With us. I'll get—thanks everyone for joining. My name is Josh Spector, UBS North American Chemicals and Packaging Analyst. Welcome to the Tech Conference, UBS. Happy to have Element Solutions and Ben Gliklich on the stage with us to talk about Element Solutions today. Before we get started, just as a research analyst, I need to disclose a relationship of myself and that of UBS, and with the company we express a view. Those disclosures are available at ubs.com/disclosures, or you can reach out to me. For those in the room at the event, there is a QR code you can scan to ask questions that will pop up to me. Feel free to use that if you want to ask any questions yourself. Otherwise, I'll drive this call. Thanks, Ben. Appreciate you having me back at this conference.
Yeah, thanks for having us.
I think the first place where I wanted to start was really just talk about some near-term trends, electronics particularly. Within your guidance for the year, you had some expectations around some markets around smartphones, automotive, various other demand drivers. Just where are we sitting today versus where your expectations were a month or so ago?
Yeah. There's been real momentum in the fast-growing niches within the electronics market. You look at AI, data center, and so forth, and that's propelled the business very well. The third quarter was a record quarter for the company. As we rolled into the fourth quarter, we've seen that electronics momentum continuing in those pockets. We've seen a slightly better-than-expected smartphone market. We've seen a bit of continued weakness in certain areas within electric vehicles. Our guidance, as we articulated it, contemplates roughly what we're seeing right now.
Okay. Fair enough. It may be early to talk about 2026, but I'll try. I think if you go back a year-plus ago, you guys were pretty confident in highlighting that you thought that the electronics part of your business would be growing high single-digit % for the next five years. Obviously, we've had strong growth in high-end compute, pretty good growth in other parts of the market, and a strong PCB market this year. I guess when you look into next year, are there any things getting better or worse from a trend perspective? Would there be any reason why you would deviate from that high single-digit growth that you saw earlier?
Yeah. We articulated early last year an expectation of a through-the-cycle growth for our electronics business in the high single digits. We've had, at this point, six consecutive quarters of high single-digit organic growth in our electronics business. That's been in a mediocre overall electronics market, which is to say that the high end has been exceptionally strong, but the low end, or the legacy nodes, I would say, have had varying levels of strength and weakness. Smartphone units are still well below trend and way off of prior peak. Industrial electronics are only okay just in a weak industrial economic environment. We're delivering on that algorithm in a mixed environment. As we roll to 2026, our expectation is more of the same. We don't currently see the industrial economy getting materially better.
There are reasons to be a little bit more optimistic in the beginning of the year from the smartphone market, but the high end remains really robust. Sitting here today, that algorithm still holds, whether that's the right number to put into the model for 2026 is early to say, but we're delivering on that framework. If anything, given M&A and new product introduction, we see that number could be better.
Okay. That makes sense. I wanted to ask on, I've personally been getting a lot of questions around ESI's exposure to consumer products, and mainly in the framework around memory costs have gone up. Cost of devices may go up next year. Is there risk to demand? Obviously, a tighter memory market has some benefits on the other end of ESI. How does that come together to impact your view around demand for your products near and medium term?
Yeah. Importantly, our business is driven by units, not pricing. The price of memory does not have a bearing directly on our revenue. Of course, as devices get more expensive, it could have an impact on units. Our business is more concentrated in logic applications, in printed circuit boards, than in solid-state memory. We have had some really good wins in high bandwidth memory in the past couple of years. For the most part, our semi-exposure skews towards logic applications. Of course, high-priced units, if that impacts demand, could be a headwind. I think we are going a few steps too far into the there are a bunch of embedded assumptions and ifs in that question. I think it is early for us to have a view on that in 2026, sitting here at this point in 2025.
Is there a way to think about the content side of things? If HBM demand is stronger and that pulls more content for ESI, does that lead to more growth if you have more constrained markets on the other side of things? Is that too niche of a way to think about it?
