Element Solutions Inc.

Good morning, ladies and gentlemen, and welcome to Element Solutions Q3 2024 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I will now turn the call over to Byron Gokarn, Vice President, Strategy and Integration. Please go ahead.

Good morning, and thank you for participating in our third quarter 2024 earnings conference call. Joining me today are our president and CEO, Ben Glicklich, and CFO, Kerry Dorman. In accordance with Regulation FD, we are webcasting this conference call. A replay will be made available in the investor section of the company's website. 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 our earnings release, supplemental slides, and most recent SEC filings for a discussion of material risk factors that could cause actual results to differ from our expectations and predictions. These materials can be found on the company's website in the investor section under news and events. 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 Glicklich.

Thank you, Veruna. Good morning, everyone. Thank you for joining. Element Solutions delivered strong results once again this quarter. Financially, operationally, and strategically, we executed well. Our multi-year effort to target the highest value and fastest growing segments of the electronic supply chain and position ourselves as key enablers of developing technologies is working. As the market has developed for our offerings, supporting high-performance computing, data centers, advanced packaging used in cutting-edge chip designs, and power electronics for electric vehicles, our revenue has grown along with it. And because of these emerging growth vectors, our electronics segment has outperformed sluggishness in more traditional electronics and industrial end markets this year. In the quarter, standout volume growth in wafer-level packaging and semiconductor assembly drove an acceleration in sales for the electronics segment, which grew 9% organically. Our advanced packaging applications and power electronics businesses accelerated sequentially as expected. Circuitry solutions also grew over 9% organically, driven by demand for data storage, certain EV applications, and circuit boards for high-performance computing. The electronics market overall, however, was not uniformly stronger in the third quarter. Smartphone sales growth did not accelerate as quickly as expected, and electronics for more industrial applications remained soft. in line with those markets. Our results are a testament to the business shifting away from some of its legacy drivers and towards emerging growth sectors. The combination of softening demand in Europe and lower revenue from metal price surcharges in the core industrial portfolio were headwinds for our industrial and specialty segment. Profitability, however, improved, and so did adjusted EBITDA from raw material cost actions and ongoing strength in our energy business, which grew sales by double digits at high incrementals. The businesses in this segment benefited from work we've done to improve them, whether through procurement, facility rationalization, or pricing actions. The impact of these actions translated into earnings growth in a soft market and should be even more evident when end markets inevitably rebound. Staying with our industrial and specialty segment, this quarter we announced the divestiture of our graphics solutions business. McDermott Graphics Solutions is a high-quality business with great attributes, that does not align with ESI's core businesses and operating model. This transaction is long-term growth, margin, and return on capital accretive. For example, the midpoint of our 2024 adjusted EBITDA guidance implies an average constant currency growth rate of 7% since 2019. X graphics, that rate increases to 8%. Transactions should be 230 basis points accretive to CRI. This transaction values the business at an attractive double-digit multiple, and given our legacy tax attributes, we should pay minimal taxes on the $325 million of gross proceeds. Pro forma for the transaction, our net leverage ratio would have been two and a half times this quarter. Transaction is expected to close in late 2024 or the first half of 2025, pending closing conditions and regulatory approvals. Taken together, we've repositioned the company through innovation acquisitions and divestitures for faster profit growth. With the support of electronics market, our confidence in the long-term algorithm for ESI is increasing. We're uniquely positioned with decades of technical expertise across the breadth of the electronics manufacturing supply chain to support OEMs and fabricators as they increasingly rely on unique material sets spanning the circuit board, the chip, and the variety of attachment technologies which connect them to deliver computing performance improvements. Our investments in new technologies from advanced packaging and die-attach offerings to nanocopper, as well as new applications in research centers in Southeast and subcontinental Asia, support our enhanced profile and mindshare with specifiers, qualifiers, and customers in our supply chain. With this invigorated and focused organization and dry powder to capitalize on strategic opportunities, Element Solutions is well-positioned for 2025. Carrie will now take you through our third quarter results in more detail.

