Element Solutions - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered a clean beat versus consensus with revenue of $593.7M vs $576.7M* and adjusted EPS of $0.34 vs $0.33*, supported by 10% organic growth in Electronics and strong wafer-level packaging demand tied to data centers and high-bandwidth memory.
• Guidance held: full-year 2025 adjusted EBITDA maintained at $520–$540M and Q2 2025 adjusted EBITDA guided to $120–$125M, with management emphasizing tariff cost mitigation, FX tailwinds, and steady demand into Q2.
• Segment divergence persists: Electronics up 13% reported (+10% organic), Industrial & Specialty down 12% reported (-2% organic) amid offshore timing and European industrial softness; margins held well in I&S due to cost discipline and raw material deflation.
• Potential stock catalysts: sustained AI/data-center momentum and HBM ramps, clarifications around tariff impacts (cost pass-through/localization), and optionality from a strong balance sheet (net leverage ~2.1x; buybacks/M&A).

What Went Well and What Went Wrong

What Went Well

• Electronics outperformed: net sales +13% to $394M (+10% organic) with wafer-level packaging sales up >20% and HBM programs ramping; “Order patterns from these customers remain strong”.
• Adjusted EBITDA resilience despite mix/FX: total adj. EBITDA $128M (+1% YoY; +5% CC) with Electronics adj. EBITDA +6% and I&S margins expanding on procurement/productivity and raw material deflation.
• Clear tariff mitigation playbook: “We believe we can mitigate most of the direct impact… on our cost structure,” via alternative sourcing, USMCA exemptions, and localization; exposure quantified (U.S.→China ~$10M; China→U.S. negligible directly).

What Went Wrong

• Industrial & Specialty top-line pressure: net sales -12% reported (-2% organic) with offshore order timing shifting to H2 and continued European weakness.
• EBITDA margin headwinds from pass-through metals: higher metal prices dragged margins (~70 bps headwind YoY), masking underlying improvement; ex-metals margins would be ~26% in Q1 per management.
• Seasonality and sequential revenue down: Q1 revenue $593.7M vs Q4 2024 $624.2M (typical seasonal pattern and divestiture impact).

Transcript

Speaker 6

I would now like to turn the call over to Varun Gokarn, Vice President of Strategy and Integration. Please go ahead.

Speaker 2

Good morning, and thank you for participating in our first quarter 2025 earnings conference call. Joining me today are our Executive Chairman, Sir Martin Franklin, President and CEO Ben Gliklich, and CFO Carey Dorman. In accordance with Regulation FD, we are webcasting this conference call. A replay will be made available in the 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 the earnings release, supplemental slides, and most recent SEC filings on our website for a discussion of material risk factors that could cause actual results to differ from our expectations and predictions. Today's materials also include financial information that has not been prepared in accordance with U.S. GAAP.

Please refer to the earnings release and supplemental slides for definitions and reconciliations of these non-GAAP measures to comparable GAAP financial measures. It is now my pleasure to introduce our CEO, Ben Gliklich.

Speaker 3

Thank you, Varun. Good morning, everybody. Thank you for joining. Element Solutions started 2025 strong. We grew profits and continue to see contributions from progress executing on our breakthrough growth strategies. The trends that drove our performance in 2024 continue to propel us forward. There has been no pause in demand from fast-growing AI, advanced packaging, and data center markets, and we also benefited from an improvement in consumer electronics markets in Asia. We grew mid-single digits organically, despite ongoing softness in Western automotive and general industrial supply chains and a mediocre market backdrop for Western smartphones. Our overall electronics business grew 10% organically on the back of our ongoing strong execution and consistent investment to improve our value proposition in leading-edge semiconductor and power electronics technologies.

Sales from our wafer-level packaging products grew more than 20% as programs on leading-edge nodes continue to ramp, including a significant pickup from high-bandwidth memory applications. Order patterns from these customers remain strong. Similarly, despite well-documented weakness from a major domestic electric vehicle OEM, our power electronics business grew nicely in the quarter from new wins that have broadened our customer base. Several years ago, we had a collection of electronics businesses with good capabilities in select niches. Today, we have a single unified electronics business that is leading in important emerging categories, collaborating across its different product areas to provide system-level solutions to OEMs and building a pipeline of breakthrough innovation that should support future growth. This has been a deliberate transformation, and we're only just beginning to see the results. Electronics is also supporting our business at a time of cyclical weakness in our industrial and specialty segment.

In addition to a weak overall backdrop in industrial markets, the segment suffered from timing-related delays in certain offshore projects. The offshore market remains healthy, and we expect to recover those volumes in the second half of 2025. Despite these dynamics, profitability in the I&S segment was relatively steady year-on-year due to modest raw material deflation and the proven price and cost discipline we've demonstrated for the past several quarters. Our results in the first quarter are not reflective of the level of macroeconomic volatility of the current moment. On the other hand, we have a demonstrated ability to be nimble in periods of uncertainty and a clear track record of navigating through these periods by focusing on our customers while also managing cost as necessary to preserve profits.

We remain steadfast in pursuing thoughtful long-term investment to develop strategic capabilities that support the technologies that we expect to drive our markets. Through recent periods of electronics contraction and recovery, we've maintained and selectively grown sales and technical resources needed to support those markets. We should not expect that investment posture to change with renewed market volatility. With our graphic sale completed in Q1, we're fortunate to have the strongest balance sheet in our history as ESI. We have substantial capacity to deploy capital to drive long-term shareholder value and expect the current market to create attractive opportunities. Carey will now take you through our first quarter business results in more detail. Carey?

Speaker 5

Thanks, Ben. Good morning, everyone. On slide three, you can see a summary of our first quarter financial results. Organic sales and constant currency adjusted EBITDA both grew 5% year-over-year. Adjusted EBITDA of $128 million was above our guidance target for the quarter. Electronics organic growth of 10% was broad-based across historically higher margin, higher value categories in circuitry and semiconductor, as well as relatively lower margin assembly materials for consumer electronics. This translated into constant currency adjusted EBITDA growth of 9% in electronics. ESI's adjusted EBITDA margin declined roughly 30 basis points year-over-year in constant currency terms. These margins were negatively impacted by higher pass-through metal prices, which drove a 70 basis point headwind relative to the same quarter last year.

Excluding the impact of roughly $100 million of pass-through metal sales in assembly solutions, our adjusted EBITDA margin would have been 26%, corresponding to a 50 basis point improvement versus last year. While FX rates have improved for us recently, currency negatively impacted total company net sales in the first quarter by roughly 3% and with a roughly $5 million year-over-year headwind to adjusted EBITDA. We expect this to reverse in Q2 and become a tailwind based on current exchange rates. On slide four, we share additional detail on the drivers of organic net sales growth in our two segments. In electronics, we saw double-digit growth with strong performance across all three business units. In assembly, stronger consumer electronics demand in Asia and the Americas more than offset continued industrial weakness, primarily in Western Europe.

Advanced specialty solder paste volumes for various computing applications grew meaningfully, and we saw strong growth of technically challenging engineered assembly solutions used in server and data center applications. Circuitry solution sales improved 8% organically, with growth continuing to come from data center applications, memory disk markets, and specialty finishes for circuit boards in the Asian EV market. Our business mix continues to shift towards B2B end markets as applications for servers, data centers, and high-performance computing grow rapidly. This transition should dampen both quarterly seasonality and general cyclicality over time. Semiconductor solutions organic net sales grew 17% from continued robust demand in wafer-level packaging for SemiFab and OSAT customers in Asia. Our ViaForm copper damascene product line grew north of 20% this quarter. The customer proximity we gained in 2023 by terminating our distribution agreement and going direct to our customers continues to yield great results.

We expect to commercialize two new leading-edge products that further support advanced packaging applications later this year. Our power electronics products also continue to grow well in the first quarter. We have made substantial progress broadening the Argomax Sintered Silver technology customer base to electric vehicle manufacturers in Asia and in Europe. These new customer wins signal growing commercial traction and validate our leading technology position in a rapidly growing end market. Industrial and specialty organic net sales declined 2% year-over-year. The 1% decline in the core industrial business was largely volume-driven and concentrated in Europe. While we have not yet seen a pickup, recent policy changes in Europe towards infrastructure and defense investment may drive an increase in industrial activity that should benefit our business.

