Element Solutions Inc Q2 2026 earnings call

Good morning, thank you for participating in our second quarter 2026 earnings conference call. Joining me today are our CEO, Ben Gliklich, and CFO, Carey Dorman. In accordance with Regulation FD, we are webcasting this conference call. A replay will be made available in the Investors section of the company's website. Before we begin, I want to remind everyone that our announced merger with Solstice Advanced Materials remains subject to shareholder and regulatory approvals and customary closing conditions. As such, we will be limiting our comments on the proposed transaction to what has already been made available in public filings and will not be taking questions about the transaction. During today's call, we will make certain forward-looking statements that reflect our current views about the company's future performance and financial results. These statements are based on assumptions and expectations of future events, which are subject to risks and uncertainties.

Please refer to the earnings release, supplemental slides, and most recent SEC filings on our website for a discussion of material risk factors that could cause actual results to differ from our expectations and predictions. Today's materials also include financial information that has not been prepared in accordance with U.S. GAAP. Please refer to the earnings release and supplemental slides for definitions and reconciliations of these non-GAAP measures to comparable GAAP financial measures. It is now my pleasure to introduce our CEO, Ben Gliklich.

Thank you, Varun. Good morning, everybody. Thank you for joining. Before we review this record quarter, I'd like to reiterate our rationale for the announced agreement to merge with Solstice Advanced Materials. This proposed transaction unites our complementary competencies to better meet customer demands for scaled, broad strategic supply partners, while also increasing avenues to prudently invest our cash flows for growth and unlocking compelling synergies. Together, we stand to build an even stronger electronics portfolio across chip and PCB fabrication, packaging, and assembly, while accelerating investment in the commercialization of new advanced materials and other growth priorities. We will have a broader, highly differentiated value proposition in thermal management and front-end copper interconnect formation. The combined company will be a market leader in profit growth and cash flow generation with multiple high-growth businesses.

The over $180 million in cost synergy potential is real and actionable with clear additional upside over time. Integration planning has begun, and we're assembling a joint team of leaders from both of our businesses to ensure the organizations are integrated thoughtfully, and we fully capture the strategic and financial promise of the combination. Carey will lead the effort on our side, equipped with deep knowledge of our businesses and processes, as well as experience successfully leading many similar exercises over his tenure at Element. Our North Star at Element Solutions has always been shareholder value creation, and we've had a robust dialogue with our investors since this announcement and will continue to listen intently to their feedback. We work for our shareholders and value their input on important decisions such as this.

As today's results show, our organic path has tremendous momentum, and combining our business with Solstice should provide an incremental lever to deliver greater value than we otherwise would have. The stock's reaction to the announcement has been disappointing, and both ESI and Solstice recognize the need to show from a cultural as well as operational perspective that we can execute against this significant opportunity. The first test of that execution will be integration. Together with other leaders from ESI and our Board, I'll be very focused on working to ensure this integration is planned and executed to our standards for excellence and delivery. Turning to our second quarter results, Element Solutions posted a record quarter as organic growth accelerated in our electronics portfolio and the specialties business continued to deliver bottom-line growth despite a mixed backdrop.

Our results were enhanced by strong contributions from our recent acquisitions, which are performing very well. These results demonstrate the ongoing success of our strategy to penetrate the highest value, fastest-growing subsegments in our addressable markets and are a testament to years of work by our teams, collaborating across labs, manufacturing sites, applications facilities, and alongside our customers at their locations. We're growing with our customers, increasingly as a partner, working together to address their most pressing technical challenges. There are significant opportunities for our teams to improve value and use manufacturing processes, particularly as pockets of the electronic supply chain have become constrained relative to accelerating demand. In the second quarter, we delivered double-digit organic sales growth for the third quarter in a row and margin expansion when excluding the impact of pass-through metals.

Our profitable growth is happening alongside increasing investment in people, technology, and plans to support the future. Sales in our Electronics segment grew 20% organically as activity accelerated across our supply chain in support of the ongoing AI infrastructure build-out. Technical requirements in data center hardware and other high-performance electronics continue to increase, and our business provides critical enabling solutions across thermal management, power density, and advanced packaging applications, to name a few. We're seeing volume growth in the highest value categories across our end markets, from leading-edge semi and high-end circuit board fabs to device assemblers, and a strong pull for innovation to enable greater levels of device performance and manufacturing yield or throughput. This dynamic drove double-digit organic net sales growth in each of our electronics verticals.

