Element Solutions Inc (ESI) Earnings Call Transcript & Summary

Welcome, everyone. It's a pleasure to be here. Okay. It's a pleasure to be here. My name is Steve Byrne. I cover chemicals for BofA, and I have the pleasure with my colleague, Vivek Arya, covering the semiconductor sector. So we both came here. We've got about 15 people with us here. We toured ESI's assembly R&D lab. That's how I would describe it. We just had a terrific 2-hour tour of this facility. We had -- with me here at the table is Ben Gliklich, the CEO. He's been with Element Solutions for about a decade. About half of that time, he's been CEO. Had the pleasure of touring a couple of their facilities in Connecticut a few years ago. We toured the Waterbury facility and the West Haven facility. And also with me across on the table is Rick Fricke. He is Executive Vice President of Electronics. And several members of Rick's staff are here with us. So we have a terrific tour of this facility. For the 15 people that are in the room that came with us, if any of you have any questions about what we saw, Vivek is the one to ask. Anyway, it was a great tour. Over to you, Ben. We'll go through some slides, and then we'll go through some Q&A.

Great. Thank you, Steve. Thanks, Vivek. Thanks, everybody, for joining. Yes, it was a productive morning and we're thrilled to share a bit more about the Electronics business and what we just talked about, frankly, with this broader audience. A couple of slides we have to share. Let me see if I can get this to advance. In any case, the materials have been posted, but I'll start on Slide 3, where we have an Element Solutions overview. And this shouldn't be a new slide for any of the folks who are familiar with the company, but Element Solutions is a chemical technology company. Our process technologies and solutions enable performance for high-value products and innovation for our customers. The business is about 60% electronics, with the balance in what we call our Industrial & Specialty segment. We'll hear most of our comments today about our Electronics business, which is really a critical enabler of performance in leading-edge electronics materials and electronics hardware. With a portfolio of products that speaks to a broader set of applications than competitors and solutions that really enable high-value product performance. The business is aligned roughly -- is aligned with our customers. About 40% of the business is in Asia, 30% in America, 30% in Europe. About $2.5 billion of sales, $480-or-so million of adjusted EBITDA last year on an LTM basis, that's pushing $500 million. And based on the guidance we gave last week at the end of second -- at the end of the first half, about $520 million. 5,300 people around the world close to customers, and people really are the source of our moat. Our business is a professional services firm that happens to bill for chemistry. By that, I mean our innovation works in tandem to solve customer problems, and our technical service exists to support our customers' manufacturing processes very close to them, in fact, on site with them. The Electronics business you're going to hear about today, about $1.5 billion in revenue in over 30 countries with many thousands of customers across the breadth of the electronics hardware supply chain, from printed circuit board fabrication to electronics hardware assembly and the semiconductor market, semiconductor fabricators and increasingly packagers of OSATs that are innovating around package design. It's a very exciting high-growth and high-value market for us. The Electronics business has been growing nicely, notwithstanding what's been a pretty difficult cycle over the past couple of years. Last year was the worst electronics market we've seen in a generation. But through the cycle, this business has grown 5% from 2019 to 2023 with a real acceleration that we're seeing into 2024. And with a disproportionate amount of that growth coming from our semiconductor business, which has grown from being about 5% of the portfolio to more than 10% of the overall business. Notably, we've been outperforming our end markets. And you can see that on the top right here, where you look at MSI, you look at PCB square meters, you can see how there's been a drawdown over the past couple of years. But our business has actually grown, notwithstanding that significant trough that we saw in the market over the prior 18 months, and a trough that we clearly bounced off of as we enter and perform through 2024. Two hallmarks of our business are stable profitability and stable strong cash flows. And what you can see is in various demand environments, this is a business that's been able to preserve profit by -- through its variable operating cost model and generate very substantial cash flows because less than 2% of sales is in CapEx. And in a down market, we're releasing working capital. And so we actually generate more cash flow in weaker demand environments. You can see the stability in margins in various volume environments, both gross profit and EBITDA and strong through-the-cycle, call it trough-to-trough EBITDA growth given the last trough before last year was 2019. And with that backdrop, let me turn it to Rick Fricke to take you through the Electronics business in a bit more detail. Rick?