Within the memory market for semiconductors, HBM is a higher value and a faster-growing niche. I think that it's a reduction; it's sort of taking two variables that aren't—it's hard to be too prescriptive around that.
Okay. We talked a lot about, or you guys have talked a lot about high-end compute, and obviously, that's been a high source of growth for many in the market. I don't know how you would describe your mix of your business today in that what percentage is high-end compute and driving more of the growth? Has that mix shifted in terms of some of the disclosures that you've had versus two to three years ago?
Yeah, for sure it has. For sure it has. If you go back a couple of years, we said about 30% of the business was automotive. This is not just electronics. This is all of Element. 30% was automotive, about 25% was smartphones. We talked about compute and internet infrastructure as being sub-20%. The smartphone market, from a units perspective, has been down continuously since then. Automotive units have been relevant automotive units, so that's excluding some of the lower-end vehicles made in China, have been down since then. The market for server boards has been growing really robustly. I would have thought that our sort of internet infrastructure and computing revenue share has grown to at least 20% of the business.
Now, that's not all AI data center applications, but it certainly has been growing and is a more meaningful percentage of the overall portfolio today.
Yeah. Maybe kind of building off the portfolio comments here, you guys have done some divestments. You've done a number of acquisitions recently. Let me just leave it open-ended to you to talk about the two acquisitions that you've announced more recently. Why are those acquisitions at ESI needed to do?
Yeah. The framework for M&A at Element has always been to back our existing businesses. To expand our penetration of markets, we deeply understand with acquisitions that make our company better and of businesses that are better inside of our company. We're staying in our core markets. We're bringing things in that enhance our customer value proposition and businesses that are better inside of Element because of our know-how, our customer relationships, our capabilities today, and that come at attractive year-one cash-on-cash return relative to our free cash flow yield. That's the rough framework that we've always had. We don't get to choose when assets like that become available. There's a scarcity of assets in the electronics space that meet our very high hurdle from a quality perspective and valuation criteria.
It just so happened that two of these assets became actionable in the second part of 2025. Both of them are great additions to our portfolio. Micromax is a market leader in a niche electronics market. This is thick film paste and electronics inks. It really fits nicely within what we do in the electronics ecosystem. It is a business we deeply understand. They are creating thick films or electronic inks using powdered metal, precious metals, which is what we do in our assembly business. We make solder paste. They are being applied to form circuit pathways. That is printed inks or used in resistors or other electronic passives. They are part of the circuit pathway, which is something that we have deep know-how and knowledge around. It is the market leader. It has really strong technologies, but it has been a bit orphaned over the past several years.
It was part of the business that DuPont divested to Celanese. Celanese does not play in these markets the way that we do. We think we have got an opportunity to really deepen the penetration of this business into the faster-growing niches within the electronics supply chain, areas that they have not been as present in because of the more recent ownership structure and a lot of know-how on supply chain. There will be synergies from a cost perspective and opportunities to accelerate revenue growth. It is a high-value business. The margins do not look as great on the face of them because they are selling a lot of precious metals. If you exclude the precious metals, it is a 40+% EBITDA margin business, which gives you a sense for the value proposition this product offers to its supply chain.
& Advanced Materials is a completely different story, but a really, really compelling opportunity for us. They're selling specialty rare gases into the fastest-growing niches of the industrial economy. They're selling cylinder gas to semi-fabricators, satellite propulsion systems, electrical transmission infrastructure. These are the areas that are growing in the industrial economy. Unlike a typical gas company, there's a lot of applications know-how and on-site service that these guys provide. Element Solutions thinks about itself as a people-based, customer-intimate, service-oriented company. EFC is doing that in the gases space. It's no different than what we do with aqueous or solid metal in our other existing electronics business. It just happens to be gases. Whether that's purification services, recycling services, loading services, they're not just selling the material. They've got a value add on top of it.
