Qnity (Q) Q1 2026 Earnings Call Transcript

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Date

Tuesday, May 12, 2026 at 8 a.m. ET

Call participants

• Chief Executive Officer — Jon Kemp
• Interim Chief Financial Officer — Michael Goss
• Operator

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Takeaways

• Net sales -- $1.3 billion, representing 18% growth year over year and 11% sequentially from fiscal Q4 2025 (ended Dec. 31, 2025).
• Organic sales -- Up 17%, with double-digit increases in both Semiconductor Technologies and Interconnect Solutions segments.
• Adjusted operating EBITDA -- $411 million, an increase of 22% year over year, with margin expanding by more than 125 basis points to 31.3%.
• Adjusted EPS -- $1.08, up 33% year over year, marking a record quarter for the company.
• Semiconductor Technologies segment net sales -- $722 million, with 12% organic growth, led by demand for advanced logic and high-bandwidth memory (HBM) chips.
• Semiconductor Technologies segment EBITDA margin -- 36.4%, up 130 basis points sequentially, driven by improved efficiencies and product mix.
• Inventory restocking contribution -- $20 million within the Semiconductor Technologies segment, especially in mature nodes.
• Interconnect Solutions (ICS) net sales -- $593 million, with organic growth of 22% year over year, led by Advanced Packaging, Interconnects, and Thermal Management.
• ICS core area sales growth -- Advanced Packaging and related core areas saw sales grow over 50% year over year.
• ICS EBITDA margin -- 28.5%, up 280 basis points sequentially, supported by operating leverage from high volumes and favorable mix.
• Adjusted free cash flow -- $28 million for the quarter, reflecting strong cash generation offset by annual variable compensation.
• Capital expenditure -- $61.5 million, including approximately one-third allocated to the new Taiwan facility build.
• Cash and short-term investments -- $850 million at quarter-end, with total debt at $4 billion and net debt leverage at 2.2x.
• Share repurchases -- $25 million of shares bought back to offset equity dilution.
• Full year net sales guidance -- Raised to $5.225 billion to $5.375 billion, a 5% increase at the midpoint.
• Full year adjusted operating EBITDA guidance -- Increased to $1.535 billion to $1.625 billion, a 4% increase at midpoint.
• Full year adjusted EPS guidance -- Updated to $3.80 to $4.14, representing a 6% midpoint increase.
• Full year adjusted free cash flow guidance -- Raised to $500 million to $600 million, a 10% increase at midpoint.
• MSI wafer start outlook -- Increased to mid-single digits to high single digits, signaling improved market demand expectations.
• Geographic performance -- Net sales in Korea grew 25%, and in America by 17%, both year over year.
• New collaborations -- Joint R&D initiative announced with NVIDIA to accelerate materials innovation for AI and advanced packaging; company included in Apple’s American manufacturing program.
• Capacity expansion -- Delaware facility (385,000 sq ft) opened and new Taiwan site announced, boosting advanced materials production and R&D to meet future demand.
• Transformation plan -- On track for $100 million EBITDA run-rate benefit by end of 2028, focusing on productivity, commercial excellence, and local-to-local operations expansion.
• Pricing actions -- Management confirmed, "we're taking targeted pricing actions," to address $20 million in anticipated raw material and logistics cost headwinds for the remainder of 2026.
• Customer mix evolution -- Portfolio continues shifting to non-consumer markets, with data centers, autonomous driving, and aerospace and defense applications highlighted as new demand drivers.
• POR wins -- Process-of-record wins continued across both business segments, sustaining long-term revenue visibility.

Summary

Management highlighted sustained double-digit growth in key segments, underpinned by strong demand in AI-related markets and advanced logic nodes. Strategic initiatives included accelerated production capacity expansions in the U.S. and Taiwan and newly formed partnerships, most notably with NVIDIA and Apple, expected to deepen technology leadership. The revised annual guide reflects higher MSI wafer start growth projections amid elevated demand signals and a broadening customer base. Qnity Electronics (NYSE:Q) described robust order books, margin expansion in Interconnect Solutions, and a favorable business mix as major contributors to outperformance. Management provided transparency on planned capital allocation, working capital discipline, and cost mitigation tactics against potential geopolitical and inflationary risks.

• Jon Kemp said, "Volumes at 3-nanometer continue to scale, and we're starting to see meaningful activity at 2-nanometer," with ongoing R&D focused on emerging angstrom-era nodes.
• Record first-quarter results were attributed to continued momentum in AI-exposed end markets and operating leverage, confirmed by management statements.
• ICS segment sales growth above 50% was powered by Advanced Packaging, AI printed circuit board (PCB) wins, and thermal management content, with managers stating these tend to ramp quickly post-win.
• ICS EBITDA margin reached historic levels due to strong absorption and mix shift toward higher-value offerings, with signals that further margin increases are expected as portfolio composition evolves.
• Although some raw material and logistics inflation is anticipated, the local-for-local strategy and targeted pricing are described as adequate to largely offset these headwinds.
• Company exposure to the China memory market is characterized as limited, with most Chinese business in mature logic rather than advanced technology nodes.
• Recent hiring for segment executive roles has accelerated, with "a really strong pipeline of qualified candidates," progress expected to be announced soon.
• Working capital metrics remain healthy: inventory days over 100, inventory turns near 6x, and receivables aging (DSO/DPO) at expected levels.
• Data center, automotive, communications infrastructure, and aerospace/defense now constitute a growing portion of revenue mix; premium consumer device exposure cited as resilient despite industry softness.

