Solstice Advanced Materials, Inc. (SOLS) Q4 FY2025 Earnings Call Transcript & Summary

Greetings, and welcome to the Solstice Advanced Materials Fourth Quarter 2025 Earnings Conference Call and webcast. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] It's now my pleasure to turn the call over to your host, Mike Leithead, Vice President, Investor Relations. Mike, please go ahead.

Thank you, and good morning, everyone. Welcome to Solstice's Fourth Quarter 2025 Earnings Call. We released our fourth quarter 2025 financial results earlier this morning. Today's presentation, including non-GAAP reconciliations, and our earnings press release are available on the Investor Relations portion of Solstice's website at investor.solstice.com. Our discussion today will include forward-looking statements that are based on our best view of the world and our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. Joining me today are David Sewell, our President and CEO; and Tina Pierce, our CFO. David will open today's call with highlights of our fourth quarter results. Tina will then review our segment performance and financial outlook before turning the call back to David for closing remarks. We will then be happy to take your questions. With that, I'll now turn the call over to David.

Thank you, Mike, and thank you, everyone, for joining us today. During the fourth quarter, Solstice Advanced Materials continued to deliver strong financial and operational results as we transitioned to an independent public company following the completion of our spin-off from Honeywell on October 30. I would like to take a moment to thank our entire Solstice team who continue to deliver for our customers throughout this transition. Across the business, we are seeing increasing momentum driven by secular growth trends in areas such as nuclear energy, AI and data centers that are well aligned with our differentiated technology platforms. This momentum was evidenced in our fourth quarter results surpassing our expectations. Not only does this reflect continued strong demand for our solutions, but it also speaks to our strong operational execution as we transition to operating as a stand-alone company and execute our strategy to drive long-term growth. Solstice finished 2025 with return on invested capital of approximately 19% and net leverage of 1.5x EBITDA, which we believe reflects the specialty nature of our portfolio and offers us significant financial flexibility. When combined with the key secular growth trends we are seeing in our core offerings, Solstice has the ability to invest in multiple high-return projects. Over the past few months, we have announced our investment to double sputtering target capacity in Spokane, Washington to meet accelerating AI demand, our investment to expand production for our Spectra Defense fibers. And just last night, we announced our ongoing efforts to expand the capacity of our nuclear conversion business to facilitate the ongoing nuclear renaissance. Guiding our capital deployment is our disciplined capital allocation strategy as we look to balance opportunities that will unleash long-term growth and shareholder returns. With that in mind, we are pleased to announce today the initiation of a quarterly dividend of $0.075 per share, marking an important milestone as we begin to return capital to shareholders. As we close out 2025, we are confident that we are well positioned for the year ahead. Consistent with the framework we laid out at our Investor Day this past October, today, we are providing guidance for the full year 2026, representing low single-digit revenue growth and mid-single-digit adjusted EBITDA growth versus the prior year at the midpoint. In addition to the full year, we are also sharing today our outlook for the first quarter of 2026 in an effort to provide additional color on the momentum we are seeing and the shape of the business in our first full quarter as a stand-alone entity. Turning to Slide 4. Before we dive into our results for the full year and the quarter, I would like to begin by taking a moment to discuss our nuclear business, which we also call Alternative Energy Services. Solstice is a leading participant in the U.S. nuclear supply chain, with our Metropolis Works facility serving as the only UF6 conversion site in the United States and a 60-plus year history as a reliable and trusted partner to our customers, leveraging our proprietary expertise. Solstice is highly committed to the exciting future of the nuclear industry, and we anticipate that we will be increasing our production in 2026 by about 20% over our planned capacity in 2024 to support our customers' needs. We are expecting to achieve greater than 10 KT of production here in 2026 due to the disciplined capital investments we have taken as well as operational improvements to enhance site reliability with higher production backed in part by the U.S. Department of Energy. As the world and particularly the United States, continues to invest in nuclear energy, all stages of the value chain will be needed to support fuel production. Even with our expansion to 10 KT annually, our current facility is largely contracted through 2030 today as evidenced by our $2 billion-plus backlog. With robust demand from our customers, Solstice is now actively evaluating further ways to expand our UF6 production to meet this demand, and we are having active discussions with customers about ways to remain their trusted supplier long term. Additionally, we have retained a leading engineering, procurement and construction provider to conduct initial engineering analysis, and we will provide an update when further progress is made. It is important for us to reemphasize here that Solstice will maintain its disciplined high ROIC mindset that underpins any of our potential investments. Finally, we wanted to take a moment to touch on the near- and medium-term earnings dynamics for this business. When the Metropolis facility was idled in late 2017 during a much different nuclear environment, this business took on a series of product loans to keep its customer commitments. The last of these loan returns has been scheduled to take place in the second half of 2026 and limits the amount of product we are able to sell into the open market. This is anticipated to impact 2026 revenues by approximately $30 million. As we move beyond that period, we have very high visibility to double-digit EBITDA growth CAGR through 2030 based on our current backlog and facility production. With that, I'll now turn it over to Tina Pierce, our CFO, to discuss our financial results for the full year and fourth quarter in more detail.

