Solstice Advanced Materials Inc. Common Stock Q2 2026 Earnings Call

Greetings and welcome to the Solstice Advanced Materials Q 2026 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. We ask that you please limit yourself to one question and one follow up. Then return to the queue. As a reminder, this conference is being recorded. If anyone should require. Operator assistance, please press star zero. It's now my pleasure to turn the call over to Mike Leithead, vice President, Investor Relations. Mike, please go ahead.

Thank you and good morning, everyone. Welcome to Solstice second quarter 2026 Earnings Call. We released our second quarter 2020 financial results earlier this morning. Today's presentation, including non-GAAP reconciliations and our earnings press release, are available on the Investor Relations portion of Solstice website at investor dot solstice.com. Our discussion today will include forward looking statements that are based on our best view of the world and our businesses as we see them today, and are subject to risks and uncertainties, including the ones described in our SEC filings. This includes statements. Regarding our pending acquisition of Element Solutions. Please see the additional disclosure in this morning's materials and our related SEC filings Joining me today are David Sewell, our president and CEO. And Tina Pierce, our CFO. David will open today's call with highlights of our second quarter results. Tina will then review our segment performance and financial outlook before turning the call back to David for closing remarks. We will then be happy to take your questions. With that, I'll now turn the call over to David.

Thank you. Mike, and thank you, everyone for joining us today. The second quarter. Solstice Advanced again delivered strong top and bottom line results reflecting ongoing robust demand trends across several of our key businesses, including nuclear energy, electronic materials, refrigerants and health care packaging In fact, six of our seven businesses grew this quarter Four of them at double digit rates. I want to take a moment to thank our entire Solstice team, whose execution this quarter speaks for itself. This performance demonstrates the strength of Solstice portfolio, not only through our transition to a standalone company, but also in a dynamic macroeconomic environment. This quarter that resilience showed up in sound execution through macroeconomic volatility. A heavier slate of planned plant turnarounds, and the largely complete exit of our transition service agreements. Our. Specialty materials, assets, and balance sheet strength continue to set us apart in this industry, allowing us to reinvest in growth at a time when many in the industry have needed to pare back. We continue to invest in compelling growth areas aligned with our strategic priorities, such as our electronic materials, safety and defense solutions, and nuclear businesses Consistent with what we believe are attractive long term outlooks for demand.

That investment spans both CapEx and increased R&D spending. As we advance the next generation of critical molecules for our customers. Together with our announced acquisition of Element Solutions. These high return organic investments mark a clear acceleration of our growth strategy. We generated $461 million of operating cash in the first half. Supported by disciplined working capital management, cash generation that funds our growth investments and supports returning cash to shareholders through our recently declared quarterly dividend. The strong cash generation of our business is what gives us confidence in the rapid deleveraging of net debt to less than three times EBITDA that we anticipate within 18 months following the close of the Element Solutions acquisition. With our strong first half performance and continued momentum across the business, we are raising our full year 2026 guidance. Even against an uncertain macroeconomic backdrop. Turning to slide four, I'd like to briefly update you on our acquisition of Element Solutions, which we announced on July 6th. This combination represents a significant acceleration of our strategy to build an industry leading advanced materials platform with increased exposure to high growth electronics, AI infrastructure and other attractive end markets. The same secular trends powering our results this quarter, include artificial intelligence.

Data centers, semiconductor manufacturing and thermal management are precisely what makes this combination so compelling. Together. We believe we will be better positioned to serve electronics and AI infrastructure customers from early stage development through high volume manufacturing. While our refrigerant solutions, including data center cooling and our specialty positions such as nuclear, remain core to the combined company. The logic here is grounded in what you are already seeing in our results. The customer expansion, secular demand, and technical capability that are foundational to the strength of our business. Solstice. And element are a natural fit, not only because we support similar customer environments, but because our complementary strengths. When you combine our chemistry expertise with elements, formulation capabilities, you get what we expect to be a leading platform for innovation that will fuel the development of next generation solutions with. Element. We believe we will also be positioned to collaborate with customers early in their project life cycles to develop solutions. Purpose built to support their objectives. The synergies we outlined in our investor materials about the transaction build directly on those drivers, which is why we have confidence in the value this creates. The transaction remains subject to shareholder and regulatory approvals and other customary closing conditions, and we expect it to close in the first half of 2027.

