Michael Harrison

Michael Harrison questioned Minerals Technologies' capital deployment strategy for 2026, considering the strong balance sheet, free cash flow generation, M&A pipeline, and remaining share repurchase authorization.

Answer

Doug Dietrich, Chairman and CEO, reiterated a balanced capital deployment approach, aiming to return 50% of free cash flow to shareholders while retaining cash for inorganic growth. He noted approximately $140 million remaining on the share repurchase program and an active M&A pipeline for bolt-ons in consumer products or larger scale acquisitions.

Michael Harrison asked for more color on the drivers of the Q1 operating margin decline and the outlook for the full year. He also questioned the potential impact of tariffs on magnesium oxide (MGO) and why the consumer-driven Household and Personal Care business has shown significant volatility and underperformance recently.

Answer

CFO Erik Aldag attributed the Q1 margin pressure primarily to lower volume leverage, along with about $2-3 million in higher energy costs and $1 million in unfavorable logistics costs. He noted the Q2 2024 margin was a tough comparison due to high-margin sales last year. CEO Douglas Dietrich addressed the MGO question, confirming it faces a 20% tariff from China and that MTI has been building inventory to mitigate impacts. Regarding the consumer business, Dietrich acknowledged recent volatility due to customer order shifts but stated the long-term growth thesis remains intact, citing strong Q2 order patterns that suggest a return to mid-single-digit growth.

Michael Harrison of Seaport Research Partners sought clarification on whether the 3-5% sales outlook was organic, its implication for full-year EPS, the impact of energy costs, drivers of sequential margin improvement in Engineered Solutions, and the pricing headwind in Specialty Additives.

Answer

CEO Douglas Dietrich confirmed the 3-5% sales growth outlook is an organic figure and suggested EPS growth could align with the company's 8% CAGR. CFO Erik Aldag noted that while energy costs are slightly higher, they are not a major impact. Aldag attributed the strong Q4 Engineered Solutions margin to improvements in the environmental business and strong equipment sales. He also clarified that the price decline in Specialty Additives was due to contractual pass-throughs, reflected in the gap between 3% volume growth and 1% revenue growth.

Michael Harrison asked for more detail on the softer performance in the Household and Personal Care (HPC) business, specifically questioning the impact of Fabric Care. He also inquired about customer backlogs and potential pent-up demand in the Environmental & Infrastructure business, and whether it still carries high incremental margins.

Answer

CEO Douglas Dietrich and Executive D.J. Monagle explained that the softness in Fabric Care was temporary, related to Asian customer order patterns, and is expected to reverse. They highlighted long-term strength driven by trends in dry detergents and renewable fuels. Executive Brett Argirakis noted that while the construction market has been depressed, they are optimistic for 2025 as interest rates fall and projects commence. Dietrich confirmed the business retains high incremental margins that will benefit the company as activity rebounds.

Michael Harrison from Seaport Research Partners asked for clarification on the soft growth in the Household and Personal Care (HPC) business, questioning how growth was only 1-2% when most product lines appeared strong besides Fabric Care. He also probed the continued weakness in the Environmental & Infrastructure business, asking about customer backlogs and the potential for pent-up demand to materialize with lower interest rates.

Answer

CEO Douglas Dietrich and executive D.J. Monagle explained that the HPC segment's modest growth was due to a slower-than-typical summer for pet care, which is now rebounding, and temporary order timing shifts with Asian customers in Fabric Care. They affirmed long-term confidence, citing trends in renewable fuels and natural solutions. For Environmental & Infrastructure, Group President Brett Argirakis confirmed the business is depressed due to high interest rates impacting construction but noted significant optimism for 2025, as many projects are specified and waiting to launch. Douglas Dietrich added that this business has high incremental margins, which will significantly benefit profitability when activity resumes.

Michael Harrison asked about the sequential decline in Europe's operating margin from Q4 to Q1, seeking clarification on the causes and the expected margin trajectory. He also inquired about the portion of customers running below take-or-pay minimums and regional differences.

Answer

Melissa Schaeffer, Chief Financial Officer, attributed Europe's margin decline to higher depreciation from insourcing and supply chain asset purchases, along with fixed cost inflation, particularly wage inflation. Eduardo Menezes, Chief Executive Officer, added that seasonality also plays a role. Regarding take-or-pay minimums, Eduardo Menezes stated they don't disclose specific numbers but noted some cases in Europe, emphasizing that it's not a large percentage of their business and utilization is similar across regions.

