Element Solutions Inc (ESI) Earnings Call Transcript & Summary

Terrific. Okay. So we'll go ahead and get started. We're very thankful to have Element Solutions, Ben Gliklich, the CEO for the company here to chat with us today, fascinating story of the company. Again, we've been around this a long time. Started off with something called Platform Holdings years ago, had a trouble here, and Ben and his predecessor fixed it up and turned it into something that's really one of the kind of shining stars within our space. As far as one of the few guys is actually growing the business, have great market positions and just done a phenomenal job managing the business, deploying capital. So again, congratulations, Ben, because we haven't seen that much in the space where you've just been smart with capital.

So maybe, Ben, let's start as I've kind of done with a lot of the companies, if you just went back to January 1 this year, you obviously had some expectations for what was going to happen this year. What ended up being better, what ended up being worse this year when you kind of do an after-action review of 2025?

Thanks for the question, Duffy, and thanks for having us here. Gosh, going back in the time machine to January of this year, it's been a good year for us. We were on track for a record year since we founded Element Solutions. We're growing really organically nicely. We're proud to have found an avenue for some interesting capital allocation as well. Entering the year, we had conviction that the high end in electronics was going to remain strong. The biggest area of uncertainty on the electronic side has been smartphones, and that goes back several years. And we weren't quite sure what to expect. I think our base case was modest growth in the smartphone market. The EV market has been a volatile one as well. If you had to point to something that didn't go as we would have expected it to go is the EV market where we saw some weakness with some concentrated customers. And then the biggest question entering the year was capital allocation. The balance sheet had been delevered nicely. We announced the sale of our Graphic Solutions business in the third quarter of 2024 that closed the end of February. And so we had a lot of capacity and it was a question of where would we deploy that capacity. And so we spent a reasonable amount of time looking for attractive areas to deploy that capital, and we were fortunate to have found 2 great acquisitions more recently here. So what's been better? High-end electronics continues to surprise to the upside, smartphones modestly better than we would have expected. What's been a bit worse? EV. What's been -- on the industrial side, we expected the offshore business to continue to be strong, it has been. On the Industrial Solutions side, volumes continue to be difficult there. But we continue to find avenues to improve margins through procurement and productivity. So that's been a good story as well. And then, of course, capital allocation is a really exciting area for us as we exit 2025.

Fair enough. And so using that as a baseline then, how does that set you up to springboard into 2026? Again, kind of the same thing, what do you think gets better? What do you think maybe is going to be challenge next year?

Yes. I think the right baseline is a continuation of what we saw here in 2025, which is to say the high end on electronics continues to be robust. Expectations for smartphones are for similar like years just because there's so much volatility around that from a units perspective, not a growth perspective. We'd like to -- we will hope that the industrial side of the business recovers. It feels as though the market has been saying things are going to get better in the back half of the year for 3 years rolling and they haven't. And so we're not going to go in with a very bullish assumption there. We don't have any data points to support that. But we do believe we can continue to drive productivity in that business. And then, of course, we've got an FX tailwind for the first time in a while, and M&A contributing. So together, it's something around $70 million of EBITDA that we'll add next year. And those are high-quality, fast-growing businesses that will be adding to our growth algorithm in the out years.

Okay. And let's dive in on both -- the two acquisitions, if we could. Walk through kind of like what they were doing individually before you got them? And then is there a chance for you to do something differently to accelerate their growth? Or are there true kind of sales synergies that you think kind of combined 2 plus 2 is bigger than 4?

Yes. So the two acquisitions are very different in terms of our approach to them and the strategy go-forward. With EFC Gases, this is a market leader in niche, rare high-purity gases, servicing the fastest-growing niches of the industrial economy, semiconductor fabrication here in the United States, satellite propulsion systems and other aerospace applications and electrical transmission. So those 3 areas together are about 75% of sales. They've been growing 15% annualized back to 2019 at very robust margins. Our plan for them is to run that as a stand-alone business inside of Element, leverage the relationships and capabilities that we have, invest behind them and accelerate the growth that was naturally coming their way. And that's just an outstanding team, outstanding business with a lot of runway to grow and the market at its back. On Micromax, it's a bit of a different story where this is a very high-quality business, market-leading technology in an attractive high-value niche market, but it's a carve-out. And it's been inside of a good company, but a company that wasn't focused on electronics. And even before that, when it was inside of DuPont, it was off to the side. And so we think that inside of Element with a really deep focus on electronics, with great access to specifiers, qualifiers inside of our electronics business, MacDermid Alpha Electronics Solutions, we can do a lot to grow their mind share and help them gain real traction in the leading edge. Right now, their applications are in what were historically the most technically challenging areas of the market, satellites, aerospace and defense applications. They're not yet into high-performance compute server boards. And we're just at the inflection where a lot of the innovation is moving from the chip to the board and onto the passives, which is where they serve. So we see a big opportunity for us to help them climb that and accelerate growth in that business. and then integrate them into our overall portfolio, where there will be some cost synergies as well.