Thank you, David. Moving to Slide 5. I'd like to begin by providing an overview of our full year 2025 consolidated results. For the full year 2025, Solstice recorded $3.9 billion in net sales, up 3% year-over-year. If we exclude the opportunistic nuclear sales in the first half of 2024 that we detailed at our Investor Day, full year net sales would have been up 6%. As David mentioned, our net sales for the full year exceeded the top end of our previously disclosed guidance range. In our Refrigerants & Applied Solutions segment, we saw 16% year-over-year growth in refrigerant sales, driven by strong demand as we continue to capitalize on the HFO transition throughout the year and penetrate new growth markets like data centers. In our Electronic & Specialty Materials segment, we achieved strong 7% sales growth in Electronic Materials, reflecting robust demand for our differentiated technology platform. Adjusted stand-alone EBITDA for the full year 2025 was $957 million, reflecting a 4% decrease year-over-year and an adjusted stand-alone EBITDA margin of 24.6%, consistent with the approximately 25% margin guidance given at our Investor Day. This year-over-year decline was primarily driven by the ongoing transition to low global warming potential refrigerants, which more than offset favorable pricing. In addition, we delivered return on invested capital of approximately 19%, demonstrating a disciplined and strategic approach as we accelerate investment in high-growth areas of the business. Finally, we reported net income attributable to Solstice of $237 million for the full year of 2025. The decrease year-over-year was driven by the impact of higher income tax expense resulting from frictional taxes associated with the spin-off as well as interest costs we began to accrue on our new debt following separation. Turning to Slide 6. I'd like to discuss our fourth quarter 2025 consolidated results in more detail. In the fourth quarter of 2025, Solstice recorded $987 million in net sales, up 8% year-over-year. In our Refrigerant & Applied Solutions segment, strong performance in our Nuclear business drove top line growth for the segment as well as continued strong demand for refrigerants due to the HFO transition that I mentioned on the prior slide. In our Electronic & Specialty Materials segment, similar to our full year performance, we achieved strong top line growth in Electronic Materials, driven by robust demand, reflecting continued momentum from the strength in our order book we reported last quarter. Adjusted stand-alone EBITDA for the fourth quarter of 2025 was $189 million, reflecting a 20% decrease year-over-year and an adjusted stand-alone EBITDA margin of 19.1%. This was largely due to anticipated transitory costs as well as the impact of the previously mentioned HFO transition in refrigerants. Our margin was also negatively impacted by the effects of plant downtime and under-absorption as we had anticipated what we discussed in our 3Q results. Finally, we reported net income attributable to Solstice of $41 million for the fourth quarter of 2025. The decrease year-over-year was in part due to higher net interest expense and noncontrolling interest. Turning to Slide 7. I'd like to discuss in more detail the key drivers of our year-over-year net sales and adjusted stand-alone EBITDA performance in the fourth quarter. Beginning with our net sales of $987 million for the quarter. Organic net sales growth was 6%, including approximately 2.5% from volume growth and 4% due to pricing. This primarily reflects volume growth and favorable pricing in both nuclear and refrigerants as well as volume growth in Electronic Materials. These increases were partially offset by lower volumes in Healthcare Packaging, Safety & Defense Solutions and Research & Performance Chemicals. Our net sales growth also included a 2% increase due to foreign currency translation. Turning to our adjusted stand-alone EBITDA of $189 million for the quarter. The decrease year-over-year was driven primarily by previously anticipated factors, including transitory costs as well as the contemplated plant downtime and under-absorption that we discussed during our third quarter earnings call. Additionally, the shift in refrigerants product mix, including the effect of imported product mix, impacted margin. While this transition results in year-over-year margin decline, we remain confident in our continued leadership in the space and the long-term trajectory of our refrigerants business. Specifically, we are encouraged by the significant increase in demand for our low global warming potential refrigerants for stationary applications due to the ongoing regulatory transition towards next-generation HFO solutions and expect to see long-term margin tailwinds as the aftermarket grows. As we will discuss shortly in the outlook section, we believe most of these near-term impacts are behind us, and we fully expect to return to an approximately 25% EBITDA margin here in the first quarter of '26 and beyond. Turning to Slide 8. I'll now discuss the results in each of our 2 segments in more detail, beginning with Refrigerants & Applied Solutions. Overall, the segment achieved $710 million in net sales for the fourth quarter of 2025, reflecting 10% growth year-over-year. This growth is composed of 8% organic net sales growth and 2% increase due to foreign currency translation. The segment posted $190 million in adjusted EBITDA for the fourth quarter of 2025, down 25% year-over-year and adjusted EBITDA margin of 26.8%, down 1,225 basis points year-over-year. As mentioned previously, this decrease was primarily driven by anticipated transitory costs and shifts in stationary refrigerants product mix. Additionally, EBITDA was negatively impacted by plant downtime and under-absorption, including in health care packaging due to anticipated customer destocking. These impacts more than offset favorable pricing and volume growth in the segment. Looking at performance for our subsegments, Refrigerants net sales increased 20% year-over-year to $367 million, driven by both favorable pricing and volume growth. Our refrigerants business performance is supported by its strong aftermarket presence as well as the diversity of end markets, including data centers, which continues to see accelerating demand. In Nuclear, net sales of $111 million represented growth of 39% year-over-year. This significant year-over-year sales growth was driven by both favorable pricing and increased volumes, while our backlog remains robust. Building Solutions & Intermediate net sales were $181 million, down 5% year-over-year. Although continued softness in the construction market impacted performance, we remain focused on driving LGWP solutions and on continuing our strong operational execution to ensure we are well positioned to serve our customers upon a return to more normalized demand in key end markets. Lastly, Healthcare Packaging had $52 million in net sales, down 25% year-over-year. The decline was driven by anticipated customer destocking during the quarter. We are encouraged by recovering order patterns seen so far in 1Q that we will believe indicates this destocking is largely behind us. Now turning to our Electronic & Specialty Materials segment on Slide 9. The segment achieved $277 million in net sales for the fourth quarter of 2025, reflecting 4% growth year-over-year. This growth is composed of 2% organic net sales and a 2% increase due to foreign currency translation. The segment posted $51 million in adjusted EBITDA for the fourth quarter of 2025, down 11% year-over-year and adjusted EBITDA margin of 18.4%, down 294 basis points year-over-year. The decrease was primarily driven by the previously mentioned plant downtime and anticipated transitory costs. Looking at the performance of our subsegments, Electronic Materials net sales increased 19% year-over-year to $112 million due to volume growth driven by strong demand. We continue to invest in capacity expansion for electronic materials to ensure we're well positioned to capture growth from secular trends for semiconductors, AI and data centers. Safety & Defense Solutions had $43 million in net sales, down 10% year-over-year. This decrease was due to lower volumes