Michael Harrison asked about the drivers behind the 150 basis point sequential decline in Europe's operating margin from Q4 to Q1, seeking clarity on factors like maintenance costs, energy pass-through, and depreciation, and requested insight into the expected margin trajectory for Europe for the rest of the year. He also inquired about the portion of customers running below take-or-pay minimums, regional variations, and the impact on utilization rates.

Answer

Melissa Schaeffer, Chief Financial Officer, attributed Europe's margin decline to higher costs, specifically sizable depreciation from insourcing and supply chain asset purchases, along with fixed cost inflation (wage inflation). Eduardo Menezes, Chief Executive Officer, added that some seasonality also impacts the quarter. Regarding take-or-pay minimums, Eduardo Menezes stated that Air Products does not typically disclose this, but noted some cases in Europe, though it's not a large percentage of the business. Melissa Schaeffer mentioned that utilization rates across Americas, Europe, and Asia are similar, in the mid-to-high 70s, consistent with fiscal 2025.

Michael Harrison of Seaport Research Partners questioned if the $1.5 billion annual growth CapEx target was a firm figure or a placeholder and asked about the criteria for project selection. He also inquired about recent merchant demand trends in light of tariff uncertainty.

Answer

CEO Eduardo Menezes clarified that the $1.5 billion is an estimate for the 2029-2030 timeframe and that all projects must meet strict return hurdles and fit within the company's capital allocation framework. On merchant demand, he noted it was difficult to assess, with a possible pre-tariff inventory build now likely to be followed by a negative impact, particularly in the U.S. and China.

Michael Joseph Harrison sought more details on the increased marketing spend within the Consumer Group, including specific advertising types and product lines, and asked about the quantifiable impact and trend of manufacturing inefficiencies from plant consolidations.

Answer

Frank Sullivan, Chairman and CEO, clarified that increased marketing spend was primarily higher advertising, disproportionately focused on social media and e-commerce, particularly for cleaners and The Pink Stuff. Russell Gordon, VP and CFO, quantified manufacturing inefficiencies at approximately $10 million in unfavorable year-over-year conversion costs and absorption in Q1, expecting this to continue in Q2, with Frank Sullivan providing the example of the Tremco Sealants Toronto plant transfer.

Michael Harrison of Seaport Research Partners questioned if the near-shoring trend benefiting CPG and PCG was slowing and whether new tariffs could reinvigorate it. He also asked if unfavorable weather in Q3 simply pushed construction demand into Q4.

Answer

Chairman and CEO Frank Sullivan confirmed that reshoring has been a benefit, particularly in technology, and that while the auto sector is slowing, the overall trend continues. He explained that most weather-delayed Q3 projects were pushed out, not canceled, but noted the challenging year-over-year comparison and that cold weather persisted through March.

Michael Harrison asked why Q3 guidance projects flat EBIT on flat sales despite MAP 2025 benefits, and what specific factors are giving management confidence in the stabilization of residential markets.

Answer

CEO Frank Sullivan explained that the flat Q3 outlook is primarily due to the return of a 'real winter' compared to a record-breaking, mild Q3 last year, which is interrupting momentum. He noted that confidence in residential stabilization comes from easing comps after a prolonged downturn and early signs of improvement in housing turnover, despite the current choppiness.

Michael Harrison inquired about the impact of underabsorption from plant startups and new investments and how that would progress through the fiscal year. He also asked about the company's confidence in infrastructure spending and its dependency on the U.S. election outcome.

Answer

Frank Sullivan, Chair and CEO, explained that underabsorption is occurring across many plants due to lower volumes, particularly in Consumer. He also cited strategic investments like the new Innovation Center and a Resin Center in Europe that add to depreciation and operating costs. Regarding infrastructure, he believes the dollars are committed and that both potential administrations would support onshoring and manufacturing, though the consequences of different policies on debt, taxes, and tariffs remain uncertain.

Michael Harrison from Seaport Research Partners inquired about customer feedback, specifically whether the strong Q2 performance was influenced by demand pull-forwards, and asked for the second-half outlook for the Power Electronics business.