Industry glossary

• MSI: Metric indicating "wafer starts" as a proxy for aggregate semiconductor industry demand and production trends, particularly at leading-edge technology nodes.
• POR (Process-of-Record): The validated status of a product or process qualified by customers for use in volume production, pivotal to securing recurring revenue streams in semiconductor supply chains.
• HBM (High-Bandwidth Memory): Advanced memory technology used for high-performance computing, enabling faster data transfer rates and improved efficiency in AI and data center applications.
• CMP (Chemical Mechanical Planarization): A critical semiconductor manufacturing step that polishes and smooths wafer surfaces, foundational for advanced node device performance.
• ICS (Interconnect Solutions): Qnity Electronics' business segment focused on materials and products essential for connecting semiconductor components, including packaging, PCBs, and thermal management.

Full Conference Call Transcript

Jon Kemp: Thank you for joining us this morning. Our strong performance this quarter demonstrates how Qnity creates value. First, through a powerful integrated portfolio. Second, a differentiated ability to innovate alongside our customers' road maps. And third, leadership in advanced materials that are foundational to the exponential growth in AI and emerging technologies. For decades, Moore's Law has been the driving force behind technological advancement in the semiconductor industry. Innovation meant shrink. Smart transistors and higher density to improve performance, and power. Now those gains are increasingly constrained by physical limits. Shrink built the last era. Stack will define the next.

That means even while shrink remains important, we're moving from 2D design to 3D architectures, stacking chips to unlock the next frontier of computing. That shift from flat to vertical elevates the importance of materials, integration and reliability and ultimately, redefine where value and leadership are created. This inflection plays directly to Qnity's strengths and how our business segments work together to power a stack. In semiconductor technologies, customers rely on our material to smooth, shape and precisely engineer surfaces at the wafer and device level. This is the foundation of performance, yield and reliability.

As AI investments accelerate, stacking creates increasingly complex advanced packages and systems, with a multiplier in both process steps and material intensity for every additional layer. And the challenge shifts from individual steps at the chip level to managing integration at scale. That's where our Interconnect Solutions business segment built on semi's work. Addressing [indiscernible] level constraints like power efficiency, heat management, signal integrity and long-term reliability. All while capturing more content as stacks grow taller. Together, Qnity brings these strengths into one differentiated platform, helping customers build scale and operate next-generation computing platforms.

With these unique capabilities, supported by our local-for-local model that keeps us closely connected to customers around the world, Qnity is well positioned as the partner of choice for many of the industry's leading fabricators and OEMs pioneering next-generation technology. This advantaged position reinforces our confidence in delivering sustainable long-term value for our shareholders. That long-term confidence is reflected in our near-term execution. Let's turn to our first quarter results, where we delivered our 8th consecutive quarter of strong profitable organic growth. [ Organic ] sales increased by 17% versus 2025 with double-digit growth across both segments. Adjusted operating EBITDA increased by 22%, and adjusted earnings per share grew by 33%.

These results clearly reflect the ongoing momentum from AI exposed to end markets and next-generation technologies, along with our ability to drive strong operating leverage. In semi, we grew organic sales 12% year-over-year, driven mostly by advanced nodes, led by advanced logic and high-bandwidth memory. We also benefited from ongoing improvements in [indiscernible] nodes and NAND. Across the board, fab utilization rates continue to improve in line with our expectations. As wafer mix continues to shift toward a leading edge with more advanced nodes, we're well positioned for continued growth, driven primarily by increasing content per wafer. Higher node complexity brings more CMP process steps. Incremental demand for our most advanced clean and requires increasingly intricate lithography patterning.

Volumes at 3-nanometer continue to scale, and we're starting to see meaningful activity at 2-nanometer. Beyond this, we're increasingly excited about [ angstrom ] era nodes like 16, 14 and 10, which is the primary focus of our R&D engagement with customers, and keeps us tightly aligned to their road maps. In ICS, we had an exceptional quarter with organic sales growing 22% year-over-year, driven by content and share gains in Advanced Packaging and Interconnect and thermal management. Advanced Packaging is expected to be a core growth driver for years to come, as the move from shrink to stack accelerates.

As I mentioned earlier, more sophisticated architectures means larger package sizes, higher layer [indiscernible] and more accunity content in every device. In Advanced Interconnects, we're winning new business with AI PCB fabs for the leading hyperscalers and premium smartphone OEMs, where signal integrity and reliability requirements continue to rise. As data center demand accelerates, managing heat is a critical objective. Our industry-leading thermal management portfolio is designed to remove heat across the entire system, supporting increasing content and higher device performance. Our growth momentum is a testament to the depth of our customer relationships and the strength of our innovation engine.

We're in a strong process of record, or POR position across both segments, due to the investments we're making in R&D and innovation, giving us visibility into our growth potential over the next few years. Built on decades of partnership, we [indiscernible] our customers' trust and with it comes a clear mandate to innovate and to move fast because in this industry, that's what it takes to win. During the quarter, we underscored that trust through several key announcements, including a new collaboration with NVIDIA, focused on advancing materials research and development for next-gen AI, high-performance computing and Advanced Packaging. By combining our materials expertise with NVIDIA's modeling and simulation capabilities, we're working to accelerate development and improve manufacturing capabilities.