Thanks, Ben. All right. So we're trying to give you some overview of what we do in our Electronics business. We'll start with a very high-level simplified version of what happens creating electronic device. So it starts with the wafer, which is the semiconductor. The wafer is patterned basically as copper, the copper part of our product line. It's then cut to die, and then moves into semiconductor assembly where the wiring on the wafer is then translated into a chip. The chip is molded and then it's assembled to a circuit. And that circuit board then goes into electric to device, different types of chip boards, different types of chips, memory logic to graphic processors. So where do we play? Our materials are materials that are left on the wafer. So there's a lot of materials that are used in the process of their sacrificial layers. There are other materials that actually end up in the wafer. So if you think about all the metals that go on the wafer and all the attachments that are made, those are where we play. So there's really 2 values -- value streams that we play in. One is in the semiconductor manufacturing and then the packaging of those semiconductors. So the deposition layers where they're depositing copper, that's our ViaForm product line. And we own a semiconductor assembly and wafer-level packaging. That's just the actual wafers cut and put a new die, which if you open up a computer and you see that, the black polymer-based chip, that's what's going on underneath the black polymer base. It's all wiring and we play there. We then play in the assembly of the PC or this PC board, so circuit board assembly. So we're actually attaching the die to the circuit board. But then our business, our circuitry business, we're actually participant in the PC board market. So the actual creation of the substrate and the copper wiring in the substrate are all products that we develop and produce and provide to the customers. So every position on the map where a product is put on the wafer attached to the die, attached to the board, and the actual board is an area where we play. So we've gone through some change in the business over the last couple of years in terms of how we're thinking about the business because our customers are thinking differently. And we've went from a regional structure, we have regional businesses to kind of focus on region to a business unit structure. And the reason we did this is we just -- we want to focus on the jobs the customers are doing, and the customer is really becoming more global and moving. There's a lot of geopolitical stuff moving [ beforehand ]. And when we focus on the job that we were doing, if you look at not just a specific material set or a specific product, we can look at all the materials used around that job. So when they're doing wafer-level packaging, we don't do one product. We do several products. We continue to look at other products we can add that solve the customer problems. Semiconductor assembly, same thing. We're doing wiring, we're doing attachment, we're doing adhesives, we're doing paste, circuit board assembly, we're doing sintering, we're doing wiring, we're doing soldering. And then in the circuitry business, the boards are getting more complex, they're getting thicker. So the wiring and the schemes that they're using in the PC board manufacturers and coming off a very different margin. It's not workforce materials anymore. They're looking for new materials to improve their yields and have better products. And then we have a memory disk product, which amazingly is a very good market because all of your data centers rather than using solid-state memory, they use memory disk in. There's only a few memory disk suppliers in the world supplying to all of them. And then Films & Smart Solutions is a smaller business that we're developing, which really focuses on automotive molded plastics and in-mold electronics. So this is just a picture diagram of a board assembly with a die on it and then in the thermal. And if you go through the color coating, you can see in the Assembly Solutions place that we play, our materials play an integral part all across the board. In semiconductor solutions, we're in the wafer. We're in the most advanced wafer packaging applications in the world, leading those markets. And in Circuitry Solutions were the designs, which have become more and more complex. And we're really the afterthought I think before, we're developing technologies and launching new products to solve the problems, the larger chips and the more power -- high-power chips are causing with low-power densities. And this is why things are becoming more complicated. We talk about Moore's Law and the action used to be in the scaling of the semiconductor. So how small can you get to basically the positive [ and negative charge up ] close to you, then sit together. So you got to have more circuits in the wafer, right? When you have more circuits, you have more power, more processing power, right? So that was the game. That's kind of -- that's changed, right? So as you're kind of advancing now, they're still doing that to some extent, but now they're packaging a lot more chips closer together so that the [indiscernible] is better. And they can drive different processing units rather than have one giant processing. So they use chiplets and other chip designs. So if you go to this heterogeneous integration, you see the chiplets extremely high, which means that they have to attach these chips to the board in different ways. They've got to deal with thermal expansion differences between materials. They had to deal with adhesives. They've got to deal with heat. And so a lot of R&D, a lot of the products we're introducing over the last several years are products that address the challenges of heterogenous packaging.