It is focused on these niches where the large players have not been as present in the past. Just like our business, where we are a market leader in a niche, they are a market leader in a niche. We think that inside of Element, because of our breadth of touchpoints, we can accelerate some of their penetration of some of these supply chains, particularly semiconductor and satellite. By having a broader offering, it will give us a bigger seat at the table with some of these critical qualifiers and specifiers in the supply chain. It is a business that is growing, has grown at a 15% top-line CAGR for the past 15 years, 30% EBITDA margin. It is accretive to our margins, accretive to our growth, and adds a new arrow to our quiver for our customers.
They are both really exciting, different opportunities, very compelled to add them to the portfolio and to have found opportunities to scale while enhancing the overall quality of Element Solutions.
How do you plan to integrate some of these? There is maybe a little bit of tension between local autonomy and separate businesses from, I think, some of the messaging from the portfolio as you go all the way from semi and follow the electron through down to the printed circuit board. There are maybe some integration benefits that maybe get you some scale. On that kind of order of magnitude, kind of where things can fit in, how do these fit in, and how do you make sure you're leveraging them to the extent that you can?
These will be two very different types of integrations in terms of complexity and timeline. EFC is a standalone business. We intend for it to remain a standalone business inside of Element Solutions. There is certain integration we need to do from a functional perspective, taking effectively a family-owned business and making sure it has the appropriate compliance and cybersecurity and so forth from a functional perspective. Its go-to-market is completely unchanged. The way we will leverage its capabilities to help us with relationships and leverage our capabilities to help their relationships is really through strategic account management, where we will do a tech day. We will go to a customer site and set up a room full of stalls or booths with our different product propositions and capabilities.
Engineers will come and learn about what we can do for them, and there will just be a booth that says EFC, for example. It is part of the portfolio, but it is not integrated from a commercial perspective or a supply chain perspective. It will be a standalone business. Micromax is more complex because it is a corporate carve-out. We have to stand up certain capabilities. It will become more part of what we call MacDermid Alpha Electronics Solutions, given where it sits, as we talked about in that electron, everywhere the electron goes in a circuit pathway. It will still be a discrete business. We do not have an ID that is shared between semi-assembly, for example, power electronics and printed circuit board fabrication. It will have its own technical team, innovation team, commercial team, supply chain.
It will be a part, and it'll be a standalone unit within MacDermid Alpha Electronics Solutions. When we go do tech days, they'll have a presence there and a capability there. Some of our know-how and best practices from a manufacturing standpoint around how to make paste will share and vice versa. There will be a bit more supply chain synergy and data generation. Use this passive with this solder paste with this printed circuit board chemistry. You'll get this level of performance, which speaks to the performance of an integrated electronics assembly as opposed to just a product, which is part of the enhanced value proposition we offer to the supply chain. There'll be more of that collaborative data generation with Micromax than with EFC. Importantly, EFC should close this year, and Micromax won't close until Q1.
We have time to digest all of this. It's a lot of work to integrate an acquisition and to do two at the same time may raise some antenna. From a phasing perspective and a complexity perspective, we have more than enough time to manage them both and do a good job of both.
Yeah. I think that was going to be my next question, which you answered to some degree, but I'll ask it anyway, just around you're doing these two deals. You just did a divestment. You have good organic growth. How are you making sure you achieve all those goals? Organic growth doesn't lag. New wins don't lag. And the integration of these goes flawlessly.
Yeah. It's a matter of the way we run our business and our operating system and the quality of the people that we have. We have names in boxes who are responsible for these integrations, and they're different than the people who are responsible for the breakthrough strategic objective that we're driving towards organically. It's a decentralized model where we drive autonomy and ownership as close to the customer as we possibly can. The folks who are working in the businesses on immediate customer pain points are different than the folks who are driving these integrations, and appropriately so.
Do either of these acquisitions then create more white space? I guess Micromax, talked about already a leader in the space. The gases side, maybe more uncertain. Does that unlock something that maybe we're not seeing from the outside that we should think about being an interesting avenue longer term?