That same commitment to collaboration and execution is reflected in our inclusion in Apple's American manufacturing program, recognizing our role as a long-term trusted partner. To support customer road maps and supply ramps for the most advanced chips, we continue to execute our capital allocation strategy to further bolster manufacturing capacity and strengthen our local-for-local operating model. In the U.S. we expanded our footprint with the March opening of a 385,000 square foot facility in Delaware. And in Taiwan, we announced a new state-of-the-art site with advanced production, clean rooms, warehousing and R&D labs scheduled to be fully operational in early 2027.

These investments significantly expand our manufacturing capacity for critical CMP materials, strengthen our operational agility, ensure global and regional capacity, and advanced collaborative innovation with customers. Before I hand things over to Mike, I want to touch on end market demand and the broader macro environment. Customers remain highly focused on supply chain resilience at a time when wafer capacity remains tight. As customers allocate capacity to the highest value applications, our portfolio mix is increasingly moving beyond consumer electronics to attractive high-value applications like data centers, autonomous driving and aerospace and defense.

And while there's been a considerable attention on the impact of memory pricing on demand for devices like smartphones and PCs, our results this quarter demonstrate we aren't seeing a material impact for two important reasons. First, our exposure is primarily to premium devices, which tend to be more resilient. And second, AI-led infrastructure growth is more than offsetting any softness in consumer electronics, whether chips are going to data centers, satellites, or smartphones, we're well positioned to pick up that demand given the depth and breadth of our portfolio. With that, I'll turn it over to our interim CFO, Mike Goss, to discuss our financial results and provide an update on our full year guidance.

Michael Goss: Thanks, Jon, and good morning, everyone. We had an excellent start to the year with first quarter net sales of $1.3 billion, up 18% year-over-year, and 11% sequentially. On an organic basis, sales improved 17% versus same period last year. Adjusted operating EBITDA was $411 million, up 22% year-over-year. Adjusted operating EBITDA margin expanded more than 125 basis points versus the same period last year to 31.3%. Adjusted EPS for the quarter increased 33% to $1.08. This was a record quarter for Qnity, driven by continued momentum in our AI linked businesses and strong execution by our team. We're very pleased with the performance, which reflects a combination of strong volumes, operating leverage and favorable mix.

Let me provide a bit more detail on how each business segment performed during the quarter. Semiconductor Technologies performed in line with our expectations with net sales of $722 million, with year-over-year organic sales growth of 12%, led by demand for advanced logic and HBM chips. We saw broad-based strength across several product lines and particularly strong gains in [ CMP ] [indiscernible]. First quarter was strengthened by $20 million of inventory restocking, particularly in mature nodes following customers' careful inventory management in the fourth quarter. This pattern was similar to what we observed in the first quarter of 2025.

Our adjusted operating EBITDA margin in the segment was 36.4%, up 130 basis points sequentially from the fourth quarter, driven by improved manufacturing efficiencies and favorable product mix. In Interconnect Solutions, impressive execution delivered net sales of $593 million with organic growth of 22%, led again by Advanced Packaging and Interconnects and Thermal Management. Sales in these core areas grew more than 50% year-over-year as we capitalized on demand tailwinds from data centers and benefited ramps on shorter cycle EOR wins from last year. Adjusted operating EBITDA margin for [ ICS ] was 28.5%, an improvement of 280 basis points sequentially. This was driven by strong operating leverage on higher volumes and favorable mix.

In line with our expectations for the quarter, we generated adjusted free cash flow of $28 million. This reflects strong operating cash flow, partially offset by annual variable compensation. Cap expenditures were reflective of our capacity expansion efforts, which included about 1/3 of our $61.5 million investment in the new Taiwan facility. Our overall balance sheet remains strong, and we're committed to maintaining a returns-focused capital allocation framework. As a reminder, our first priority is to reinvest organically in the business to sustain a cost market growth. We continue to anticipate elevated CapEx investment for the full year at approximately 9% of sales, driven by investments to strengthen our [indiscernible] footprint in key geographies and support our transformation initiatives.

Over the longer term, we expect CapEx to be in the 6% of net sales range. We also remain committed to returning capital to our shareholders through our quarterly dividend, and during the quarter, we repurchased $25 million worth of shares to offset normal equity dilution. We're well positioned from a liquidity perspective with approximately $850 million in cash and short-term investments at the end of the first quarter. Total debt outstanding is $4 billion with a net debt leverage of 2.2x. We maintain balance sheet flexibility to focus on the areas that add value in the long term. Our transformation plan announced last quarter is underway and tracking to plan. We have work streams dedicated to 3 focus areas.

Driving productivity and quality improvements, strengthening commercial and innovation excellence and advancing our local to local operating model. We continue to expect these actions to deliver approximately $100 million of EBITDA run rate benefit by the end of 2028. Separately, our transmission is further supported by continued progress on IT separation. This parallel effort is well underway as we continue to make steady progress on TSA exit across our digital infrastructure. Turning to guidance. Building on our strong first quarter results. We expect a normal seasonal increase in the second quarter with sequential net sales growth in the mid-single digits, supported by strong brand trends, including continued momentum for AI-driven applications high-performance computing and advanced connectivity.