Cost savings in action, motion like. So what does this all mean? And we try to move quickly to these slides so we can get to Q&A and answer your questions, but trying to boil this down. We've got a broad portfolio of electronics materials and process technologies to solve emerging customer pain points. Some of these businesses, the investment community might be more familiar with because they've been around for a long time, like our circuit board assembly business and our Circuitry Solutions business. Some of them are growing in terms of their size in our portfolio. It might be newer technologies. There are opportunities, frankly, in each of these business slices for market outgrowth because there are new needs, whether that's from thermal management or new applications, technical requirements in automotive electronics, for example, or the opportunity and solution set driven by the nonstandard approach from energy to packaging, new packaging designs. Each of these businesses plays a part in solving a new customer challenge. Of course, there are divergent market growth rates. Our Circuitry Solutions business, which is the process chemistry that is used in turning a laminate into a printed circuit board, it's about 1/3 of our Electronics business sales and the 5-year market growth expectation, and this is using market research and market forecast is about 7%. And we see 2 to 3 points of outperformance in that market because where we play in that market is faster growing, higher technology applications like package substrates, where printed circuit boards are quickly becoming almost semiconductors, driven by heterogeneous packaging. We also have innovative, more sustainable metallization technologies that are solving OEM needs around environmental concerns. And so this is a market that's also bouncing off the bottom, right? The big end market for our Circuitry Solutions business has been smartphones, and we've seen a significant trough in demand that's starting to see a recovery. So that's how we get confidence in the 5-year growth expectation and also our outperformance. The circuit board assembly business, which those who are here with us today they saw a lot about, is a 4% to 5% market grower. It's got a more industrial exposure than our Circuitry Solutions business, hence, a slightly lower growth rate. But again, we see 2 to 3 points of market outperformance really driven by innovation in both alloys. So what types of materials are we converting into solder pastes and are, again, sustainable capabilities, right? We're recycling materials, solving OEM needs for environmental concerns. The semiconductor assembly business, right? So this is what Rick was talking about, where we're putting die into packages, where there's been a huge amount of innovation around advanced packaging designs is 11% of sales, but growing from a market perspective, 15% to 20%. And based on our offering and capability for this subsegment, we see 10-plus points of market outperformance. So this is a business that will grow from 10-ish percent of our Electronics business to a much more meaningful contributor at very attractive margins. And then the wafer-level packaging business, think about that as copper deposition and front-end capability, where we're growing in line with MSI from a market perspective. But based on innovation we've brought to market subsequent to the ViaForm transaction we did last year, we see 5 to 10 points of incremental outperformance. Putting this all together, you've got an Electronics business that's growing in the high single digits over the next 5 years. And that's before any significant contribution from the Kuprion transaction we did, which is a little bit harder to underwrite due to uncertainty in the very near term but has huge potential. And the incremental margins in this business are quite attractive. And so putting that together, the Electronics business should be growing north of 10% on the EBITDA line for the next 5 years, and making that a little bit more immediate. The last slide is just our guidance. And so last week, we raised our second quarter guidance from approximately $125 million to approximately $135 million. And that's driven by two things. The first is our margins have been sustainably higher, driven by our ability to hold some of the price that we had to take over the past couple of years and a declining raw material environment with a bit of help from mix. Because our circuitry business and our wafer-level packaging businesses have really accelerated, and that's driven by AI applications and a healthier electronics environment in certain pockets. Those are higher-margin businesses, thus further helping the margins. As we look to the full year, we took up our full year guidance from $515 million to $530 million to a new range of $530 million to $545 million on the back of that increase. And we'll have a better clarity around second half dynamics on our second quarter earnings call, which will come at the end of July or early August. All in all, the things we were talking about today, both in this presentation and on the tour that are propelling the electronics market, they're here. We're seeing them in the P&L today, and we have a greater conviction than ever in their durability and are very excited to continue to support our customers through their innovation and their growth. And so with that, we'll take some questions.

Maybe I'll kick it off and Vivek can jump in with questions, and I'll repeat it for you. But you just had a slide up there, Ben, that really caught my attention, where you looked at the market growth projection in the various sub-businesses in Electronics. And then you had your own expectation for outperforming each of those market growth. Without going through the math on all of that, what's your gut feel over these next 5 years about your level of excitement about this business of yours? Is it the end market growth recovery? I mean you said worst electronics year in a generation. Is your excitement about the recovery in the end market and the growth? Or is it your potential for share gains? And we talked about a lot of things on that tour, where there were comments about this is -- nobody else has this or -- so which of those drives your optimism over the next 5 years?

The answer is yes, right? I think that, again, our conviction and our ability to support our customers and their customers and win together is as high as it's been. And we've built a track record over the past several years of outperforming our end markets, right? And the data bears that out. And that's been through a pretty volatile environment. And our capabilities are only getting better. As a team, the solution set that we have is better than it's ever been. The customer intimacy is better than it's ever been. We've done a couple of highly strategic transactions. And as an organization, we focused on R&D and commercial efforts using some new tools we brought in, and that has been working. And we're at this really attractive inflection where the end markets have bottomed. And we're seeing a recovery from a cyclical perspective, but also very rapid change in technology that's supporting a secular demand driver from AI, automation and new emerging technology applications, all of which is additive to the base business in smartphones and in industrial electronics and Internet infrastructure and data centers. So you've got this base business that's recovering and this new growth vector where we are very well primed to participate in one. That was a good answer, so let's go to the next question.

On Slide 10, you guys highlight that you have a 2 to 3 multiple uplift on a dollar value content when it comes to heterogeneous integration. But is there any offsetting dampening effect from a lower unit production that comes from heterogenous integration versus if it just stayed in the prior form?

Operator, could you hear that fine?

Yes, we hear that fine.