Thanks, Ben, and good morning to everyone. I am now on slide three, which provides an overview of the third quarter financial results. We delivered 6% organic sales growth, translating to constant currency adjusted EBITDA growth of 8%. Despite difficult comparisons, gross margins in both segments improved year over year, as we benefited from mix in electronics and additional raw material favorability in INS. Year to date, Incremental margins for the business remained well ahead of our targeted 30% to 40% range. These margins did moderate as expected in Q3, given year-over-year comparisons on the OPEX line, primarily due to incentive compensation accruals and other variable spend items, as the business continues to perform well against plan. In the third quarter last year, we were accruing below target incentive compensation, and this year we are above. Together, that accounts for over 100 basis points of year-over-year impact to adjusted EBITDA margins in the quarter. Electronics grew 9% organically, an acceleration from 7% in the second quarter, led by growth in advanced packaging solutions, a sequential rebound in power electronics, continued demand for high-value advanced circuit board metallization chemistry, and growth in memory disks for cloud storage markets. Net sales in our industrial and specialty segment were flat organically. The strengthening U.S. dollar negatively impacted total company net sales and adjusted EBITDA in the quarter by roughly 1% and 2%, respectively, year over year. Constant currency adjusted EBITDA grew 10% in electronics, driven by the mixed benefits of higher sales in semiconductor and circuitry solutions. In INS, constant currency adjusted EBITDA grew 4%, with improvement in offshore margins and input cost favorability offsetting softer volumes in industrial service treatment. Excluding the impact of the $109 million of pass-through metal sales in assembly solutions, our adjusted EBITDA margin would have been 27% in the quarter. This is flat year over year, but up when excluding the compensation accruals discussed earlier. On slide four, we share additional detail on the drivers of organic net sales growth in our two segments. Growth in the electronic segment was robust in the quarter as the higher end electronic supply chain continued to improve. Assembly grew 4% organically, improving from 2% growth in the second quarter. The growth was in Asia, particularly India and China, where solder paste volume demand increased given electronics assembly activity in the region. Volumes for core assembly products continue to decline in Western markets due to automotive and broader industrial market conditions. Circuitry Solutions sales grew 9% organically, despite the softer-than-expected smartphone market. This result reflects a mixed shift in our business towards emerging electronics applications. This is a positive development. which gives us confidence that the next driver of high-end electronics market growth is emerging. Nonetheless, we still believe smartphones and other legacy markets will continue to grow over the medium term as new AI-enabled devices drive refreshed cycles. Semiconductor solutions grew 26% in the quarter. Last year, in the context of our Viaform transaction, customers built up inventory in the second quarter ahead of closing, which made the third quarter an easier comparison this year. When adjusting for this timing-related item, the semiconductor business still would have grown in the mid-teens due to improved utilization at major OSAPs, high demand for wafer-plating chemistry at Asian semi-fabs, and certain new fabs that came online in the quarter. We see a runway for several years of double-digit organic growth in these product areas. We are gaining market share on legacy nodes and seeing a surge in demand from emerging advanced packaging applications and other innovation we are bringing to market. Finally, as expected, the business benefited from sequentially higher power electronics sales for EV customers due to greater production rates at existing customers and new business wins. In industrial solutions, a little over half of the 3% sales decline was due to reductions in surcharges for commodity metals such as palladium and nickel. As has been the case for most of this year, these metal price swings negatively impacted headline sales, but the higher mix of value-add, high-margin chemistry revenue is beneficial to margins. Automotive demand weakened over the course of the quarter as production slowed. Our expectations for revenues in the fourth quarter reflect this trend. The continued margin favorability and cost discipline should partially offset the impact to the bottom line. Energy solutions remained a bright spot in the INS portfolio, with organic sales growth of 10%. The energy business should continue to operate at similar levels given ongoing drilling activity. Turning to slide five. We generated $86 million of free cash flow in the third quarter and remain on track to deliver $280 million to $300 million for the full year. Inventory levels improved and overall working capital increased modestly, reflecting sequential sales growth. CapEx was in line at $13 million as we further progressed strategic capacity expansion projects and application development initiatives in growth geographies. Our full-year expectations for cash interest, cash taxes, and CapEx remain largely unchanged. Our trailing 12-month net leverage ratio at quarter end was 3.0 times. The strength of our balance sheet was highlighted earlier this month when we repriced the interest rate on our term loans to SOFR plus 175, which we believe are the tightest levels that high-yield credits have been able to achieve in the current market. In conjunction with this repricing, we paid down $100 million of term loan debt. Overall, we believe we have navigated several years of elevated interest rates with only a modest impact to cash flows. When we include our expected 310 million plus in proceeds from the graphics sale, our pro forma net leverage ratio would have been 2.5 times at quarter end. As Ben mentioned, we are in a great balance sheet position with meaningful capacity for future value enhancing capital deployment. Now we'll turn the call back to Ben to discuss our outlook. Ben?

