Q4 2024 Element Solutions Inc Earnings Call
Speaker Change: Good morning, ladies and gentlemen, and welcome to the Element Solutions fourth quarter and full year 2024 Financial Results Conference Call.
Varun: All lines have been placed on mute to prevent any background noise. After the speaker's 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.
Varun: Good morning and 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 investor section of the company's website.
Varun: 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.
Varun: Please refer to the earnings release, supplemental slides, and most recent SEC filings on our website for discussion of material risk factors that could cause actual results to differ from our expectations and predictions.
Varun: Today's materials include financial information that has not been prepared in accordance with U.S. GAAP.
Varun: Please refer to the earnings release supplemental slides for definitions and reconciliations of these non-GAAP measures to comparable GAAP financial measures.
Speaker Change: It is now my pleasure to introduce our CEO, Ben Gliklich.
Thank you, Varun. Good morning, everybody. Thank you for joining.
Speaker Change: Element Solutions had an outstanding year in 2024. We produced record results, improved our portfolio, and positioned the company for longer-term outperformance.
Speaker Change: We delivered full year adjusted EBITDA above the high end of our original guidance range, despite a material incremental FX headwind that had built over the year.
Speaker Change: The company improved meaningfully across multiple vectors in each of our businesses.
Speaker Change: We outperformed our markets, penetrating the fastest growing emerging niches in the electronics industry, driving margins and investing in new capabilities.
Speaker Change: Adjusted EBITDA with 13% in constant currency to a record $535 million.
Pre-cash flow of $294 million as a record as well.
Speaker Change: It was our fifth year out of the past six in which we converted more than 50% of adjusted EBITDA to free cash flow. And that is despite having more opportunities to invest in growth and therefore spending more on CapEx than in prior years.
Speaker Change: These results were not a product of a generally exuberant market backdrop.
Speaker Change: Only select niches of the electronics industry were strong, while a large portion across consumer goods and automotive was generally soft.
Speaker Change: MSI growth came in well below the market's expectation entering the year and our industrial business fought headwinds from low levels of activity in construction, heavy machinery, and Western automotive manufacturing.
Speaker Change: Notwithstanding that backdrop, we met our financial commitments in 2024, but more importantly, we made meaningful progress continuing to position our business for longer-term outperformance.
Speaker Change: We're a critical supplier of solutions for leading-edge electronics hardware. Our product roadmaps are increasingly informed by, and critical to, emerging needs in high-performance computing markets, and our relationships with the key specifiers and technologists in the markets are strengthening.
Speaker Change: We worked hard to bring our margins back close to their prior high.
Speaker Change: With over 100 basis points of EBITDA margin expansion in 2024, we've just about accomplished that.
Speaker Change: We've shown price discipline and driven positive mix through our progress in high-value niches in electronics
Speaker Change: And we're back at those levels in a period of weak volume in industrial and assembly. So we see a path to set new record margins from greater facility utilization and further mix improvement from here.
Speaker Change: In 2024, we also took steps to focus and enhance our portfolio.
Speaker Change: In September, we announced an agreement to sell McDermid Graphic Solutions for $325 million.
Speaker Change: This is a good business, but it contributed lower growth and margins, and with weaker cash flow conversion than the rest of our businesses.
Speaker Change: We were able to structure the transaction to take advantage of tax assets, such that we should net almost all of the proceeds.
Speaker Change: It's expected to close in the first quarter, subject to customary closing conditions and adjustments.
Speaker Change: And so we are left here with a better portfolio across all key relevant metrics that we believe is also better positioned for growth, and a balance sheet that is as good as it has been since we founded ESI.
Speaker Change: This is all to say that while we're pleased with a record year in 2024, we're even more excited about what we were able to do last year to position the business for longer-term success.
Speaker Change: Carey, we'll now take you through the fourth quarter and fill your financials in more detail. Carey.
Carey: 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.
Speaker Change: Growth was led by semiconductor solutions at 19% and circuitry solutions at 10%.
Carey: 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.
Carey: Emerging technologies are requiring more complex material solutions. 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.
Carey: These advanced packaging solutions, complex multi-layered printed circuit board process chemistries, and high-reliability thermal materials are driving the business in a period of sluggish consumer electronics demand overall.
Carey: We expect that to continue, so these emerging applications are gaining as a percentage of the overall electronics market.
Carey: 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 that should drive further outperformance in the years to come.
Carey: On the bottom line, constant currency adjusted EBITDA grew 9% year-on-year, with margins roughly flat to the fourth quarter prior period.
Carey: Adjusted EBITDA was in our guidance range despite an incremental $3 million FFS headwind in the quarter.
Carey: While most of our input costs have eased, higher pass-through metals in our assembly business generated a year-on-year headwind to company margins of roughly 80 basis points.
Carey: Excluding net sales from these passive metals, our adjusted EBITDA margin would have been 25%, representing 60 bits of margin expansion.
On slide five, we discuss full-year financial results.
Carey: Overall organic sales grew 4%, driven by emerging sources of demand in electronics, even as European industrial end markets remain soft.
On a constant currency basis, adjusted EBITDA improves 13% year-on-year.
Carey: 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.
Carey: excluding the impact of roughly 400 million dollars of pastured metal sales in our assembly solutions business
Our adjusted EBITDA margin went up 26% for the year.
Carey: This is a very strong result, but we see room for further improvement.
Carey: foreign exchange translation with a 12 million dollar a year on your headwind to adjust it EBITDA and roughly three cents headwind to adjust the EPS
Carey: Currencies continue to be volatile, and current rates present additional FX headwinds in 2025, as Ben will cover shortly.
Carey: Next, on slide six, we share additional detail on fully organic results.