More specifically, in Semiconductor Technologies, we expect sequential net sales to be roughly flat with a margin profile in the mid-30s. For ICS, we expect [indiscernible] net sales growth in the high single-digit range with margins in the mid- to high 20s. From a mix perspective, across both segments, we continue to see end market strength similar to the first quarter combined with the normal seasonal increase in consumer electronics. In addition, we're also making incremental investments to support strong customer ramps [indiscernible] seeing. Additionally, considering the ongoing conflict in the Middle East, we're taking a prudent approach to planning while continuing to strengthen our portfolio position to meet customers' needs.

We're seeing modest upward pressure in certain raw materials, energy and logistics costs. To mitigate these impacts, we're leveraging our local-for-local operating model, working closely with a diversified supplier base across regions, and adjusting inventory levels for critical materials. Based on what we see today, we don't expect any near-term operational disruption, where we are seeing incremental increases in input or logistics costs, we're taking targeted pricing actions to pass those through in a disciplined manner. The external environment remains dynamic, and we are continuing to monitor how things evolve. Today, overall demand signals remain strong, and customer conversations are constructive.

With this in mind, we're raising our full year guidance to reflect the strength we realized in the first quarter and our forecast for the remainder of 2026. Our guide incorporates our expectations of MSI wafer start growth to be mid-single digits to high single digits, increasing from our previous expectation of mid-single digits. This underscores our confidence in the underlying demand signals we're seeing. Net sales is now expected to be $5.225 billion to $5.375 billion, a 5% increase at the midpoint.

We assumed geopolitical inflation headwinds for some raw materials and logistics costs of approximately $20 million for the remainder of 2026 based on current conditions, but expect to largely offset these through pricing actions with some timing variability. Adjusted operating EBITDA is now expected to be $1.535 billion to $1.625 billion, a 4% increase at the midpoint. Adjusted earnings per share is now expected to be $3.80 to $4.14, a 6% increase at the midpoint. Finally, adjusted free cash flow is now expected to be $500 million to $600 million, a 10% increase at the midpoint. Overall, we expect double-digit net sales and EBITDA growth year-over-year.

As we move through the year, we're maintaining a disciplined and measured approach in the second half, balancing execution with visibility, customer alignment and flexibility to support long-term value creation. Jon, back to you.

Jon Kemp: Thanks, Mike. Before we open the call for Q&A, I want to underscore a few things as we mark 6 months as an independent company. First, we're pleased with our progress executing our growth strategy, delivering meaningful innovation to solve our customers' toughest challenges, scaling our platforms in step with their growth and allocating capital to the highest return opportunities. We're excited by the traction we're seeing as our strategy translates into differentiated offerings, increasing demand and solid performance. Strategy points the way forward, but culture is what drives results. Qnity's team is aligned on the goal focused on getting things done and committed to the outcomes.

We're looking forward to executing against this path with discipline and focus, driving durable growth and long-term value for our investors. That wraps up my remarks. Operator, let's open the call for Q&A.

Operator: [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions] We'll take our first question from Chris Parkinson with Wolfe Research.

Christopher Parkinson: When we think about the trajectory for the balance of the year, obviously, there have been a lot of moving parts even within the last few weeks. Could you speak to your assumptions in terms of what appears to be an accelerating mainstream recovery and how that should affect your second half numbers as well as [indiscernible] in '27? And then also, Jon, I think most of us are of where you've been investing in a lot of new products and those seem to be ramping on a preliminary basis. If we can just get the framework for those as well?

Jon Kemp: Thanks, Chris. I appreciate the questions. Maybe starting with the first question on mainstream demand. We're excited by the progress that we're seeing from some of our mainstream customers. Obviously, it's been kind of a slow recovery in that part of the market, but we're seeing very constructive signs and signals. I think the commentary in the most recent earnings season is positive.

And we see utilization rates continue to increase on the mainstream logic side, really kind of from the from the mid-70s last year into the high 70s, maybe even into -- a little bit into the low 80s kind of in the first quarter, and we expect to see continued sequential improvement as we move through the remainder of the year. Obviously, there is a bit of an impact from memory market on demand in some of these areas. But what we're really excited about is the increasing positive demand that we're seeing from AI applications starting to extend in the mainstream realm.

We've heard lots of customers talking about edge computing and physical AI over the last few weeks and the growth that they're anticipating from that think that, that's going to power kind of the next wave of AI-led infrastructure demand, and we're excited to see that progress on the recovery on the mainstream side. Maybe moving to your second question around new product introductions. We're really excited by the continued progress that our innovation and R&D and commercial teams are having on securing new process of record, or POR wins. 2025 was a record year for us, and we saw POR wins in every [ line ] of business.

That momentum has continued into the early part of this year, where we continue to see wins across the most advanced technologies in both segments. To give you a couple that I'm really excited about. We -- obviously, we launched some new CMP materials across both pads and advanced cleans, targeting the most advanced semi [indiscernible] 2-nanometer and even starting to get into the some of the [indiscernible] of [ 16, 14 ] and forward. We've seen some nice wins in our lithography space in both [indiscernible] as well as some EUV sublayers to help facilitate the continued growth of the most advanced lithography.