And were they already moving into those areas and you're just going to help them? Or that's an opportunity you saw to take them from an area and move it into kind of a white space areas that they weren't in?

Look, their technology is leading in the market. They have a right to participate in that market. They're already in the passive space, but commercially, I think that there's an opportunity to invest to help them gain share in those applications.

Okay. And then with those kind of already in the bag, right, I guess, what does that do for your strategic vision and for Element, again, '26 and maybe going out 3 or 4 years? Is it possible that we see 2 or 3 or 4 of those types of deals every year, and we can kind of increase your -- the real growth rate inorganically? Or is this just kind of a one-off that happened to come together and that's lumpy and won't repeat?

There are sort of two mantras for Element Solutions. The first is operational excellence and prudent capital allocation. So we've got great businesses, make them better more days than not. And the way that they manifest as great businesses in addition to above-market growth is really strong cash flows. And so our job, the leadership team of Element is to deploy those cash flows in prudent ways with a lot of flexibility around that. So it's been M&A, always in markets we deeply understand behind our businesses, there have been buybacks. We have a modest dividend. We've delevered the balance sheet over time. And so capital allocation is part and parcel of what we do. And the other sort of hallmark is that we want to be the best company in our industry in terms of the value we provide our customers, the opportunities we create for our people and the value we create for our shareholders as measured by intrinsic value per share. And so as we look out over the next couple of years, there isn't some fixed algorithm for capital allocation, right? There's a fixed growth algorithm organically. There are fixed frameworks around how we deploy our strategy, but we're going to retain flexibility to deploy capital. We would love to continue to invest, particularly behind our electronics business, but in general, behind our businesses to compound earnings per share, to improve our value proposition to our customers. There's nothing that we must own, and we've been disciplined around our leverage ceiling. And so we'll exit the year with 3 turns of leverage. The ceiling in the past is -- the ceiling has been 3.5, very comfortable at 3. It was as low as 1.9 recently. But keeping the balance sheet conservative and then investing behind our businesses is something you should expect us to do over any 3-, 5-year period.

Fair. And maybe walk us through on the electronics side, you've, I think, pretty deftly kind of gotten yourself into some of the higher-growth areas. But how is the change in the focus for electronic end markets married up, I guess, with your portfolio and why you've kind of been able to accelerate growth a little bit behind that?

Look, the acceleration in our electronics business is a product of deliberate strategy and a bit of luck. The portfolio that we had when we launched Element Solutions was a great portfolio of market leaders in niche markets, serving primarily printed circuit board applications with a foothold in the semiconductor market. So from a deliberate perspective, we improved our access to the semiconductor market. If you look at what we did with the ViaForm or the Entegris distribution agreement that we canceled as an example of that. And then we saw this convergence coming where printed circuit boards were seeing more innovation and prioritized resources towards solving those emerging customer pain points. And that has given us better mind share with the key specifiers and qualifiers and OEMs in our supply chains. And so we put our businesses together, this collection of market-leading niche electronics assets into one company and really made a push on marketing and applications development and strategic account management to bring the breadth of what we do to bear to these important supply chain partners. And that has driven market share and mind share as I said, and allowed for us to really outperform our end markets and gain great traction in the fastest growing niches of our available market.

Definitely going to come back to electronics because it just drives so much. But let's touch on the industrial business for a second because it's still over 1/4 of the company. One, I guess, strategically, should that remain part of the company -- I mean, again, is there a way to create value with those separate? Or do you think that they work well together and it's not an issue? And then two, just again, the same kind of question, how do you see the strategy for that business over the next 2 or 3 years? What should we expect to see there?

So our Industrial & Specialty space segment smaller than it was 2 years ago because we sold the Graphic Solutions business. So it's also two really high-quality market-leading businesses that are growing earnings in what has been a very difficult backdrop for industrial companies over the past several years. We have an offshore solutions business, which is less than $100 million of revenue, growing really nicely, very strong pricing power, really strong market position in what has been a growth market, deep offshore exploration and production. So that's been a great story for the company, really good business. The Industrial Solutions business is also a great business that has been demonstrating the quality of the business because it's been facing a significant volume headwind over the past 3 years. Volumes are down 15-plus percent, earnings are up. That's pricing, that's procurement, that's productivity despite facility utilization being meaningfully down. So it's primed for really strong incrementals when that market gets better, but we're not calling for that market to get better imminently. Both of these businesses are like our other businesses, they're asset-light, people-intensive, really strong cash flow businesses. We are not emotional about the portfolio as it is currently constructed. We see a pretty meaningful value creation opportunity from our industrial assets. We don't believe that the right catalyst is self-generated here. And we want to back the great horses that we have in terms of the people and the assets in the portfolio.