Okay. Thank you. Chip volumes are going up, put more simply. So you've got a more complicated chip at the core as a core processor. There's still plenty of chips around it. It's not displacing chip volume, I would say. I think it's actually increasing chip volume. If you think about like -- you talked about industry buzzwords. Maybe 5, 7 years ago, we were talking about system on chip, right, where they're trying to do everything on a single chip. Now they're saying, well, we can't do that anymore. So now they've got a processing unit, memory, graphics processors. So they're actually using more chips in their design. Now the chips are getting smaller and the pitches, it's getting a lot tighter, but I think the chip volume is just naturally going up because it is [ prominent rather than the 10 ]. Whereas before, when we were talking about system on chip, Moore's Law was all about not only scaling the chip and more, but also getting cost out, right? And so they can fit more chips on that 300-millimeter wafer. Now the processing power they need and all the other things that they need to do, they don't have that. So the chips, they use a logic processor or a graphics processor and they put lots of chips around it to do other parts of the electronic need. And so more chips, faster devices and frankly, cost savings because they don't have to scale through an EV data you're tuned in.

Great. Thank you so much for having us. So we recently had an industry trade show, COMPUTEX in Taiwan. And there were two observations. First is just how the ecosystem is coming together, whether it's the foundries, whether it's the fabless companies, right, it's the whole electronics. And secondly, how these road maps are accelerating, what used to be the classic Moore's Law 18- to 24-month cadence. Now people are talking about a 1-year cadence they're bringing out. So I'm curious then, as you look at your kind of partnership and collaboration, how early do you get involved in the process? So should we be thinking about this year, you are partnering with the ecosystem and chips that might come out a year from now, 2 years from now? So talk to us about the collaboration you have with these different parts of the ecosystem.

So I'll start, and I'll pass it to Rick. But I think the primary observation is that over the past 3, 5 years, we've been working to create one MacDermid Alpha Electronics Solutions business. Historically, these were discrete businesses. We had a certain board assembly business. We had a circuitry solutions business. We had a semiconductor business. There was a lot of discovery value when we brought these businesses together and started doing road map exchanges with these customers, and they're beginning to appreciate the breadth of what we can offer. And so our seat at the table has improved. Then we did the ViaForm transaction last year, where we went from being a manufacturer and innovator to actually having the customer touch at the largest semiconductor fabricators in the world. And that further enhanced our access, if you will. And today, I think it's very clear that our value proposition and breadth of offering is appreciated by the critical specifiers, if you will, in the industry. And Rick has anecdotes about very senior executives in this supply chain spending hours in our labs doing applications work. Rick, if you want to...

Yes. I mean we -- one, you're absolutely correct. The market -- the design cycle has completely changed than it used to be. If I was a fabless, I just call up TSMC and say, "Hey, make me a chip." Now they want to know what's in that chip and they want to accelerate and they want to know what's in the package. And you hear back TSMC's packaging being their bottleneck in some of their most advanced chips. But all of a sudden, you've got -- it's really more of a related tool or material provider to the customer, the tool provider. And the customer, they need two things, could be an OEM or the actual manufacturer. And they're all working together because the problems the industry is facing are more pronounced where you see it being still. Now it's we've got power densities, we've got heat problems, we've got all kinds of different things we're working on. So everyone's got to work together since [ we're in that inning ]. And that these -- a lot of these customers see it as a real strategic advantage if they can figure this out, right? Whereas before, they wouldn't think as much about it. So we had a very large customer who plays in the automotive industry in our Singapore facilities, and it was a C-level person who spent 4 hours in our Singapore lab just trying to look at data and look at how we look at things. So this is getting -- I have another customer who I go way back with, he's the most senior R&D person packaging side of this company, called me up the other day and were like, "You guys will have like weekly meetings with you, people working on this." So I think the market's changed the behavior a little bit, but it's also because we do have the breadth of products, and we've invested in the lab facilities that we're able to be a participant at a higher level, right? We're not talking about the spec of our copper product. We're talking about how the copper product enables the specific combination of something else. And that's a conversation the customer wants to have is how do I do my job better. That's why we reorganized around customer jobs versus product lines. You'll see a lot of our competition just talk about all this, this is my [ usage line ] and this is my copper mine. I think that we would be thinking about the solution.

Maybe one more thing to pick up on. You mentioned power density, and I think that's become a really important buzzword in semis, as we are going towards these more advanced GPU impact that do a lot of competition but also suck up a lot of power along the way. So maybe talk to us about what specific products, like what part of your work is exposed to addressing that issue. And is there a road map and a base of new technologies that you think are going to help the semiconductor industry?