Thank you, Gary. We're on track for a record year in 2024. Our competitive position in electronics is as strong as it has ever been as reflected by record segment revenue in the third quarter, even though recovery in these end markets has been mixed through the first nine months of the year. We expect broader base growth in our electronic end markets in 2025. Conversely, industrial end markets are weaker than we expected a few months ago, and our fourth quarter outlook for the INS segment reflects what is typically a seasonally softer period of activity. It remains to be seen whether interest rate cuts in the US and Europe as well as Chinese stimulus will prove to be a tailwind for large industrial sectors like construction and automotive that have remained weak for much of 2024. Our narrowed full-year 2024 adjusted EBITDA guidance range of $535 to $540 million retains the midpoint of our prior guidance and translates to healthy mid-teens constant currency growth this year. While there's macroeconomic uncertainty as we look out to 2025, We're confident in how we've positioned the business for the next several years. We're a critical material solutions partner to our supply chains with broad applications expertise to address a diverse set of growth areas, many of which are proving resilient against the macro backdrop. We have a focused strategy to invest behind and grow our businesses and meaningful opportunities to optimize costs and processes across the company, which we are pursuing. Our balance sheet is in great shape and gives us a great deal of flexibility. In short, we're well positioned for another record year in 2025. In closing, I'd like to thank all of our stakeholders for their continued support of Element Solutions, and in particular, our exceptional and highly engaged people around the world who were responsible for another strong quarter that laid the foundation for more to come. Before we begin the Q&A session, I want to acknowledge the recent media speculation around our business. We don't comment on rumors, and we therefore ask that you keep your questions focused on our quarterly results and outlook. Now let's begin the Q&A session.

If you would like to ask a question, simply press star followed by the number one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. We advise you to please limit to one question and one follow-up. We'll pause for a brief moment to compile the Q&A roster. And your first question comes from the line of Josh Spector with UBS. Josh, your line is now open.

Yeah, hey, good morning, guys, and congrats on a solid quarter. I just wanted to ask on electronic trends more broadly. So, you know, if I look at your results through the year, it looks like we've seen some acceleration on a two, three-year stack over the last couple of quarters. Obviously, there's been some moving pieces and some timing effects here, but wondering if you could acknowledge in terms of how that impacts your view on the progression into 25, you know, are we seeing an accelerating trend continue into fourth quarter into next year? Would you agree with that view or is there some different take in terms of how you characterize it? Yeah, thanks for the question, Josh.

The electronics market this year has not been uniformly improving. And so when you think about expectations entering the year, there were optimists around the smartphone market getting better. Obviously, the auto market broadly is worse, and that's a big electronics driver. And so what we've seen in our business is traction in some of these emerging technology trends that's offsetting some of that broader weakness. And as we turn to 2025, indicators or early forecasts are for more general improvement in the electronics market, right? So as we sit here today, the forecast for MSI is, you know, somewhere between high single digit and double digit growth in 2025. Recent research we've seen shows PCB square meters growing in the mid to high single digits. That's a better backup than what we're seeing in 2024. And so, yes, we'll see a seasonal deceleration or a seasonal impact in Q4 in electronics this year. But we've got reason to be pretty optimistic for, I call it an acceleration, from broader electronic health in 2025.

Sorry, I'm muted. So if I could just follow up on your comments on assembly and advanced packaging, or sorry, advanced packaging, not assembly, around your comments around acceleration and share gains there. Are you seeing that within your semi segment, within circuitry? And can you characterize just broadly how much that's impacting your portfolio in the most recent quarters here?

Yes, our the beauty of this business is that a trend like innovation in package design and advanced packaging impacts all three of our electronics businesses. What we sell in via form and wafer level packaging in the semiconductor business plays into that. The high end circuit boards are enabling or effectively becoming the base onto which multiple chips are assembled. And then our assembly business at its leading edge also plays into advanced packaging. So the traction and trajectory of advanced packaging is lifting our broader electronics business. It just happens to be a small slice, for instance, in our assembly business and a bigger slice of our semi-business, and you can see the divergence in the results accordingly.

Okay. All right. Thanks, Ben.