Offshore's year-over-year sales decline in the quarter was a result of timing for a few large orders that fell into the latter part of the year. We continue to expect healthy growth for that business this year on the back of pricing and new wins. Slide five addresses cash flow and the balance sheet. We generated $30 million of adjusted free cash flow in Q1. The adjustment takes into consideration the sale of our graphics business and certain non-recurring expenses and tax items. The first quarter is always our slowest from a cash flow standpoint, given the semi-annual interest payment on our bonds and annual incentive payments. We invested $12 million into working capital, which primarily reflects a seasonal inventory build and higher accounts receivable due to increased SIFT. CapEx in the quarter was $11 million, somewhat below our guided run rate.

We still plan to invest roughly $65 million over the course of the year to support strategic growth initiatives. Now turning to the balance sheet, our net leverage ratio at the end of the quarter was 2.1 times, which is the lowest level in our history as ESI. Our capital structure remains fully fixed at an effective rate of 4%, and we have no debt maturities until 2028. With that, I will turn the call back to Ben. Ben.

Speaker 3

Thank you, Carey. Our business fared well through the first quarter despite the specter of trade actions impacting business and consumer sentiment. We are a short-cycle business, and any economic assumption for the balance of the year comes with macro uncertainties. Given our global footprint, the recently announced trade actions have added complexity to our business ecosystem. In this uncertain moment, there are immutable aspects of our business that merit reiterating. We operate locally in most of our markets, with sourcing, manufacturing, and technical support resources close to our customers. Our diversified and regionalized manufacturing footprint allows us to be nimble to accommodate dynamic trade flows. Our products represent a tiny fraction of the cost of high-value goods but are integral to their performance. Thanks to those attributes, we believe we can mitigate most of the direct impact from ongoing and potential future tariffs on our cost structure.

Additionally, we're in the midst of initiatives to further localize sourcing and remain in regular communication with suppliers and customers around ways to mitigate cost issues that arise as a result of the ongoing tariff situation. There may also prove to be opportunities where competition may not have the same luxuries of flexibility and geographic breadth that we enjoy. In the absence of additional clarity around tariff implementation and its impact on demand, without any emergent signs of a slowdown in our core markets and with some cushion provided by the weaker US dollar and outperformance in Q1, we're maintaining our initial full-year guidance of adjusted EBITDA between $520 million and $540 million as our current best estimate of earnings potential this year.

For the second quarter of 2025, we expect a similar demand picture to Q1 and therefore expect adjusted EBITDA in the range of $120-$125 million, which is roughly flat sequentially when removing the $4 million contribution from our graphics business in Q1. This assumes that tariffs do not have a sequential demand impact, which is the best assumption that we can make today, especially based on April trading, which has been solid thus far. As we've demonstrated repeatedly in recent periods of uncertainty, whether during prior tariff escalations in 2019, COVID in 2020, or the inflationary impacts that followed, we're prepared to react quickly to shifts in demand and cost. We have a highly variable OPEX structure and local teams that can rapidly respond to customer needs. We are prepared to navigate the dynamic environment that has emerged. It was a good start to 2025.

Commercially, we've built a high-quality, high-probability pipeline of large leading-edge electronics opportunities and margin-enhancing industrial projects. We think these are unlikely to be derailed by current circumstances. Operationally, we're increasing manufacturing capacity for future growth areas such as nanocopper and power electronics, streamlining our legacy manufacturing footprint, and we're building research and applications development in high-leverage geographies. We continue to execute other functional process improvement programs to add efficiency across the organization. Our company is executing well, with long-term growth prospects as good, if not better, than in the past. That is a tribute to our teams, who are responsible for another good quarter of both results and progress.

Let me close by thanking all of our stakeholders for their continued support of Element Solutions and, in particular, our talented and dedicated people around the world working productively and collaboratively and quite creatively, I would add, to support our customers and drive long-term value for our shareholders. With that, Operator, please open the line for questions.

Speaker 6

Thank you. At this time, I would like to remind everyone in order to ask a question, press star, then number one on your telephone keypad. We ask to please limit to one question and one follow-up. We will pause for just a moment to compile the Q&A roster. Our first question comes from the line of Josh Spector with UBS. Your line is open.

Hey, guys. This is James Cannon for Josh. Congrats on a solid quarter. I just wanted to poke on.

Thank you.

I just wanted to poke on the guidance range and particularly since you're not including any significant impact from tariffs. As we think about the low end of the range, can you just remind us what some of the macro indicators that are underlying that assumption are?

Speaker 5

Sure. Maybe just the big picture thoughts on the guidance range as just articulated in our prepared remarks. We finished Q1 ahead of plan. We see a modest impact from tariffs from a cost perspective. We're largely able to mitigate most of the impact from tariffs to cost. We've got an FX tailwind, and our April trading, right, demand remains strong. We haven't seen any signal of demand destruction year to date from tariffs. It is on that basis that we're maintaining our full-year guide. There's nothing that's indicated demand destruction, and the demand assumptions we had entering the year are the best we have. There's a bit of, I'd call it, more uncertainty around that range, but we haven't seen anything. If anything, April's ahead of plan. How do you get to the high end and the low end?

It's really electronic strength and industrial weakness. Those are the two key variables. The electronics business is outperforming our baseline expectations entering the year. The industrial market is modestly weaker, I would say, and if that persists, depends which one sort of overtakes the other to get to the various bookends of that range and obviously doesn't include any demand destruction from tariffs, given the uncertainty around what tariffs will be implemented and when and what that will do to the consumer.

Got it. Thanks. Just on a separate note, I just wanted to poke on you called out data center strength in both assembly and circuitry. I was wondering if you could frame just size the exposure there.

Yeah. As we think about our data center exposure in the circuitry business, we're selling circuit board process chemistries that go into the large server boards. That's a business that wasn't that big for us just a couple of years ago, but it's been growing really rapidly, double digits year on year now for several years. On the assembly business, we talked about high-performance specialty alloys, solder pastes, and then engineered products that are used in server board assembly as well. Altogether, this is north of $100 million in both of those businesses. If you add in our memory disk business and circuitry, you're bumping up against $200 million of exposure in that market.

Great. Thank you.

Speaker 6

Your next question comes from the line of Bhavesh Lodaya with BMO Capital Markets. Your line is open.

Hi. Good morning, Ben. Ben, one more follow-up on the guidance. Assuming we do see a slower end market demand in the second half, and given how important the third quarter is for ESI, can you talk about some of the potential actions that you envision you can take to defend your end guide here?

Speaker 5

Yeah. Element Solutions has the benefit of a highly variable cost structure. It's something we've highlighted in the past and been able to demonstrate in the past. We can almost automatically take dramatic costs out of the business from incentive compensation, quickly tighten our belt around travel and other discretionary expense line items without damaging the long-term growth trajectory of the business. We flex that down if you go back to Q2 of 2020, where we took SG&A down 15%-20% in a quarter. If we need to do that, we know how to do that. We can do that without difficulty. That's not contemplated in our guide right now. We're running with, I'd call it, full OPEX out of Q1 and into Q2, and those levers remain at our disposal.

Got it. Someone follow-up, maybe a question for Martin. Martin, you've been a large shareholder and obviously a big part of Element Solutions' growth story so far. As we look ahead from here, where do you see yourself as part of the Element Solutions story and in terms of ownership and involvement in study directions going ahead from here?

I didn't hear the question clearly. Just Ben, where do you see your involvement? Put that in the context of recent. I think you're probably asking me why for the first time in 12 years I sold some shares, and that's simply for liquidity reasons. As a matter of principle, I wouldn't want to sell shares at a time when the business was obviously not inhibited in any way from my transacting or in a very healthy state. Of course, as you can see, the business is in a very healthy state. It really doesn't change anything to do with my long-term vision for the company, my long-term involvement with the company. That was simply for liquidity purposes. It's a long journey for me, as you know, from founding platform to today.

I feel that if you like persevering and working to put this business in the right position, it has been a journey that's appropriately being rewarded in the equity markets, obviously with all this current disruption, but overall. I don't see anything changing. It's taken a long time to really understand this business. By the time I get into the point where you really understand it, no point in stopping now. There we are.

Richard, the thoughts. Thank you.

Speaker 6

Your next question comes from the line of Mike Harrison with Seaport Research Partners. Your line is open.

Hi. Good morning.

Morning, Mike.

Noted within the semiconductor business, strong growth in wafer-level packaging, and you mentioned high-bandwidth memory as a driver there. Can you give us a little more color on the key applications that you're serving in high-bandwidth memory and maybe comment on how you see the opportunity unfolding there?

Speaker 5

Yeah. Our wafer-level packaging business continues to grow really nicely. The primary product in there is damascene copper. And you'll recall in 2023, we terminated a long-term distribution agreement there, gave us more customer proximity, better access to technology roadmaps. We talked about having a couple of new product launches coming in the back part of this year associated with our wafer-level packaging business and really directly attributable to that. There has been very strong growth. Within high-bandwidth memory, those are Korean customers that are ramping their production significantly. Again, this is data center and high-performance computing driven. We see a lot of growth opportunity there, and our product has incumbency or has established, I would say, incumbency in that market going forward.

All right. I was just wondering, within the electronics business, you've been targeting 2-4% outperformance of the underlying market over time. In the current environment where there is some additional uncertainty or we might expect some potential slowing of the underlying market, how confident are you that you can still deliver on that outperformance of 2-4%?

Appreciate that question, Mike. It's not as though we're coming off a period of really robust growth in the broader electronic supply chain. You go back to 2024, you had soft MSI. You did have a strong PCB market, which we nicely outperformed. You look at this quarter, our semi business growing in the teens is, I would say, vastly outperforming the underlying semi market. Our assembly and circuitry business is both growing in double digits organically, I think is also healthy outperformance relative to those markets. The reason for that is our penetration of fast-growing emerging growth vectors. We refer to them also as these B2B sales, talking about data centers and low-earth orbit satellites that are dislocated from the consumer electronics cycles that used to be primary drivers of our electronics business.

We see those B2B markets as continuing to grow and have seen no slowdown in demand, if anything, an acceleration in demand there. We are confident in our ability to continue to outperform.

All right. Thanks very much.

Speaker 6

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

Hi. This is Rock Hoffman on the line for Steve Byrne. Just given the recent focus on rejiggering manufacturing locations besides the tariffs, as well as preparing for the potential of a consumer or industrial demand pullback, is there any risk to the timelines of rollouts for blockbuster products such as Argomax, Cochrane, and Shadow Plus, as well as any other medium-term projects getting pushed out further?

Speaker 5

Yeah. It's a fair question, Rock. There are two dynamics here, right? The first is to protect ourselves and our customers from the impact of tariff price increases. We're localizing certain parts of our supply chain, moving production from one site to another. That's a discrete tactical activity. We'd like to believe that we have fungibility across our sites from a production perspective. That's something that's ongoing by our local teams. On the other side, as you mentioned, we do have some big products coming down the pipeline that require discrete manufacturing. The people working on those are different people, right? We are nearly finished with doubling our Argomax capacity at our site that produces that. We've made real strides forward on active copper manufacturing and trying to scale that up.

We are expecting to have a new plant ready, mid-scale plant ready to produce that in the second half of this year. There is a lot of activity in the supply chain, but we are adequately staffed and resourced to support it.

Understood. Just as a follow-up, could you go a bit more into how the industrial business is performing geographically and key market drivers that enabled only 1% organic sales drop this quarter?

Yeah. It's a good observation. The industrial surface treatment business, which sits within our industrial and specialty segment, had revenue and volume down about 1%. That was weakness in Europe, relatively stable, slightly down market in the Americas, and some strong growth coming out of Asia. Our Asian industrial business is winning share, is participating in the growth in the automotive sector in China, and benefiting from that.