as a result of order timing during the quarter. We continue to anticipate long-term growth in this business, including strong performance in 2026, and we are investing in capacity expansion to support growing market demand for our Spectra line of solutions. Finally, Research & Performance Chemicals net sales declined 3% year-over-year to $121 million. This decline was primarily driven by a softer demand backdrop, particularly in our Specialty Additives product offerings. Moving to Slide 10 to discuss Solstice' balance sheet and capital management. As David discussed earlier, our strong balance sheet and cash flow generation continue to enable financial flexibility. Our capital expenditures for the full year 2025 were $408 million, a 38% increase compared to the prior year period due to planned increases in capital spending to drive long-term growth. We remain focused on reinvesting in the business to unleash growth in the high-return areas such as our recent announcement in Electronic Materials and Spectra. Adjusted stand-alone EBITDA less CapEx for the full year 2025 was $549 million, a 21% decrease compared to the prior year, driven by higher capital expenditures and the decline in stand-alone adjusted EBITDA. Cash conversion finished the year at 57%. Turning to our capital structure. We have maintained a conservative leverage profile and strong liquidity position. As of December 31, 2025, our long-term debt was $2 billion, and we had cash and cash equivalents of $534 million, resulting in net debt of approximately $1.4 billion and a net leverage ratio of approximately 1.5x based on our full year 2025 adjusted stand-alone EBITDA. As of December 31, 2025, we also had $1 billion of availability under our revolving credit facility. Combined with the cash on our balance sheet, this results in approximately $1.5 billion of total liquidity. Our capital allocation priorities will continue to guide how we deploy capital. As a reminder, these include: first, investing in high-return organic growth projects, maintaining a strong balance sheet and strong liquidity position, accelerating growth through selective M&A and returning excess capital to shareholders. As David mentioned earlier today, we were pleased to announce a quarterly dividend of $0.075 per share, delivering on our commitment to initiate a regular dividend at a conservative level. Turning to Slide 11. I'd like to discuss our outlook and financial guidance for both the full year and first quarter of 2026. For the full year 2026, we expect to deliver net sales between $3.9 billion and $4.1 billion, adjusted EBITDA between $975 million and $1.025 billion and adjusted diluted earnings per share between $2.45 and $2.75. Additionally, we expect capital expenditures between $400 million and $425 million. Our outlook for the full year assumes a stable macroeconomic environment as well as the estimated $30 million of revenue impact from our final nuclear loan return that David mentioned. Additionally, we expect an approximately $30 million cost impact from TSAs. You can find additional full year 2026 modeling considerations in the appendix to this presentation. In order to provide additional insight into our first full quarter as a stand-alone company, we are also today providing guidance for the first quarter of 2026. We expect to deliver net sales between $935 million and $985 million and adjusted EBITDA between $235 million and $245 million, which implies an adjusted EBITDA margin of approximately 25%. Our outlook for the first quarter assumes continued momentum in Refrigerants, Nuclear and Electronic Materials. It also reflects a sequential increase in margin on the roll-off of certain costs. And finally, it assumes a year-over-year margin headwind primarily due to refrigerants mix, reflecting a continuation of the dynamics discussed today relating to the HFO transition. Finally, given the robust interest and the exciting growth outlook for our nuclear business, we do plan to host a webinar later this year to talk in greater depth about this business. I'd now like to pass it back over to David for some closing remarks.