As we discussed at our May Investor Day, we're making investments to meet the increasing demands of our customers, adding additional manufacturing capacity for several high-growth product lines, and increasing our laboratory footprint and innovation resources to remain on the leading edge. One of our largest focus areas has been Cuprion, where we're working to commercialize a differentiated new technology to solve several emerging customer pain points around thermal management, power delivery, and plating copper on challenging substrates. Our development partners working with this material are incredibly enthusiastic, which is evident in a growing commercial pipeline. We're actively sampling products from our first plant to qualify it through our customers, and we have high conviction in the opportunity in this market and urgency to establish incumbency with this technology.

Over the past quarter, we've made plans to increase throughput at our initial plant and increase the scope of our second site, which will be located nearby in California. Taken together, our capacity outlook for year-end 2027 is higher than it was entering the quarter. Beyond investments in organic growth, we continue to demonstrate the returns of prudent capital allocation into attractive adjacencies that bring value to our customers. The integrations of Micromax and EFC are going well. Both businesses are performing ahead of our plans for this year and contributed meaningful adjusted EBITDA growth in the quarter. It was both operational excellence and prudent capital allocation that led to the 27% increase in adjusted EPS we delivered in the second quarter. Carey will now take you through our second quarter business results in more detail. Carey, please.

Thanks, Ben. Good morning, everyone. On slide three, you can see a summary of our second quarter financial results. We delivered record quarterly revenue, adjusted EBITDA, and adjusted EPS. Organic net sales grew 15%, and constant currency adjusted EBITDA increased 33% year-over-year. Electronics organic net sales growth of 20% was broad-based. Each of the segment's verticals grew organically by double-digits, led by our semiconductor business, which was 31% in the quarter. Adjusted EBITDA margins, excluding pass-through metals, improved 120 basis points year-over-year to 27.8% this quarter, which was in line with the first quarter, despite significant sequential non-metal raw material inflation. The year-on-year improvement was primarily driven by product mix, with organic growth in higher-value product lines and partially offset by inflation in our specialty segment, as well as continued OpEx investment to support growth initiatives and fund above-target incentive compensation.

Building on that last point, if we exclude the above-target component of incentive compensation accruals in the quarter, driven by our outperformance relative to plan, OpEx in the second quarter would have been more than $10 million lower, and adjusted EBITDA margins would have been nearly 30%, which has been a long-term target for us. On slide four, we share additional detail on the drivers of organic net sales growth in our two segments. In electronics, 20% organic growth was driven by sustained investment in AI infrastructure and other high-performance computing applications. Demand remained particularly strong across semiconductor packaging, advanced PCB chemistries, and engineered assembly materials supporting data centers and power electronics. This was more than offset by strength in AI-related applications and continued customer investment in next-generation technologies.

Semiconductor Solutions organic net sales grew 31%, with improved order patterns for power electronics products and growing momentum in thermal interface materials for high power consumption applications, such as AI GPUs and CPUs. We also saw strong and growing demand for advanced packaging solutions from OSATs in Asia. Revenue growth for the products within this business was magnified in the quarter by the substantial year-over-year increase in precious metal prices that are inputs to many of these solutions. The Assembly Solutions business grew 18% organically, supported by broad demand for higher reliability solder paste in Asia, and further enhanced by growth in engineered preform materials used in data center applications. The Indian market continues to show robust growth for assembly as electronics manufacturing supply chain diversification continues. Circuitry Solutions net sales improved 15% organically, benefiting from continued demand for metallization solutions tied to AI infrastructure and high-performance compute.

We are supporting customers as they add capacity and are seeing traction with technologies that are critical to increasingly complex PCB architectures. Finally, this business is also benefiting from continued growth in Southeast Asia, where we have a strong and expanding presence. Micromax is not included in our organic net sales growth calculation but contributed approximately $130 million to reported sales in the quarter, roughly two-thirds of which is related to metals. The business continues to perform well ahead of plan and is growing revenue and adjusted EBITDA significantly on an ex metals basis. We are very pleased with these results and the progress of the integration. Turning to our Specialty segment, Industrial Solutions grew 3% organically in the quarter due to a modest return to growth in European industrial markets early in the quarter From global surcharges and price increases tied to rising raw material inflation.

