys.