Element Solutions Inc (ESI) Earnings Call Transcript & Summary

We're very excited to have Element Solutions up here with us in New York today. We have CEO, Ben Gliklich; the Head of Electronics, Joe D’Ambrisi; and the Head of semiconductors and assembly, Rick Fricke, to talk us through today a little bit about what's happening in Element. Very interesting story and the roughly 2/3 electronic materials, 1/3 industrial. They get stuck in our chemical bucket a little bit more, and I think they're a higher-quality company than on average for sure in my space. And so what we're trying to do is branch out a little bit, Toshia was going to be with us and he had issue come up this morning. So he can't be with us, but Trevor from his team is here with us today. Ben is going to walk through maybe about 15 minutes just kind of explaining their electronics business. What we'll focus on that today, that 2/3 of the business, and then we can get into some Q&A. Before I turn it over to Ben and team though, I just want to say that we're required to make certain disclosures in public appearances about Goldman Sachs relationships with companies that we discuss. Disclosures relate to investment banking relationships, compensation received or 1% or more ownership. We're prepared to read aloud disclosures for any issue upon request. However, these disclosures are available in our most recent reports available to U.S. clients on the firm's portal. So with that, again, very happy to have the Element team, and I'll turn it over to Ben to walk us through a little bit the nuts and bolts of their electronics business. So take it away, Ben.

Thanks, Duffy. Thanks to everybody for joining. It's great to be here. We're excited to share a bit more detail about our electronics business, provide some insights into what we do and into our capabilities. I'm going to make a couple of introductory comments here, and then I'm going to turn it to our electronics leaders on my left and right, Rick and Joe. I'd note that there's a lot of content in this deck. We're not going to go through it in a lot of detail. It's more of a reference document. We're really here to hit the tops of the waves and take your questions. There is some technical content in here. So for those who are more from Duffy's universe in the chemical side, we've included a glossary in the appendix that will help with definitions and some of our abbreviations. If you flip to Slide 3, this is an Element Solutions Overview. So Element Solutions is a diversified chemical technology company and we provide materials and process solutions that enable the performance and innovation for high-value supply chains. We are really focused on high-value end markets, selling to the very fragmented supplier base of large global OEMs. About 60% of the business is electronics. That's what we're going to focus on here today, 40% falls into our Industrial and Specialty business. It's a global company, about 40% of revenue in Asia, 30% in the Americas and 30% in Europe and a very strong cash flow generative company. The hallmarks of the business are stability of profit margins and stability of cash flows in all market environments. Over the past several volatile years, we've demonstrated that outperforming markets from a financial perspective on the top line and preserving profit despite inflation and volume volatility. On Slide 4, you can see a very high-level overview of our electronics segment, and that's what we're here to talk about. We're leaders and highly differentiated within our electronics portfolio. We've got strong global positions in very high-value niche applications in our markets. And we're positioned importantly around the world and close to our customers. So it's a global footprint of market-leading businesses that fit together exceptionally well and are focused on emerging pain points driven by technology inflections. And that's what Joe and Rick are going to be talking about today. Just very quickly, on the financials of this business on Slide 5, a couple of things to call out. The first thing is trough to trough. So the last trough we saw in the electronic cycle was in 2019 before 2023, where there was a significant dislocation in the electronics market. Trough to trough we grew 5%, 3% organically. But I'd note that the trough in 2023 was much deeper than the trough in 2019. And so that is substantial market outperformance. You can see that on the top right here, where the 2 big indicators we would point to are MSI and PCB square meters. We grew organically 3% against a PCB market that was down 2% from a CAGR perspective and MSI up 2%. Smartphones were down 4% annualized over that period of time. So we've really outperformed our end markets, and the business is very well positioned today, both cyclically from a recovery perspective coming off this very significant trough we saw in 2023. And from a technology inflection perspective. Again, Joe and Rick will talk in detail about these emerging trends in electronics hardware and how we're solving the pain points associated with them from a materials and process solution perspective. With that, let me turn it to Joe on Slide 6.