Okay. And the Industrial Solutions business, what's the best metric to track macro-wise? Is it just global manufacturing? Like what is it that really drives the volume in that business over time?

So about half of it is auto with a skew towards the West. The other half is construction building products, industrial equipment and machinery, so it's ISM and PMIs.

Fair enough. And in that down period, have you guys taken market share in that business? Have you done better than the market, would you guess?

Yes, we absolutely have. And I think that, that can be supported empirically. So our volume decline is less than the market. And that's because of a real strong commercial emphasis. And also we've been supporting customers. We've seen a pretty dramatic realignment from a supply chain perspective, a lot of our European customers are moving into new geographies. We're helping them do that, we're equipment financing for them. And so we've won some really big pieces of business. We've also had -- several of our large competitors have been in the midst of transactions, and that has created a white space for us, and that has allowed for us to outperform.

Maybe looking at the company as a whole, again, we've gone -- it's been a long road with this one. Valuation is better today, but I think a lot of people would argue that something you've got peers like Qnity and Entegris. When you're sitting down with it, what is the right way to think about valuing this company? I mean what is the right peer set in your mind? I think you've done better than people would have suspected 2 or 3 years ago. But you've gotten rewarded for the EBITDA that you've generated, but not so much for a multiple improvement, like the company is a higher-quality company than people would have thought. So just in general, what are your views on valuation?

It's not our job to assign a multiple for the business. Our job is to grow what gets multiplied, and we're very focused on that. And on a relative basis, we've absolutely outperformed the broader indices in which we -- the broader peer group and even the electronics peers. This company is now more than 70% electronics. When you look at our heads-up comparison against some of our peers, we've been outgrowing them. And so we think that the portfolio has demonstrated resilience through downturns because there was a recent downturn in electronics and then upside on the way up. And we're proud of that execution. The thing that I think is sometimes missed when you evaluate Element in the context of electronics businesses is the cash flows, right? And so ex metals, our margins are comparable to those peers. We sell $300-or-so million of metal on a pass-through basis. It doesn't impact margin dollars. It just impacts margin percent. So you could look at it ex metals the way we do. And so margins are expanding. They're close to historical records, and they're in line with peers. But our capital expenditures are dramatically less than peers, right? It's an asset-light business. And so when you look at our cash flow conversion, or even more simply, you look at our earnings per share, but the multiple is meaningfully lower. What do we do about that? Well, when it becomes dislocated, we buy back stock. Again, we generate a lot of cash. And so in our first 7 years as Element Solutions, we repurchased 20% of shares outstanding, maybe a little bit more. We generate cash consistently every quarter and buybacks are certainly part of our arsenal to help us compound earnings per share, which is the North Star for the company.

Okay. And sometimes we get pushback from investors kind of flipping that up, the capital costs are lower, the R&D percent is lower. So therefore, it's not as good a quality company. You want to have high R&D, you want to be growing and needing capital to do that. So when you comp yourself again to an Entegris, to a Qnity, there's a lot of pieces in that. But what would you expect the growth algorithm relative to those types of companies would be going forward?

A simple pushback is, if you can get the growth and the margin without the capital intensity, it's probably a good thing.

It's a wonderful thing. But I think their point is at some point, you still run out of road or what have you.

Look, the growth algorithm that we believe is right for our electronics business is high-single digits through the cycle, and we've delivered high single-digit organic revenue growth out of our electronics business the past 6 quarters. And it hasn't been a uniformly strong electronics environment. Sure the headlines are really strong about capital into data centers. That's a small, albeit growing slice of the electronics ecosystem. A lot of electronics that go into cars, that go into smartphones, that go into industrial equipment, and those are markets that haven't been particularly robust. And so across the broader electronics ecosystem, it's a good time, but it's certainly not a great time. And we've been delivering high single-digit organic growth. We've been outpacing some of the peers you mentioned earlier on a like-for-like basis with our semiconductor business and our circuit board business. And that's all with a less R&D-intensive and capital-intensive model. And that's just the nature of the business. Now where we sell into semiconductor, we're spending the appropriate percentage of sales more in line with some of those peers in R&D. But our assembly business, where there's $300 million of pass-through metals, it's less R&D-intensive. And it's still growing quite nicely. The right growth algorithm for the overall business is mid- to high single-digit top line, 1.5x that on EBITDA because we're getting an incremental margin of between 30% and 40%. And then with prudent capital allocation from the strong cash flows this business generates, 2-ish percent of sales in CapEx, we should be compounding EPS in the teens. And over the past 3 years, we've done things that work against our ability to grow EPS in the short term, selling our graphics business, delevering the balance sheet. But that unlock an acceleration or the right thing for the long-term growth algorithm of the business.

