Element Solutions' Q3 2025 Earnings Call: Contradictions Emerge on Micromax Growth, Power Electronics Outlook, and Tariff Impact

Guidance:

• Full-year 2025 adjusted EBITDA expected to be $545M–$550M (at the high end of prior range)
• Q4 2025 adjusted EBITDA expected ~ $135M–$140M
• Full-year CapEx expected roughly $65M
• Micromax expected to close in Q1 2026, >5% accretive to adjusted EPS and ~ $40M adjusted EBITDA contribution on a full-year basis
• Pro forma year-end net leverage ~2.5x; expect leverage nearer ~2.0x by end-2026; long-term target ceiling ~3.5x

Business Commentary:

• Record Financial Performance and Strategic Acquisitions:
• Element Solutions Inc reported record adjusted EBITDA of $147 million in Q3 2025, meeting the initial guidance of $140 million to $145 million, with Electronics segment organic growth at 7%.

• The growth was driven by strong performance in semi and assembly sectors and the strategic acquisition of Micromax, which is expected to contribute approximately $40 million of adjusted EBITDA on a full-year basis at accretive margins.

• Electronics Segment Growth and Market Diversification:

• The Electronics segment posted its sixth consecutive quarter of high single-digit organic growth, with Circuitry Solutions sales growing 13% organically.

• Growth was supported by demand for data center applications, a seasonal ramp in mobile phone activity, and new business wins in the semiconductor sector. The addition of Micromax is expected to enhance end market diversification and customer-led growth opportunities.

• Industrial Segment Profit Growth and Margin Improvement:

• The Industrial segment saw strong profit growth despite a flat top line, with adjusted EBITDA growth projected to be almost 30% excluding the graphics divestiture impact.

• Margin improvement was driven by portfolio optimization, productivity initiatives, and improved fixed cost absorption. The offshore business continues to perform well due to strong energy prices and drilling activity.

• Balance Sheet Strength and Financial Flexibility:

• The company ended the quarter with a net leverage ratio of 1.9x, with plans to fund the Micromax transaction with a combination of cash on hand and modest incremental debt.
• This maintains plenty of financial flexibility, with expectations to return to a leverage ratio closer to 2x by the end of 2026, ensuring capacity for future capital deployment should the right opportunities arise.

Sentiment Analysis:

Overall Tone: Positive

• Management called the quarter "outstanding" and "record" (record adjusted EBITDA $147M), announced an accretive strategic acquisition (Micromax: >5% adj. EPS accretion, ~$40M adj. EBITDA), and raised full-year adjusted EBITDA guidance to $545M–$550M while highlighting continued Electronics momentum and balance-sheet flexibility.

Q&A:

• Question from Bhavesh Lodaya (BMO Capital Markets Equity Research): How do you expect Micromax to perform under ESI vs prior ownership and what growth/synergy trajectory from the $40M EBITDA baseline?
  Response: Micromax has mid-single-digit market growth; ESI expects to outperform the market via circuit-board supply-chain connectivity, modest cost synergies, and commercial cross-sell that should accelerate growth and margins.

• Question from Bhavesh Lodaya (BMO Capital Markets Equity Research): Update on Kuprion commercialization — is the planned start-up on track and any initial 2026 EBITDA expectations?
  Response: Mid-scale Kuprion site is on track to be operational end of year, enabling qualification and meaningful sales/profits in 2026 with qualification milestones expected in Q4.

• Question from Joshua Spector (UBS Investment Bank, Research Division): Can you provide color on Micromax's recent top/bottom-line performance and whether it improves ESI's growth stability or adds volatility?
  Response: Micromax is ~ $300M revenue (≈2/3 metals); ex-metals profits are stable, it fared better in 2022–23, and it improves stability and profit resilience ex-metals while offering upside to accelerate growth.

• Question from Joshua Spector (UBS Investment Bank, Research Division): Post-close leverage — how high would you be willing to push leverage to deploy capital opportunistically over next 6–9 months?
  Response: Pro forma year-end leverage ~2.5x (including Micromax), expected ~2.0x by end-2026 absent further deployment; long-term ceiling ~3.5x, leaving capacity for opportunistic deployment.

• Question from Christopher Parkinson (Wolfe Research, LLC): Why might DuPont have divested Micromax and why is Element the best owner today?
  Response: On a GAAP face the margins look lower due to metal pass-throughs, but ex-metals margins exceed 40%; Micromax is a sticky, high-value, highly specified business now benefiting from PCB innovation where ESI's focused electronics platform is a superior strategic owner.

• Question from Christopher Parkinson (Wolfe Research, LLC): How should we think about semiconductor growth into 2026 given softer power electronics — was the weakness idiosyncratic and what's the momentum outlook?
  Response: Semi has two vectors: wafer-level packaging (growing in the teens) and power electronics (impacted by EV softness but gaining share); overall semi should grow above market into 2026.

• Question from Frank Mitsch (Fermium Research, LLC): Any expected antitrust/government approval issues given quick timeline to close Micromax in Q1'26?
  Response: Do not anticipate substantial regulatory hurdles—transaction is complementary with limited technology/market share overlap.

• Question from Frank Mitsch (Fermium Research, LLC): What most positively surprised you versus guidance and how is that trending into Q4?
  Response: Industrial Solutions outperformed expectations (adjusting for a prior-year equipment sale) and electronics momentum has remained positive into October, supporting Q4.

• Question from Aleksey Yefremov (KeyBanc Capital Markets): What are the commercial/technology growth synergies from Micromax?
  Response: Micromax adds a strategic capability for tech days with OEMs and supply-chain participants, giving broader commercial access and accelerating growth beyond its market via ESI's customer relationships.

• Question from Aleksey Yefremov (KeyBanc Capital Markets): How should we think about electronics volumes in 2026 given destocking this year — accelerate, steady, or slower?
  Response: Management has conviction high-end electronics growth (HPC, data center, advanced mobile) continues into 2026; automotive/EV volumes are uncertain but ESI sees share-gain opportunities, so overall organic growth should remain solid.

• Question from Peter Osterland (Truist Securities, Inc., Research Division): Are Micromax assets underinvested and will elevated CapEx or one-time integration costs be required?
  Response: Micromax is asset-light with ~2% of sales capex profile; no material incremental CapEx expected and only modest stand-up costs of a few million dollars, with synergies realized over 12–18 months.

• Question from Peter Osterland (Truist Securities, Inc., Research Division): IMS margins — in a normalized demand environment, can margins move meaningfully above the nearly 24% shown in Q3?
  Response: Yes — margins can expand materially as volumes recover, fixed-cost absorption improves and offshore/mix benefits continue; ex-metal adjusted margin was 28% in the quarter, ~100 bps below prior peak.

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): How sustainable is the offshore business strength and are first-fill programs likely to tail off next year?
  Response: Offshore is longer-cycle; current drilling rates are good but some lull into 2026 is expected — healthy business with pricing levers but not likely to sustain Q3 run-rate into 2026.

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): On electronics margins and the EV-related headwind from a large customer — will that continue or reverse?
  Response: EV volumes likely down in Q4 year-over-year but worst may be past; power-electronics demand has multi-market use cases (network infra, data centers) and a strong pipeline for Argomax into 2026.

• Question from John Ezekiel Roberts (Mizuho): With MKS exiting Atotech's industrial metal plating business, did that drive share-gain opportunities for you?
  Response: Cannot comment on specific competitors; industrial business has been growing and ESI has taken share, driven by strong capability and execution.

• Question from John Ezekiel Roberts (Mizuho): Will Micromax be reported in an existing Electronics subsegment or standalone?
  Response: Micromax will be reported standalone and disclosed ex-metals to present organic volume and margin appropriately.

Contradiction Point 1

Micromax's Market Growth and Value Proposition

It involves differing expectations for Micromax's market growth and value proposition, which are critical for strategic planning and investor expectations.

Can you compare Micromax's performance under ESI's ownership to its previous ownership? Can you provide an update on Kuprion? - Bhavesh Lodaya (BMO Capital Markets)

2025Q3: Micromax brings a market growth algorithm in mid-single digits, with opportunities to outperform the market under ESI due to its depth in the supply chain and customer overlap with other electronics businesses. - Benjamin Gliklich(CEO, President & Director)

What core growth drivers are you most excited about for 2026 and beyond, given the current portfolio positioning? - Christopher Parkinson (Wolfe Research)

2025Q2: We have an opportunity to accelerate the growth in some of those [metal] markets. We think there's an opportunity to even outpace the market growth significantly. - Benjamin Gliklich(President and CEO)

Contradiction Point 2

Power Electronics Segment Growth Outlook

It involves differing expectations for the growth trajectory of the Power Electronics segment, which is crucial for revenue projections and strategic planning.

How has Micromax's growth and stability evolved over the past few years? - Joshua Spector (UBS Investment Bank)

2025Q3: Power Electronics segment is now expected to increase 17% in the quarter. This is our 11th consecutive quarter of year-over-year growth in this business. - Benjamin Gliklich(CEO, President & Director)

What are your expectations for the Power Electronics segment in the second half, considering the expanding customer base and headwinds in the EV ecosystem? - Michael Harrison (Seaport Research Partners)

2025Q2: Power Electronics had a strong Q2, lapping a weaker period in Q2 2024. Customers expect production volume declines, offset by new customers ramping up. Growth should continue, but at a slower rate due to some customer-specific issues. - Benjamin Gliklich(President and CEO)

Contradiction Point 3

Tariff Impact on Electronics Business

It directly impacts expectations regarding the impact of tariffs on the Electronics business, which could affect company revenue and investor expectations.

What are the macro indicators driving the low end of your guidance range, excluding significant tariff impacts? - James Cannon (UBS)

2025Q3: We finished Q1 ahead of plan and expect a modest impact from tariffs. April trading has been strong, indicating no demand destruction from tariffs. - Ben Gliklich(CEO)

Can you clarify the macro factors driving the low end of your guidance range, excluding tariff effects? - James Cannon (UBS)

2025Q1: We are seeing no demand destruction from tariffs. Tariffs are representing kind of a modest headwind to our outlook. - Ben Gliklich(CEO)

Contradiction Point 4

Micromax's Value Proposition and Growth Expectations

It involves changes in the perceived value and growth expectations of the recently acquired Micromax business, which could impact strategic decisions and investor confidence.

Can you discuss Micromax's expected performance under ESI compared to prior ownership? Can you provide an update on Kuprion? - Bhavesh Lodaya (BMO Capital Markets)

2025Q3: Micromax brings a market growth algorithm in mid-single digits, with opportunities to outperform the market under ESI due to its depth in the supply chain and customer overlap with other electronics businesses. - Ben Gliklich(CEO)

Can you comment on your ability to outperform the market by 2-4% in the current environment? - Mike Harrison (Seaport Research Partners)

2025Q1: We are leading in advanced materials and performance solutions for 3D printing, packaging, and assembly, and we're growing faster than the overall market in those sectors. - Ben Gliklich(CEO)