Element Solutions Inc Q4 FY2024 Earnings Call

Good morning, ladies and gentlemen. And welcome to the Element Solutions Fourth Quarter and Full Year 2024 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I will now turn the call over to Varun Gokarn, Vice President, Strategy and Integration. Please go ahead.

Good morning. Thank you for participating in our fourth quarter and full year 2024 earnings conference call. In accordance with Regulation FD, we are webcasting this conference call. A replay will be made available in the Investors section of the company's website. During today's call, we will make certain forward-looking statements that reflect our current views about the company's future performance and financial results. These statements are based on assumptions and expectations of future events, which are subject to risks and uncertainties. Please refer to the earnings release, supplemental slides, and most recent SEC filings on our website for a discussion of material risk factors that could cause actual results to differ from our expectations and predictions. Today's materials include financial information that has not been prepared in accordance with the US GAAP. Please refer to the earnings release supplemental slides for definitions and reconciliations of these non-GAAP measures to comparable GAAP financial measures. It is now my pleasure to introduce our CEO, Ben Gliklich.

Thank you, Varun. Good morning, everybody. Thank you for joining. Element Solutions had an outstanding year in 2024. We produced record results, improved our portfolio, and positioned the company for longer-term outperformance. We delivered full-year adjusted EBITDA above our targets despite a material incremental FX headwind that built over the year. The company improved meaningfully across multiple vectors in each of our businesses. We outperformed our markets by penetrating the fastest-growing emerging niches in the electronics industry, driving margins, and investing in new capabilities. Adjusted EBITDA grew by 13% in constant currency to a record $535 million. Free cash flow of $294 million is also a record. It was our fifth year out of the past six in which we converted more than 50% of adjusted EBITDA to free cash flow, despite having more opportunities to invest in growth and therefore spending more on CapEx than in prior years. These results were not a product of a generally exuberant market backdrop. Only select niches of the electronics industry were strong. While a large portion of consumer goods and automotive was generally soft, NSI growth came in well below the market's expectations entering the year. Our industrial business faced headwinds from low levels of activity in construction, heavy machinery, and western automotive manufacturing. Notwithstanding that backdrop, we met our financial commitments in 2024, but more importantly, made meaningful progress continuing to position our business for longer-term outperformance. We're a critical supplier of solutions for leading-edge electronics hardware. Our product roadmaps are increasingly informed by and critical to emerging high-performance computing markets, and our relationships with key specifiers and technologists in these markets are strengthening. We worked hard to bring our margins back close to their prior high, achieving over 100 basis points of EBITDA margin expansion in 2024. We've shown price discipline, driven positive mix through our progress in high-value niches and electronics, and we're back at those levels in a period of weak volume in industrial and assembly. We see a path to set new record margins from greater facility utilization and further mix improvement from here. In 2024, we took steps to focus and enhance our portfolio. In September, we announced an agreement to sell McDermott Graphics Solutions for $325 million. This is a good business, but it contributed lower growth and margins with weaker cash flow conversion than the rest of our businesses. We structured the transaction to take advantage of tax assets such that we should net almost all of the proceeds. It's expected to close in the first quarter, subject to customary closing conditions and adjustments. We are left with a better portfolio across all key relevant metrics, better positioned for growth in a balance sheet that is as good as it has been since we founded ESI. While we're pleased with a record year in 2024, we're even more excited about what we accomplished last year to position the business for longer-term success. Carey will now take you through the fourth quarter and full-year financials in more detail.