Thanks, Ben, and good morning, everyone. On Slide 6, just to level set everyone on the process of electronics manufacturing. In very simple terms, you have a semiconductor wafer that's fabricated by companies like TSMC and Intel and Samsung and then sliced into an individual die. That die is then traditionally sent to a semiconductor packager or what now is commonly referred to as an OSAT, a company like ASE or Amkor or JCET and they take that semiconductor die and put it into a package, Traditionally, it was done on stamped metal lead frames, interconnects where discrete, copper or rather gold or aluminum wires were used to connect, make the [indiscernible] doing the chip and the semiconductor package and the lead frame. And then that was packaged in a mold compound, which would protect that semiconductor chip in those interconnections. A bare printed circuit board would be fabricated by one group of our customers. And then that chip package would be sent to a contract assembler or an electronics manufacturing services company. That would put that semiconductor package and a whole bunch of other components onto a circuit board and then send it to Box Bill, where final assembly of the electronic device would be done. This is the traditional technique for manufacturing semiconductor packages. And there are still millions of packages that are manufactured this way today. And if you look at the evolution in the last 10 or 15 years of these technologies, they've really been incremental changes in the semiconductor fabrication. We've seen scaling that continue to make smaller and smaller transistors and in the printed circuit board side, and the IC substrate side, the same type of scaling to finer lines and spaces, finer feature sizes and increased circuit density. The real sea change in technology in the electronics manufacturing process has been in the advanced packaging space. And there's a tremendous amount of technology discontinuity that's going on in that space right now. And all of that presents rather a tremendous amount of opportunity for Element Solutions. Ashley? This is admittedly an oversimplification of the hundreds of manufacturing steps that are used to manufacture an electronic device. But it's really intended to show the diverse range of solutions that we provide to our customers that span the entire process of electronics manufacturing. If you look at semiconductor fabrication in the upper left, we are a provider of proprietary metallization chemistries that form circuit pathways on a semiconductor chip. The majority of front end of line semiconductor manufacturers really consists of a lot of high purity, but mostly commodity chemicals and gases and copper damascene and bump metallization that we provide are just a couple of the very few proprietary process that are actually used in semiconductor fabrication. For printed circuit board and IC substrate fabrication in the lower left, we supply every chemical step in the process. The only steps that we do not provide are the mechanical steps in making a printed circuit board or an IC substrate like drilling and lamination as an example. In the case of a conventional printed circuit board, those semiconductor packages that are made by integrated device manufacturers and OSATs along with the bare printed circuit board, go on to contract assemblers or electronic manufacturing services companies. And then they mount these components on to a bare printed circuit board and then final electronics assembly, goes on to Box belt. The point of this slide is to illustrate all of the areas in the electronic manufacturing process that Element Solutions touches. And the number of areas and the breadth of those areas that we touch are unique in the industry. There is no other single competitor that we go up against in all of these areas of electronic device manufacturing. And we believe that's important to electronic OEMs in our industry, and I'll tell you a little bit about that in an upcoming slide. Ashley? So we're organized into businesses, largely the way our customers are organized. We have lines of business that serve the semiconductor industry to start that you see on the left, foundries, IDMs and OSATs and those lines of business are organized really by their core capabilities, what we call the key capabilities that you see there. The first is metallization, essentially the forming of conductive pathways in the semiconductor chip or in a semiconductor package. And although it says wafer metallization as that core competency, it's really more appropriate to say substrate metallization because we're not only metallizing silicon, but we're metallizing a number of different substrates that could be part of that semiconductor chip or that semiconductor package. It could span all the way from mold compounds to insulating layers to other materials like glass, as an example. And in semi assembly, we're providing various attachment solutions for chip attach and die attach and a broad portfolio of die protection, reinforcement technologies to go along with that. We'll come back to thermal management in just a bit. Our capabilities in circuit board assembly is in the center, very similar to what you see in semiconductor assembly, except the scale and the performance specifications are completely different in those, still very important, but just different and typically an order of magnitude larger in terms of size, if not more. And instead of die attach then, so you're going to see component attach and package attach and you're going to see component protection and reinforcement, same fundamental technology to be used in semiconductor assembly. And the same is true for circuit board assembly. Those metallization technologies that we use to fabricate a printed circuit board or an IC substrate are very similar to what we use in wafer-level packaging when we're providing metallization solutions for the semiconductor package or the IDM or the OSAT. So some of these growth themes are driven by the megatrends in our industry. Rick is going to talk about that in just a couple of slides. Many of them are driven by the emerging challenges that our customers in these various disciplines are facing. A good example is thermal management. When you put a lot of processing power, especially as an example, in high-performance computing applications, we've all heard stories of where someone has a bitcoin mining server and you put it in a room and it can heat the whole house, need to generate a tremendous amount of heat. And that heat needs to be managed. It needs to be removed from the device. And if not, you're going to have reliability and performance challenges when you have those thermal challenges. On top of that, there's a lot of different materials in an electronics package. There are metals, there are polymers, there are other inorganic materials like silicon and glass. And they all expand and contract at different rates when they are heated. And that in and of itself becomes a reliability challenge. So if we're going to metallize a semiconductor package that metal needs to move at relatively the same rate as a piece of silicon or a piece of glass or another piece of metal. And that's a really difficult challenge that the industry faces today and it's one of the most -- one where a significant portion of our innovation resources are dedicated today is to solve the challenges of thermal management in the package. Not only do we have internal innovation resources working on it and now we've made a recent acquisition of a pretty unique technology that helps us solve some of these thermal management challenges, and Rick is going to talk about that as well in just a few slides. Ashley? So a few slides back, we took a very high-level look at the electronics manufacturing process. Historically, those process steps were performed by companies that largely stayed in their lanes. If you were -- foundries made chips, OSATs package those chips, PCB fabs made boards and IC substrates, EMS companies put the whole package together and assembled everything. But as advanced packaging continues to evolve, those discrete lines between all those functions in an electronics manufacturing process are really getting blurred. There are a significant amount of convergence of all of those process steps at the semiconductor packager or the advanced packaging applications, and our solutions sit at the center of that convergence. The diagram below or in this slide shows just a few of the solutions for forming circuit pathways and for interconnecting those circuit pathways together, 2 of the fundamental things that we do in the electronics manufacturing process. And all of these solutions that are necessary to construct an electronic device are interdependent with one another. So if you have one single reliability failure in any part of an electronic package, then obviously, that package is going to be scrapped. It's going to be a yield loss. And our ability to provide those integrated solutions to our customers in a full suite, the full breadth of our portfolio is, again, it's unique in the industry, and it's something that electronics OEMs value. They want to know that if there is a die-attached material that's in contact with a bumped pad -- a bump metallization pad, how is that going to interact with each other. We're the only company in a position to be able to understand that to be able to generate data around it to be able to predict what that reliability is and be able to work with an OEM with our suite of processes and solutions. If an OEM needs to figure it out from another set of companies, they're going to go to this company for die attach, they're going to go this company for bump metallization, they're going to go this company for polymer reinforcement. OEMs find value in that. They find tremendous value in that in the breadth of our portfolio. And then Ashley -- so most of you are probably familiar with the term more than more. As semiconductor scaling became more and more difficult and Moore's Law. We started to deviate from Moore's Law. We weren't getting twice the transistors and twice the performance at a lower cost every time we went down to a lower node or a smaller node in semiconductor fabrication, in fact, somewhere around 14 nanometers, that performance benefit got less and less and somewhere around 7 nanometers, the cost of delivering those performance benefits got less and less. And so the industry turned to advanced packaging as a way to solve this solution and get improved performance. And it was done by taking what were essentially big monolithic chip designs that had all the functionality of a semiconductor chip on one piece and disaggregating that function. So you could make some of the most critical functions at leading-edge nodes like 7 and 5 nanometers, and you could make some more pedestrian requirements or functions of a semiconductor chip like memory and things like that at 28 or 40-nanometer nodes. And that provides a significant cost benefit. Now it's still, when you look at a prior technology package with a homogeneous integrated package today, the costs are significantly more. We believe that the value associated when customers go to heterogeneous packaging is more than 2x to 3x the value of the package that people often see because the number of advanced material solutions and chemistry solutions that we use to make a heterogeneous package are significantly greater than just the cost the package itself. And we believe that's important. When you're going from a 2.5D package where you've got a single layer of chips disaggregated on an IC substrate. And when you move to something like 3D package where you're stacking active chips on top of one another, and you're putting 2, 3 or 4 layers potentially of high-bandwidth memory together. That just exponentially multiplies the number of technologies and solutions that we can provide to solve customer challenges about how they package. What's neat about the packaging industry is that there's very little standardization in the packaging industry today. The industry would love to go down that path, they're simply not there. And you're going to see a lot of these companies that have either proprietary designs or branded designs that are important to them, and they like that. That's good for us because standardization is -- leads to commoditization, and that leads to a greater number of competitors that we would prefer not to see in these spaces. Specialization is fantastic for us because it gives us an opportunity to integrate, to innovate rather and to provide technology solutions that are unique to our customers. Rick?