Please turn to Slide 12. With strong performance in 2025 and accelerating momentum throughout the fourth quarter, we are confident that we are well positioned to deliver on our full year 2026 guidance. As we have transitioned to a stand-alone company with an independent strategy and refined operating model, we believe we are in the early days of unlocking Solstice's full growth potential. As we discussed today, Solstice is well aligned to strong secular growth trends such as nuclear, advanced computing, data centers and defense spending, and we are prioritizing investments in these compelling areas as part of our differentiated growth strategy. Given our strong financial position, we are able to invest high-return capital in these businesses to capture this growth while also initiating returns of cash to shareholders. Finally, guiding all of these decisions is our rigorous focus on safety, operational excellence, durable margins and return on capital. We are incredibly excited about the significant opportunities for growth ahead, and we are confident that our market leadership and differentiated technology will enable us to deliver meaningful value creation in the months and years ahead. We look forward to sharing additional updates throughout 2026. With that, we are now happy to take your questions.

[Operator Instructions] Our first question today is coming from John McNulty from BMO Capital Markets.

Congrats on a great start. Looking forward to more going forward. So I guess I wanted to start out with a question on the nuclear platform. When we look at kind of what's happened over the past few years in terms of demand, you can see pretty steadily both the spot and the contract prices have gone up in some of the data that's out there at least. I guess can you help us to think about how pricing may flow through this business for you looking out over the next few years?

John, thanks for the question and the comments. The nuclear business, obviously, spot -- there is a spot pricing market, and you can track that spot pricing market. It has gone up substantially. since we've restarted the plant in 2023. And if you look at our backlog through 2030, we do lock in contract pricing for that. So as new orders continue to come in, it continues to come in at incrementally higher prices as they align with the market and the tight supply-demand dynamics. Our backlog is -- can be anywhere from 3 to 5 years, and then we have a spot market where we'll keep a little bit of capacity for the open market. which obviously gets premium pricing. So when you combine all those factors and you look through 2030, you'll just see incrementally growing pricing as the demand and the spot market continues to increase, which it's shown over the last couple of years and through our contract pricing through 2030.

I would just add the double-digit earnings growth CAGR from '26 to '30, that certainly pricing is a component of that.

Got it. Okay. Fair enough. And then maybe just as the follow-up, I guess, can you give us some at least preliminary thoughts around the commentary that came out last night around the potential to expand capacity? I guess, can you help us to think about the permitting process and maybe potentially just the scale that you're considering just given kind of what you see in terms of overall demand from your customers? Is it something that could be as big as a 50% capacity expansion or even maybe bigger than that? I guess can you help us to frame that a little bit in terms of how you're thinking about it going into the look at the -- with your EPC partner?

Absolutely, John. The way we're looking at it is really First, starting with conversations with customers right now on what that demand profile is going to be in the future. Obviously, it's an incredibly tight market. You've heard our current administration talk about 400% increase in nuclear energy output to 2050. And then if you peel back the onion even more, there are currently 75 to 77 new nuclear reactors being constructed -- with another 100-plus announced that they will be constructed. So we're trying to take all of that new demand into account. And with our return on invested capital profile that we need, we want to make sure we're aligned with what that customer need is and what that capacity need is going to be, obviously, especially being the only converter in the United States. So I mean, I don't want to not answer your question. At minimum, we'll continue to debottleneck -- but with the engineering work that we're doing, it would entail potentially brick-and-mortar new capacity that could be significant. But we need to tie in the customer demand out past 2030 and what that looks like with all this new construction that's happening. And then obviously, we work closely with the DOE to ensure that's aligned as well. So as soon as we get better clarity on what that demand is and what that pre-engineering work looks like, we'll certainly share it. I would tell you, though, that initial conversations with customers right now are very positive.

Our next question today is coming from Kevin McCarthy from Vertical Research Partners.

With regard to your refrigerant sales of $1.5 billion in 2025, can you comment on how your mix of HFOs versus HFCs evolved and what you're expecting along those lines for 2026, please?

