Thank you, and welcome to our first quarter 2026 earnings call. I'm joined by Jon Kemp, Qnity's Chief Executive Officer, and Mike Goss, Qnity's interim Chief Financial Officer.

Earlier today, we issued our earnings release along with a supplemental slide presentation, which can be found on our Investor Relations website. Before we begin, I'd like to remind you that today's discussion will include some forward-looking statements.

These statements represent our best view of predictions and expectations for the future, but numerous risks and uncertainties may cause actual results to differ. Please refer to our earnings release and SEC filings for a discussion of these risks.

We'll also be discussing certain non-GAAP financial measures, and I encourage you to view our earnings materials for information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures. Now, it's my pleasure to turn it over to John.

Thank you for joining 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' roadmap.

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, smaller 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 designs 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 redefines where value and leadership are created.

This inflection plays directly to Qnity's strength and how our business segments work together to power the stack. In Semiconductor Technologies, customers rely on our materials 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.

The challenge shifts from individual steps at the chip level to managing integration at scale. That's where our Interconnect Solutions business segment builds on Semi's work, addressing system-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 technologies.

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 eighth 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 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 mature nodes and NAND.

Across the board, fab utilization rates continue to improve in line with our expectations. As wafer mix continues to shift toward the 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 cleans, 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 roadmaps. 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 interconnects 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 counts, and more Qnity 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've earned 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 roadmaps 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 US, 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, cleanrooms, 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 advance 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. While there's been 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. 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.

Thanks, John, 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 the 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, with particularly strong gains in CMP consumables. 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 from ramps on shorter-cycle POR 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.

Capital 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 above-market growth. We continue to anticipate elevated CapEx investments for the full year at approximately 9% of sales, driven by investments to strengthen our local-for-local 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 2.2 times.

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 workstreams dedicated to three focus areas: driving productivity and quality improvements, strengthening commercial and innovation excellence, and advancing our local-for-local operating model. We continue to expect these actions to deliver approximately $100 million of EBITDA run-rate benefits by the end of 2028.

Separately, our transformation is further supported by continued progress on IT separation. This parallel effort is well underway as we continue to make steady progress on TSA exits 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 demand 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 sequential net sales growth in the high single-digits 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 for HBM. 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 disruptions. Where we are seeing incremental increases in input or logistics costs, we are 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 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 in mid-single digits to high-single digits, increasing from our previous expectations 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 have 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 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.

John, back to you.

Thanks, Mike. Before we open the call for Q&A, I want to underscore a few things as we mark six 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.

Great, thank you so much. When we think about the trajectory for the balance of the year, obviously there've 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 the trajectory into '27? Then also, John, I think most of us are aware you've been investing in a lot of new products and those seem to be ramping on preliminary basis.

If we could just get the framework for those as well. Thank you so much.

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 earning seasons has been positive, and we see utilization rates continue to increase on the mainstream logic side, really kind of 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 application 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.

We 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 launched some new CMP materials across both pads and advanced cleans targeting the most advanced semi nodes, 2 nanometer, and even starting to get into some of the angstrom-era nodes of 16, 14, and forward.

We've seen some nice wins in our lithography space in both ARF as well as some EUV sublayers to help facilitate the continued growth of the most advanced lithography. Then on the interconnect side, we continue to see new wins in AI PCB boards with fine lines and interconnect, copper solder and interconnect products, as well as continue to see progress advancing our thermal management portfolio across thermal pads, liquid gap fillers, and phase-change materials.

A lot more to come on innovation, but it's really powering the strong momentum that we're seeing in both segments.

Great. Just as a quick follow, just switching over to the ICS side of it, I think it's a lot of what we hear about the data centers, hyperscalers, and GPUs seems to be pretty much heading in the right direction.

It seems like the kind of the content which you can in terms of your total addressable market, it seems to be further evolving even since what you put out at the CMD last year. Could you just speak to further the kind of the broader opportunity, how you see kind of the run rate of growth over the next few years, and whether that actually differs and it's higher than it was even 6 to 9 months ago?