I think we've all heard of some of these megatrends. We'll focus on 3 of them: Artificial intelligence and data centers, electrification and sustainability. And what's happening in the industry is that the chip designs, the advanced packaging designs are all changing how the customer needs to think about packaging or presenting an electronic device, right? And so all of a sudden, they have to make decisions they didn't have to make in the past about material interface, how they interact with each other. And a lot of it is driven by different power concerns. We talk about thermal. So if you think about artificial intelligence and you read up on the different chips we're using. These chips, they measure data center utilization by how much power is being utilized by the data center. These chips will hide a lot of power. When you have all the power going into a chip, you think about that, all the metallization we're doing in circuitry. So it's channeling the energy to run the actual chip and processor. And the boards are pretty debt. So they put a big NVIDIA chip, let's say, in the middle, and they put all the other chips around it. All of a sudden, that chip -- that board to work. The other chips have different problems. There's a lot of heat going in there. And so all of a sudden, they have to think about how do I make that chip perform spending a lot of money on it in the different packages. So the needs have changed. So with needs changing, it creates an inflection point in the industry where the customers are asking us, say, "Hey, you guys can provide a breadth of solutions across from the wafer level up to the PCB board, how does solder paste work with an under fill? How does this circuitry work with the final finish on a PCB board. And so we can have those discussions with the customers and provide those solutions. It's also creating opportunities for us to gain market share in areas where previously, they would choose to just do the same thing they've done for the last 20 years. So these inflection points are very important for us. So if we move on to electrification, electrification you think about electric vehicles, right? These are -- it's a whole change, right? If you think about an internal combustion and you've got 100 years or more to develop those, now electric vehicles over the last 10 years have kind of come on, and you think about all the challenges of putting electric drivetrain together, right? And the same things that matter to an internal combustion engine [indiscernible], longevity, durability matter to these drivetrains, but they're all electronic. So things like attaching the inverters to the drivetrain become more and more important. So one of our products is a silver centering allows them to low-weight, high durability, attach the inverters to the drivetrain. That's something I don't have to think about before. So as we build our portfolio around these megatrends, we're building our products -- building our solutions portfolio to address all of these needs that are changing. And it's really real change in the environment, our customers, they don't understand it. As Joe said, all of a sudden, it used to be your compartmentalized to what you did in the electronics industry. But now TSMC is doing advanced packaging. They're doing chip design, they're doing wafer level, right? They didn't do that before. right? And so all the sudden they're asking us questions about how do we do this? Or what materials do we need to use and how do they work together better. And then if you look at sustainability, this is less of a technology change, more of a -- it's either regulated and/or there's a lot of companies who want to buy into this. How do we reuse metals. How do we reuse water. How do we make sure that we can address the needs of our customers, our consumers, our stakeholders on sustainability. A lot of the materials that were used in the past are materials that regulators and/or companies don't want to use moving forward. They're dangerous materials. I mean in the semiconductor industry, the electronics industry, there's a lot of materials that if we listed them, maybe you'd say, well, those are bad materials, right? So how do you get rid of those materials and create a more sustainable environment, so that when you make the electronics, you're supporting that stakeholder. And so a lot of the work we've been doing in sustainability is we do a lot of recycling of metal. We've been working very hard to make sure no bad materials are in our products. And also promoting that with the customers, and they respond very well to that. And as the regulations change, it becomes a little bit of a challenge sometimes, but we stay ahead of that and make sure that we're addressing those customer needs. Kuprion. So this is an acquisition we made recently. So it's a pretty exciting one, a great team out in San Jose, California. Active cover. So they make a product that is a nano-particular copper that turns into a pace that we can screen print in different areas. We use it for thermal management we're working on through glass vias. We're looking at something called thermal electric trenching, which is all addressing things mostly around AI because all electricity is used, all the heats that's being generated, you want to be efficient. And our plating solutions are great, and we've used them forever in PCB application. We use it for die attach, package attach. But they can't do -- you can't plate copper to address these needs. So this is a printable copper. And so we've been working on it. We're building it up. We're working with a lot of key customers. There's a lot of interest and it's really a product, I think, that's going to address a lot of the needs of these megatrends moving forward. And the people who walk into the doors of our San Jose facility, if you knew the customer list, you'd be pretty impressed. But everyone is kind of giving us a wow factor on this one. How do we get it done? That's great.