Sure. All right. Well, first off, we're in the wafer, right? So our ViaForm products, damascene products, they were kind of workhorse products were allowed, at least you get to use lower nodes or these faster processors, yield becomes a real issue, right? And so we developed -- we're continuing to develop products that are improving the customers' yield, improving the layers that they can use the copper on. So they want to use plating wherever they can. As you get to the lower layers, you'll use like physical vapor deposition or something else, so really products that can address that. So in that chip stack, we're there. Now all of these advanced chips you're talking about then use advanced wafer packaging, copper or any other pillars kind of buzzword that you can look up. But that means that the traditional kind of wire bonding and things they were doing, they're moving more of that wafer, right? So they'll put a packaging layer on the top of the wafer. All those advanced chips do that, and we have leading products in that space. Then you get into the PC board side. And I was telling the group here, if you get into -- there's pictures of them out there. So when you look at the NVIDIA chip stack and how closely they are now, which energy they use and a PC board that's on a plastic substrate, right? Plastic substrate is an organic material. So when it gets hot because you there's that much power going through it, it will melt and it will work, right? And so the work we're doing with thermal processing on the PC board, trying to do finer larger lines to move more power on lower layers, there's all things that the customer care about what we're doing today. Then you get into the die attach, right? You think about people used to use LED to attach things to boards and it just doesn't work when you have that much heat, it will melt, right? So we're in the silver sintering and we're in the copper sintering, we're in all different things that provide better thermal conductivity, but also more robust board design, right? Because now a board you're seeing in a laptop, okay, if it breaks more than a car driving a sensor that's steering the car. It's a big problem if it breaks, right? So reliability and all those other things that people are doing becomes more important. So we're spending a lot of time and energy in that space.

Maybe one follow-on on that, and that is you just kind of describe that whole supply chain. How much wallet share do you think you can gain by having really critical technology in part of that chain and to be able to leverage that to get more wallet share out of your customers? How meaningful is that?

So the hallmark of this business is that our material, our solution represent a fraction of the cost of the finished goods. And that's where we want to play. We don't want to play in high-bulk, high-cost materials. We want to play in high value-add niche materials. And what we found is some of these solutions can dramatically improve yields for customers, and we're very good at selling on value. So if we're improving yields for customers, we're saving them a great deal more than we could possibly price. And the value proposition that we represent to the customer is very compelling and creates a win-win. And so when you think about a lot of the things Rick was just talking about, we're solving customer pain points where -- and I think about yields, right? In all aspects of electronics hardware, it's not just in chip manufacturing, if something is not working, you have to make it to figure that out. And so they're throwing out finished product. And some of the issues that folks are struggling with that are damaging yields, there isn't a great material solution for you. And so active copper's value proposition is so compelling, right, and some of the other innovation we're bringing in the ViaForm market is so compelling. So we're not after wallet share broadly defined. We want to win in our niches and capture the value that our innovation and technical service represents. We'll do more than fine in terms of delivering on our commitments and our outgrowth if we're able to do that. We're not solving for absolute revenue dollars, right, we're solving for profit dollars and delivering above-market growth.

It's also -- I mean, I think, again, the business organizational changes we've made over the last 2 years, it makes an impact because if you're a regional structure and you're kind of a single product line, you walk to the customer and say, "Hey, I sell copper damascene." It's a different conversation if you walk to the customer and say, "Hey, I work on every job you're doing across the electronics manufacturing space. We have products in electronics spaces. This is what we can do for you. This is how they work together." And getting that level of conversation with the customers, it's really advanced over the last 2 years. And they want to have the conversation with us. So you can talk about target share, market share, wallet share. It happens because we're at the table and we're flexing our muscles as a $1.5 billion electronics company, and the customers want strategic suppliers. They know a high-quality systems, and they know they have the right products for them to solve their future needs. So being at that table helps us a lot. And we look at pipeline growth, we look at win rates and all of that has been improving quarter-over-quarter.

I think that's a fair point, which is there are certain niches of the market that we have a total of them that we're trying to drive share, right? We talked about formal coatings as an example, and some of the more polymer-based opportunities, underfills and edge bonds. We're a small player there, but because of the materials compatibility aspect we've talked about today and how we can show our materials work together, we have a lot of addressable market to go after there that's not relying on industry growth.

There's a lot of ongoing kind of tension between U.S. and China, right, especially in the heat of semiconductor. So how much has it kind of helped or impacted your business so far?

So trade restrictions around American companies doing business in China has been around for several years, and those restrictions are in the P&L today, right? There are certain things we cannot sell into China and we do not sell into China. But our model, by and large, is to buy, manufacture and sell locally. And we're supporting not just the semiconductor industry, which is actually somewhat small in China relative to its presence in Korea, Japan, Taiwan, but also the printed circuit board market and the assemblers. And they are present in China without trade restrictions for the most part. What we're seeing is a China Plus One approach. So large-tiers customers, even Chinese customers are building manufacturing capability outside of China, in Thailand, in Vietnam, in Malaysia and Mexico. And we have a global footprint and ability to support them as they stand up their manufacturing. So it's required some incremental innovation and applications labs and on-the-ground technical service. We're getting there before the customer is getting there, because setting up a PCB fab takes a lot longer than setting up applications lab for us. And so it's driving share and opportunity our way. We are absolutely seeing that trend. And so it is -- it has an impact, but it's one we've been navigating for several years.