Answer

President and CEO Benjamin Gliklich confirmed there was no evidence of demand pull-forward in Q2, noting that any smartphone-related ramp is expected in Q3. He explained that while Power Electronics had a very strong Q2, the growth rate might moderate in the second half due to some customer-specific production shifts, though new customer wins are expected to offset this.

Michael Harrison of Seaport Research Partners inquired about customer feedback, specifically whether the strong Q2 results were influenced by demand pull-forward, and asked for the second-half outlook for the Power Electronics business.

Answer

President & CEO Benjamin Gliklich stated there was no evidence of demand pull-forward in Q2, unlike the prior year's smartphone-related activity. He noted that while Power Electronics had a strong Q2, the growth rate might slow in the second half due to customer-specific production declines, though this would be offset by new customer ramps, and the long-term outlook remains strong.

Michael Harrison requested more detail on the key applications Element Solutions serves in the high-bandwidth memory (HBM) market and questioned the company's confidence in its ability to continue outperforming the underlying electronics market by 2-4%.

Answer

CEO Ben Gliklich explained that the growth in wafer-level packaging, particularly damascene copper, is driven by Korean customers ramping up HBM production for data centers. He expressed confidence in continued market outperformance due to strong penetration in fast-growing B2B vectors like data centers and low-orbit satellites, which are less tied to consumer electronic cycles.

Michael Harrison of Seaport Research Partners asked for more color on the PCB market, specifically about a potential bifurcation between advanced and legacy boards. He also inquired about the current M&A environment, including target availability and valuations.

Answer

CEO Benjamin Gliklich confirmed a clear bifurcation in the PCB market, with ESI's outperformance driven by its strong position in high-growth, complex boards for IC substrates and servers. Regarding M&A, he stated the balance sheet is strong and they are actively seeking high-quality, tuck-in acquisitions at reasonable values, while also having capacity for share repurchases.

Michael Harrison of Seaport Research Partners questioned if reported shortages of Advanced Packaging materials necessitate higher CapEx for ESI and could lead to better pricing. He also asked for an outlook on the power electronics business.

Answer

CEO Benjamin Gliklich stated that ESI's existing footprint is adequate to meet demand, so significant CapEx increases are not needed, though they are scaling new products like Kuprion. He sees material shortages as a sign of robust demand rather than a pricing lever, noting margins are already healthy. Regarding power electronics, Gliklich confirmed an expected acceleration driven by both customer production ramps and new business wins across various OEM types, leading to a strong growth outlook.

Michael Harrison asked for details on the direct impact of tariffs, the performance drivers and margin outlook for Performance Chemicals, specifics on cost-cutting actions in Oilfield Services, and the expected earnings cadence for the remainder of the year.

Answer

EVP and CFO Ian Cleminson stated that while the company is monitoring tariffs, its diversified supply chain provides flexibility, and the direct impact is low. He noted the main headwind in Performance Chemicals is customer caution, not direct costs. President and CEO Patrick Williams added that Oilfield cost actions include asset consolidation and personnel efficiencies, with benefits expected in Q3/Q4. For the yearly cadence, Ian Cleminson projected Fuel Specialties would be on target, Performance Chemicals would likely see Q2 performance similar to Q1, and Oilfield Services should see slight sequential improvement from Q2 onwards.

Michael Harrison of Seaport Research Partners inquired about the Oilfield Services business, specifically opportunities outside Latin America to offset revenue shortfalls. He also asked about potential anomalies in Fuel Specialties' SG&A, trends in raw material costs for Performance Chemicals, and whether the Q3 adjusted EPS of $1.35 is a reasonable expectation for Q4.

Answer

Patrick Williams, President and CEO, confirmed a focus on growth outside Latin America for the Oilfield segment, highlighting progress in the Middle East, particularly with Saudi Aramco, which is expected to drive growth in 2025. Ian Cleminson, EVP and CFO, stated there was nothing unusual in Fuel Specialties' SG&A and noted that raw material costs are stabilizing, with price/mix volatility expected to settle sequentially. Patrick Williams concluded that Q4 EPS should be 'broadly in line' with Q3's $1.35, possibly 'a tad higher,' driven by sequential improvement in Oilfield.

Michael Harrison asked for a breakdown of the 5.8% same-store sales growth between ticket and car count, and questioned the drivers of the year-over-year EBITDA margin decline, particularly regarding SG&A costs.