It's a very exciting opportunity. We put in our early assessment of potential opportunities associated with certain applications and it's a limited number of applications here in Slide 14. We're still learning as we go up the curve from customer interest to high-volume manufacturing, but the opportunities associated with this over the medium and long term are tremendous, which is a good transition to Slide 15, which is what does this mean for our growth algorithm or at least the electronics near-term growth algorithm. We say near term because there's really only a modest Kuprion contribution assumed on this slide because of the uncertainty of timing, because of the things we'll learn as we move from proving that the product works, which we've done, through to our own high-volume manufacturing, applications work at the customer level and getting it into their high-volume manufacturing. But there's a significant amount of customer pull, just can't quite a certain timing associated with value from that investment. We've broken down sales ex metals by the businesses we just took you through. And then what's the 5-year market growth expectation, how do we outperform and what are the drivers of that outperformance on this slide. I'll start with the Circuitry Solutions business where we talk about 7% 5-year market growth expectation. That's from Prismark, that's their latest expectation for the PCB market growth. And we give ourselves 2% to 3% outperformance of that market, driven by where we participate in that market, primarily at the leading edge with IC substrates, which are critical to emerging needs around advanced packaging. This is probably the area where Kuprion can contribute the most in the near term and that would drive further outperformance should that hit. When we say near term, we're talking about 2 years or so. The circuit board assembly business, the 4% to 5% market growth expectation comes from Prismark Electronic Systems growth algorithm or forecast. And our outperformance there is driven by some of the innovation we're doing with new alloys for higher reliability, sustainable products that we've introduced and some of our polymer-based thermal interface materials, and electronics, call it protection that we've been investing in. Circuit board -- semiconductor assembly is the most exciting area here. And this is market growth from advanced packaging. And our outperformance opportunity is driven by our thermal management materials. Right? So that's Argomax and some of the other materials we use here that are supporting our semiconductor assembly customers. Think about that as the OSATs. And I'd point to the fact that given this significantly higher growth rate from this part of the business. Semiconductor assembly is on track to be 20% of the business within the next 3 years. And so what that means is that the overall growth algorithm will accelerate. Semiconductor assembly is also a medium-term opportunity for Kuprion. So you could see even further outperformance from the semiconductor assembly business as you look out, and so your growth algorithm here, we're talking about high single-digit organic growth, will accelerate over time given the mix shift in the business and Kuprion's ramp period. And finally, wafer level packaging, that 6% number is MSI, and we expect to outperform that nicely driven by the ViaForm transaction that we did last year and some new applications that are emerging for the Copper Damascene technology associated with hybrid bonding. And so that's a smaller business, but that's also outperforming our other businesses. further contributing to the acceleration in the growth algorithm as you move out a couple of years from now. What does that translate to? It translates to a high single-digit near-term organic growth trajectory for our electronics business growing faster over time, incremental margins in this business, excluding the impact of our pass-through metals are north of 35%. So we're talking about easily double-digit electronics EBITDA growth in the near term and accelerating. And with that, we will end our prepared remarks a couple of minutes longer than we thought. Hopefully, a lot of -- helpful content and let's take some questions.