Thank you.

Speaker 6

Your next question comes from the line of Chris Parkinson with Wolfe Research. Your line is open.

Speaker 3

Great. Thank you so much for taking my question. Ben, it's very clear that premiumization of the portfolios obviously has already been paying off and perhaps paying off even more despite some uncertainty. Can you just hit on some of the things, getting away from tariffs for just a second, but just what makes you the most enthusiastic across both assembly and circuitry and how you see your product offerings kind of evolving throughout 2025, 2026, what you're hearing from the marketplace? And perhaps if you could sneak in a comment on Cochrane in there as well, it'd be greatly appreciated.

Speaker 5

Yeah. Absolutely. You asked about circuitry and assembly specifically, and I'll address those too. I think the general observation that we're seeing a shift towards high-value B2B sales in both of those businesses is very exciting and will change some of the cyclicality that you might have seen in our assembly business and our circuitry business in the past. Our technologies for these very high-performing server boards, which are different than the GPUs themselves, but the boards that the GPUs sit on inside of those data centers, are very thick, very difficult to metalize. We've got the flagship product and process technology for that application. We've been winning a significant share there.

We've made real strides penetrating the IC substrate market, which has been a softer market within the circuit board or within the circuitry industry, but has long-term very high performance or has very high growth opportunities associated with it. We've won real business with final step metalization or what's called solder preparation for electric vehicles, where there's an immersion tin product that's been growing really nicely in the Asian electric vehicle market. All across the circuitry business, we're seeing new demand vectors where our technologies are preferred processes. In the assembly business, we've been skewing that business towards higher tech applications, the renovation and alloys, some engineered products that have really interesting applications in data centers. Active copper isn't contributing yet, and that's Cochrane. Indeed, the number of applications and the pull from the customer base is incredibly robust.

The engagement with OEMs, OSATs, specifiers, and applicators remains really, really high. Our conviction in the earnings potential of that technology is rock solid and just an added layer of growth from here forward.

Speaker 3

That's great color. Just as a quick follow-up, I think the balance sheet is in a pretty good spot, especially after the graphic sale. Can you hit on, can you give us some insights on how you're thinking about some of the tucking M&A you've discussed before, buybacks, and just your comfort level going forward for the balance of 2025? Thank you so much.

Speaker 5

Yeah. Absolutely. Thanks for the question, Chris. Leverage is as low as it's ever been in our history. Six-year history is Element Solutions. Balance sheet is in really good shape. We paid down some debt and still have $500 million of cash to deploy. There is a lot of volatility right now. The volatility should create interesting opportunities to deploy that capital. We are very well positioned to take advantage of them. With regard to M&A versus buybacks, I think the simple observation I'd make is that the hurdle for M&A is higher with our equity where it is. That does not mean that there cannot be any very compelling M&A created by this opportunity, but the buyback option looks pretty interesting too.

Speaker 3

Thank you so much.

Speaker 6

Your next question comes from the line of Pete Otterland with Truist Securities. Your line is open.

Hey, good morning. Thanks for taking the questions. I wanted to start by following up on the impact that tariff uncertainty might be having on customer conversations and order patterns. I guess specifically, have you seen any signs of tariff-related pre-buying across your core end markets, either in first quarter or in April?

Speaker 5

Yeah. It's a good question, Pete. That's something we've been looking for evidence of. We see the sort of headlines of folks buying new phones in anticipation of tariffs. From where we sit in our supply chain, we're not seeing that as a direct pull on consumption of our chemistries. We really don't see any clear evidence of this being a pre-build. That's not to say that some of the demand isn't. Again, if you think about where the growth is coming from, these are B2B sales, and you can see the CapEx that's driving it, whether that's in data centers or in the electric vehicle market or in the low-earth orbit satellite markets. We don't think that this is driven by pre-build or pre-buying, but some of it could be in fairness.

That's a very helpful color. As a follow-up, I just wanted to ask about the margin performance within INS. You had a nice expansion there in the first quarter despite organic growth being down. I guess just looking to the rest of the year as the energy business comes back, would you expect to drive segment margins higher from here, or were there any benefits to call out from mix or costs that were limited to the first quarter?