Answer

CFO Mary Meixelsperger clarified that transactions drove about one-third of the comp, but it was closer to a 50/50 split with ticket when adjusted for calendar shifts. Both Meixelsperger and CEO Lori Flees attributed SG&A deleverage to a planned "reset year" involving refranchising impacts and technology investments, expecting leverage to return as growth accelerates.

Michael Harrison of Seaport Global Securities asked for the gross margin outlook for FY25 given various cost factors and inquired about the valuation multiple and proceeds from the recent refranchising transactions.

Answer

CFO Mary Meixelsperger guided to a relatively flat year-over-year gross margin, as benefits from scale are expected to be offset by labor inflation and the margin drag from a growing base of immature stores. Regarding the refranchising, Meixelsperger pointed to the $71 million in proceeds disclosed in the Q4 cash flow statement but declined to provide a specific multiple, stressing that the deals are valued based on long-term returns from accelerated, capital-efficient network growth.

Michael Harrison of Seaport Research Partners asked for details on growth within micro-contamination control, including visibility and whether customers are extending filter life. He also inquired about the P&L impact of foreign exchange beyond the top line, given recent currency volatility.

Answer

CEO Bertrand Loy explained that while advanced logic and HBM customers are driving growth with a focus on purity, mainstream customers are indeed stretching filter lifetimes amid low utilization, creating a headwind. CFO Linda LaGorga added that while FX can have a manageable impact on margins during volatile periods, it is not a primary driver of the Q2 margin outlook.

Michael Harrison asked about the expected EBITDA margin cadence for 2025, considering seasonality and Q2 incentive compensation. He also requested an update on the silicon carbide CMP business's performance in 2024 and its outlook for 2025.

Answer

CFO Linda LaGorga advised that the 2025 margin cadence would follow a very similar pattern to 2024, accounting for Q2 equity award timing. CEO Bertrand Loy reported that silicon carbide revenue was flat in 2024 due to a soft market but remains a promising area where Entegris is well-positioned with a strong cost-of-ownership value proposition pending an industry recovery.

Michael Harrison asked about the business opportunity from repairing damaged vehicles when they are sold or traded in, particularly with large resellers like CarMax.

Answer

CEO Chrishan Anthon Villavarayan agreed this is a positive long-term opportunity. He noted that rising used car prices make it more attractive for dealerships and resellers to repair vehicles before sale. He stated that Axalta has a 'really strong presence' in this channel and expects this business to grow as the market eventually stabilizes.

Michael Harrison of Seaport Research Partners asked about Axalta's long-term positioning within the consolidating Chinese Light Vehicle market and how the new partnership with Dürr for digital paints will accelerate the commercialization of its NextJet product line.

Answer

CEO Chris Villavarayan expressed confidence in Axalta's position in China, citing strong partnerships with the largest local EV and ICE players, which he expects will lead any consolidation. Regarding the Dürr partnership, he described it as a union of two leaders that enables efficient, in-line two-tone coating and customization with negligible overspray, a significant sustainability and cost win for OEMs.

Michael Harrison asked for more color on the consumer end market weakness in the U.S. and Canada, questioning if it was broad-based. He also sought specific examples of new business wins and share gains in the EMEA region.

Answer

President and CEO Dr. Ashish Khandpur explained that the consumer market weakness was concentrated in the U.S. and Canada, with double-digit declines in both staples and discretionary goods, a trend expected to continue in Q2. In EMEA, he highlighted strong performance and wins in healthcare, consumer (e.g., toys), defense, and energy infrastructure, which drove growth in the Color and Additives business.

Michael Harrison asked for details on the decision to cease the SAP S/4HANA ERP implementation, including its progress and the timing of alternatives, and also inquired about the drivers of strength in the healthcare market.

Answer

President and CEO Dr. Ashish Khandpur stated that the ERP project's risk, complexity, and cost had increased substantially, making it unviable. He noted that alternative, less costly systems can now deliver similar benefits more quickly. Regarding healthcare, he highlighted double-digit growth in 2024, driven by new business wins in drug delivery devices, remote monitoring systems, and some restocking of medical supplies.

Michael Harrison requested a detailed overview of the Latin America business, including capacity and commercial resources, and whether future growth would be organic or require M&A. He also asked about capital allocation priorities, specifically share repurchases, with leverage now below 3x.

Answer

SVP and CFO Jamie Beggs stated that Latin America is primarily a packaging market where Avient has ample capacity, making M&A unnecessary for growth. She noted growth is driven by deploying existing technologies and near-shoring trends. Regarding capital allocation, she clarified the leverage target is closer to 2.5x net debt-to-EBITDA, and meaningful share repurchases are not a priority until that target is met, though offsetting dilution remains a possibility.

Michael Harrison asked for a quantification of the EBITDA impact from several Q1 disruptions, including the Rotterdam turnaround, a maleic facility outage, and a fire at a customer's facility. He also inquired about the expected headwind from planned turnarounds in Q2.

Answer

CEO Peter Huntsman confirmed the Rotterdam turnaround impact was about $5 million in Q1 and is expected to be $10 million in Q2, consistent with prior guidance. He estimated the customer fire had a $3 million negative impact. CFO Phil Lister added that the maleic outage had a negligible margin impact due to the already thin margins in that European business. For Q2, Lister and Huntsman indicated the other planned turnarounds are relatively small, with the main focus remaining on the Rotterdam impact.

Michael Harrison inquired about the specific markets for new business wins in North America Polyurethanes and the company's competitive position in construction. He also asked for an update on the commercial contribution timeline for two Performance Products capacity expansions.

Answer

Chairman, CEO and President Peter Huntsman identified the new business wins as being in OSB/wood, insulation, and the broader furniture/appliance markets. For the expansions, he stated the PU catalyst project in Hungary should be done by year-end, while the completed ultra-pure amines project is in its qualification phase, with revenues expected to begin in early 2025.

Michael Harrison inquired about the impact of tariffs, asking whether the main concern for Quaker Houghton is input costs or the broader effect on customer demand. He also requested more detail on strategic initiatives, such as the multichannel approach and brand simplification, and sought clarity on the puts and takes for second-quarter EBITDA.

Answer

President and CEO Joseph Berquist explained that the company can mitigate most direct tariff impacts on raw materials and finished goods due to its local-for-local manufacturing strategy, noting the primary concern is the harder-to-assess impact on end-market demand. Berquist detailed strategic shifts, including realigning leadership around product segments, simplifying the brand portfolio, and developing a multichannel approach with inside sales and e-commerce to better serve smaller customers and free up the direct sales force. CFO Tom Coler added that Q2 EBITDA is expected to be modestly higher than Q1, driven by normal seasonality, continued market share gains, and the contribution from the Dipsol acquisition.

Michael Harrison asked about the significant Q4 gross margin decline, the viability of the 37-38% gross margin target for 2025, the drivers of success in Asia Pacific, and the underlying macroeconomic assumptions for the 2025 revenue and EBITDA growth forecast.

Answer

President and CEO Joseph Berquist stated that while the 37-38% gross margin range is the 'right ZIP code,' the company is also focusing on driving EBITDA margins to the high teens. He attributed Asia Pacific's strength to new business wins in metals and with BEV suppliers, which the company aims to replicate globally through enhanced customer intimacy. For 2025, he confirmed a 1-2% market growth assumption, favorable comps from H2 2024, and $15 million in-year savings. CFO Tom Coler added that foreign exchange is expected to be a low single-digit headwind to sales.

Michael Harrison inquired about the drivers behind the sequential decline in Q3 operating margins, the source of strong volume growth in the Asia Pacific segment, the outlook for Q4 revenue and margins considering seasonality, and key modeling assumptions for 2025.

Answer

CEO Andrew Tometich attributed the margin pressure to a lag effect in index-based pricing and the timing of SG&A expenses, which were partially offset by cost controls. He credited the Asia Pacific strength to broad-based organic new business wins. For Q4, he anticipates continued market softness and seasonality, though new business wins should provide an offset. CFO Tom Coler added that gross margins are expected to remain stable within the 37% to 38% range. For 2025, Mr. Tometich stated the company will focus on executing its strategy and controlling costs, positioning it to capitalize on any market improvements.

Michael Harrison of Seaport Research Partners requested more color on the 'customer-specific issues' in the biofunctionals business and asked why the 'globalized' initiative saw a sales decline despite new investments.

Answer

General Manager Jim Minicucci explained that the biofunctionals weakness is concentrated in the high-end luxury and travel retail skincare segments. CEO Guillermo Novo clarified that the 'globalized' initiative's sales decline was driven by this softness in the 'core' business. He stressed that the 'new' business from recent capital investments is ramping up as planned and is not the source of the decline.

Michael Harrison requested more detail on the nature of the 'trade policy impact' uncertainty, whether Ashland saw any pre-buying activity in Q1, and if recent winter weather had affected operations.

Answer

CEO Guillermo Novo explained the primary concern regarding trade policy is the impact on global trade flows, not direct input costs, highlighting potential duties in Europe on Chinese HEC. He confirmed there was no significant pre-buying activity in Q1. He also noted a minor two-day weather-related shutdown at the Texas City plant, which they expect to offset with existing capacity.

Michael Harrison of Seaport Research Partners asked for a regional breakdown of the Coatings business, the size of its China operations, and whether the Q4 operational issues could lead to similar fixed cost absorption problems in fiscal 2025.

Answer

Dago Caceres, GM of Specialty Additives, outlined that the coatings market is stable in North America and Europe, with growth in the Middle East, Africa, and India. CEO Guillermo Novo specified that China constitutes 25% of the Coatings business. Novo clarified the Q4 operational issue was an isolated absorption problem at a U.S. plant during a productivity investment start-up and is now resolved. He confirmed that potential weakness in China and its impact on plant utilization are already factored into the fiscal 2025 guidance range.

Michael Harrison of Seaport Research Partners asked about pricing in Performance Coatings, inquiring if it was consistent across subsegments, and about leading indicators for the Traffic Solutions business heading into its high season.

Answer

CFO Vince Morales noted that pricing in Performance Coatings benefited from carryover in long-cycle businesses, with new pricing being introduced in Q2. CEO Timothy Knavish identified three drivers for Traffic Solutions' strength: momentum from 2024 share gains, pent-up demand from last year's wet weather, and a growing tailwind from infrastructure spending, all pointing to a strong Q2 and beyond.

Michael Harrison requested more detail on business conditions and outlook for Latin America, India, and China.

Answer

CEO Tim Knavish described Latin America as a 'rockstar performer' benefiting from strong GDP and near-shoring. In India, PPG leverages a joint venture with Asian Paints to combine its technology with local market strength. For China, he noted PPG is positioned in the right segments (auto, aero), grew each quarter in 2024, and is gaining share with domestic auto OEMs. He views the elongated recovery in China as a benefit for raw material sourcing.

Michael Harrison followed up on the aerospace business, asking about long-term plans for capacity expansion given current constraints and whether it is now the top priority for organic growth investment.

Answer

Chairman and CEO Timothy Knavish confirmed that aerospace is a top priority. He explained that the recent divestiture frees up capital and management resources to focus on high-growth businesses like aerospace. He stated that PPG is actively looking at long-term capacity additions in parallel with ongoing debottlenecking efforts, reflecting a bullish multiyear outlook.

Michael Harrison of Seaport Research Partners asked why full-year EPS guidance was maintained when foreign exchange has shifted from an expected headwind to a potential tailwind, suggesting an offset from lower underlying market expectations.

Answer

Christophe Beck, Chairman and CEO, explained that while the full-year earnings promise remains the same, the path to achieving it has changed due to the dynamic environment. CFO Scott Kirkland added that while FX has improved recently, it remains volatile, and the company still expects it to be a headwind for the full year, albeit potentially less than originally anticipated. They are managing many variables, and FX is just one component of a complex equation.

Michael Harrison asked if recent hurricanes had any quantifiable impact on the Institutional or Specialty businesses in Q3 and if any drag was expected in Q4.

Answer

CEO Christophe Beck stated there was no business impact in Q3 from the hurricanes. He credited the company's world-class, resilient supply chain, noting that producing 92% of sales locally has become a huge competitive advantage. He emphasized that while there is a human impact, the business has become very good at managing through these events, though he could not comment on potential future events.

Michael Harrison asked for more detail on the Suvinil acquisition, specifically about potential operational synergies, cross-selling opportunities, and any required integration investments.

Answer

Executive Heidi Petz stated that Sherwin-Williams is leveraging the 'Valspar acquisition playbook' and will be 'very aggressive' in pursuing both top-line and operational synergies. While premature to detail specific investments, the focus is on efficiency. Executive Allen Mistysyn added that the company has an appetite to invest in businesses with above-market growth potential, as it has done in packaging and coil.

Michael Harrison asked how potential changes in immigration policy could affect Sherwin-Williams' business and the labor availability for its professional painter customers.

Answer

CEO Heidi Petz responded that it is too early to determine the impact but emphasized that the company's focus on enhancing contractor productivity through technology, efficient delivery, and strong field support helps mitigate labor constraints regardless of their cause. She noted that reliability has become a key differentiator.

Michael Harrison asked for the company's view on remodeling demand trends and whether factors like falling interest rates and rising home equity could be important drivers next year.

Answer

Executive James Jaye expressed optimism, citing indicators like the LIRA index, which is expected to improve in mid-2025. He highlighted that the Residential Repaint business is already up mid-single digits in a flat market due to prior investments. Executive Heidi Petz added that the company is well-positioned to capitalize on a market recovery through its 'success by design' strategy.

Michael Harrison of Seaport Research Partners inquired about the operational and financial ramp-up of the new Pasadena facility, the drivers behind weakness in commodity consumer surfactants, and margin pressures in the Polymers segment. He also asked about the potential impact of tariffs on import competition and the strategy behind growth in the Surfactants distribution channel.

Answer

President and CEO Luis Rojo explained that the Pasadena site is in its early stages, producing 6 of a planned 60+ products, with a full contribution expected in H2 2025. He confirmed Q1 had $4 million in pre-operating expenses, which will lessen in Q2 before turning positive. Rojo clarified that the consumer product weakness is due to sluggish market demand, not an intentional shift. He stated the high-cost inventory in Polymers is clearing out in Q2, which should improve margins. Regarding tariffs, Rojo noted potential for reduced import competition in MCT and some Surfactants. He attributed distribution growth to a global strategy of acquiring new Tier 2/3 customers and underlying market growth.

Michael Harrison inquired about the sustainability of the recovery in Stepan's agricultural business, the drivers of European surfactant performance, weakness in the consumer side of surfactants, and the company's path to achieving its near-term target of $60 million in quarterly EBITDA.

Answer

CEO Luis Rojo confirmed the agricultural business recovery is sustained, with 22% growth in Q3 and a positive outlook for Q4, stating the destocking trend has ended. He attributed European surfactant strength to similar positive agricultural trends. For the consumer segment, Rojo noted that while personal care was down, the core laundry and cleaning business grew 4%. He explained that the quarter's $53 million EBITDA was suppressed by a $3.3 million one-time fraud event and weak polymer volumes, implying the $60 million level is attainable as these headwinds subside.

Michael Harrison asked for more color on the operating margin decline in Q1 and the guided decline for Q2, questioning if the full-year margin would be down or could still approach the 15% target. He also inquired about the specific tariff impact on magnesium oxide (MGO) sourcing and whether the company was building inventory. Finally, he questioned the persistent underperformance and volatility in the Household and Personal Care business.

Answer

CFO Erik Aldag attributed the Q1 margin pressure primarily to lower volume, along with higher energy and logistics costs, and noted the Q2 2024 margin was a tough comparison due to high-margin equipment sales. He stated the 15% full-year margin target is achievable through volume recovery and the new cost savings program. CEO Douglas Dietrich confirmed MGO from China faces a tariff and is part of the strategic inventory build. Regarding Household and Personal Care, Dietrich acknowledged recent volatility but expressed confidence in a return to mid-single-digit growth, citing strong Q2 order patterns and long-term private label trends.

Michael Harrison sought clarification on whether the 3-5% sales outlook was organic, inquired about the potential for full-year EPS growth, asked about the impact of energy and mining costs, the reason for unusual sequential margin strength in Engineered Solutions, and requested quantification of pricing headwinds in Specialty Additives.

Answer

CEO Douglas Dietrich confirmed the 3-5% sales growth outlook is organic and suggested the company could maintain its 8% compound annual EPS growth track, depending on product mix. CFO Erik Aldag noted that energy cost impacts were not major and that strong productivity and higher-margin projects in Environmental and Infrastructure drove the sequential margin improvement in Engineered Solutions. Aldag quantified the pricing headwind by noting that Specialty Additives volume grew 3% for the year while revenue grew only 1%.

Michael Harrison asked for an update on business trends in China following the Lunar New Year. He also inquired about the recent Tesla Cybertruck recall related to an adhesive failure, asking if it was an H.B. Fuller product and if the situation presented a business opportunity.