Sure. I'll start, and I'll certainly have Mike and Tina jump in. We have seen over the last couple of years, a continued evolution of our product mix from HFCs to HFOs. We are now stronger in HFO sales than HFCs. I believe that number was 60% HFOs. And if you look out over the next couple of years, I would say we expect it to get to approximately an 80-20 split of HFOs to HFCs. There will be a continuing need of HFCs, especially in the aftermarket, as you can imagine, as well as our blends. But Tina and Mike will certainly have you add color.

Yes. Just to build on what David said there. If you go back to our Investor Day, we had guided to greater than 60% HFOs, less than 40% HFCs. Obviously, we're seeing, as David mentioned, significant momentum, particularly as you go into the second half of this year. And as you well know, 454B and the uptake there has driven a lot of that. So we have that as well as some of the new data center demand, which continues to accelerate. So overall, continuing to see a very nice mix shift there.

Great. And then if I may come back to the UF6 business. Maybe a few questions there. How did your backlog trend in the quarter? And I think you made a comment that you anticipate a $30 million sales impact from the loan return. It sounds like that's kind of a one-off event. But perhaps you can just comment on how you would expect your sales volume to trend in 2026, maybe gross and net of that loan return, please?

Yes. So obviously, that loan return goes back to when our plant was idled. We had been on the receivership of loans to keep our customers in production. And now this is the final of the loan payback. If you were to look at 2026, even with the loan payback that occurs of that $30 million, we still anticipate kind of a low to mid-single-digit growth rate in nuclear. So even despite that headwind, we're still going to grow. And then obviously, to your point, it's kind of a one-timer for '26. And beyond that, those loans are all repaid and then it's full production growth in that double-digit EBITDA CAGR that Tina referred to.

And I would just add there that our backlog is in excess of $2 billion, and we have good line of sight through 2030. And as we've mentioned before, about 10% of that would be open for spot sales at a favorable spot pricing right now.

Next question today is coming from Josh Spector from UBS.

Kind of a similar line of thought here. Just not sure if you can get a little bit more granular on the US 6 pricing in '26 and '27. -- understanding there's backlogs and pricing will take time. But will there be any increase in contract pricing in '26 versus '25? Or is that all longer dated? And that $30 million of loan repayment, can you size that in terms of EBITDA?

Yes. So Josh, I'm going to -- I'll answer it as best I can without obviously sharing customer pricing. The orders that we're shipping in '26 are probably orders that have come in, in that 2023, 2024 time frame. So if you look at -- and a good guide point could be, if you just look at spot pricing over the last few years, you've seen incremental step-up in pricing, and that's probably directionally close or reflective of our contract pricing. So every year that our backlog continues to ship, it's going to be incrementally improved pricing from how those contracts were set up when we received those orders. There is inflection points in our pricing that cover inflationary aspects. So we do get increases on top of that from that regard. But just our backlog to help maybe give a constructive outlook on it. It gets incrementally better through 2030 on a pricing standpoint as the market continues to increase on its market pricing.

Okay. And the EBITDA impact of the $30 million loan repayment?

Well, we don't give exact EBITDA in our subsegments, but we have talked about the margin profile is similar within our RAS segment. So I think it would be fair to estimate around a $10 million impact in EBITDA for 2026.

Our next question is coming from Arun Viswanathan from RBC.

I guess I just wanted to ask about refrigerants. We've gotten some questions on, I guess, the OEM inventory backlog. Maybe you could just address that and I guess how that plays into your outlook for HFO growth in '26. Are you still kind of catching up to some prior shortages? And -- or do you see that as a potential headwind as you move through the year?

Yes. Thanks for the question. We -- the shortages that occurred earlier in 2025 are, by and large, well behind us. We feel really confident in our supply chain moving forward. And then with our outlook for 2026, we really feel confident in our growth outlook and everything we're seeing. And as you keep in mind, it's -- we have an OEM business and then almost half of our business is automotive. And then at a macro level, half of our business is aftermarket. And now we're seeing really strong data center growth in refrigerants. So when you couple all that together, we feel really good about the growth aspects of refrigerants. We feel very good about the stability of supply chain and being able to maintain excellent service for our customers moving forward.