And then on the Interconnect side, we continue to see new wins in AI PCB boards with fine lines and interconnect, copper [indiscernible] and interconnect products as well as continue to see progress advancing our thermal management portfolio across thermal pads, liquid gap fillers and face change materials. So a lot more to come on innovation, but it's really powering the strong momentum that we're seeing in both segments.

Christopher Parkinson: Great. And just as a quick follow-up, just switching over to the ICS side of it. I mean, I think it's a lot of what we are [indiscernible] of the data centers, hyperscalers and GPUs seems to be pretty much heading in the right direction. Can you just speak to -- it seems like the kind of the content, which you can -- in terms of your tangible addressable market, it seems to be further evolving even since what you put out at the CMD last year.

Can you just speak to further the kind of the broader opportunity, how you see kind of the run rate growth over the next few years and whether that actually differs and it's higher than it was even 6 to 9 months ago?

Jon Kemp: Yes, thanks. Obviously, the ICS business continues to outperform significantly and really driven by the strong alignment that it has to AI-led demand and that's really fueled by the -- or the exposure that we have to kind of the 3 highest growth areas in the Interconnect segment, Advanced Packaging, Thermal Management and AI [ PCB ]. And in the first quarter, we saw those 3 areas collectively grew by more than 50% in the quarter year-over-year, benefiting from -- those tend to be a little bit shorter cycle wins. And so as we win new business, they tend to scale up a little bit faster.

And so what you're seeing is the results of some of the wins that we had last year starting to scale and really contribute to growth. We expect Advanced Packaging and Thermal in this part of the market to remain the fastest-growing parts of our portfolio. We're investing in line with our customers to meet their capacity as they put more capacity in the ground, especially for things like Advanced Packaging, and they continue to build out more advanced printed circle board architectures to be able to meet the rising demand. And we're investing in line with that to be able to meet that demand.

I don't think we're at the point where I want to update guidance on the ICS segment, but we're excited by the continued momentum that we're seeing, and we think it will be a strong contributor to our growth going forward.

Operator: We will move next with Melissa Weather with Deutsche Bank.

Melissa Weathers: Congrats on the really nice start to the year. I really like this narrative of shrink versus stack, I think that's an interesting way to frame it. I guess to that point and kind of following up on the last question, the AI PCB design wins that you talked about, it seems like those PCBs need to be upgraded significantly as we look at like the architectures of some of these new processes coming out. So is there any other color you can give on, like, what the direction of travel is in that market? What kind of visibility do you have? How deep are your customer engagements on that PCB side?

And then I noticed you -- it kind of seems like maybe it's the third fastest grower behind Advanced Packaging and thermals. Is that the right way to think about it? Or I guess any other color on the AI PCB, I think, would be helpful.

Jon Kemp: Sure, Melissa, thank you. I think the progress that we're seeing on the AI PCBs is maybe an underappreciated part of the growth story, right? So what we're seeing is as the OEMs are looking to drive performance, reliability in their system level design, they need the capability to get all of that computing power effectively distributed throughout the data center. And what that requires is an increase in the number of layers so that you can get that [indiscernible] all of that data rapidly transited into the system. And so the increase in the layer count as well as trying to -- very similar to what we've seen on the semiconductor side in terms of increasing density.

They're trying to do the same things on the [ circa ] Board and the way to increase density on the [ circa ] Board is a combination of both shrink and stack. So you're putting smaller lines, and [indiscernible] call finer lines and spaces on the [ circa ] board, while you're also adding more layers to the architecture. In both dimensions, both of those trends require more advanced technology to allow the overall board to meet the performance requirements of the application. And in both situations, both finer lines as well as in higher layer counts, that plays into the strength of the Qnity portfolio and really where our metallization business has been positioning itself for several years.

We put a concerted effort on this part of the market going all the way back to the downturn in 2023, where we shifted our R&D portfolio significantly to focus on this part of the market, and it's paying dividends today, and we continue to be excited by the road maps that we have with our leading PCB customers as we help them to scale, kind of, the next-generation format for printed [ circuit ] boards as well as the next-generation formats for Advanced Packaging.

Melissa Weathers: Perfect. And then as we look at your growth over this year and maybe next year, you talked about some of your capacity plans in your prepared remarks. But at a high level, how do we think about your ability to supply at this point? Are there any areas where you may be constrained, or accelerating capacity build-outs? And I guess, is there any like kind of revenue framework that we should be thinking about for how much you can supply and where your limits are?

Jon Kemp: Yes. Thanks, Melissa. So when we think about our supply and demand planning, we do that in lockstep with our conversations with customers on what their demand ramps are expected to be over the next few years. And typically, we can invest inside of the investments of our customers. So that gives us good [indiscernible] and usually after we've already have POR wins. So these tend to be very high return projects that we have confidence because already won a lot of the business that will then be used in these facilities.

Our local for local operating model has been a strategic advantage for us where we continue to invest to build out capacity and capabilities in all of the key geographies that are important to our customers. If you look at the last few years, we've added capacity in every single one of our semiconductor product line to make sure that we had capacity not only to meet demand as it returns to the record 2022 levels but even beyond. And that's kind of underscored by the announcements that we made in the first quarter with the new capacity in the U.S. and Taiwan.