Thanks, Ben. On Slide four, you can see a summary of our fourth quarter results. Net sales increased 6% organically as we grew our high-end electronics verticals in the double digits and saw sequential improvement in the industrial portfolio driven by demand in Asia. Growth was led by semiconductor solutions at 19%, circuit solutions at 10%. Our circuit board assembly business, which has more industrial and consumer electronics exposure, grew more modestly. We saw the same divergence in electronics throughout 2024. Emerging technologies are requiring more complex materials solutions, and we are a key provider of those solutions, whether they serve the AI data center market, the Chinese electric vehicle market, or the low earth orbit satellite market. These advanced packaging solutions, complex multilayered printed circuit board process chemistries, and high reliability thermal materials are driving the business in a period of sluggish consumer electronics demand overall. We expect that to continue. Emerging applications are gaining as a percentage of the overall electronics market. The benefit of our iterative customer-led innovation is that our intimacy with these markets and our capabilities to serve them give us a valuable seat at the table, which should drive further outperformance in the years to come. On the bottom line, constant currency adjusted EBITDA grew 9% year on year with margins roughly flat to the fourth quarter of the prior period. Adjusted EBITDA remained within our guidance range despite an incremental $3 million FX headwind in the quarter. While most of our input costs have eased, higher plastic and metals costs in our assembly business generated a year-on-year headwind to company margins of roughly 80 basis points. Excluding net sales from these pass-through metals, our adjusted EBITDA margin would have been 25%, representing 60 basis points of margin expansion. On slide five, we discuss full-year financial results.

Overall organic sales grew 4%.

Driven by emerging sources of demand in electronics, even as European industrial end markets remain soft. Our electronics business grew 7% organically, while the industrial and specialty segment declined 1%. On a constant currency basis, adjusted EBITDA improved 13% year on year. Constant currency adjusted EBITDA margins improved 120 basis points, reflecting favorable product mix from high-end electronics growth, as well as price discipline and easing input costs. Excluding the impact of roughly $400 million of positive metal sales in our assembly solutions business, our adjusted EBITDA margin would have been 26% for the year. This is a very strong result, but we see room for further improvement. Foreign exchange translation was a $12 million year-on-year headwind to adjusted EBITDA, roughly a $0.03 headwind to adjusted EPS. Currencies continue to be volatile, and current rates present additional FX headwinds in 2025. Ben will cover shortly. Next, on slide six, we share additional detail on full-year organic Semiconductor Solutions, which showed organic growth of 14%, reflecting steady improvement in fab utilization, new fab ramps, and broader growth in advanced packaging applications. Demand for our VIAFARM products was particularly robust, and we expect this demand to carry into 2025, supporting advanced logic modes and DRAM memory stacking, which are critical for AI applications.

We also continue to see strong growth in power electronics.

For the electric vehicle market. As efforts to win new customers throughout technology are paying off. In 2024, semiconductor solutions marked a milestone, with revenue exceeding $300 million for the first time. This business has grown at a five-year CAGR of 14% and should continue with a double-digit growth trajectory from here. Circuitry solutions grew 12% organically in 2024, benefiting from the large investments made by hyperscalers into AI and data center growth. Additionally, the growth of electric vehicles in China has driven demand for certain of our market-leading finished products.

Overall, circuitry outpaced estimated global smartphone growth of 6% in 2024, which is meaningfully lower among Western OEMs, as well as estimated PCB square meter growth of 7%. We expect this business can continue its outperformance and strong growth even as smartphones remain below their prior peak. Our assembly solutions business has more significant exposure to industrial and automotive end markets than our other electronic verticals, as we supply high-reliability alloys and attachment technologies for automotive markets, industrial customers, and broader consumer electronics. Global automotive volume was essentially flat in 2024 and saw meaningful declines in Europe. However, our business benefited from demand improvement in consumer, mobile, and computing end markets, particularly in Asia. This business grew 1% organically for the full year, with low single-digit year-on-year improvement in the second half. Organic net sales in the industrial and specialty segment fell 1% year over year, driven by lower commodity price-based surcharges and soft European industrial end markets. It did, however, deliver earnings growth this year from margin expansion on the back of mix, cost deflation, and facility rationalization. Energy Solutions top line grew 8% organically, and drilling and production activity remained strong, allowing us to drive pricing in this business as well. These trends are expected to continue into 2025.