Thank you, Josh.

Your next question comes from the line of John Roberts with Mr. John. Your line is now open.

Thank you. Just to follow up on that, how big would you scope advanced packaging to be if you combined the impact across the three segments?

Yeah, you know, the advanced packaging term is somewhat generic. And so, you know, it's hard to capture it precisely because I think it means different things to different people. But it's, you know, it's a hundred, couple hundred million dollars of revenue at this point.

um you know and and growing very rapidly okay and then um circuitry outperformed the market i think during the quarter um china evs i think were particularly strong during the quarter because of the stimulus program they had i think that's been easing so um how much does that inflect as we go into the fourth quarter in circuitry

Yeah, the circuitry business has, we believe, outperformed its market, and there were three things we pointed to. China EVs being one, where certain of our final finish applications are really doing very well in the Chinese EV market, but also data storage and circuitry for high-performance compute, which seem to have real legs as we look ahead. So Again, I think the seasonality that we're pointing to in the electronics business is pretty normal, and the forward-looking indicators for 2025 that I talked to in the first question give us confidence for another record year in 2025 and continued strong results across the electronics business, inclusive of circuitry.

Thank you.

Our next question comes from the line of Mike Harrison with Seaport. research partners. Mike, your line is now open.

Hi, good morning. Thanks for taking my questions. Ben, it sounds like some large chip makers are talking about a shortage of advanced packaging materials, at least near term. Does that point to a need for you to spend more on additional capacity in the coming quarters? And as you think about CapEx for 2025, And the other piece of that question is, does tighter supply of advanced packaging materials point to higher pricing for some of your leading edge technologies?

Yeah, thanks for the question, Mike. So, our existing footprint for our core products is more than adequate to support significantly increased volumes, you know, across the electronics complex, inclusive of what we do in advanced packaging. we are working very quickly to scale up Couprion manufacturing capability, for example, and making good progress there. But that's really a new product we're introducing. So we have the capacity to support that market. And, you know, I don't believe that those capacity constraints you're pointing to are suggesting are indicative of an issue on our side. They are indicative of really robust demand, which you can see other indicators of when you just look at pricing, for instance, for leading-edge chips. And that to us is a real tailwind and, again, gives us further conviction in the growth opportunity here. To the second part of your question around pricing, we're actively, I would say, winning more than our fair share of the new nodes and in discussions on winning legacy nodes and being backwards integrated. We've got a great value proposition. Our margins in advanced packaging are healthy. There are incremental pricing opportunities from time to time, but I wouldn't say that there's a uniform underpricing of our capability, and I think our margins support that.

right thanks for that and then uh you noted that there is some acceleration going on in power electronics and it sounds like some of that some market recovery but it also sounds like you're uh winning additional business can you talk about how you see that power electronics opportunity uh maybe evolving or playing out over the next few quarters yeah thanks for the question mike the power electronics business

was soft in the second quarter we pointed that out and we expected it to accelerate in the third quarter and indeed it did that's a product of several things some of our core customers were ramping production rates and we've won new pieces of business we've got a really exceptional capability in power electronics a differentiated product and value proposition that enables performance reliability range for leading electric vehicles and because of the product life cycles of certain automotive OEMs, it's taken some time to get traction in their supply chains, and we're seeing that today. So the pipeline for our power electronics capability is very, very strong, and the wins have been strong, and we're starting to see them contribute to the P&L. Those are wins with Chinese OEMs, Western legacy OEMs, and some of the emerging Western OEMs as well. There's a very bright future for what we do in power electronics. Notwithstanding a weak EV market, that business is growing very nicely.

All right. Sounds good. Thanks very much.

Thank you. Your next question comes from the line of Pavesh Lodaya with BMO Capital Markets. Pavesh, your line is now open.

Good morning, Ben. Just following up on your comments you made in electronics, uh morning uh we have seen consultants calling for roughly twice the growth next year for some metrics like msi and all now if we look at this year i realize we have via form in some other moving pieces but we'll see around 15 ebitda growth for the electronics segment with your comments on acceleration in growth and and putting some of these consultant estimates in msi and pcb markets in place do you think next year we see a similar growth profile Yeah, thanks for the question, Babesh.