Both of those are bringing kind of state-of-the-art production capabilities, especially for the fastest-growing part of our semi segment, which is [ CMP consumables ]. It gives us access to clean room space to production capacity to R&D labs. And we're excited. What I would say about the scale-up is in Delaware, where we've got our first line already operational and in customer [indiscernible]. Obviously, in Taiwan, we'll do -- we'll complete the equipment installation in the fit out this year and expect that site to be fully operational in early 2027. On the Interconnect side of the house, we typically -- the capacity investments there are typically relatively small and quick to scale up.

So we can do those in fairly modular incremental investments that are kind of well inside the capital allocation framework that Mike talked about in the prepared remarks.

Operator: We will move next with Bhavesh Lodaya with BMO Capital Markets.

Bhavesh Lodaya: A question on your agreement signed with NVIDIA and Apple recently. If you could talk a bit more about around the scope and longevity of these agreements. And I'm curious how this plays in your relationship with TSMC? If -- and does it make it easier to win qualification for the next 10 nodes? Is there a part to potentially getting more market share over time? Happy to your thoughts on that.

Jon Kemp: Yes. Thanks, Bhavesh. Good question. When I think about the agreements, to me what I think it underscores, is really the attention that materials providers are starting to see from across the technology and the semiconductor ecosystem. Whereas in the past, a lot of the conversations would be just directly with our manufacturing partners and the folks who are buying the transactional customers, what you're seeing is that when you get to things like signal reliability, power efficiency, thermal management that the technology and the process complexity are so great that the materials innovation angle is starting to kind of emerge as one of the important drivers of system-level performance.

And so you're starting to see -- we're starting to see OEMs get involved in material selection and design, and they're looking for capable materials innovation partners to help them advance what they're great at, which is the application engineering. So Qnity brings that materials innovation expertise that can complement the fantastic application engineering capabilities of many of our OEM partners. And that partnership allows us to speed up the pace of innovation and to make sure that we're keeping pace with the technology road maps in the industry.

It reinforces the partnership that we have with customers, but it's more an extension of those partnerships because we're now involving, kind of, the rest of the value chain in those holistic system-level design decisions which creates great opportunities for us because our portfolio is fairly uniquely positioned to be able to solve the problems at a system level design.

Bhavesh Lodaya: Got it. And maybe as a follow-up, a separate question. There are reports of multiple Chinese players trying to scale up their memory production to benefit of the ongoing shortage in the industry. Just given your presence there, could you talk about if you are seeing that impact are you exposed to this dynamic in the second half?

Jon Kemp: Yes. Good question, Bhavesh. So on the memory market, look, I think lots of folks are trying to allocate capacity to the highest return opportunities. We're certainly seeing that on the utilization trends for both DRAM as well as NAND, just to give you a couple of data points there. On DRAM, we kind of finished 2025 in the mid-80s and have been, kind of, trending up into the high 80s, and we continue to expect to be in the high 80s, maybe even reaching above 90% as we get into the second half of the year.

And there is progression in NAND as well from kind of the mid- to high 70s last year, kind of the high 70s and progressing quickly, maybe even into the low 80s as we get into the second half of the year and start to see continued recovery in that part of the market. As it relates to the memory market in China, we don't have -- most of our China semiconductor exposure is really on the mature logic side because memory usually converts more quickly to the most advanced technologies. And in China, we're not selling into the most advanced technologies in China.

So we don't have a lot of in-depth conversations with the memory part of the market in China.

Operator: We will move next with John Roberts with Mizuho.

Unknown Analyst: This is [indiscernible] from [indiscernible] John. A nice sequential uplift in EBITDA margins. As we think about Q2, I know there are moving parts on raw material inflation. But how are you thinking about margins in Q2? And then I have a follow-up as well.

Jon Kemp: Sure, thanks for the question. We had a little bit of feedback on your line. But I think I heard you ask about EBITDA margin heading into second quarter. So at a headline number, we're really excited about the first quarter performance. Even the margins were above 31%, driven really by continued momentum, as we said in our prepared remarks across both segments. And we see that trend continuing as we head into second quarter. Specifically around second quarter, the couple of pieces that I highlight.

We do expect the volume benefits to continue with a little bit of slight headwind from product mix, especially on the ICS piece of the business as that transitions into the consumer electronics time of the year, and that's a normal seasonal shift that we see. Additionally, coming out of the spin, we did have a lot of planned hiring post spin. That took a little longer than we originally expected, but it did ramp up nicely, and we got good traction in that hiring in the back part of the first quarter. And obviously, that will carry forward into the second quarter.

Additionally, with all the growth that we are seeing, we're continuing to make additional hiring investments to support that growth. And so if I click up a notch, overall, I do expect semi to continue to be in the mid-30s from a margin perspective, and ICS continues to perform nicely in the mid- to high 20s on an EBITDA margin basis. And all of it is continuing to support that continued growth that we're seeing.

Unknown Analyst: And, can you provide an update on hiring of the Head of Semiconductor and [indiscernible]

Jon Kemp: Sure. I'll go ahead and take that one. What I would say is we're making great progress for both of those roles. We've got a really strong pipeline of qualified candidates that we're actively engaging and evaluating. We're obviously working with as much speed and urgency as we can, and we're fortunate to have a couple of really qualified executives who are doing a terrific job helping to run the business as we work through this process. And I look forward to sharing more about those appointments as we get here into the future.