Right. Fair enough. No, that's clear. Now when you look at the electronic materials industry kind of writ large, right, given the, U.S., Qnity, MKSI, do you think there will be meaningful structural inorganic changes to that industry? Or all this stuff goes through cycles. And now people are pretty excited, multiples are pretty high. Sometimes that makes it difficult for things to happen. But we've seen a decent amount of consolidation, probably your closet peer got acquired several years ago. Would you suspect that we will see continued consolidation in this industry?

Yes. So this is a market that has been consolidating for several decades. We are the market leaders in the markets in which we participate. And so we're always eager to bring new capabilities to bear to support our customers and supply chains. Not all electronics materials businesses are made the same. You just went through the capital intensity, the R&D intensity and the natural return of a lot of those businesses. So we're not looking from our perspective, simply for electronic materials business. They need to meet a quality threshold that is very high because our business quality is quite high. The other dynamic is that because we're in a strong position in our markets, and there has been reasonable amount of consolidation, there's nothing that will happen from a strategic perspective that will put us on a definitive posture where we have to go consolidate. So our view is we're eager to consolidate high-quality businesses. We are a great long-term home for these assets. I think we've proven through our operating system and strategy that we can run these businesses as well when they meet the model that we're looking for and the quality criteria we're looking for. But we're not going to be forced buyers by other consolidations. So I can't read the tea leaves. I can only speculate around incremental consolidation. But our posture on this is we're happy to add high-quality business, but we don't feel like anything will force us to do so.

Okay. Kind of post COVID, again, you guys less so than a lot of my other companies have to talk about like raw material costs and stuff like that, but kind of underneath what has been the trend for raw materials for you guys kind of last year, this year, looking into next year? And have you been able to offset that with pricing generally?

So our business, a few observations around raws, right? When you look at our cost of goods, 80% is variable. And so we don't have a big fixed asset footprint. And so when raws go up, that has an impact very quickly. But we are able to pass through either contractually, through negotiations, price increases pretty consistently. That's always been the model, and that was the model coming out of COVID when there was a lot of inflation. We're able to pass that price on. And we're able to hold that price by and large. And so it took a little while. So our margins were under a bit of pressure coming out of COVID. We've recaptured that and more. And we've been able to hold price in what's been a deflationary environment for our raws over the past several years. Our outlook for 2026 is for roughly flat input costs, just a conservative assumption. But we're driving better procurement, and so we see room for margin expansion from better procurement and then mix. We're bringing new technology to market. And we value price. So if we're coming to market with something that improves our customers' operations, we share in that game. And so there's a margin expansion opportunity because the segments of the market that are growing fastest are the highest tech, so the mix is better. And then we have innovative products that we bring to market alongside that.

Okay. And then maybe one kind of around politics. Obviously, there's been a lot of trade noise around electronics in the last year or so. When you look at that, one, has that directly impacted your business at all? Again, are you getting calls from the administration kind of saying, "Hey, don't sell this or don't sell that type thing. And then two, if countries turn out to be winners from this and again, maybe it's more stuff in the U.S., more stuff in Korea, maybe China, kind of going on their own chips, where do you win, where do you lose geographically, if one side of the other kind of comes out on top?

So the business is very local. So we're buying manufacturing and selling locally with local teams on the ground, providing technical support. And so when there was a lot of noise around tariffs, the threat was not that we were going to have to pay tariffs with the cross-border flows, it was, everything is going to get expensive, it's going to destroy demand, which didn't happen in 2025. So we've got a resilient model from tariffs. The benefit of our business is it's local, and we're global. We're global leaders. So when business moves from, let's say, China to Thailand or India, we're there on the ground to support our customers who have much more complex manufacturing processes than we do. And so we're helping them stand up their sites. So we've won share in the electronics business as circuit board fabrication, for example, moved from China to Vietnam and Thailand this year. We've helped large smartphone OEMs stand up assembly in places like India, where they've started to move device box building. So the realignment of supply chain thus far has been a positive for us. And I would expect it to remain so.