Yeah. From an M&A perspective, Micromax and EFC both get us into adjacencies that we're not currently in. There is, could there be further consolidation opportunities in the electronics inks and thick film paste market? There could be. In gases, we're going to be very choosy because, again, we're not interested in bulk gas, technical gas businesses. We're interested in high purity, rare, and specialty gases with a real people-intensive bent to them. Those are reasonably scarce, but not nonexistent. It does give us white space from a capital allocation perspective, for sure.
Whether we want to talk about these acquisitions or just the portfolio evolution, how has your seat at the design table changed? Again, the tension between a local selling salesforce with heavy technical service versus big product roadmaps at bigger companies, are you gaining more mind share on the larger scale and product roadmap side, which should benefit ESI with this broader portfolio, or is there a different way you'd think about it?
We say that roughly 80% of what we sell is either specified or qualified, and that percentage is going up. As I was talking about before, being able to do a systems solution sale as opposed to a product sale is highly differentiated. There is no company in the market that has the breadth of, that has the cogent broad portfolio that we have in the electronics supply chain. We are seeing much greater levels of engagement higher up in the technical organizations of the major OEMs and specifiers than we've ever had before. That's a product of bringing the portfolio together and being able to talk about the way that pastes and circuit board and semi-assembly products work. It's a product of the innovation we're bringing to market.
Things like Kuprion, for example, are really growing our mind share and relevance in the supply chain. The ViaForm Omega or the ViaForm transaction we did with Entegris a couple of years ago also changed the perception of our electronics business with the key customers or some of the key customers. Collectively, it's not the stated strategy, but an outcome of the strategy is greater relevance and mind share and access in the few key, in the technical rooms, in the technical leadership of our supply chain.
Do you think you'd be talking about more system sales and be able to talk about that as a percentage of your mix over time? Is that big enough to start to matter, or is that more just, I guess, maybe you get more pieces of the pie over time, and that shows up as higher growth?
The way it manifests, you can't just spend time with the OEMs and specifiers because the direct customers rely on us to support their production. It is a two-sided sale. It is getting that qualification, and then once you're on that approved vendor list, making sure you're selling to every person who is an approved supplier into that supply chain. The way a systems sale will look is more market share with the circuit board fabricator and the EMS provider to that systems builder. You can't even quantify, "Hey, this is a system sale revenue dollar," per se. It just looks like above-market growth and market share.
How do you think competition has maybe changed in the space? I mean, you have your own portfolio change that's going on. You now have another electronics competitor, which is now separate from the larger parent. Everyone's chasing some higher growth parts of the market. Where does ESI win out versus some of those competitors, and how has this changed over time?
If you go back to the founding of ESI, we were the, I don't want to say least stable, but the most dynamic company in the market. We were the only one who had been through all of the sort of corporate strategic activity that happened at Platform Specialty Products, our predecessor company. You fast forward six and a half years, and we are the most stable company in the market that has gone through the least amount of corporate activity, with some of our competitors being divested, spun out. At the same time, we've been adding to our portfolio more than our direct competitors have. Our value proposition, our focus on our end markets, and our capability set has been growing. We feel as though we've been winning, and I think the data bears out market outperformance.
Some of the strategic activity around and the like does not really change the competitive dynamics because the portfolios of the market in the market are mostly unchanged over the past several years. The customers are looking at product as opposed to corporate identity. Our product portfolio is growing. Our capabilities are enhanced. We are bringing new technology to market. That is leading to real progress from a market share perspective and mind share perspective within the supply chain.
When you think about high-end compute and, I guess, specifically data centers and maybe energy at some point being a limiting factor on growth, how does ESI's portfolio help alleviate that? Is that something that's maybe more of a benefit for your portfolio, or does that not change the opportunity set for you?
There is not a silver bullet around this, but if you look at the innovation we've been, some of the innovation we've been driving towards, it's been around thermal management and power density. How do you get more power efficiently through electronics assemblies? That is what we do with Argomax. That is one of the things that Kuprion is helping solve. It also has a thermal management attribute to it. We have some solder TIMs that we've introduced that are solving some problems around heat management in high-performance chips. A significant portion of our business is being driven by that dynamic, by introducing higher reliability alloys and alloys that can support greater power density in assembly or in the circuitry business.