And the other side of that coin is just the biggest government incentives, right? There's a U.S. chip side. There is a European version of that. There is, I think, a Korean version of it. There is a Japanese version of it. So how are you taking advantage of all these incentives that are coming in?

Yes. So it's stimulating incremental investment in capacity. And we're very well positioned to win more than our fair share of that incremental capacity. We have incumbency in many of these markets. We're participating in certain CHIPS Act funding opportunities because we have very valuable IP that's supporting some of this innovation, particularly in advanced packaging. And it's a tailwind for us. It's a tailwind for us.

You want to talk about who you compete with? Who would you consider to be your most significant competitors, who kind of got highlighted here recently when DuPont disclosed they want to spin out their electronics business, which competes with you in some capacities. That's a couple of years from now, but how would you position yourself among your competitors?

So we've talked about having the broadest portfolio of solutions in our niches and being market leaders in the niches in which we participate in. So there isn't one competitor that we compete with in all of our different businesses. But -- and importantly, the electronics materials landscape is a very big landscape. And the right way to look at it is not as electronics materials, but it's in these solutions slices based on customer applications and what the products are doing. So our Circuitry Solutions business competes with some of the businesses that reside in what will be DuPont Electronics. It competes with a business called Atotech. It was acquired by MKS several years ago. It's got some competitors that are Japanese and some competitors that are local. The assembly business is a completely different set of competitors. There's some Japanese, some Chinese, privately held companies in the Americas and Europe. The semiconductor business, there's some overlap, but not entire overlap. So we do compete with a business that resides within mobile, we do power electronics, but also a different set of Japanese companies, Korean companies. So there's no one that can do the breadth of what we do. And again, being able to speak to that breadth is highly differentiated. We're going after in that polymer business a completely different set of competitors. So we're unique in that value proposition to the market, and really from a business quality perspective as well. Real formulation-driven, IP and technical service-supported capabilities. The folks that I mentioned as competitors, they also have broad different portfolios, but they don't have the same attributes as our businesses.

[indiscernible] Entegris was a supplier in that?

So Entegris was a co-supplier of ours until last year when we transacted to terminate a distribution agreement we have with them. Entegris is more focused in the semiconductor market and has a split of CapEx-driven revenue and OpEx-driven revenue. Just about everything we sell is OpEx at the customer level, so we're not selling capital equipment. Entegris' portfolio does not compete directly with ours. They do have high-purity chemicals, gas chemicals, electronic gases that are consumables, just not in the same solution set that we represent. And Merck, similarly, has a concentration in the semiconductor market, also gases from their Versum acquisition, and then a lot more in OLED and in display than we did.

You mentioned capital goods, and it makes me think of the machines, the tools, that some of this material gets applied with, and you're not really in that, you sell the materials, not the machine. Is that a disadvantage to you?

It's an advantage for us that we're not in those markets. So in the circuit board business, for example, the tool is -- we can provide the same solution our competitors who sell equipment provide without wearing the capital intensity and cyclicality of that business, right? There are many companies that are happy to provide the tool in a package with us. It is not a disadvantage, by any means. In the semiconductor market and in the IC substrate market, the tool matters. We've got partnerships with the toolmakers. And the fact that we're not competing with them in any capacity is actually helpful. Rick, you can talk about the three-legged stool.

Yes, I mean the material provider, the tool provider and the customer, right? So we have to work with all 3. We used to be the material provider. So we spent a lot of time with our tools. We consider them partners, tool providers. We have some contractual relationships with them in certain things where we've become process of record. So it allows the versatility and also allows us to be on the forefront of technology. If you look at some of the customers who have the material and the tool, if they spend a lot of R&D dollars on their tools, they're not investing as much in the materials where, in our case, our tool provider is more than happy to have us spend more money investing in R&D and the materials, so they can improve their products and they can spend time on the tools where they're special. So again, we spend the product time working with these companies, a lot of time fostering the relationships. We have technology road map sessions with them regularly where they're in our labs, we're in their labs. It works very well.

You had a useful slide that kind of just showed, from the wafer to circuitry, printed circuit board, the whole thing, and where you had business operations. Were there any holes in there that would be complementary to you to move into those voids or those areas where you're not currently?