Yeah. It's a good observation, right? That offshore business is a high-margin business for us, and it was down year over year. We talked about that in the prepared remarks with the drivers of that are, and we do expect it to get better in the second half, which will drive margin expansion, all else equal. The reason that margins improved is the standard cost-price discipline we've exercised, and we've seen some ongoing raw material deflation, which we expected entering the year. There is reason to see that industrial and specialty segment margin improve going forward. I don't care if there's anything we don't know.

Speaker 3

Yeah. I think the other point to make is that volumes in the core industrial business are still down meaningfully from their peak. While we are a highly variable cost model, getting more volume to those plants does have some operating leverage. We are not anticipating a lot of that in 2025, but that is still upside to margin if you think about the long-term opportunity there.

All right. Very helpful. Thank you.

Speaker 6

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

Thank you. Nice quarter and guidance. I assume your March quarter results and your June quarter guidance has a bonus accrual consistent with your full year previous earnings targets, or if not, could you tell us what you're assuming there?

Speaker 5

Yeah. Look, as we answered a question earlier, we're running with full OpEx right now. We haven't been reducing bonus accruals on the basis of demand destruction that we haven't seen any of yet. We have that full lever at our disposal.

there any seasonal differences you're expecting here in the next second, third, and fourth quarter versus what you had in 2024?

Yeah. That's a great question, John. It speaks to the Q2 guide. It's hard to say what a normal year is, but if you go back several years, typically the second half was 52-53% of EBITDA, and the first half was the balance. The past several years have had a lot of different lumps associated with supply chain disruptions and all the things we've lived through. Last year, interestingly enough, the second quarter was quite strong in electronics, benefiting from the pre-builds of smartphones that typically fall into Q3 and other consumer electronics device launches. We had a stronger Q2 than typical, and we didn't have the same level of Q3 uplift that we normally would have. When we look at Q2 this year, we're assuming a more, I'll call it normal seasonal pattern on the basis of consistent demand from Q1 into Q2.

Thank you.

Speaker 6

Your next question comes from the line of John Tenwanting with CJS Securities. Your line is open.

Hi. Thanks for taking my questions and that nice quarter. The first one, just expanding a little bit more on the stronger demand in April, or I guess the stable demand. Are you seeing any pockets of weakness or strength in there, or is it a straight line continuation of what you saw in Q1 by end market, number one? I'll follow on after that.

Speaker 5

Yeah. It's really consistent with Q1. In some areas, a modest acceleration around semi is what I would say.

Okay. Great. For the year, I just wanted to be clear. Are you assuming zero demand destruction from the current tariff environment, say a base level of 10%, and with the potential for more depending on the countries and where negotiations go? Is that what I'm hearing in terms of what the underlying assumption is at this point?

Yeah. We're assuming in aggregate the same demand environment that we expected entering the year.

Okay. Great. If you see, for example, the continuation of 145% for, say, China through the rest of the year, that's not going to meaningfully impact what your expectations are for demand?

Speaker 3

It's hard to say to put parameters around that because let's take, for example, the latest tariff in the tariff argument exempting a whole series of products that we are a part of the manufacturing process. The devil's going to be in the details. I think trying to micro-pick at that doesn't really work because you're dealing with an environment that's so volatile. This is on the assumption that the world is continuing as normal.

Speaker 5

Importantly, it's taking into consideration the cost impacts of that, right? What we're saying with this is we can mitigate the impact of tariffs on our cost structure and maintain our guidance range on that basis. We can go through the levers of what we're doing to offset cost in the different buckets if that's a follow-up that folks want to go into.

Great. No, that makes sense. Thank you, guys.

Speaker 6

Your next question comes from the line of Alexei Yefremov with KeyBank Capital Markets. Your line is open.

Thanks. Good morning. This is Ryan on for Alexei. Ben, I guess I'll take the low-hanging fruit here and just ask you, what exactly are you guys doing to kind of mitigate the costs that are coming in the supply chain from tariffs at this point?