Operator: We will move next with Edward Yang with Oppenheimer.

Edward Yang: Jon, Mike, congrats on a nice quarter. First question is on Interconnect Solutions. EBITDA margin there was a record by a wide margin. It sounds like that's sustainable, but just wondering where that ceiling can go? And on the flip side, why was semiconductor EBITDA margin down year-over-year?

Jon Kemp: So maybe I'll go ahead and start and then ask Mike to chime in. On the interconnect margins, I think what we're seeing there is the continued benefit of really strong volumes and nice operating leverage, fixed cost absorption, combined with a really favorable product mix. I think as we've talked about in the past, the fastest-growing parts of that segment, advanced packaging, the AI PCBs, and thermal management also happen to be the highest value parts of the business. So as that growth continues to scale and comprise a larger percentage of the overall total, you're seeing some natural mix benefits and that's kind of flowing through.

And we've talked about before, ICS continuing to have the most opportunity for kind of ongoing margin increase. You're seeing it in the first quarter as we go from, kind of, our prior construct of in the mid-20s to start to get to the mid- to high 20s, and we expect that trend to continue going forward. Mike, maybe I'll turn it over to you.

Michael Goss: Yes. Thanks, Jon. On the semi margins, as we said in our prepared remarks, the semi business performed nicely and in line with our expectations in the quarter. From a margin perspective, the -- we saw a little bit of maturity in the first quarter and that product mix can always impact margins in the semi space. But from a broader, maybe give you a little bit of color more broadly from a geographic perspective, we continue to see nice performance across broader part of Asia, with a couple of highlights from Taiwan and up 25% year-over-year on a top line basis in Korea, up 17% year-over-year. America has performed nicely as well.

So looking ahead to next quarter, I continue to expect to see nice performance out of semi from a growth perspective. And as we've talked about before, their margins should be -- continue to be in the mid-30 spaces.

Jon Kemp: And then maybe I would just add there. As we think about that, the mid-30s is a really healthy place to be for the semi margin given the increased level of investment that the most advanced technology requires both from the innovation side as well as to scale up the level of quality and performance necessary to support the high-volume manufacturing at our customers.

Edward Yang: Okay. That's very helpful color. And follow-up question is just, obviously, the memory market is working out very well for you right now. But there is some labor unrest. I wonder if your Korean memory and foundry customers. And just wondering if you -- what you're hearing from that partner? And do you have any contingency plans in place if there are any walk-outs or disruptions there?

Jon Kemp: Yes. Good question. I think we're all watching the news over in Asia closely on that front. And I don't know that I have anything new or different to share than what's already kind of out there in the public sphere. I would say our conversations with kind of all of our customers, particularly those in Asia, are happening on a daily or sometimes even multiple times today where we're working with them on, kind of, what they're seeing and what the needs are.

We're always -- one of the things that we have as part of our normal ongoing process is a constant practice of doing kind of rigorous scenario planning so that we can be agile and resilient in any type of environment. And certainly, in the last couple of years have taught us anything, it's been to be prepared for unexpected shocks that can happen in a moment's notice. And I think our teams have done a really nice job of adapting and responding to kind of whatever the markets and the external environment is thrown at them, and we'll continue to use that discipline around scenario planning and rapid response and agility in the environment here as we go forward.

Operator: [Operator Instructions] We will move next with Frank Mitch with [ Fermium ] Research.

Unknown Analyst: A nice start to the year. You guys had your conference call on Feb 26. Obviously, the world changed on Feb 28, but I'm not sure that, that would be a huge impact for your business. You offered a kind of a soft guide on 1Q and obviously came in materially better than that. What may have surprised you in March if that is indeed true? And if so, does that continue in April and beyond?

Jon Kemp: So I think as we think about the first quarter and the guide for the second quarter, I think at a high level, Frank, I would say that semi largely performed in line with our expectations. The one part of the semi market, it did a bit better than we were expecting was really kind of in the mature in the mature logic space where we saw some restocking and some other -- more constructive comments than maybe than we were expecting before. And then really the most of the outperformance in the first quarter was really driven by the strong growth from the Interconnect Solutions segment, and the continued strength in Advanced Packaging, Thermal Management and AI PCBs.

But even the broader interconnect space was relatively healthy. So the magnitude of the strength there compared to what I would call kind of historic seasonal patterns. It was remarkable, and we see that momentum continuing in the second quarter. And Mike gave a little bit of color there on what we expect in each of the segments going into the second quarter with kind of roughly flat revenue for the semiconductor segment and another high single-digit sequential increase from the Interconnect segment, with the start of some of a build in some of the consumer electronics applications in our portfolio. Mike, anything else you'd add there?

Michael Goss: Yes. I think the thing that I would add to that, Jon, is there's a couple of points sitting here in the second quarter. What we do see is continued strong order books, which is always great to be able to say, positive demand signals from our customers and the continuation of the node transitions that Jon mentioned earlier, along with continued POR wins. From a perspective about the second half, [indiscernible] prepared remarks, we talked about the guidance that we issued today having taking a very prudent view on that from an inflation perspective.