Answer

President and CEO Celeste Mastin reported strong mid-to-high single-digit growth in China, driven by portfolio repositioning in HHC and significant share gains in electronics and EVs within the EA segment. She emphatically stated that the adhesive involved in the Cybertruck recall was not an H.B. Fuller product. She framed the incident as an opportunity that highlights the need for highly technical partners like H.B. Fuller, particularly in growing areas like exterior automotive trim and structural adhesives.

Michael Harrison questioned the drivers behind the weakness in the HHC segment's packaging and consumer markets, asking about customer inventory trends and whether share shifts were negatively impacting H.B. Fuller. He also asked if the 2025 guidance incorporates conservatism given recent performance misses.

Answer

CEO Celeste Mastin described a 'dramatic slowdown' in HHC during Q4, affecting 10 of 13 market segments, potentially due to customer inventory rationalization. She acknowledged that consumer shifts to lower-cost products can be a headwind. Regarding guidance, she stated the company is committed to the range, which already assumes a slightly negative volume environment, but noted that better-than-expected volume or interest rate cuts could provide upside.

Michael Harrison from Seaport Research Partners questioned if the strong growth in Construction Adhesives was due to temporary factors like restocking and asked about the sustainability of the current activity level. He also inquired about controllable drivers for EBITDA growth heading into fiscal 2025, such as restructuring and acquisition synergies.

Answer

CEO Celeste Mastin attributed the Construction Adhesives success to restructuring, share gains in roofing (data centers, institutional buildings), and innovation like their new eco-friendly spray adhesive. She stated that she does not see evidence of restocking, but rather solid market demand. For 2025, Mastin and CFO John Corkrean outlined controllable factors including $10 million in remaining restructuring benefits, $20-25 million in EBITDA from recent acquisitions, and synergy capture, offset by wage inflation and variable comp rebuild.

Michael Harrison inquired about the Precision Clad Strip business, seeking clarity on the magnitude and timing of the expected 2025 volume decline due to customer inventory actions. He also asked about the drivers of the semiconductor business recovery and the specifics of the $73 million impairment charge in the Precision Optics segment.

Answer

President and CEO Jugal Vijayvargiya explained the Precision Clad Strip decline is roughly 20% year-over-year, spread across 2025, due to a customer's inventory reduction initiative, with a return to growth expected in 2026. He noted the semiconductor recovery is driven by advanced nodes for AI and high-performance computing, offsetting weakness in power semi. VP and CFO Shelly Chadwick clarified the Precision Optics impairment was a non-cash, model-driven accounting adjustment reflecting a revised forecast following a major customer loss, but not the company's commitment to the business.

Michael Harrison asked about the timing and savings from recent portfolio optimizations in Albuquerque and Asia, the permanence of cost reductions, the potential impact of missile shortages on the defense business, and the destocking timeline for the Precision Clad Strip customer.

Answer

President and CEO Jugal Vijayvargiya detailed the sale of the unprofitable Albuquerque architectural glass business (~$10M annual sales) and ongoing facility consolidations in Asia. VP and CFO Shelly Chadwick quantified cost takeouts at $15-20M, with over half being permanent, plus a temporary $5-6M incentive comp benefit. Vijayvargiya confirmed the defense business is strong, with bookings up significantly, and noted that the Precision Clad Strip inventory correction is expected to continue into the new year.

Michael Harrison of Seaport Research Partners requested more detail on the evolving distribution channel in Latin America and how FMC's strategy and organization are adapting, particularly in light of recent restructuring.

Answer

President Ronaldo Pereira detailed that distributor consolidation in the region led to a loss of FMC's historical share with smaller retailers. In response, FMC is now investing in a new sales team with skills tailored to a direct-to-grower model, focusing on crops like soybean and corn. This strategic shift is enabled by new technologies like fluindapyr, which are highly relevant to these large growers and provide a compelling entry point.

Michael Harrison asked about demand trends for hard goods and equipment, and whether customer behavior has changed in response to interest rate shifts.

Answer

CEO Sanjiv Lamba stated that hard goods sales are down mid-single-digits, which he sees as a leading indicator reflecting the broader industrial weakness. He noted that large-ticket purchases are sluggish globally due to economic uncertainty. Regarding interest rates, he has not yet seen a bullish shift in U.S. consumer behavior; if anything, sentiment appears to be tightening slightly despite anticipation of future Fed cuts.