Speaker 5

Yeah. I set myself up for that one. There are really three buckets of cost increases that we're seeing from client tariffs. The first is raw materials that are imported from China into the United States. We do not do much of that ourselves. We do have suppliers that are sourcing from China, and we have spent a bunch of time trying to find alternative sources and understanding what those cost impacts would be to us. That is a pricing lever that we have had to throw, and we have been very clear. We have done this in the past when we have seen inflation of specific commodities where we pass that on to customers directly. The second bucket is finished goods or rather other things that we are importing into the U.S. from places other than China. One example is Mexico.

We've got quite a bit of cross-border trade with Mexico. Fortunately, we qualify for the USMCA exemptions there. Figuring out what products are going back and forth and making sure that they do qualify for those exemptions has been a big piece of work. We've got confidence that that 10% tariff on imports in the United States isn't going to be meaningful for us. The third bucket are things that we're shipping from the United States to China. We do have some finished goods and raws that we're shipping into China. What we've done to mitigate that impact is localization, right? Moving our sourcing and moving our manufacturing from the United States to jurisdictions in Asia, maybe not directly into China, and shipping through and shipping to China from there. That should be able to offset most of that impact.

Net-net, we don't view it as a headwind to our guidance.

Understood. That's helpful. I guess just sticking on this topic, I mean, you talked about kind of China to the U.S. and U.S. to China. Can you maybe just size on a dollar basis or a percentage basis of goods, just kind of like what your actual exposure there is? Thanks.

U.S. to China is in and around $10 million. China to U.S. direct is negligible. Again, that's through our suppliers. The finished goods into the U.S. from other countries is sizable. We have been able to offset that through exemptions and also some level of localization.

Great. Thank you.

Speaker 6

Your next question comes from the line of David Silver with CL King. Your line is open.

Okay. Thank you. I had a question, I guess, about maybe some of the behavior of some of your major customers. I’d like to maybe focus on your R&D activities and your product development activities, in particular where you’re collaborating closely with customers. Has the current uncertain environment that everyone’s asking about, has that had a notable impact on the company in terms of the pace or the resourcing behavior of your customers? In other words, for longer-term projects where you’re collaborating, what has been the behavior? Has there been any change from your major customers given the current uncertain environment?

Speaker 5

The short answer, David, is no. We're working on long-term projects associated with breakthrough technologies. The industry, the market, the consumer is pulling those technologies. We continue to see a very active level of engagement between our R&D functions, our direct customers, specifiers, OEMs. The business is very local. Our innovation is not just on the breakthroughs, but it's on new applications, technologies. It's on sustainable applications. We've seen no pause in momentum whatsoever. You heard us talk about two new product introductions we're expecting in our most advanced front-end area at the end of this year. Those are continuing at pace.

Okay. Thank you. Just one last one. If I caught your comments correctly, I think regarding consumer electronics, you've indicated maybe a slowdown or softness in the Western, I think, smartphone market. You also talked about a pickup in that category in Asia. I'm just wondering if you could maybe just flesh that out a little bit. Is that company-specific? Is there a big shift going on that you see? Why wouldn't the softness in the Western, why wouldn't the Western consumer electronics market start to look a little bit more like the growthier performance in Asia going forward?

Yeah. You call out an interesting note, which is we talked about strength in consumer electronics in the Americas, but softness in smartphones in the West. That consumer electronics strength in the Americas is PCs and other consumer electronics, X smartphones. There was strength in the local Chinese smartphone market in the quarter, right? We've seen some government subsidy to drive consumer activity in China. We did see a strength in that local market. That's not for export. Also strength in non-smartphone consumer electronics in the Americas. That's the distinction that I would call that you've picked up and that we saw in the first quarter.

Okay. Great. Thank you very much.

Speaker 6

Again, if you would like to ask a question, press star one on your telephone keypad. There are no more questions from the queue. I will now turn the call back over to Ben Gliklich for closing remarks.

Speaker 5

Thank you, Cass. Thank you, everybody, for joining. We look forward to seeing many of you in the weeks and months to come. Have a great day. Take care.

Speaker 6

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