It's early to be talking about guidance or even shadow guidance for 2025. Our commitment and goal every year is to outperform our end markets. We've demonstrated an ability to do so. The data points you just pointed to, we are aware of. We spoke to them earlier. And that does give us confidence and conviction for a very good year next year. But it's early to put hard numbers to it. That's where I would, how I would think about that. But the trajectory is good. And furthermore, you know, this isn't just a 2025 trend. tailwinds and the dynamics in the market that are supporting those estimates for 2025 are long tailed and durable. And so our outlook isn't just for a strong 2025, but from several years of solid growth in electronics.

Got it. And then have you seen a change in your custom base or market share for advanced packaging? Are you growing volumes as your existing customers ramp up, or are you seeing some new business wins outside your current base?

Yeah, so what's interesting in the way that the market has evolved is as we've moved from monolithic designs where the computing gains were from scale, right, transistor scale, to heterogeneous packaging, the there's been no standardization, right? So people are coming at breakthroughs or pursuing breakthroughs in computing power through multiple unique designs. And so you've got designs coming from the semi-fabs who are moving into packaging. You've got designs coming from OSATs. You've got designs coming from OEMs and hyperscalers. And that gives us a really solid seat at the table because materials requirements are different when you're looking at non-standard designs. And so I would say that our mind share with qualifiers and specifiers is greater than it's been. And that OSAT segment of the market is growing tremendously. So yes, we're seeing growth in existing customers, but we're seeing new customers and we're having dialogues with new third parties, right? New specifiers in ways we haven't in the past. Our share is our share of the overall market is growing as this segment of the market is growing faster than the overall market. And I think certainly our mind share is growing even faster than that. And that's a leading indicator.

Thank you.

Your next question comes from the line of Steve Byrne with Bank of America. Steve, your line is now open.

Yeah, thank you. With respect to your auto and market, Ben, I'm specifically referring to the ICE vehicles. Are your sales effectively moving just in line with production rates? Or can you comment on whether there's any kind of a shift within the new models? Is there any increased metallization of body parts and so forth? Could there be a shift away from that? Just curious on that end market for you.

Yeah. Our ICE auto business is not a direct one for one with units. There are share gain opportunities that we've been pursuing in certain geographies where we've been underrepresented. And we've had some good success there. There are other applications like breaks where we've been winning quite a bit of market share. And then occasionally there are fashion trend changes where things move from chrome look and feel to paint. And when that happens, we lose some value. So it's not a direct correlation. We feel as though our share of our addressable market is solid and improving. We've been committed to this market. We've been consolidating this market. And we see an opportunity when that market inevitably recovers for that to propel pretty strong earnings growth in that segment. Okay.

And then it looks like your COGS were up 10% year over year. You highlighted higher pricing for metals. Is that the bulk of that or is any of the incentive comp in that? But you also mentioned some procurement rationalizations in your remarks, Ben? Is that a meaningful offset, and what are you doing there?

Yeah, so most of what you're seeing is metal price inflation. We have done some facility rationalization. We have gotten better around procurement. Our raw materials sequentially were roughly flat year over year. They were better. So the inflation is metal price, and then we have an ongoing productivity effort to make the business better every quarter and and you know it's it's not huge values uh on a quarter by quarter basis but if you look at the margins in our ins segment in a you know declining volume environment we're driving margins um favorably and we're growing earnings and i think that's a testament to what we're doing to make the business better thank you thank you

Your next question comes from the line of John Tonwantang with CJS Securities. John, your line is now open.

Hi, good morning. Thank you for taking my questions. I was wondering if you could give us an updated expectation on power electronics going forward. Should we expect that business to outgrow the EV market in general just based on, you know, platform wins and share gains and, you know, put new platforms ramping up? Or does that catch up to just EV growth rate in general at some point?

No, so from where we sit today, John, and thanks for the question, this business will significantly outstrip EV units. There's a lot of white space. We've got good share on certain platforms and no share on other platforms, and we're working very hard and have a strong pipeline that supports significant expansion. There are certain EVs, very low-end EVs, where this isn't an applicable technology, but for most of the high-performance EVs, this is the best technology and we expect it to be adopted. And so there's a lot of runway for this business to grow significantly. And as we've seen in a slower growth EV environment, it's significantly outstripping the market.

Could you share what the run rate of that business is today? And maybe secondarily, is there an opportunity outside of EVs?