And so as we monitor that closely and proceed through the second half if conditions, I'll say improve, we have a chance to do even better.

Unknown Analyst: Got you. Understood. And listen, I appreciate the increase in the free cash flow guide for the year. Obviously, your EBITDA guide also went up. And so it was, kind of, in lockstep with that. How do you think about working capital use throughout the year? Obviously, a bit of [indiscernible]. How do you think about that playing through the year?

Michael Goss: Yes. Thanks for the question. Yes. Free cash flow in the quarter was right in line with our expectations. As you know, we always prioritize high-return capital investments to make sure we're continuing to have the leading nice capacity to match the strong demand that we continue to see from our customers. And you saw that in our recent announcement to announcements that Jon mentioned earlier in Taiwan and here in Delaware. First quarter had about 1/3 of that [indiscernible] expansion in the first quarter CapEx, which is just based on kind of timing that when that will close. From a discussion around working capital specifically, yes, it's an area that we're obviously focused on every day, every week.

Inventory remains healthy. IDS sits a little over 100 days and DSO and DPO are nicely in line with where we'd expect them to be. And then more broadly, inventory turns are sitting right around 6x, which is right where we like it. So from a [indiscernible] through the year as sales grow, obviously, I would expect [ AR ] to go with that a little bit, but it's something that we're watching, and I think we're in good shape on a working capital perspective.

Operator: We will move next with Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan: Congrats on the very strong results here to start the year. So my first question is really in the past, I think you've indicated that MSI would be a good metric to track to -- kind of, gauge your performance and you'll perform above market growth. Clearly, you're well above that, especially in ICS. Do you still figure that to be the best kind of metric to use? And along those lines, are you still thinking about stronger than mid-single-digit growth in MSI this year?

And if that is the case, how does that kind of change your mix would AI, HPC and data center, maybe be more like 20 -- to 20% of your business mix, up from 15%, maybe just even a year ago. How should we think about that?

Jon Kemp: Yes. Thanks, Arun. Good question. So look, I think that MSI continues to be a really good metric for Qnity particularly as it relates to the semiconductor segment. We have increased our expectations for MSI for the year, as Mike alluded to in the prepared remarks, going from our prior expectations of mid-single-digit to now in that mid-single digit or high single digit. And I think there's room to do even better than that as we move through the second half of the year and [indiscernible] of things evolve. But as we mentioned, the order books remain strong and our customer conversations [indiscernible] being constructive.

When you think about other metrics, obviously, Interconnect has been growing much, much faster over the last several quarters. We've tried to look for different kind of external benchmarks and metrics to be able to correlate that too. Historically, we've looked at kind of the one that's probably the best has been the PCB area metric. That kind of [indiscernible] last year, it was kind of in the low double-digit range. This year, it's kind of in that mid-single digit to high single digit in a very similar spot to where MSI is. So -- so not a lot of spread between kind of the published PCB metrics versus the MSI metrics.

Outperformance in ICS continues to be led by those 3 growth areas that I talked about before. And I think that will increasingly shift our end market mix in a favorable direction. What we're seeing is, obviously, the strong growth in data centers. I think we're -- as you correctly presumed in your question, I think we're approaching to where that's probably 20% of the portfolio here, we typically will rack and stack that at the end of the year. But I think we're certainly approaching that.

And we're seeing kind of an increase from other parts of the industrial economy, whether that's automotive with nice strong increases in autonomous driving trends, with communication infrastructure, aerospace and defense as we see nice diversification throughout the industrial economy, and we expect that to accelerate as AI demand starts to penetrate into those other end markets. And obviously, the offset there is probably a little bit of slower growth more broadly in the consumer electronics space. Although we continue to do pretty well for us because our exposure is really connected to the premium side of that market, which has been much more resilient.

Arun Viswanathan: And then you mentioned the growth and the move towards 2, 3-nanometer as well as 12, 14 and 16 [ Angstrom ] technologies. Maybe you can just give us a brief -- some brief details there. Are you well positioned? Would you have to make more investments on that side? And what is the timing on some of those developments, kind of, starting to contribute to profitability at Qnity?

Jon Kemp: Yes. Thanks, Arun. Look, we're really excited by the technology road maps in both of our segments. The semi road map, we're really excited. Obviously, we're seeing a lot of benefit from the 3-nanometer volumes that continue to scale. We're hearing great things and excited by the start of 2-nanometer technologies as we get to the second half of the year. Similarly on the memory side with HBM 4. A lot of very positive commentary in the first quarter and in the months that have followed around the progress that our customers are making with HBM4. And we're guided to see those continue to progress in coming years.

I'll leave the exact commercialization timing to kind of the announcements of what some of our customers have said, the investments that we've made over the last couple of years, the investments that we're making this year give us a tremendous amount of confidence that we'll have sufficient capacity to scale up those next-generation technologies with our customer. In particular, I think it's a real benefit for both the polishing and patterning parts of our business. So whether it's CMP or lithography, we're well positioned from a capacity point of view. We continue to see nice wins on POR positions for those [ Angstrom ] era nodes.

And as those commercialize over the next few years, we'll have sufficient capacity to meet the growth of our customers.

Operator: [Operator Instructions] And we show no further questions in queue at this time. This concludes our Q&A session, the call and webcast. You may disconnect your line at this time and have a wonderful day.

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