Okay. Makes sense. I want to ask one on the industrial side of the business. I think it's actually been a bright spot within the portfolio. You've done a divestment of graphics, but the EBITDA within that part of the segment has been growing. I guess made the comment before, we're not going to rely on much industrial growth next year, but what is driving the success in that business? Can that business grow next year if we're in a flat industrial environment?
Yeah. The calling card for Element is operational excellence and prudent capital allocation. Operational excellence does not rely on organic volume growth. When you look at our industrial business, we have made it better. The industrial solutions or the industrial and specialty segment, it is two pieces. It has an offshore business that is doing quite well at attractive margins through pricing discipline or through pricing action and market share growth in a healthy market. The industrial solutions business, which is the bigger piece, has been growing earnings through productivity, improvements, procurement activity, and market share gains. We are the leader in that market.
We have been flexing that muscle and taking advantage of our market position and our ability to meet customer needs better, to grow market share despite a declining volume arrow, and to make our sites and footprint more efficient, which has really been where the margin expansions come from. The margins in the industrial business today are at record levels despite volumes being down more than 10% over the past several years. How do we get better? We drive margin. We win share. You do not need market growth in order to deliver that. There is still plenty of share for us to go after.
Do you see any more need to divest or prune the portfolio back? Obviously, the growth has been higher in electronics. More of the acquisitions have been driven by electronics. That just gets larger and larger. Does that drive you to think about anything else differently?
Not at all. Our portfolio holds together high-quality, stable, strong cash-flowing businesses with market-leading positions in attractive markets. We're not emotional about any of our businesses, but we're certainly not going to proactively seek to separate them. They're all great businesses with plenty of growth opportunities in front of them.
Maybe I'll give you the last question here to broadly talk about how investors should think about ESI's algorithm today. I mean, I mentioned with acquisitions, the electronics have gotten larger. You've been very free cash flow focused over the entirety of ESI's existence. I think when I look at it, the growth potential has gotten higher. The stock has seen some pressure as of late. One, what should investors expect in terms of growth and kind of what the company should be delivering? Two, what's the market missing today that you think is the opportunity?
Yeah. Look, the North Star for the business is to compound intrinsic value per share, to compound earnings per share in the teens. The growth algorithm is mid-single-digit top line, one and a half times that at EBITDA, and very strong cash flow generation to deploy in pursuit of that North Star. If you look back over the past five years, we delevered the balance sheet before these recent acquisitions to below two times from three and a half times. We sold a business that took $0.14 of EPS out of our pockets because it was the right thing to do for the long term. Notwithstanding that, we're still compounding and growing EPS. There's a significant amount of pent-up earnings per share growth entering 2025. We flex that muscle through capital allocation, but we're still only levered at three times exiting this year after two reasonably accretive acquisitions.
What investors should expect is for this business to compound earnings per share in the teens over the long term. We're primed to continue to do that with an acceleration in earnings growth next year from some really interesting capital allocation that's going to prove out not just in one year, but over the next several.
Anything you'd want to say in terms of what isn't asked or what's the most misunderstood part of Element Solutions?
It's hard to know what people understand or don't understand. We sit at this funny intersection between materials and electronics. We come to conferences like these and have really great discussions around trends in the electronics market. There's a lot of enthusiasm about that. I think that there is an opportunity for Element to get the appropriate attention and respect from the market for the innovation it's bringing to enable its customers to deliver value to their supply chains. I think that that is something that we could do a better job of clarifying going forward because that's something that we are doing, and we're just beginning to see the fruits of it today.
When you think about where our capital has gone, both internally towards Kuprion expansion, this S-TIMs product I was talking about, and then from with Micromax and EFC, there will be more and more of that going forward.
Great. I think we'll leave it there. Thanks for taking time with us.
Thank you, Josh. Thanks, everybody, for joining.