Okay. And then just on the electronic materials side, it sounds like you have a relatively robust outlook there. Is there a way you can maybe describe what you're seeing by end market or by maybe product line? Where are you seeing the most strength and potential for upside?

So I'll give a higher-level look, and I'll certainly have Tina maybe provide some additional commentary. As we look at the demand for leading-edge nodes, it's really been remarkable. And our sputtering targets with our copper manganese sputtering targets are just really an excellent and preferred solution as you get down to 3 nanometers, 2 nanometers and really below 7 nanometers in general. So we feel great about the demand of our electronics business. We feel really good about memory as well. That demand is very strong, as you can imagine. So overall, this is driving the acceleration of our CapEx investment in our Spokane manufacturing site. And that's in effect to ensure we can keep up with the demand profile throughout the rest of the decade. Tina, any other commentary?

Yes. I think the demand signals that we're seeing absolutely reinforces the decision that we made to expand our Spokane facility. In terms of the other businesses, Safety & Defense Solutions, we made another announcement there. We see a strong growth profile this year for that business. And then for Research & Performance Chemicals, part of that business, our Specialty Additives business is related to construction. And this is where we've taken a more conservative view. We're not expecting a significant improvement in the construction.

Our next question today is coming from Hassan Ahmed from Alembic Global.

David, I know there are a lot of moving parts around this, but I'm just trying to reconcile the Q1 guidance range you guys gave with the full year 2026 guidance. I mean, very simplistically, if I sort of sit there and take the midpoint of your Q1 range, call it, $240 million in EBITDA, I mean, I come up with $960 million full year. If I go to the high end, that's $980 million and the midpoint of your 2026 guidance is $1 billion. So I mean, as I sort of hear your commentary, a lot of sort of growth kicking in, a lot of the one-offs that you guys saw that compressed the margins in Q4 are being reversed in Q1. And I understand there's seasonality and other factors as well. But could you talk a bit about -- and I know you touched on this a little bit earlier, some of the headwinds and the tailwinds that go into that bridge from, call it, Q1 to full year 2026.

Sure. I'll kick it off, and I'll turn it over to Tina. One of the 2 biggest areas that are really more of a '26 onetime situation is our continued transitory costs from the split with Honeywell and the TSA agreements we have in addition to the nuclear piece. And Tina, why don't you just kind of walk through some of those transitory costs that are kind of negating some of the really exciting growth aspect that we have.

Yes. As we mentioned, in terms of the second half of the year, we had some transitory items the second half of '25. Specifically, it was like an FX hedge that Honeywell had place. We unwound that in October. And then as we stood up a logistics center from Honeywell, we had additional cost rollover from that. Specifically for first quarter, if we just look at the year-over-year margin decline, there's really a couple of things. One is the stationary, the fact that there's still more OEM sales. The [ 454 ] did not really kick in until second quarter of last year. So there's still some impact from that. Our corporate expenses have ramped because we were -- we really didn't stand the organization up until the second half of last year. And then finally is the TSAs that David referenced. And we started to incur those in November and December. And if you recall, this is roughly $30 million. And it tends to be a little bit heavier first half as we do all the IT transitions versus the second half. And then I'd say just in terms of just some comments around 2026, we do see, as you alluded, strong growth in our nuclear business, electronic materials, refrigerants, defense. We've taken a more conservative stance on construction. We see that we can likely cover price, any inflation through price, slight tailwind on FX and then the transitory items that we spoke about. And then the nuclear loan repayment, we already mentioned that's roughly $30 million of impact. So that's kind of how we're seeing the year shape up.

That's very helpful. And as a follow-up, just around capital allocation. I know you guys just instituted the dividend policy. But broadly speaking, I know you guys are new in the public domain and maybe a little sort of cautious around M&A and the like. But how are you thinking about M&A, particularly in light of some of the run-up in materials, chemical valuations that we have seen over the last couple of weeks, right? I mean, at times, it may be worthwhile to put aside how new you are as an independent company and maybe take advantage of cheap valuations, right?