We are very excited about what our two companies can build together. Turning to slide five, I'd like to discuss our second quarter 2026 consolidated results. In the second quarter of 2026. Solstice recorded $1.148 billion in net sales, up 11% year over year, which exceeded the top end of the guidance. We provided for the quarter in our. Refrigerants and Applied Solutions segment Strong demand for refrigerants driven by the ongoing HFO transition and accelerating data center orders, together with continued strength in nuclear and a recovery in healthcare packaging, drove double digit top line growth for the segment. In our electronic and specialty Materials segment, net sales growth was driven by robust demand in our electronic Materials business for semiconductor applications. Adjusted EBITDA for the second quarter of 2026 was $290 million, up 2% year over year, and exceeding the top end of the guidance we provided for the quarter. Adjusted Ebit. Margin was 25.3%, in line with our expectations for the quarter. The decline in margin year over year was primarily driven by the timing of certain plant turnaround activity and prior year production incentive credits. Partially offset by volume growth and favorable pricing. As a. Reminder, we continue to see ongoing strong demand for our low global warming potential products.

Now, over a year into the 454 B transition. We continue to expect our refrigerants and applied Solutions segment to deliver mid 30% adjusted EBITDA margins in the second half of 2026. As the aftermarket develops. We reported GAAP net income attributable to Solstice of $119 million for the second quarter of 2026, up from $97 million a year ago, or $0.75 per diluted share, consistent with what we signaled last quarter Noncontrolling interests. Declined sequentially to. To $15 million this quarter from the atypically high. $20 million in the first quarter. This quarter. We also reported adjusted diluted EPS of $0.88 for the second quarter. Finally. Free cash flow for the first half of 2026 was $248 million, which is inclusive of the significant year over year increase in growth, CapEx. As we invest in high return opportunities across the business, including the Spokane expansion to meet robust, sputtering target demand. And with that, I'll now turn it over to Tina Pierce, our CFO, to discuss our financial results for the second quarter. In more detail.

Thank you, David. Turning to slide six. I'd like to discuss in more detail the key drivers of our year over year net sales and adjusted EBITDA performance in the second quarter. Beginning with our net sales of 1.148 billion from the quarter Organic net sales growth was approximately 11%, reflecting both volume growth and favorable pricing. This primarily reflects volume growth and favorable pricing in both nuclear and refrigerants, as well as volume growth in electronic materials Foreign currency translation was a modest tailwind of roughly half a point Turning to our adjusted EBITDA of $290 million for the quarter, up 2% versus the prior year period. Year over year improvement in SM, together with the favorable corporate and standalone comparison, more than offset a decline in Rev, which is primarily attributable to the timing of certain plant turnaround activity and production incentive credits that David, just discussed. Turning to slide seven, I'll now discuss the results in each of our two segments. In more detail, beginning with refrigerants and applied solutions. Overall, the segment achieved $850 million in net sales for the second quarter of 2026. Reflecting 12% growth year over year, driven by volume growth and favorable pricing across the business.

The segment posted $280 million in adjusted EBITDA for the second quarter of 2026. Down 6% year over year and adjusted EBITDA margin of 32.9%, down 648 basis points year over year. As mentioned previously, this decrease was primarily driven by the timing of plant turnaround activity and prior year production incentive credits, which more than offset volume growth and favorable pricing in the segment. Turning to the performance of our subsegments, refrigerant net sales increased 13% year over year to 473 million, driven by both favorable pricing and volume growth across our product offerings. Beyond the 454 strength that David highlighted, data center orders remain robust. Again this quarter, underscoring how this business sits at the intersection of several key secular growth trends. Our nuclear business had $125 million in net sales, up 27% year over year, reflecting both favorable pricing and increased volumes. We are seeing positive momentum in this business, reinforced by new supply agreements with three small modular reactor developers for the first time in decades, we are seeing meaningful innovation from entrepreneurs across the nuclear ecosystem. We remain excited about this differentiated business and the critical role we believe it will play in the nuclear renaissance. Now, clearly taking shape.