This business has been restructuring its go-to-market and supply chain strategy over the last year. We are happy to see the strong execution beginning to play out. Our Offshore Energy Solutions business grew 1% organically, slower than Q1, driven by timing impacts and some disruption from the war in Iran. Finally, EFC Gases & Advanced Materials contributed $16 million of revenue in the second quarter. Demand for electronics, satellites, and electrical infrastructure applications remains strong, though this business is lumpier than our others. Commercial activity is very healthy, and we expect EFC to have a substantially larger second half sequentially, and we have good visibility into that. The EFC team is executing at a high level, growing wallet share with existing semiconductor and space customers, and winning new qualifications in both. Slide five addresses cash flow and the balance sheet.

Adjusted free cash flow for the quarter was $74 million, a strong increase sequentially and year-over-year. With metal prices relatively stable, we have seen the benefit of the higher earnings growth we are experiencing this year. We did continue to invest in working capital, albeit more modestly, as we continue to see increased volume demand across the business. The cadence of our cash generation is typically more second-half weighted, and we expect this year to follow a similar pattern assuming metal prices stay at current levels. On the capital expenditure side, we invested $28 million this quarter, bringing year-to-date investment to over $50 million. As we have discussed, we are accelerating investment in certain high-value product areas such as Cuprion and thermal interface materials for hyperscale customers, while at the same time moving aggressively on existing plant consolidation projects and our Industrial Solutions supply chain.

We now expect CapEx for the year to be roughly $100 million, which is on the higher end of the guidance range we provided last quarter, though it's still less than 3% of sales. These are high-returning projects with attractive paybacks that support long-term growth. Turning to the balance sheet, our net leverage ratio at the end of the quarter was 2.9x on a pro forma basis, including Micromax and EFC. Given earnings strength and expected cash flow, we anticipate reducing leverage to roughly 2.5x by the end of the year. With that, I will turn the call back to Ben.

Thank you, Carey. Our company is strong and well-positioned in attractive growth markets. In each of our businesses, we've identified opportunities and built strategies to deliver substantial profit growth through investment in people and capabilities over a multi-year timeframe. We pride ourselves on customer centricity. On this front, we're seeing the fruits of persistent investments in technical service capabilities, technology roadmap exchanges, and a focus on customer pain points where we can improve product performance or customer productivity. Organic acceleration in the first half, in particular, the sources of that growth, give us confidence in a strong year and momentum into 2027. Underlying demand in the high-end electronics market remains. The positions we've established in the fastest-growing, highest-value niches of these markets should serve us well.

As a result, we are raising our adjusted EBITDA guidance to a range of $690 million-$710 million for the full-year. This range reflects the trends we saw in the first half, combined with ongoing execution of our strategic roadmaps in each of our businesses while taking into account the one-time benefits of metal hedge gains realized in the first half of 2026, having recorded the associated costs in the second half of 2025. We expect third quarter adjusted EBITDA to be approximately $180 million, with demand conditions sequentially similar to the first half, taking into consideration some risk from raw material and logistics inflations that we may not recapture immediately through improved pricing and sourcing actions. We now expect 2026 adjusted EPS growth of approximately 20% on a full-year basis.

Element Solutions is executing very well. The proposed Solstice transaction is recognition of what we've done, what we're doing today, and what we're capable of doing in the future. From a foundation of remarkable predecessor companies like MacDermid, Enthone, Alpha, Micromax, EFC, Coventya, Kester, H.K. Wentworth, OM Group, Polytechnic, and Cuprion, we've built something bigger and greater than any of them could be individually. We don't forget the histories of those businesses, which are far longer than our own. Also that those businesses were built on the shoulders of others that came before them. We're immensely proud of this chapter, it is not the first, nor clearly will it be the last for our businesses.

For now, let me conclude once again by thanking all of our stakeholders for their continued support of Element Solutions, and in particular, our people who are entirely responsible for all of our success in the past and our potential in the future. With that, operator, please open the line for questions, and as a reminder, we will not be taking questions on the recently announced proposed merger with Solstice. Thank you.