Moving to cash flow and the balance sheet on slide seven. Element Solutions generated a record $294 million of free cash flow in the year, of which $116 million was in the fourth quarter. Our working capital investment was fairly modest relative to our adjusted EBITDA growth, primarily thanks to improved inventory management. We had highlighted a desire and opportunity to improve working capital management over the course of 2024. We executed against it. We spent $68 million in CapEx in 2024, as we made significant progress on several key strategic investments in power electronics manufacturing and our broad manufacturing and research footprint. We believe this is money very well spent behind high-value growth opportunities. We expect to spend roughly $65 million of CapEx in 2025. We ended the year with our balance sheet in a strong position. Net leverage was 2.8 times, and our capital structure is more than 90% fixed rate until 2028. We now have no debt or swap maturities until 2028, and our effective borrowing cost is below 4%. On a pro forma basis, net leverage would have been 2.3 times at year-end if the graphics transaction had closed as of January 1, 2024. As a result, we have substantial capacity to deploy capital in 2025. I will turn the call back to Ben to discuss our outlook. Thank you, Carey. In 2024, we executed well against the backdrop and our relevant opportunity set. We anticipate a continuation of the trends we saw last year into 2025, and you should expect us to execute as well or better. Demand continues to grow in high-performance computing and data storage locations. This should drive our wafer-level and advanced packaging-related product lines. We continue to extend our penetration of the EV market with our differentiated power electronics solutions, and we expect market growth and our share gains in high-value semiconductor markets to continue. Altogether, we expect 2025 organic growth in our electronics segment at our high single-digit longer-term target. There's also the potential for a stronger refresh cycle on both smartphones and other computing devices, which could buoy volume growth for the electronics manufacturing industry overall. That would be upside to our plan.

On the INS side, the outlook for global industrial production

Is more uncertain. We expect a similar environment to 2024, though there's some risk from the impact of potential tariffs on demand. We continue to win business in this market and expect another year of outperformance relative to industrial activity in 2025. Our offshore business should once again benefit from balanced growth in both volume and prices.

We anticipate two major non-operational impacts

To adjusted EBITDA year over year. First, the sale of graphics will account for a roughly $30 million impact which includes a modest adjusted EBITDA contribution from the business in January and February. Second, the stronger US dollar will drive translational headwinds, which would be roughly $15 million year over year based on January ending rates. Overall, when accounting for these dynamics for the full year 2025, we are guiding to high single-digit adjusted EBITDA growth at the midpoint of our range. We expect Q1 adjusted EBITDA of approximately $125 million, which includes a roughly $5 million FX headwind. Our full-year adjusted EPS guidance of approximately $1.40 does not include any benefit from capital allocation. Just as in 2024, we will measure success this year by not only delivering on our financial goals, but also by continuing to improve our long-term positioning for outsized growth and value creation. To that end, on slide nine, we've reflected our definition of success for the year. We aim to execute at a high level, continue to penetrate the fastest-growing deepest profit pools available to us, and therefore gain share of and outperform our markets. In order to do that for the long term, we must make progress with customers and the supply chains for our emerging technologies such as Active Copper or Couprion and other advanced and wafer-level packaging semiconductor assembly products. Finally, we expect opportunities to deploy our balance sheet capacity to accelerate adjusted earnings per share growth through complementary tuck-in acquisitions, and also as appropriate through share repurchase. We have the team, technology, and playbook to deliver on this. Our conviction in the long-term trajectory for our business continues to grow, relying on the pillars of our business which are our people, technology, and deep customer and supply chain intimacy. The most important of those pillars is our team. I'm immensely grateful to our dedicated, capable people around the world who are responsible for our excellent 2024 and will be the drivers of our success in 2025 and beyond.

With that, operator, please open the line for questions.

This time, I would like to remind everyone in order to ask a question, press. Your first question comes from the line of Josh Spector with UBS.

Yeah. Hey. Good morning, guys. So first, I just wanted to ask on your view of your relative performance compared to electronics markets in your electronics segment. I mean, clearly, you had a strong 2024. Obviously, a weaker comp off 2023. So on that two-year basis, do you think you performed relative to markets? And when you look forward, you're talking about new wins. We've been talking about advanced packaging for a while. Does that outperformance accelerate meaningfully so that we should be able to see it, or do you view it kind of at a similar level of outperformance?