It's very hard to enter a new customer application organically, right? These are businesses with very, very high barriers to entry, high switching costs and, if you're not doing it today for a customer, they're going to be skeptical that you'll be able to do it in the future. And that provides a lot of the moat around our businesses and the margin entitlement, if you will, that our businesses have. When we look for M&A, we look for businesses that look like ours where we're solving a customer pain point that's adjacent to something we're doing today, business that we deeply understand because it's in the same supply chain, business we can make better because it's inside of our company versus outside of it, meaning there's some synergy. Those niche businesses do exist. And that's the type of thing we look for when we look at inorganic growth. Electrolube and what we did there is a case study. We took a toll. It was a new market for us, and we didn't know what we didn't know. But it was a business that had marquee customers regionally, so we knew that technically sophisticated customers were buying this product. It was family-owned, didn't have a global footprint, it couldn't bring its capability to market everywhere. And so we've been working with that material and proving to ourselves we can win, right? And then we can make incremental acquisitions in that area once we know we can win and we've proven an ability to execute there. That's a good case study for how we think about that. Importantly, there's nothing missing. There's nothing that puts us at a strategic disadvantage, right? So where we play, we have the best technology, technical service, innovation, applications capability. And there's been a lot of consolidation in electronics materials around us, but nothing has undermined our position and our ability to serve our customers. And there's nothing we see that could do that. So we won't feel as though our hand is forced into inorganic opportunities. We'll be a proactive part of that.

It seems like an awful lot of your business has to do with electrification and metallization. Just a question about your raw materials, how would you characterize it? And how do you think it can potentially change? How much of it is a metallic material? There was some really interesting discussion on the tour about this copper paste and the silver sintering, and it sounds to me like those have some really meaningful growth potentials. So does that generate even a greater portion of your cost there?

So we're providing connectivity, so a big thing we're buying is conductive metals. And I would say that our costs are split between commodities like tin and copper and silver, and then really niche materials, compounds, that we buy in very small quantities, that sort of create the magic, if you will, around those commodities. We don't have a large exposure, I would say, that's not in some way contractually managed. So the tin we buy, we pass them. We don't make margin on it, and so we don't have that exposure from metals fluctuation. In some cases, customers want a fixed price for a year, we'll hedge it in; similarly, silver. And in those niche raws, some of them got harder to get in the supply chain crisis that followed COVID. But as one of the larger players, we've got a very good ability to get what we need to support our needs.

I just want to add. One thing to add is, even in some of those commodity, [ they'll have about 10 ], as everybody know, and some of these things probably doesn't come out very strongly. We have an enormous recycle business where we take electronics, we take everything, and we recycle it into mostly recycled tin where we purify it. And some of our key customers, they want us to sell them only 100% recycled tin, right? So we have a business that -- there other people in the recycled business, but we do it for internal use. So we don't just buy virgin material, we buy waste and recycle it, and it helps us with some of the commodity cost you're talking about.

And we get a margin on it when we're able to do that, so it turns something that could be more commoditized, something more proprietary, because of the volumes we can sell of recycled material.

One more I have for you would be just the whole topic of AI and machine learning. Is that a more driving demand for your business? Or is it also helping you on manufacturing?

It's certainly driving demand, and we have found applications for AI in certain of our functions today. We've done some pilots around AI and formulation and R&D. But right now, it's more, call it, the finance function, automating some of that capability integration, when we're bringing large data sets of product information and trying to marry it together. So we're in the early innings, I would say, of exploring that, but it's a huge demand driver, a lot of potential.

Well, it's creating an incredible inflection point in the market. Everything is changing. Everything changes when you have that much power going into a chip, in the motherboard. So it changes what the customer needs are. Again, circuit boards, they were made the same way forever. Now it's a problem area. Customers have to solve for that. They wouldn't even think about it before, right? Now it's technology innovation required in this. So it changes a lot of the industry dynamic and it changes the way customers think, creates opportunity.

Kieran had a question.

So a question about fees, the importance of the strength of your balance sheet to your customers. And related to that, the extent to which -- to an earlier question about competitors that may provide equipment and materials, the extent to which you may use it [ versus demand ] as a mechanism to generate relationships with customers.

So since it was a little quiet, the question was about strength of our balance sheet and its importance to customers and equipment financing opportunities because we have a healthy balance sheet, and is that a way to help drive business our way. So one of the great things about the Kuprion transaction we did last year was we accelerated the ability for that technology to be monetized because, if you were going to choose a process of record for a high-value application, you're not going to use a startup, right? There's just too much risk associated with them. And so we brought in a great technology and immediately lent it market recognition, quality recognition, applications know-how that accelerated customer adoption. So the balance sheet matters insofar as large customers aren't going to want to work with a company that has a risky corporate outlook, right? That's the first thing -- answer to that. We have used our balance sheet, both in our Electronics business and in our Industrial Solutions business because we're looking for ways. It's such a sticky business, right? To win market share through a better value proposition, that better value proposition can be yield, it can be innovation, can be environmental and it can be a willingness to help a customer grow. And the printed circuit board industry, right, they're running off thinner margins. It's a fragmented industry with smaller companies that have higher cost of capital. So we'll help a customer grow by buying them a line or a piece of equipment in exchange for a long-term contract at attractive margins where it's a win-win. So that works in the PCB market. The semiconductor market is a different animal, right? These are very well capitalized and very, very expensive pieces of equipment. So in the PCB market, it's several hundred thousand dollars to $1 million or $2 million investment with a 2-year payback at high margin that's contractually guaranteed. The equipment in semiconductor fabs is tens -- hundreds of millions of dollars, and they don't need our capital on our balance sheet for them. But we have used our balance sheet to support growth to win market share and support our customers. It's just another tool in our toolkit as we think about having the best value proposition in our markets.