Awesome. And so those on the line, the one to ask a question, there's a text box in the bottom. You can punch it in there, and we'll get it. We've got a number -- we're probably going to run over it looks like. So I think the first question we've gotten in a couple of different ways so far is basically, how do you assess your competitors, who are your primary competitors? How are you different in those product chains versus competitors, I think is probably the first one.

Yes. So as Joe was talking about earlier, we're the only participant in our markets that can speak to this breadth of technical solutions. And so that gives us an ability to think differently about customer pain points. We're not using one product, right? We can look at the suite of materials that are used. We have viable competitors, large competitors, but they're different in each of these applications. And the traction we're getting from our more unified electronics business, which has been a big initiative over the past 3, 4 years is reinforcing that differentiation and we've been introducing new sort of -- it's not more -- it's more than marketing tools, technical tools to show how our materials work together, and those are also getting a lot of traction. So we are typically a market leader in the niche applications in which we participate with viable competitors, but with a very differentiated solution set. To list a few of our competitors on the Circuitry side of the business, we compete with a business called Atotech, which is part of MKS with Dupont. There are some very good technical companies out of Japan, on the assembly side of the business. It's a completely different set of competitors, [indiscernible] and Henkel on the semiconductor assembly side of the business. And then on the front end of line and some of the back end of line, you've got large Japanese [ conglomerate ] are Hitachi and Sumitomo that participate in those markets as well.

Okay. And then A lot of people were -- and don't worry, but I would say that aggregate of your business isn't as good as, let's say, pads and slurries, which is what most of the chemical analysts know kind of as the electronic materials. But they don't grow as fast, so fine. But commoditization is something that worries everybody. If you look, let's say, at the last 5 years kind of in your verticals what's happened with your market share? And I think more importantly, what people want to know is if you took the top 3 or 4 competitors in each vertical, is that group gaining market share or losing? Meaning what everybody fears is a Chinese player comes in, commoditizes one of your profitable areas and it goes away. Do you see that in your business like when you look over the last 5 years, let's say.

So the moat around our business is not a specific piece of IP or a specific manufacturing process. The moat around our business is twofold. It's innovation, which is incremental development. We're not going to a room with a blank sheet of paper trying to come up with the next big thing. Our customers come to us with future designs and future requirements, and we solve them by making small modifications to what we already have. There are very rare step changes in material science. Kuprion is one that we think could actually fit that bill, but they're very rare. So most of our innovation is incremental development, which makes that hurdle for a new entrant very, very high, because we know what the customers need and we have a sort of know-how internal to the company that built what the customer has needed for decades, general many, many product life cycles. So that's the first part of the moat. The second part of the moat is the technical service. Our customers rely on our people on site to support their high-volume manufacturing processes. Our customers are high-volume manufacturers. They're not chemists. And so we work to support the chemistry and make sure it's imbalanced. That's a big difference from front end of line semiconductor, where there isn't a significant technical service requirement because every manufacturing process is designed to be copy exactly with incredibly high purity levels. The circuit board business and the assembly business that isn't the case. So yes, there are some local competitors at the very low end, but we maintain or, in fact, grow our lead over them through incremental innovation supporting customer needs.

Okay.

So commoditization happens at the very low end. It hasn't happened at the high end, and we continue to invest to support that gap. Now growth in these markets is happening more at the high end than at the low end right? So growth in these markets is happening in the IC substrate market and advanced packaging. It's not happening in circuit boards or televisions. And so what we're seeing is market share is migrating because only the leading players are participating in those leading applications. And so our position, we feel is sustainable. And our share at the high end is growing.

Okay. Okay. And a little bit different. Within your electronics business, what's your auto exposure, ICE versus EV. And then within EV, how much is kind of specific to the U.S. and Tesla.

So we haven't broken down the market exposure by business before. What we've said is that we get about 1.5x to 2x the value on an electric vehicle versus an internal combustion engine car. That is not just from electronics market expansion. It's also from our Industrial Solutions business, where there are more fasteners in an EV versus an internal combustion engine car, interestingly enough. The EV opportunity for the business in electronics is not just units. It's also technology adoption. So we have -- Rick was talking about Argomax and centered silver. It's not just about thermal management, it's also about reliability, and it is the best -- it's a category killer for power electronics. But it is not on every high-performance EV today. Some of the legacy OEMs have design cycles that are way longer than Argomax has been prevalent in the market, and therefore, it hasn't been integrated into the latest designs. So we're going to grow with EV unit growth, we're going to grow with adoption of Argomax and similar technologies, Kuprion, for example, can also meet a lower performance need for power electronic power savings. And so we feel like we've got a very good position there, and it's not just units, it's expansion in the market. I don't know if there's anything you add.