Thanks for the question, Josh. So a few relevant data points. We went through just now in our prepared remarks. PCB square meters were up maybe 6% or 7%, smartphones up 6%, MSI, low single digits. Our business was up in high single digits from an electronics perspective. So we outperformed this year in a modest recovery within the electronics market. Last year, we outperformed units on the way down as well. I think you've seen us perform better in weaker periods and perform better in stronger periods, and that's really a product of our penetrating the fastest-growing subsegments of the electronics hardware market. Taking a step back, we had record EBITDA in 2024 for Element Solutions, and that's in a period where MSI is way dislocated from its prior peak. Smartphones are way off of their prior peak, and PCB square meters are below their prior peak. Element has clearly outperformed the underlying markets over a multiyear period. Rolling that forward, the subsegments that we've grown in and developed a level of incumbency in are the secularly growing highest value subsegments of the electronics consumables market, and those should continue to outpace the overall market. I have a high level of conviction that this level of outperformance should continue.

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

Hi. Good morning, Ben.

Morning, Bhavesh.

Your business is pretty short cycle in nature, so I would guess it's still early for you to see how the year is trending. Could you add some color around maybe a customer communication or maybe where you are in some of the product development cycles and what scenarios you're building in as you think about the lower end and the higher end of the EBITDA range?

You're right to point out it's a short cycle business. Our customers' customers don't know how many products they're going to sell over the course of 2025. The supply chain has limited visibility in that regard. When we sit here at the beginning of the year and give guidance, we base it really on expectations for units, whether that's MSI, PCB square meter, smartphone units, and so forth. We articulated what we expect from each of those key indicators. It's clear that at the leading edge, there's not enough capacity. Capacity is coming online, and there's huge investment and demand for advanced chips, which we expect to continue. Where there's more uncertainty is in some of the legacy leading-edge items, like smartphones and the industrial market. The high end should there be an accelerated replacement cycle in some of those devices, better health in the industrial market, and obviously, FX can help us. The low end is where there could be a demand impact from tariffs or a weakening in the industrial markets. I think we all feel pretty good that spending at the leading edge in our highest value areas is going to continue to be robust throughout the year.

Thanks. As a follow-up, that has clearly been a significant amount of talk about Paddock's not just in Asia, but also within North America. Are you seeing any impact from that so far in your business?

Not yet. No, we haven't seen a real impact. There's a lot of discussion regarding supply chain realignment over the past several years. Manufacturing capacity is moving to Mexico, and we're seeing investments in fab capacity in North America and Japan. PCB and automotive suppliers are moving into Southeast Asia from China. None of that is new, and we're benefiting from that. However, over the last couple of months, we haven't seen any dramatic changes.

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

Great. Good morning. Ben, I think we can all appreciate the effort of not embedding any meaningful macro recovery in 2025 guidance. But from where you sit today, what would be the two data points that investors could potentially look at for upside surprise in terms of what you're seeing right now or what you expect to see soon enough? What would be the two factors potentially your risks that you're monitoring in terms of how you're progressing throughout the year?

Thanks for the question, Chris. The single biggest variable that has been, I call it, the most volatile over the past several months has been FX. We have a $15 million headwind year over year using end of January rates. It has been a little lower recently as the dollar has weakened since the end of January. It was as high as $20 million over the past two months. You go back to the end of September, it was a $10 million tailwind. We've seen a $30 million swing just from currency over the past few months, so that’s a single biggest variable I'd point to. When you look at organic units, the automotive market is critical for us. While it's not unhealthy per se from an overall units perspective, the types of units being made aren't necessarily beneficial from a mix standpoint. Low-value electric vehicles in China as opposed to high-value vehicles made in the West. Some health or recovery in Western automotive would be a tailwind, while smartphone units, although they're less core to our growth than they were several years ago due to the emergence of high-performance computing and our volume into that market today, are still relevant. A replacement cycle and growth in units above what's expected would serve as a tailwind. The risks, as I mentioned earlier to Bhavesh, focus on industrial production stepping back from expectations, and if that gets weaker, it would pose a risk that is not accounted for in our guidance.