Yes. I think it's a fair comment. I would say what we're really grateful for is to have such a strong balance sheet. And since our spin, we've really started to develop a robust M&A pipeline, quite frankly. So I think M&A in the future is certainly on the table. We do want to ensure it fits our strategy, it fits our return profile and the markets we serve. But we do feel like with our balance sheet, we are well positioned. And to your point, if there's a very attractive bolt-on asset that's available at the right price, I think it would be fair to say we might move faster than in typical circumstances.

Next question today is coming from John Roberts from Mizuho Securities.

It's [indiscernible] Rodriguez for John. A quick one on refrigerants. As you continue to transition from HFC to HFOs, like what should we expect the margin hit to be? -- essentially, like how should we think of the margin degradation as you continue to transition in that business?

Yes. The way I would think about it is short term because we do get higher margins in the aftermarket. So as we transition to HFOs, those are newer units most typically. So once they're in the market for a couple of years, then the aftermarket kicks in, and then that's where you will start to see the margin neutrality from HFCs. Having said that, as Tina mentioned, we went through that in 2025 and in the beginning of '26. But our anticipation is we'll start getting those aftermarket sales more robustly in the second half of '26. And then as that flows through, I think margin continuality comparatively to HFCs is very realistic.

Okay. And in terms of timing, like do you expect like your transition to be completed by the end of 2026? Or does that spill over into 2027? Like when do you expect your transition to be completely done?

Well, we expect the full transition to be done in early '26. And then it's -- the aftermarket should kick in from transitions that happened in the previous few years. And then obviously, in Europe, that transition happened several years ago. So they're completely transitioned over to HFOs. And then in early 2026, we should be complete.

Our next question today is coming from Duffy Fischer from Goldman Sachs.

First question, again, just around refrigerants. When you look at '26 and '27, is there any additional regulatory help for volumes in those years that would create an opportunity for HFCs to take -- or HFOs to take market share from HFC?

Duffy, I think the legislation is by and large, taken place. Europe is fully converted. The U.S. will be mostly converted. The only caveat with that is on commercial refrigeration. That still has not converted yet. So from a regulatory standpoint, if that gets accelerated, that would certainly accelerate the conversions in commercial refrigerations, but we're anticipating that to be over the next couple of years. So that could certainly be a tailwind. The other piece really would be Asia. There is talk that Asia will convert to HFOs by the end of the decade. We remain cautious that, that happens. But if it does happen as anticipated, that could be a huge tailwind for us.

Fair. And then could you size your data center business is growing rapidly in refrigerants. How big is data center as a percentage of your refrigerants business?

We don't split it out, Duffy. It's -- the way I would say it is it's growing rapidly. It's certainly a smaller piece of our business, but it's growing very fast. I think we referenced double-digit growth in our data centers. We are doing -- we can mostly split it out, but we don't have it 100% split out just because -- we're a step removed from the installation. So we haven't given a number yet, but that is something we'll continue to track and provide when ready.

Yes. And it's Mike. I'd be remiss not to add. We're really excited about data centers because we really attack it from 3 fronts at Solstice. We get a lot of questions around refrigerants. And obviously, there's a lot going on around next-gen refrigerant and cooling solutions. But you also have to remember on the electronic materials side of the house, what we're doing on the chip to get the heat off of the chip as well as our nuclear business sort of where we started the call. A lot of the nuclear energy is going to fuel data center growth. So we're really excited around if a lot of this data center growth comes to fruition, we attack that opportunity from really at least 3 different angles from an overall Solstice perspective.

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Mike for any further or closing comments.

Great. Well, look, we really appreciate everybody joining us today to discuss our fourth quarter results, and please follow up if you have any questions. Thank you, and have a good day.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.