No, we do a ton of customer segmentation there. It's really interesting when you look at it because we have a segment we call kind of we need something now. So a lot of the higher-end vehicles kind of we're not investing EV development needed a solution. So they use essentially screws to attach their inverters, which isn't very efficient and isn't very durable. So they started with that, and now they're moving towards our solutions, which are -- and provide them lower weight higher reliability. So that trend is moving to more and more of the markets, trying to look for a solution that is more moderate than maybe a physical attachment.

Okay. And just because this time and you have business there, a couple of people have asked what's the impact do you think from the earthquake on your business in Taiwan? What do you think the impact will be on kind of the greater electronics industry?

For starters, I'll say, it was terrible. It's very scary. We're fortunate that all of our people are okay. The families are okay. Our sites are, by and large, okay. We had a small issue that we will be able to resolve pretty quickly at one of our sites. We won't be down for any material period of time. It's early to assess an impact on the broader supply chain. I don't know, Rick, if you have a view.

Just is there any scuttle about anybody who's in trouble where they've lost maybe meaningful capacity...

It's early. I don't know anyone who is in that area of the Taiwan was affected yet. I mean if I think back years, the weather in [indiscernible] industry, Japan, other things, it gives customers a little bit nervous. But that area of Taiwan that was affected doesn't have a ton of our competitors or us or even the electronics industry in it and so on, but that all has happened, but I haven't heard anything yet. It's going to impact so much.

Okay. Then another question just around the variability of profit within the portfolio. So the average is 22% margin. What this gentleman was asking, if you kind of say, let's take 30% as a threshold, what percent of this business would be above 30%? Are there like 10% that maybe has 40% margins or something like that, that kind of carries the segment is there something where you've got outsized contribution from a business or share...

So we have to take metal price out.. So what we did in the analysis you saw on the slides is we fixed metal price at 2023 levels. And so that takes the noise of metal price volatility out, but we didn't remove the price 10 specifically that we sell on a pass-through basis. If you took that out, that's a $300-or-so million in 2023. So you're going to see the margins significantly higher ex metal. And that is the way we look at it. Within each of the verticals we just went through, there is significant divergence in different products. So within the wafer level packaging semi assembly, circuit board assembly and circuitry businesses, you've got products that are significantly higher gross margin and below average. Where the growth is coming, skews towards higher-margin applications. And by the way, there's also metal in wafer-level packaging, for example, we're selling gold and there's a lot of copper that weighs on margins where we're not backing out the fluctuation or the value there. The -- there is driven by -- as evidenced by the 35% incrementals, room for the margins in this business to expand. And what you saw in the performance of this business over the past couple of years is margin stability in a highly inflationary period, right? And so I think that there's real upside over the medium term...

We're constantly working on it. I mean we're working -- like even -- like I'll just take some of our lower -- you're talking about metals being lower margin. But recycled, we are very active buying recycled 10, let's say. And with that, our margins are -- if we use that 10, our largest or greater, right? So the more recycled material we can do and process the better we can do first mind of material. So we constantly are working this all over the world.

Okay. And then if you go back to that Slide 7 that you showed the different pieces of the chain and kind of where you are -- where you're not -- if we think about inorganic growth over a longer period of time, do you want to get into more of those spaces where you're not? Or would more of the focus be going deeper in the spaces that you're already in?

So inorganic growth is focused on investing behind our businesses, to buying business we deeply understand that are better inside of our company than outside meaning what synergies that make our company better, meaning they improve our value proposition to our customer. We're not interested in going into some of the commodity bulk chemicals Joe mentioned that are important in front end of line because they're commodities. And they're not going to be critical. They're not going to be solving pain points for customer brands. They're not -- and therefore, they're not going to carry the margin or the value opportunity associated with solving pain points for customers. There are some areas where we could go deeper. There are some capabilities that we'd like to add. It's very hard to get into new markets organically here. It's not an electronics material monolithic market. It's a series of niche, niche applications, which we're trying to explain with slides like Slide 7. And so there are some niche applications that are high value that we love to be in and could enter inorganically. We'd also like to continue to consolidate.

Okay. And then for this electronics business, a lot of people throw out some different MKSI, Integras, DuPont segment, Rogers. If you put those together cumulatively and comp that versus you on a bunch of different stuff where you'd have more data than we would be able to get, how would you say you comp on growth, on margin expansion possibility on free cash flow yield over time? Where do you end up being better, where do you end up being behind.

So we will grow less than pure-play semiconductor companies through the cycle because that market is going to grow faster. The base rate is higher. But our capital intensity associated will be significantly less. And so if you think about and similarly, if you think about margins, less CapEx, EBITDA less CapEx margins, they'll compare favorably. So the growth rate won't be as high, but we will still grow really nice. And I think what we're trying to support here is there's an inflection in this market cyclically and secularly that we are critical to and will benefit from. So the growth rate from this business will accelerate over time and it won't require significant capital or OpEx to meet those means. So you're going to see margin expansion, you're going to see EBITDA less CapEx that is favorable to the companies you suggested there that are more semiconductor oriented. And so your sort of business quality metrics will be higher with significant growth.