Okay. And just when you get big growth areas like that and movements, sometimes you get inventory build, people always kind of double, triple order stuff just to make sure. Do you see any of that in your chains? Do you worry that we might have an inventory issue if things slow down a little bit.

Our customers don't really stock our product. The exception is in the semiconductor business where they want to have 6 months on hand. But if you go to a printed circuit board fabrication -- fabricator, they don't want to have big jugs of chemistry sitting on the floor. There are lots of people, right? And we're local. So they expect -- they place an order, they're going to get something within a week, if not a few days. So there's not a lot of inventory of our product. In the past, where we've seen inventory build is a finished good. So the most recent example of that was the printed circuit board market for domestic Chinese smartphone. There was an overbuild of the actual finished product in preparation for the reopening post COVID. I don't see that here. And the way I could support that sort of from an anecdotal or empirical standpoint is that our growth is coming from new lines to support advanced server boards for the data center market, right? A lot of the growth we're seeing, and there was this question about was there a pull forward around COVID. A lot of the growth we're seeing is new investment, new kit to support server boards for these large data center build-outs.

Okay. Fair enough. Maybe just a quick update Kuprion, where you kind of do an after-action review on that. What has that done to the portfolio? How is that delivered for you guys?

It's not an after-action review at this point. We're in the middle of the action with Kuprion. So Kuprion was a technology that we acquired in the middle of 2023. And it was really a material science company that had a very innovative material for copper that solved a lot of very pressing pain points in the high-end electronic supply chain. And we have spent the past 2 years doing 3 really hard things, scaling up manufacturing for a brand-new sort of material market, commercializing a brand-new material to the market and helping our customers figure out how they were going to get the equipment sets to use this in their high-volume manufacturing. And so as we sit here 2.5 years in, the commercial pull is stronger than we could have imagined. So customers really want to use this, and it is because it's enabling them to do things they couldn't do without it. There's some drop in applications. There's some new applications, but there's a huge amount of pull to the extent that we have stopped new engagements. We've limited the number of customers that we will sort of talk to about this because we can't make enough for them to do samples. So we don't want customers to say to start working with this, order it from us and not be able to satisfy that. The first piece is where most of our energy is right now, which is standing up the manufacturing capability. And so we were originally going to build one large plant, and that was going to take too long. So we are simultaneously building a -- what we're calling a mid-scale site, which should be operational at the end of this year, which will make enough quantity. So we'll solve this issue of being able to sample the material for the market and also get some sales from the material in 2026 and then a large-scale plant, which will most likely be operational in 2027. And then there's a lot of innovation right now with customers on applications technology, how they're going to use it. But it is an example of how our electronics business has changed, things we're doing from a strategic deliberate perspective to bring new technology to market to climb the technical ladder in terms of access to CTOs and leading engineers in our supply chains and improve our traction in those markets, and it's bearing fruit. There are many, many anecdotes I could provide of customers we didn't have good relationships with or access to who are now becoming customers across all of our electronics portfolio because of dialogue that started around active copper.

And if that -- if you had the large plant on stream today, could you sell everything? Or you still need to go out and create the demand for it. So it needs to have...

There's a qualification cycle with us. So our customers need to qualify the material and then they need to qualify their product. And in some cases, where we're enabling something new, they need to sell that product. And so they want it because it's going to drive their revenue, but they can't sell that product until they're making it. So there is a cycle time. But the mid-scale cycle is going to be very busy once it's ramped.

And this is displacing what material today, generally?

So it is providing an alternative for circuit board metallization, microplating, certain die attach semiconductor packaging applications, certain thermal interface material. It's got a really broad application set. This is the way to think about it.

Okay. And then last one, I always get a lot of questions on the metal pass-through stuff. Have you guys ever thought of a creative way, I don't put it in the corporate segment or something like that, where you could kind of look at the way you guys do the margin and that stuff? Or you just don't think it's that big of an issue that, that doesn't hold you back really to try to do something with it?

So it's a fair observation and it's becoming -- it will become a bigger line because Micromax sells $200 million of metal. And so you should expect us to address that into our financial reporting after the Micromax transaction closes. We think that the quality of the business is understated because of the metal sales.

No, I think that's fair. I just didn't -- yes, somehow so people can do an apples-to-apples versus peers, I think, would be helpful. Okay. Awesome. Well, Ben, thank you so much for coming and spending some time with us today. Again, this has been one of the true bright spots in our space over the last couple of years. So congratulations on that.

Thanks, Duffy. Appreciate your time and interest. Thanks, everybody.