Thank you so much.

Thanks. Obviously the ICS business continues to outperform significantly and really driven by the strong alignment that it has to AI-led demand.

That's really fueled by the access or the exposure that we have to kind of the three highest-growth areas in the Interconnect segment: advanced packaging, thermal management, and AI PCBs. In the first quarter, we saw those three 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 circuit board architectures to be able to meet the rising demand.

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'll be a strong contributor to our growth going forward.

Much appreciated.

Hi, thank you so much, and 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 the architectures of some of these new processors coming out.

Is there any other color you can give on 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? Then I noticed 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 PCBs, I think would be helpful.

Sure, Melissa, and thank you. I think the progress that we're seeing on the AI PCBs is maybe an underappreciated part of the growth story, right?

What we're seeing is as the OEMs are looking to drive performance, reliability in their system-level designs, 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 all of that data rapidly transmitted into the systems. The increase in the layer counts, as well as it's 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 circuit boards, and the way to increase density on the circuit board is a combination of both shrink and stack. You're putting smaller lines and what's called finer lines and spaces on the circuit 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. In both situations, both finer lines as well as in higher layer counts, that plays into the strengths 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're continue to be excited by the roadmaps that we have with our leading PCB customers as we help them to scale kind of the next-generation formats for printed circuit boards as well as the next-generation formats for advanced packaging.

Perfect. Thanks for that.

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?

I guess is there any kind of revenue framework that we should be thinking about for how much you can supply and where your limits are?

Thanks, Melissa. When we think about our 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 over the next few years.

Typically, we can invest inside of the investments of our customers, so that gives us good and and usually after we've already have POR wins, these tend to be very high-return projects that we have confidence because we've 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 lines to make sure that we had capacity not only to meet demand as it returned to the record 2022 levels, but even beyond. That's kind of underscored by the announcements that we made in the first quarter with the new capacity in the US 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 to cleanroom 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 qualifications. Obviously, in Taiwan, we'll do the we'll complete the equipment installation and 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, 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.

Thank you.

Hi, good morning, John. Question on your agreement signed with NVIDIA and Apple recently.

If you could talk a bit more around the scope and longevity of these agreements. I'm curious how this plays in your relationship with TSMC, and does it make it easier to win qualification for the next set nodes?

Is it a path to potentially getting more market share over time? Happy to hear your thoughts on that.

Thanks, Bhavesh. Good question.

When I think about these 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.

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. 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 roadmaps 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 problem at a system-level design.

Got it. Maybe as a follow-up, a separate question.

There are reports of multiple Chinese players trying to scale up their memory production to benefit from the ongoing shortage in the industry. Just given your presence there, could you talk about if you are seeing that impact, and are you exposed to this dynamic in the second half?

Good question, Bhavesh. 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.

Nice progression in NAND as well, from kind of the mid to high-70s last year, kind of in 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, 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, we don't have a lot of in-depth conversations with the memory part of the market in China.

Hi, John, Mike. This is Saurabh in lieu of John.

Nice sequential uplift in EBITDA margins. As we think about Q2, I know there are moving parts on prompted inflation, but how are you thinking about margins in Q2?

Then I have a follow-up as well.

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.

At a headline level, we're really excited about the first quarter performance, and EBITDA margins were above 31%, driven really by continued momentum, as we said in our prepared remarks, across both segments. We see that trend continuing as we head into second quarter.

Specifically around second quarter, there's a couple pieces that I'd highlight. We do expect the volume benefits to continue, with a little bit of slight headwind from product mix, especially in the ICS piece of the business, as that transition into the consumer electronics time of 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 first quarter, and obviously that'll carry forward into second quarter. Additionally, with all the growth that we are seeing, we're continuing to make additional hiring investments to support that growth.

If I click up a notch overall, I do expect the 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's continuing to support that continued growth that we're seeing.

Thanks. Can you provide an update on hiring of the head of Semiconductor and permanent CFO?

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.

Thank you.