Sure. Okay. And then somebody was asking, just on this year, like at the midpoint of your guide, what are you expecting for top line in that volume growth on the electronics side? Are you seeing customers double order as people are getting excited and do you buy into kind of the inflection and things improving rapidly throughout the year? Are you seeing any worrying signs?

Yes. So we were mid-single-digit organic growth at the midpoint across the overall portfolio with greater growth in electronics than in industrial. We saw a very encouraging start to the year, particularly in the semiconductor market. Those data points continue to hold true. And there is energy -- there has been energy entering the year about an acceleration in electronics in the back half. At the high end of our guidance range, we have some assumption of that acceleration occurring. At the low end, we just sort of see normal seasonality. We have not seen, heard of double orders or anything around that, we're seeing true sort of underlying market improvement, I would say, or at least stability, if not improvement, certainly improvement on the semiconductor side. And semiconductor is a good moving indicator. Saying in the industry, chips don't flip and chips have a much longer supply chain than the circuit board market. So these chip orders are going to get delivered and they're going to have to go on a substrate and we're critical suppliers of that substrate and the attachment process to the substrate. So that's encouraging for us as we look to the back half.

And then on the slide that you showed, your volumes versus a couple of macros, I think you might have been -- where you outperformed basically over the last 4 or 5 years. Is there a chance that you're just more defensive, so you do better than those macros in kind of a weaker down type environment that you would lose some leverage in the upward. Do you think you'll still be able to -- if we're up 6% or 8%, let's say, for a couple of years, can you still beat that metric by a couple of points?

I would expect that we can. I think we can support that when we look at historical data. And given the innovation that we're bringing to market. I would expect that we will continue to be able to support that.

Okay. And then the -- you mentioned incremental margins of 35% for how long does that run out? So one point of volume we get 35%. When do you kind of hit a point of saturation a little bit where maybe that would start to fall? Or is it -- we've got a clear runway for a couple of years at that level.

Growth in this business, it tends to be from -- it's certainly existing supply chains and by and large, existing customers. So we have ample capacity in our sites. Most of what we do is formulation. And so the incrementals are not from volume utilization as much as they're from OpEx absorption. We've got a commercial organization that's supporting these customers already. We've got innovation resources supporting these customers already. We've got G&A to support our global footprint. Growth requires maybe new technical service, maybe some feet on the ground in a new country. But by and large, the existing people can support growth in the business. And so I don't see an imminent inflection in incrementals. Certainly not in the medium term.

Well, I mean there are changes in the geopolitical stuff that's happening. I was just in India a few weeks ago. And one of the things that struck me is that the Indian economy is investing in electronics assembly. And if you talk to the people there, and they want to employ the people in India, right? They don't know how to -- they aren't skilled in that. So we've been putting investment in universities to train people on how to do electronic assembly, to improve investment in consortiums to kind of pilot plants down there, bring people in and train them, they told me 10,000 people. But we're constantly like investing in that community because there's billions and billions of dollars going to that. So you have to look at each individual economy situation a little bit differently, and that's where we're putting our investment. So I don't think the capital -- we're not a capital intense business, right, but you've got to look at your situation and then the situation of the country and the situation of the region and invest in that. That's what we're doing.

A couple more in queue here. And then Trevor, I don't know if you've got anything you can jump in. But -- so can you touch on customers in Electronics segment a bit more? You mentioned TSMC and the focus of offering kind of a full suite of capabilities. Are you seeing others move either up or downstream and kind of becoming your customer and how does that play on who wins in that space with people coming downstream or the people going upstream?

So we'll try not to use customer names here, but maybe what we'll say is OEM engagement is greater than it's been because of these emerging pain points and interest in what we do is increased from OEMs. And then you've got large semiconductor companies, the CEO of a large American semiconductor company talked about why he's interested in packaging the other day. It was because packaging was 15% of the value 5 years ago, and now it's 40% of the value. So the opportunity that the foundries see from packaging is much greater. And so they're moving down -- and that's sort of from the silicon to the package, and that's creating much more interface with them. And the vehicle in transaction plays right into that because that gave us a much more important seat at the table with front end of line, which will then drive as they move more of their energy to back end of line and packaging, greater opportunities for us. I don't know if there's more you want to add...

The environment out there is -- it's big. Yes. And everyone -- I think most of the companies that you would mention see packaging as a differentiator. So everyone wants to be in that space, right? They want to have the better the better board right. And there's a lot of partnerships being formed. So people who normally weren't in the packaging space or partnering with the OSATs, but there's also a capacity issue. I mean you heard one of the customers in Taiwan [indiscernible] some a big investment in 2 [indiscernible] advanced packaging fabs that they're going to put in place in Taiwan. And they said that their AI bottleneck is packaged. So all these companies want in. And some of it is just how do you support all that. But as we said earlier, the materials needed the -- technology needed is very different than it was 5 -- 3 years ago.