Building solutions and intermediate net sales were $180 million, down 1% year over year Continued construction market softness weighed on the subsegment. But we remain focused on advancing our GWP solutions and maintaining disciplined operational execution to ensure we are well positioned to serve our customers upon a return to more normalized demand in key end markets. Lastly, for healthcare packaging, net sales were 73 million, up 24% year over year. The increase was driven by a recovery in customer demand patterns following the destocking we saw in the second half of 2025, as well as favorable net pricing. Now, turning to our electronic and specialty materials segment on slide eight, the. Segment achieved $298 million in net sales for the second quarter of 2026, reflecting 8% growth year over year, driven by volume growth in electronic materials. The segment posted $64 million in adjusted EBITDA for the second quarter of 2026, up 24% year over year and adjusted EBITDA margin of 21.6%, up 280 basis points year over year. The increase was primarily driven by volume growth in electronic materials and productivity improvements. Looking at the. Performance of our subsegments. Electronic materials. Net sales increased 15% year over year to 119 million, driven by volume growth and robust customer demand across semiconductor applications.

We were also recently recognized with the top Supplier Award from SK Hynix, a strong external validation of the strength of our technology and execution. As David noted, we are expanding electronic materials capacity to meet AI and data center driven semiconductor demand, which we see as a significant multiyear opportunity for Solstice. Safety and defense solutions, had $43 million in net sales, up 7% year over year. As we anticipated last quarter, the business returned to growth driven by non armor applications, and we continue to invest in capacity expansion to support long term market demand for our spectra. Line of solutions Finally, research and performance chemical net sales increased 3% year over year to 135 million, with growth in fine chemicals partially offset by ongoing in-market softness in specialty additives. Moving to. Slide nine to discuss Solstice balance sheet and capital management. Our strong balance sheet. Cash flow generation and conservative leverage position continue to enable financial flexibility and fuel Solstice many attractive growth investments. I would like to start with cash. With Solstice generating $461 million of operating cash flow in the first half of the year in. Addition to healthy earnings generation, we were able to execute strong working capital management, reducing our dollar inventory.

Despite the healthy increase in revenue and rising input costs. Our. Capital expenditures for the first half were $186 million, a 32% increase compared to the prior year period due to planned increases in capital spending to drive long term growth and high return areas of the business As a reminder, beyond the electronic materials expansion in Spokane, we are actively investing in our spectra ballistic fibers expansion in Virginia, as well as advancing further expansion of our nuclear conversion business, as we work through Debottlenecking at our Metropolis facility, we are exploring attractive, incremental opportunities that we believe can take capacity beyond 10,000 metric tons. And we expect to share more later this year. Turning. To our capital structure, we have maintained a conservative leverage profile and strong liquidity position. As of June 30th, 2026, our total debt was approximately $2 billion and we had cash and cash equivalents of $750 million, resulting in net debt of approximately $1.25 billion and a net leverage ratio of approximately 1.3 times, based on a trailing 12 month adjusted EBITDA. As of June 30th, 2026, we also had $1 billion of availability under our revolving credit facility. Combined with the cash on our balance sheet, this results in approximately $1.75 billion of total liquidity.

As David mentioned earlier, we announced on July 17th approval of a quarterly dividend of 7.5 cents per share, in line with last quarter, which will be payable on September 10th to shareholders of record as of August 27th. We. Continue to view returning excess capital to shareholders as a key piece of our overall capital allocation approach. This same balance sheet strength is what allows us to finance the Element Solutions transaction from a position of discipline. We have structured the acquisition to preserve our current credit rating profile and our cash generation supports a clear path back to our target leverage in the periods following close. Turning to slide ten, I'd like to discuss our outlook and financial guidance for both the full year and the third quarter of 2026. Importantly, we did what we said we would do during this quarter, delivering above the range we set and converting that into strong cash generation. This kind of execution is the foundation for the confidence we are expressing today, both in raising our full year outlook and in our continued ability to drive growth for the full year 2026, we now expect to deliver net sales between 4.12 5,000,000,004.185 billion, adjusted EBITDA between 1.03 5,000,000,001.055 billion, and adjusted diluted earnings per share between $2.75 and $2.95.