To elaborate a little bit on the ViaForm transaction, what that gave you guys you weren't getting before, why it was worth $200 million, sort of bought yourself out of that. What changed as a result?

So in 2003, a predecessor company to Element Solutions sold the distribution rights to ViaForm to a predecessor company of Entegris for $20 million. It was an evergreen contract with a 35% distribution margin. There was no way out of it. That product became a market leader in copper deposition for front-of-line applications. When I took over as CEO of Element, we started having exchange with Entegris because it wasn't a great structure for either of us or our customers. We were still doing the innovation. We're still doing the manufacturing. They were selling. They were getting a margin that was below average for them. And the customers couldn't see through to 1 counterparty. And so how could we untangle, if you will. And eventually, Entegris was raising proceeds, subsequent to their acquisition, to delever. And we found a mutual win, if you will, where they can raise proceeds at an attractive multiple of the trailing earnings of that business. We could solve this customer issue and do so at what we believe was the trough demand environment for the semiconductor market in the second quarter of last year. So we paid a healthy multiple on trough earnings. That business has inflected positively. We now have a seat at the table with these front-end customers, with these semi fabs, that we didn't have to the same extent previously. So there's an intangible benefit from this. Just our access to market, the road map exchanges we're doing with very important market participants, the financial benefit is clear. That business has ramped really nicely. We didn't have control of setting pricing, Entegris set pricing, and so that had a whole other host of issues where opportunity is associated with it. And we've seen that business take off this year, right? Fab utilization is increasing. We're winning more business than we were before because of our, let's call it, focus on that product. And when we think about the multiple we paid on 2024 earnings, it's a single-digit multiple for a very sticky, high-value product. It was also less risky because we were making the stuff already and doing the innovation and standard sort of acquisition would be. So it was a real win for us and I think it was a win for Entegris and our customers.

The only thing I'd add is it was very difficult in that relationship structure to introduce new technologies because we didn't really have the attention of the Entegris sales force, right? So as we kind of innovated or we felt the customers were kind of leaving us for new products, we weren't getting the traction that we could get. Now that we have the whole structure and we're talking about the product, transaction with the product, new product introduction has gone much faster and a lot of real interest we're getting from consumers.

I had a little question based on your answer, but you talked about the packaging, R&D business. People who got low capacity from [indiscernible]. So I'm just curious, like how has your philosophy changed over the last several years as you [ contemplated that ]?

So people are what matters. And that's not just an R&D comment. This is a professional services company. Our people are in front of our customers all of the time. Our products are not sold based on a chemical formula. They're sold based on an outcome. So our ability to innovate that outcome and then represent that outcome and ensure that, that outcome is delivered, that's our value proposition. The markets we participate in, particularly in electronics, are growing and attracting a lot of attention, and that creates a lot of competition for our people. And so we have no choice but to be the choice employer in our markets. And I think we understood that when we launched Element Solutions, and we made it one of the 3 prongs of our vision, right? Our vision is to be the best company in our markets in terms of the value we provide our customers, the opportunities we create for our people and the value it great for our shareholders. But we've had to really back that up with actions. And I believe we have. That strategic vision, by the way, is not words, it's measured empirically. And so the surveys we've done of our people, we do them every 2 years, have been markedly positive. So 2020 over 2018, in the depths of COVID, more than 90% favorable answers versus 2018 in terms of the quality of experience people had at this company, the opportunities they had at this company, the culture that they perceived at the company. We did that survey again in 2022. Again, longitudinal, same questions were asked, again, more than 90% favorable versus 2020. The next survey is this fall, so that will be an important metric. But this is a people-based company with the great fortune of having great people who have been here for a long time, great brands and reputation in the market and, more recently, a level of investment that these companies independently, historically, did not have. And so the tools that -- and we're sitting in one today, right? This is a new site with more modern capabilities than any one that this company had experienced previously. And that is, again, talent retention, customer value proposition, all sort of captured physically in this space. So I believe we're investing in people and technology more than we had in the past, and it made manifest empirically in customer interaction, pipeline, P&L, both revenue and margin.

I think we've run out of time here, Ben. Truly appreciate this. We very much appreciate the tour. Thank you, Rick. Thank you, Ben. If any want a follow-up discussion with Vivek or me, give us a shout.

Thanks very much. It was great to see you. Thanks for coming.