So, you know, we tend not to quantify product revenue, but think about it as somewhere between $7,500 million today. And there is an opportunity outside of EVs, right? So this is a material that's used for, you know, power intensive applications. And so where you've got high power densities and small spaces, this material really performs. And so we're seeing it actually, or derivations of this material in smartphones and in data centers, And the addressable market is certainly expanding in power conversion and power transmission, utility applications. There's quite a bit of addressable market for this that's untapped. Got it. Thank you.

Your next question comes from the line of Chris Patterson with Wolf Research. Chris, your line is now open.

Great, thank you. So when we're taking a step back and thinking about your longer-term margin opportunity and looking at your portfolio, obviously, you know, getting rid of graphics and some moving parts and electronics, you know, how should we be thinking about your margin progression versus prior peak in each segment and then just holistically, you know, what are your key considerations? I know you don't manage the business this way, but, you know, what are kind of the couple puts and takes we should all be assessing? Thank you so much.

Yeah, thanks for the question, Chris. So when we think about the margin opportunity for the business, we think about it X pass through metals. This quarter, X pass through metals, EBITDA margin was 27%. Prior peak was in 2021, Q1 of 2021, it was about 29%. And as we look at our business today, right, our overall volumes are down because the industrial business has a lower average selling price. Graphics is a lower margin than average business, and the businesses that are accelerating are higher than average margin businesses. So, you know, we believe that 29% is not a ceiling, and we've got a runway to get that number into the 30s. I wouldn't say that that's, you know, one or two quarters away, but certainly the margin entitlement of this business is different. than it was several years ago. And, you know, we've got a path forward to driving this margin, that X metal margin to new record levels in the next couple of years.

Got it. And just a corollary of that question, Ben, you know, part of me looks at your business and it seems like the markets and your customers are basically, you know, going, the market's basically going towards your portfolio in terms of necessity and obviously new opportunities. basically new technologies. And the part of me also looks at you over the last couple of years and just adding a lot of new product capabilities and co-brand and everything else. Do you feel, especially in electronics, given your comment about, hey, you're not the same thing to everyone, do you feel that your portfolio is exactly where it needs to be in terms of the core semi and circuitry customers? Or do you think there's kind of more to be done over, let's say, the course of the next two years? Thank you.

Yeah, thanks for the question, Chris. We've done a lot of work to reposition the portfolio and invest in new technologies to enhance our value proposition to our customers. And some of it has been fortunate that the market has migrated towards the core assets that we acquired 10 years ago. We don't feel the need to add anything to our portfolio in order to deliver value to our customers today. Right. Strategically, we're well positioned. We're in strong market positions in our core markets. We've enhanced our value proposition through our deliberate actions, whether that's innovation or acquisitions. But of course, we're always open to inorganically add capabilities that would improve our offerings to our markets. We don't feel the need to do that, but You know, that is part of our strategy of operational excellence and prudent capital allocation. Importantly, M&A around us doesn't undermine our strategic position, so we don't think our hand would be forced in that way, but we'll see what's available in the market to enhance our offerings.

Thank you. Your next question comes from the line of Mike Lithead with Barclays.

Mike, your line is now open.

Great. Thank you. Good morning, guys. Ben, I want to stick on the theme of electronics. I think big picture, you've talked a lot on this call about the shift ongoing in the electronics business from, say, the legacy drivers to some of these new emerging growth drivers. I guess when you think about your electronics business now, how does this change, if at all, your expected growth rate or returns on your business? medium term versus maybe what it was the past three to five years under sort of this legacy framework.

Yeah. Thanks for the question.

So the reason for that observation of that shift is we're in a broad, you know, the electronics market today is not particularly strong. There are just slices of it that are strong. And our traction in those slices is allowing for us to outperform. The smartphone market isn't going to be meddling forever. There will be a replenishment cycle. We're not going to be selling 1.1, 1.2 billion smartphones globally forever. And so I think that when we look out a couple of years, the markets that we're benefiting from now will have durability, should have durability. And then the broader electronics market, whether that's smartphone, automotive, will have some some recovery, some cyclical recovery. And so as we look forward, the growth rate for our business, and you would have seen in some investor material we prepared and went through in April and June, the growth rate for the business is accelerating in electronics as a product of traction for new technologies and recovery from a cyclical trough. We can't call when that recovery from the cyclical trough will be, but in the next couple of years, you'd expect that to come and and taken together that gives us confidence that you know our electronics business should be a you know a mid to high single digit grower from here um and margins for all of element should accrete because of that because the electronics business has a higher margin than the ins segment and will become a larger percentage of the overall company great that's super helpful and then

Just two quick follow-ups on capital deployment. One, when you receive the graphic sale proceeds, do you have any immediate redeployment plans? Should we expect any sort of buyback on the back of that closing? And two, just given where leverage is today, can you speak to how you're seeing the M&A pipeline relative to buybacks today?