This is probably we were talking about equipment too because their equipment providers are an increasingly important participant as you sort of are at the foundry and packaging level.

We call the 3-legged stool, right? You got to have a customer, you got to have a material, you got to have a tool, right? And so we spend a lot of time working with the equipment providers, making sure that our materials work well on their devices. And even to the point where we have people in the fabs, we have people in the facilities, fine-tune performance.

Yes, I'll jump in. Looking ahead into '24 and into '25, the market is expecting continued demand growth in AI hardware such as NVIDIA GPUs, which requires 2.5D [indiscernible] packaging. Can you touch on where you might play within that [indiscernible] supply chain specifically and other areas of your business that are most exposed to the AI supply chain.

Okay. [indiscernible] So first off, right, all these newer ships are moving to wafer-level packaging, right? So we play wafer-level packaging, right? So if you look at the ViaForm products and just the copper that extension bumps the RDL layers, all those sorts of things, nanocopper we play there on the wafer. And then if you look at how you have to put the chip down -- assemble the chip and put the chip down on the cord, right? we play an underfill, we play in adhesives, we play in die-attach, we play in solder paste, right? And what's interesting about it is like it used to be that you could just take a solder paste and underfill, put them together and they would work. But what we've discovered and we do a lot of R&D around is how do you optimize that? How do you optimize the interface between those materials because the interface between materials on these new chips are becoming more and more important. And so like a company that's doing the [indiscernible], they're asking us, they don't want to do trial and error. They're asking us all right, so what should we select, right? That's a great question to be asked. For me, right? What should we select because we have the technology, we have the understanding to answer those questions. And to Ben's earlier comments because we have such a breadth, right, across like the finish on a PCB board matters to what the chip you're attaching it to, right? And so if we weren't involved in final finish on a PCB board, we wouldn't understand that. But we are involved in that. So the customers you're mentioning can ask us that question and say, well, what finish should I use if I'm going to put this chip down to the board and what solder paste or underfill showing use with that. And it's very technical, but that interaction with customers is incredibly valuable, and it's really changed for the last 3 years because customers don't want to use new materials. They don't want to have to go through the hassle, but they have to because of these new packaging [indiscernible].

Kuprion has a very significant opportunity set in the medium term to sell some of the thermal issues we just talked about with power density. And the pull from the largest foundries in the world, for those capabilities is incredibly strong.

And there's challenges that it's hard to describe, but like if you think about just the electricity utilized on these new boards, right, like trying to get the loss of electricity when you go from through the board to the chip is intense, right, then the heat what NVIDIA says they charge $35,000 a chip right or something like that crazy. If it gets too hot, there's software that actually throttles it down. So it goes from 100% performance to a 33% performance. Not paying that much for a chip and then because it's too hot, you can't run it at optimum speed. So all these challenges become real, right? They want to solve them like a Kuprion product, other products we're building on our portfolio. That's where we're investing because those are the pain points that will really change the game. And to your point, those are the pain points that people find value and then we'll pay for them.

You've eaten a lot of inflation in raw materials over the last couple of years. If we exclude metal, how much benefit do you think you can get over the next couple of years? And then of your sales, are any of the index where those come down and you kind of automatically have to pass it through? Or is everything kind of -- or what percent, I guess, would you have a shot at kind of keeping that spread.

Sure. So 3 pricing mechanisms across Element Solutions. Right? The first is the pass-through metals, which we've talked about. We charge our customers what we pay for metal. If our customers want a fixed price, we'll hedge that metal. And so that's a direct pass-through with no margin [indiscernible]. There are some surcharges -- products like nickel and palladium that are commodities. And we have an index. There is a modest amount of margin in some of those surcharges -- when that price goes down, you lose those sales, but it's not a material margin driver, I would say. And then there's a negotiated price increases, where we go to a customer and say, our ability, our cost to serve you has increased, and we have a discussion and we reset price on that basis. And by and large, those stay and that's where we're preserving margin. We have not seen significant price pressure over the past 1.5 years despite what was a period of significant price increases, and so we feel good about the price increases that we had to take over the past couple of years. Raw material prices have stabilized price 10 shot up recently. And so some of the pass-throughs, there's been volatility around, but the niche raws that we buy that we're passing through those negotiated price increases, they've stabilized. And just like us, we had to negotiate price increases with our suppliers. They're not going to give us that price back, though we are spending more and more time on procurement to try to recapture some of that value. The margin tailwind we have should certainly persist in the first half on a year-over-year basis. We'll see about the back half, but we'll still have that tailwind. We don't see a headwind other than 10, which isn't really a headwind because we pass it through, but it will have an impact on margins. Optically.

Terrific. Well, listen, Ben, Joe, Rick, thank you guys very much for coming to spend some time with us. I'll keep us on track today. If anybody has got any follow-ups, you can certainly send me an e-mail and we can pass it on. We'll spend the day with Element today. So anything that we didn't get through that you'd like to know, please forward me an e-mail, but gentlemen, thank you so much for coming to spend time with us today.

Thanks, everybody, for joining.