Additionally, we now expect capital expenditures between 400 and $20 million and $440 million. Today, we. Are also providing guidance for the third quarter of 2026, as we want to help investors better understand our business and our first year as a public company. In the third quarter, we expect to deliver net sales between 900 and $90 million and 1,000,000,030. Our. Outlook for the third quarter assumes continued momentum in refrigerants and electronic materials, and more modest nuclear performance, reflecting the timing of final product loan returns and order patterns. With consistent margin performance. A few additional modeling points for the second half. We expect a negative revenue of approximately $30 million from the final return of nuclear product loans skewed modestly toward the fourth quarter. I'd now like to pass it back over to David for some closing remarks.

Thank you. Tina. And please turn to slide 11. With strong performance in the first half and solid momentum heading into the remainder of the year, we are well positioned to deliver on our full year 2026 guidance. As we discussed today, we are seeing continued strong demand in our businesses that serve key end markets aligned with secular growth trends, including artificial intelligence, data centers, semiconductor manufacturing and nuclear energy, and thermal management. These are core strategic areas for Solstice, where we have both a clear right to play and right to win. This is a strong, growing business today with durable pricing power, high returns on capital, and robust free cash flow. We are putting that cash flow to work with disciplined reinvesting in our businesses. Both in terms of expanding our R&D pipeline as well as high return growth CapEx, while returning excess capital to shareholders through our quarterly dividend, our pending acquisition of Element Solutions builds on that momentum, accelerating a strategy that is already working. We are energized by both delivering on our current business quarter after quarter and bringing these two companies together to create even more value. We have worked well underway to develop an integration roadmap to seamlessly bring our businesses together.

After this transaction closes, in order to unlock the compelling opportunities we see ahead for our combined company, we remain. Excited about the significant opportunities ahead in 2026 and beyond. We look forward to sharing additional updates throughout the year. And with that, we are now happy to take your questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question. Queue. You may press star two if you'd like to remove your question from the queue. As a reminder, please ask one question and one follow up. Then return to the queue. One moment please, while we pull for questions. Our first question today is coming from Kevin McCarthy from Vertical Research Partners. Your line is now live.

Hi, this is Matt Hauer on for Kevin McCarthy. Congrats on the. Nice quarter. And in refrigerants. How do you see sales and EBITDA growth unfolding in the back half of the year? And what kind of margin impact do you expect from incremental unit sales given the transition to Hfos?

Thanks, Matt.

What we talked about for refrigerants business is continued. Sequential margin expansion. I think we talked about mid 30s for the second half of the year, which we feel very confident in. We talked about some of the margin. Impacts in second quarter. With that behind us, we see the margin expansion continuing. We did have sequential margin expansion in refrigerants in Q2 over Q1. And from a volume standpoint. We feel very confident in continued strong demand for our refrigerants. We're actually seeing a little bit of an acceleration to hfos from HFCS, which. We think is a continued positive. And, you know, for the most part, the aftermarket for Hfos in North America has not kicked in yet. So that's additional upside that we see moving forward.

Thanks. And then as a follow up, maybe you could discuss how your development of next generation non PFAs refrigerant molecules is progressing.

So we're doing a lot of work. On next generation molecule and we're really excited about the development that we have ., we're currently,, in testing that looks very promising. And we have already begun,, conversations with customers on this as well., part of the,, refrigerants that Tina talked about on, on the margins., we did increase our R&D spend earlier this year., and a big. Chunk of that is going to the next generation molecule as well as,, next generation molecules in development for ,. Things like two phase direct to chip immersion cooling. So we feel really well positioned,, to continue to innovate in next generation.

Thank you. Our next question today is coming from Josh Spector from UBS. Your line is now live., yeah. Hi. Good morning., I just wanted to ask about the second half guidance. So you gave sales, but not EBITDA for three. Q so I'm not sure why you you didn't give that., just considering we don't have a ton of history. So can you help us either with a specific kind of range for three Q EBITDA or a way to think about phasing, just given the moving parts here.