Yeah.

So, you know, pro forma for when we received the proceeds from the graphic sale, you know, the balance sheet will be the best it's been since the middle of 2021. And, you know, our thinking around capital allocation is unchanged. We're going to be opportunistic and unafraid to move quickly when a great opportunity arises.

Your next question comes from the line of David Silver with Zelle King. David, your line is now open.

Yeah, thank you. So this is a question, I guess. It's been a little bit over a year since you completed the transactions for Viaform and Couprion. And at the time, I guess one of the ancillary benefits was maybe that with an expanded toolkit, you know, it would lead to doors opening or deeper collaborations with some highly desirable uh you know very large customers um that maybe you couldn't you know you couldn't deal with at the same high level prior to that so i was just wondering you know it's been a little bit over a year um could you just talk about the the progress or the success with um strengthening your front end of the line offering in terms of getting collaborations going with those newer customers? And then secondly, if you could just provide an update on the progress with commercializing the Couprion products.

Sure. Yeah, thanks for the question, David. So the VIAform business, the VIAform distribution agreement that we terminated last year and paid to terminate, has been an outstanding capital deployment. That's a business that we're seeing very strong growth in. We're seeing, you know, double-digit EBITDA growth year over year and great traction with customers, with toolmakers. The pipeline for that product is more than tripled year over year. And so, you know, that thesis is playing out and the timing was very good. So we feel very good about that transaction and indeed it is helping drive better relationships with the important decision makers in the supply chain. Couprion is going well as well. It's just at a different stage. So we said a couple quarters ago that what you're going to hear from us about Couprion is we're focused on supply chain. by building our capability in high-value manufacturing and supporting our customers and their capability in applications development at high volume. And we're making good progress there. We're getting closer at scaling, you know, the pilot site, I would say. The commercial pull for this product is outstanding. You know, the customers just want more of it to run samples. And so, you know, the thesis around the capabilities of this technology is also playing out. You know, I expect we'll have our first product qualification this year, and so revenue will be attached to that. And, you know, our confidence in the value proposition it offers to customers and the returns that our owning that will deliver to ESI and its shareholders is very, very high.

okay thanks and then this next question would kind of would be in the category of like resourcing for your multi-year you know growth targets but um you know your company has laid out kind of five-year targets where adjusted eps growth the kager is kind of in the low to mid double digits and you've mentioned quite often that your business is not inherently capital intensive. You know, with all the opportunities that you see, I mean, I'm just wondering from a, I don't know, two to three year outlook from here, what are the key areas that your company would need to resource to, you know, keep on track for hitting, you know, your multi-year earnings growth targets I mean, I'll just throw out R&D, but I'm guessing that your business will become inherently more R&D intensive going forward. And certainly in some locales, you might be competing for talent with national champions and things like that. So just a thought on where the company might need additional resources to hit your multi-year growth targets. Thank you.

Yeah, thanks. We talked about it a little bit in our prepared remarks, right? We're adding scale manufacturing, so we're adding a new line for ArgoMax production as an example. We're obviously building Couprion manufacturing, but from a capacity perspective, we are well-equipped. We're investing in applications labs close to the customer, and that's probably the biggest area I'd highlight is people and applications capability, where our customers are, and our customers are moving, right? We're building an applications lab in Vietnam. We're building an applications lab in Thailand. We're building a research center in India. You know, customer proximity, being able to solve customer problems quickly locally is very important, and that's where we're building resources and have been for several years. It's on the long-term roadmap and syncs, synchronizes, fits with that long-term earnings target. that we've articulated and the long-term incremental margins we expect this business to support in the 30s and 40% range.

Thank you very much.

Thank you. There's no further question at this time. I will now turn the conference back over to Ben Glicklich for closing remarks. Ben?

Great. Thank you. Thank you very much. Thanks, everybody, for joining. And we're looking forward to seeing and speaking with many of you in the days and weeks to come. Thank you very much.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.