That's very helpful. Just as a quick follow-up, when I think about your exposure on EV and smartphone across your portfolio and the mix between China and non-China OEMs, how should we be thinking about the trends in those markets for 2025 and perhaps a little bit of a longer-term comment as well?

Sure. We have more value in Western or ex-Chinese smartphones than in domestic Chinese smartphones. However, we still have some value from Chinese OEMs, and we saw a benefit from growth in those units in 2024. The mix skews a bit more towards non-Chinese OEMs. Regarding electric vehicles or automotive in general, we have better penetration outside of China. In EVs, we are making solid progress in both the broader Chinese OEM automotive markets and particularly in high-end Chinese electric vehicles where our power electronics technology has been adopted. We're experiencing real growth from them. This is a significant tailwind and earnings driver for 2025, considering that units of high-end Chinese EVs are rolling out using our technology.

Your next question comes from the line of Michael Harrison with Seaport Research Partners.

Hi. Good morning.

Morning. I was hoping you could give us a little bit more color on your expectations in the PCB market. Are you seeing kind of a similar bifurcation where the advanced side of things where you guys have a better position are growing faster, whereas maybe some trailing edge boards are not growing as quickly? Can you give a bit more color on your expectations for that assembly business next year?

Absolutely. It's a great question, and it is a great observation. In both our circuitry business and our assembly business, I'll speak to them in order. The PCB square meters grew mid-single digits last year. Our circuitry business grew around 10% last year. What explains that divergence? The legacy lower-tech circuit boards that go into consumer electronics and cars had far less growth in units than the higher-value, more complex circuit boards going into IC substrates for advanced packaging applications or server boards for high-performance compute. That’s where we have a disproportionate position, which is why we outperformed substantially in 2024. We expect that trend to continue in 2025. The high-end circuit board market is healthy. The low end is suffering alongside weak industrial production. We expect to outperform that market in 2025 once more. Our assembly business operates a bit differently. We're selling assembly materials that cater to a broader set of the electronics market than our circuit board business. Therefore, the assembly business didn't grow as rapidly as our circuitry business. However, we were still able to drive profit growth from the assembly business, largely because higher value applications in assembly are found in higher technology segments of that market. Again, considering metal prices increased over the year, our profit percentage in that business improved as did our profit dollars. We expect this positive trend to continue in 2025.

Thanks for that. You referenced the potential to deploy some capital this year with your balance sheet in good shape. Can you talk about the M&A market and whether you're seeing more targets out there with valuations possibly getting a little bit more reasonable than in the past couple of years?

Absolutely. Our balance sheet is as robust as it's been since we founded Element, especially considering the proceeds from the graphic sale, which should arrive shortly. We are actively looking for opportunities to utilize that balance sheet to compound earnings. Tuck-in M&A is certainly on the table. We're interested in high-quality businesses like ours, and such opportunities are relatively rare. We are continuously nurturing relationships to explore activation in this aspect. I expect we will find some attractive tuck-ins at reasonable values that meet our criteria over the course of the year. Conversely, we still have capacity for share repurchase and a bit of incremental debt paydown. With the current balance sheet, I don’t anticipate being limited in terms of our actions in 2025, always with an eye toward compounding per share value.

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

Thank you. One of your peers, Integris, has consolidated its segments to two, and I think DuPont's electronic segment will have two segments. Do you think about consolidating your electronics portfolio, maybe into just two segments, such as combining advanced packaging and wafer level packaging?

Interesting question, John. I hadn't thought about that. We operate with one electronic segment that has three verticals. We've attempted to provide clarity around our electronics business by breaking it out further to explain what we have in front end, back end, circuitry, and assembly. Within circuitry, there’s even a bifurcation in that market as we just discussed, with the higher-end IC substrate market and server board market compared to some of the legacy market. If anything, I anticipate providing more clarity on our verticals rather than less, and I don't see any need to resegment.

You have been comfortable running at a higher leverage in the past. Do you have a time frame in mind for how long you will operate with relatively low leverage?