Hi, John, 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. On the flip side, why was Semiconductor EBITDA margin down year-over-year?

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. We 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.

Thanks, John. 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, we saw a little bit of mature node restocking in the first quarter, and that product mix can always impact margins in the Semi space. 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 highlights from Taiwan up 25% year-over-year on a top-line basis, and Korea up 17% year-over-year.

Americas performed nicely as well. 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 at the mid-30s basis.

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 an innovation side, as well as to scale up the level of quality and performance necessary to support the high-volume manufacturing of our customers.

That's very helpful color. Follow-up question is just, obviously the memory market is working out very well for you right now, but there is some labor unrest at one of your Korean memory and foundry customers, and just wondering what you're hearing from that partner, and do you have any contingency plans in place if there are any walkouts or disruptions there?

Thank you.

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 a day, where we're working with them on kind of what they're seeing and what the needs are. 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.

It certainly, if the last couple of years have taught us anything, it's to be prepared for unexpected shocks that can happen at a moment's notice, and I think our team's done a really nice job of adapting and responding to kind of whatever the markets and the external environment have 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.

Thank you.

Thanks so much and nice start to the year. You guys had your conference call on Feb 26th.

Obviously, the world changed on Feb 28th, but I'm not sure that that would be a huge impact for your business. You offered us 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?

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, with the one part of the Semi market that did a bit better than we were expecting was really kind of in the mature logic space, where we saw some restocking and some other more constructive comments than maybe we were expecting before. 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.

The magnitude of the strength there, compared to what I would call kind of historic seasonal patterns, was remarkable, and we see that momentum continuing in the second quarter. 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?

I think the thing that I would add to that, John, is there's a couple points. Sitting here in second quarter, what we do see is continued strong order books, which is always great to be able to say, continued positive demand signals from our customers, and the continuation of the node transitions that John mentioned earlier, along with continued POR wins.

From a perspective of the second half, in my prepared remarks, we talked about the guidance that we issued today taking a very prudent view on that from an inflation perspective. 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.

Gotcha. Understood.

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 a use in 1Q.

How do you think about that playing through the year?

Thanks for the question. Free cash flow in the quarter was right in line with our expectations.

As we always prioritize high-return capital investments to make sure we're continuing to have the leading edge capacity to match the strong demand that we continue to see from our customers, and you saw that in our recent announcements that John mentioned earlier in Taiwan and here in Delaware. First quarter had about a third of that Taiwan expansion in the first quarter CapEx, which is strictly on timing of when that bill closed.

From a discussion around working capital specifically, yeah, 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. More broadly, inventory turns are sitting right around six times, which is where we'd like it.

From a pacing through the year, as sales grow, 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 from a working capital perspective.

Thank you so much.

Great, thanks for taking my question. Hope you guys are well.

Congrats on the very strong results here to start the year. 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?

Along those lines, are you still thinking about stronger than mid-single-digit growth in MSI this year? If that is the case, how does that kind of change your mix with 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? Thanks.

Thanks, Arun. Good question.

Look, I think that MSI continues to be a really good metric for Qnity, particularly as 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 digits to high-single digits, and I think there's room to do even better than that as we move through the second half of the year and watch how things evolve.

As we've mentioned, the order books remain strong and our customer conversations remain 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 to. Historically, we've looked at kind of the one that's probably the best has been the PCB area metric.

Last year it was kind of in the low double-digit range. This year, it's kind of been in that mid-single digit to high-single digit, in a very similar spot to where MSI is, 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 three 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.

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 communications 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.

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.

Thanks for that. Then you mentioned the growth and the move towards 2, 3 nanometer, and as well as 12, 14, and 16-angstrom technologies.

Maybe you can just give us some brief details there. Are you well-positioned, or would you have to make more investments on that side?

What is the timing on some of those developments kind of starting to contribute to profitability at Qnity? Thanks.

Thanks, Arun. Look, we're really excited by the technology roadmaps in both of our segments.

The Semi roadmap, 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 HBM4, 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 excited 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. 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.

Thanks.