Solstice Advanced Materials Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Solstice completed spin-off from Honeywell on October 30 and is listed on Nasdaq. Third quarter net sales grew 7% year-over-year. Adjusted stand-alone EBITDA was $235 million, margin 24.3%.
• Refrigerants & Applied Solutions segment had 22% year-over-year net sales growth in refrigerants due to HFO transition. Electronic and Specialty Materials had growth in Electronic Materials and Safety and Defense Solutions. Alternative Energy Services backlog grew 12% sequentially.
• Refining operating model to focus on commercial excellence, drive productivity and optimize return on invested capital. Pro forma capital structure has prudent net leverage profile of approx 1.5x.
• Allocating capital to semiconductor materials, nuclear conversion, protective fibers and cooling technologies areas.

Segment Performance

• Refrigerants & Applied Solutions: Achieved $687 million in net sales for the third quarter of 2025, reflecting 9% growth year-over-year. Composed of 8% organic net sales growth and 1% increase due to foreign currency translation. Posted $243 million in adjusted EBITDA for the third quarter of 2025, down 3% year-over-year and adjusted EBITDA margin of 35.4%, down 431 basis points year-over-year. Refrigerant net sales increased 22% year-over-year to $400 million. Building Solutions and Intermediate net sales were $175 million, down 3% year-over-year. Healthcare Packaging net sales were $49 million, down 14% year-over-year. Alternative energy service business had $63 million in net sales, down 2% year-over-year, but backlog up 12% during the quarter.
• Electronic and Specialty Materials: Achieved $282 million in net sales for the third quarter of 2025, reflecting 2% growth year-over-year, largely attributable to favorable foreign currency translation. Flat organic sales growth consisted of increases in Electronic Materials and Safety and Defense Solutions as well as Research and Performance Chemicals pricing, offset by Research and Performance Chemicals volume declines. Posted $47 million in adjusted EBITDA for the third quarter of 2025, down 15% year-over-year and adjusted EBITDA margin of 16.7%, down 319 basis points year-over-year. Electronic Materials net sales increased 4% year-over-year to $103 million. Safety and Defense Solutions had $53 million in net sales, up 6% year-over-year. Research and Performance Chemicals net sales declined 2% year-over-year to $126 million

Guidance

• On track to deliver full year 2025 guidance: net sales between $3.75 billion and $3.85 billion, adjusted stand-alone EBITDA margin of approximately 25%, capital expenditures between $365 million to $415 million.
• Fourth quarter results expected to reflect remaining transitory costs, refrigerant seasonality and near-term actions to position for strong growth in 2026. Confident in momentum into 2026.

Risks

• Anticipated transitory costs related to spin-off and technology transition from HFCs to HFOs.
• Factory downtime issues including planned and unplanned downtime impacting EBITDA in the short term.
• Supply chain and market dynamics related to the transition in refrigerants and other segments.

Question and Answer

Q: Congratulations on the split. So I wanted to get into the AES segment a little bit more. Even since your Capital Markets Day, there's been growing enthusiasm kind of around the nuclear markets. And I guess we can see that even today in your backlog expanding. I guess, can you help us to understand a little bit more about what drove that backlog increase? Was it primarily price? Was there more volume coming in? And also how you can capture volume growth going forward? I know you've got the big debottleneck that's coming on, but it seems like you may be close to sold out even post that. So I guess, how do we think about the growth for this business given the enthusiasm and excitement around nuclear right now?

A: John, thanks for the question. And the backlog increase, we saw a 12% backlog increase, to your point. That was new orders, not pricing. And we are aligned with our capacity expansion with the volume anticipated demand that we see. However, there has been a lot of recent announcements of expansion investments. So we're following that very closely. And if we need to continue to expand manufacturing capabilities, we'll be able to do so to meet the demand. But it's an exciting growth opportunity for us long term, and it's really nice to see all of these announcements and investments that have been made in the marketplace.

Q: Congratulations on your first public quarter, exciting stuff. David, I wanted to pick up on your prior thought. At the Capital Markets Day on October 8, you set forth an EBITDA growth trajectory in the mid-single-digit range for the medium term. And I understand you'll probably give more specific guidance next quarter. But as we think about that mid-single-digit glide path, might it apply to 2026 as well? Or do you think there are either transition issues or market issues that you're seeing that would cause it to be below or above that range? How are you thinking about that growth trajectory for the next year or so?

A: Yes. Thanks for the question, Kevin. We'll certainly, to your point, give 2026 guidance when we report fourth quarter. But the way we think about it and have we -- and again, we're on track for how we see it is exiting the year around that 25% margin and then our growth rate will come from there. So we don't feel like there'll be continued downside. We feel like the 25% is our baseline, and that's where we'll be able to grow from with the growth secular trends that we're seeing that get us pretty excited.

Q: I want to follow up on that last question. Just -- so if you look through your slides and kind of how you guys have talked about the second half, you have $30 million in transitory costs you're calling out from corporate. It seems like你're calling out a lot of this plant and downtime impact as perhaps more temporary at maybe $20 million, $25 million. Are those things that we should be adding back base case to next year? And if that number is wrong, what would you point us to instead?

A: Yes. Josh, so really, the anchor is the guidance that we provided. And so that's the $950 million of EBITDA for 2025, which is approximately a 25% margin rate. So what we've highlighted here on Page 13 is, yes, the $30 million of transitory cost, those will definitely not reoccur. We had $10 million -- approximately $10 million in quarter 3, and then you can see there's approximately $20 million in Q4. And this involved a hedge. We are part of the broader Honeywell hedging program. That has been discontinued effective at the time of the spin. And then as we stood up our new freight and logistics organization, there were some changes in the estimates associated with that. All of that is behind us now. And then as David alluded on the plant downtime and absorption, all of the plants are up and operating now. So we don't anticipate that going forward. And then the final factor there is just seasonality, and that's largely our refrigerants business. That business tends to be a little bit heavier in second and third quarter. So that's the third reason for the step down. But overall, we continue to remain confident in the guidance that we provided at our Investor Day.