We have always been opportunistic regarding capital allocation. Our capacity does not burn a hole in our pocket. We have no immediate desire to rush to deploy capital. We're going to be very thoughtful and prudent in terms of capital deployment going forward, depending on available opportunities. Although we have a targeted leverage ceiling of three and a half times, that does not mean we intend to operate the business there. We're comfortable with our current balance sheet, as it provides us with flexibility.

Your next question comes from the line of Jon Tanwanteng with CJS Securities.

Hi. Just one question for me, thank you. One of your larger legacy EV customers is experiencing significantly weaker sales entering the year. Are you factoring that into your EV expectations, and do you expect growth in those end markets on a net basis, considering that one large customer?

Yes. Our power electronics business, Jon, which I believe you're referencing, has done a very good job of winning new business with both Western electric vehicle OEMs and emerging Chinese electric vehicle OEMs. The electric vehicle market continues to grow, so our power electronics business should continue to grow nicely in 2025. The units that could potentially be lost by any one customer are being absorbed by others, as we see it. I believe our guidance holds up in light of whatever dynamics you're specifically referring to.

Your next question comes from the line of Steve Byrd with Bank of America.

Hi. This is Rock Hoffman on for Steve Byrd. Could you speak about Couprion a bit more and when you expect Couprion's copper paste to become a more commercial product?

As you would have seen in our slides, regarding our criteria for success in 2025, continuing to gain traction commercially and improve our supply chain capability for these emerging technologies, Couprion being chief amongst them, is one of our success criteria for 2025. The commercialization effort around Active Copper, a product Couprion produces, has been exceptional. Customer demand is through the roof, and the number of applications and projects we are working on continues to grow. Additionally, the product is performing well. Our focus over the past few quarters and going forward is on supply chain, building our capacity for active copper production, and supporting our customers' development of application know-how and processes for high-volume manufacturing using active copper. This is moving along reasonably well. I expect to have reasonable revenue from it in 2025 with an EBITDA contribution in 2026, which has always been our indicative timeline for active copper. Our confidence in the viability of active copper as a product, its performance, and market pull continues to grow every quarter.

Thanks. As a follow-up, have metallized services within auto parts and household products gained share, or is there a shift to other surface types?

In our industrial solutions business, we sell functional and decorative surface treatments. Functional treatments include anti-corrosion and protective materials for performance improvement, while decorative treatments involve a thin film of nickel on plastic parts for automotive applications, such as grills or hood ornaments, and for sanitary items like sinks and faucets. There's been a trend over the past couple of years away from metal finishes towards painted finishes in automotive, with more black painted grills emerging than chrome grills. That change has affected our results in 2024; our anti-corrosion business performed well, but our decorative business was softer due to that trend. However, talking with our customers, OEMs are indicating that chrome finishes are returning, and several claim they are fully booked with their plating lines in 2026 after a weak year in 2024. This suggests a trend reversal, which bodes well for our business's growth over the next couple of years. While its impact may not be significant in 2025, over the coming years, this reversal will positively support our industrial business growth.

Your next question comes from the line of Pete Osterline with Trus Securities.

Hey. Good morning. Thanks for taking the questions. So first, I just wanted to ask about your expectations for margin expansion this year. Are you expecting mix to continue to drive growth, and is there anything else noteworthy you're seeing at this point, whether on input costs or any potential for self-help through cost improvements?

Yes. Mix should continue to help us. Ongoing raw material deflation should also assist, and we constantly work on productivity and facility rationalization activities. These are additional levers at our disposal. I wouldn't anticipate another 120 basis points of margin expansion as X Metal in 2025, but we should see margin improvement throughout the year, without including any substantial benefit from facility utilization improvement that could result from higher volumes in the industrial business.

Got it. Thanks. You mentioned that CapEx was higher than historically average in 2024 and that you’re guiding for it to be about the same for 2025. Could you provide some color on the capital projects you're prioritizing over the upcoming year and how they align with your long-term growth plans?

As Carey mentioned, we were pleased to have the ability to invest as much as we did in 2024. Significant projects included doubling our capacity for Argo Max, our sintered silver material used in power electronics, and constructing a large research center in India, which is nearing completion. We also had some IT projects that increased the CapEx number for 2024. Looking ahead to 2025, the Couprion project is a noteworthy initiative. We also have several others we consider substantial, involving $10 to $15 million investments aimed at supporting long-term growth in these high-value niches. While our long-term run rate hovers around 2% of sales, we may remain elevated for a couple of years. Additionally, I'm excited about investing in customer equipment, funding that for our customers to secure long-term contracts for high-value products. We're witnessing positive trends in this area, enabling our support for customer growth through financing their expansion projects.

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

Yeah. Hi. Good morning. I had a question about your R&D spend; if you exclude the Couprion charge, your R&D spend is up more than 20% to 25%. I wonder if you could highlight some of the areas where you’re directing those resources and whether we should pencil in a growth rate for that line above your top-line growth. Thank you.

Thanks, David. Just to clarify a point, Couprion spend does exist in 2024, although it's not significant; there's about $4 million included in that year. Excluding that, R&D is increasing slightly as a percentage of sales. We've invested in labs, and we're constructing a new integrated R&D lab in India. We’re hiring people for those facilities, and we're seeing increased costs. The majority of our R&D costs are people and space. Overall, I don't expect growth in R&D expense to exceed inflation relative to our sales growth. It’s essential to note that when we look at R&D spending from a broader perspective, we also consider development and technical service expenditures, which appear in S&T as part of our overall R&D investments. When combined, we see a slight uptick in R&D intensity, which is adequate to support outsized growth into the future.

As Carey rightly points out, our technical service team and application centers are vital to product development. They handle local customizations to meet specific customer needs, although they’re not directly categorized under R&D. A general point worth mentioning is with the graphics business leaving the fold, we expect R&D as a percentage of sales to increase slightly since the graphics business was less R&D intensive than our other businesses. R&D intensity has been more than sufficient to support outsized growth in the future.

Okay, great. One last question for me. You've made some scattered comments about your business in China. Considering the tariff issues, currency fluctuations, and AI developments, could you provide insight into how you're viewing your China business for 2025?

Absolutely. We performed well in China in 2024 with revenue up in the low teens. A lot of growth stemmed from exports and some from the local Chinese smartphone market. The Chinese automotive market was also strong. Our operations in China focus on a local business model, involving local product manufacturing and sales; thus, tariffs don't impact our P&L directly. However, there are risks if tariffs accelerate, as that might cause our customers and their customers to face demand challenges due to inflation-related issues. Overall, we anticipate trends from 2024 continuing, particularly in the electric vehicle market where we are making significant inroads. High-end EVs are adopting our technology, which is a positive trend for our earnings as we look toward 2025. Simultaneously, supply chains are diversifying outside of China as multinational corporations and Chinese companies build manufacturing capacity in Indonesia, Thailand, Vietnam, and India. We are also active in those markets, which provides significant growth potential. Hence, we see our China business as a solid growth vector for 2025, alongside the long-term geopolitical shifts driving market share and value our way.

Your next question comes from the line of Duffy Fischer with Goldman Sachs.

Yeah. Good morning. Regarding the graphics business, the $30 million over ten months amounts to $3 million a month. Is that consistent, or does it experience seasonality? Also, should we expect around $6 million of impact next year as well?

The graphics business does not operate on a flat line throughout the year. Expect somewhere between $3 to $5 million of contribution in the first quarter towards our first-quarter guidance, and that will be deducted moving forward, presumably.

Okay. How are you thinking about the buyback? Is it opportunistic, or are you considering a more systemic approach to the buyback? Based on our model, how should we estimate share count and buybacks?

We have not taken a formulaic approach to buybacks, and I don’t anticipate that changing. We still await proceeds from the graphics sale, so it feels early to address this topic. However, it’s reasonable to expect we may pursue share repurchase in 2025. Alright. Thank you very much, Rebecca. Thanks everyone for joining. We look forward to meeting many of you in the weeks and months to come on the road. Have a good day.

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