Carey: Semiconductor solutions' organic growth of 14% reflected steady improvements in fab utilization, new fab ramps, and broader growth in advanced packaging applications.
Carey: Demand for our VIAform 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.
Carey: We also continue to see strong growth in power electronics for the electric vehicle market.
Carey: as efforts to win new customers through our technology are paying off.
Carey: In 2024, semiconductor solutions marked a milestone, with revenue exceeding $300 million for the first time.
Carey: This business has grown at a 5-year CAGR of 14% and should continue with a double-digit growth trajectory from here.
Carey: Circuitry Solutions grew 12% organically in 2024, benefiting from the large investments made by hyperscalers into AI and data center growth.
Carey: Additionally, the growth of electric vehicles in China has driven demand for certain of our market-leading final finish products.
Carey: Overall, circuitry outpace estimated global smartphone growth of 6% in 2024, which was meaningfully lower among Western OEMs, as well as estimated PCB square meter growth of 7%.
Carey: We expect this business can continue without performance and strong growth even as smartphones remain below prior peak levels.
Carey: We did however deliver earnings growth this year for margin expansion on the back of mix cost of inflation two facility rationalizations.
Carey: Energy solutions top line grew 8% organically drilling and production activity remains strong and we have had the opportunity to drive pricing in that business as well.
Carey: These trends are expected to continue into 2025.
Carey: Moving to cash flow on the balance sheet on slide seven.
Element solutions generated a record $294 million of free cash flow in the year of which a $116 million was in the fourth quarter.
Carey: Our working capital investment was fairly modest relative to our adjusted EBITDA growth, primarily thanks to improved inventory management.
Carey: We had highlighted a desire and opportunity to improve working capital management over the course of 2024 and we executed against it.
Carey: We spent $68 million in Capex in 'twenty four as we made significant progress on several key strategic investments in power electronics manufacturing and our broad manufacturing and research footprint.
Carey: We believe it's money very well spent behind high value growth opportunities.
Carey: We expect to spend roughly $65 million of Capex in 2025.
Carey: We ended the year with our balance sheet in a strong position net leverage was two eight times and our capital structure is more than 90% fixed rate through 2028.
Carey: We now have no debt or swap maturities until 2028, our effective borrowing cost is below 4%.
Carey: On a pro forma basis net leverage would have been two three times at year end.
Carey: If the graphics transaction had closed as of January one 2024.
Carey: As a result substantial capacity to deploy capital in 2025 and beyond.
Dan: And with that I will turn the call back to Dan to discuss our outlook.
Dan: Thank you Gary.
Dan: In 2024, we executed well against the backdrop and a relevant opportunity set.
Dan: We anticipate a continuation of the trends we saw last year into 2025.
Dan: Expect us to execute as well or better.
Dan: Demand continues to grow in high performance computing and data storage applications.
Dan: 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.
Dan: Altogether, we expect 2025 organic growth in our electronics segment at our high single digit longer term target.
Dan: There is also the potential for a stronger refresh cycle on both smartphones and other computing devices, which could believe volume growth for the electronics manufacturing industry overall.
Dan: That would be upside to our plan.
Dan: On the IMS side the outlook for global industrial production is more uncertain.
Dan: We expect a similar environment to 2024. So there is some risk from the impact of potential tariffs on demand.
Dan: We continue to win business in this market and expect another year of outperformance relative to industrial activity in 2025.
Dan: Our offshore business should once again benefit from a balanced growth in both volume and price.
Dan: We anticipate two major nonoperational impacts to adjusted EBITDA year over year.
Dan: First the sale of graphics will account for roughly $30 million impact, which includes a modest adjusted EBITDA contribution from the business in January and February.
Dan: Second the stronger U S dollar will drive translational headwinds, which would be roughly $15 million year over year based on January ending rates.
Dan: Overall when accounting for these dynamics for full year 2025, we are guiding to high single digit adjusted EBITDA growth at the midpoint of our range.
Dan: We expect Q1, adjusted EBITDA of approximately $125 million, which includes a roughly $5 million FX headwind.
Dan: Our full year adjusted EPS guidance of approximately $1 40 does not include any benefit from capital allocation.
Dan: 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.
Dan: To that end on slide nine we've reflected our definition of success for the year.
Dan: We aim to execute at a high level continue to penetrate the fastest growing deepest profit pools available to us and therefore gained share and outperformed our markets.
Dan: In order to continue 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 co brand and other advanced in wafer level packaging and semiconductor assembly products.
Dan: 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.
Dan: We have the team technology and playbook to deliver on this and our conviction in the long term trajectory for our business.
Dan: Continues to grow.
Dan: That conviction relies on the pillars of our business, which are our people, our technology and our deep customer and supply chain intimacy.
Dan: The most important of those pillars is our team.
Dan: 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.
Speaker Change: This time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad will pause for a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line of Josh Spector with UBS.
Speaker Change: Okay.
Josh Spector: Yeah, Hey, good morning, guys. So first I just wanted to ask on your view of your relative performance compared to electronics markets.
Josh Spector: In your electronics segment, I mean, clearly you had a strong 2024.
Josh Spector: Obviously, a weaker comp off 23, so on that two year basis. How do you think you performed relative to markets and when you look forward you are talking about new wins, obviously been talking about advanced packaging for a while does that outperformance accelerate.
Josh Spector: Meaningfully that we should be able to see it or do you view kind of a similar level of outperformance.
Josh Spector: Yeah. Thanks, Thanks for the question Josh.
Josh Spector: A few relevant data points right that we went through just now in our prepared remarks PCB square meters were up maybe 67% smartphones up 6%.
Josh Spector: MSI low single digits and our business was up in the high single digits from an electronics perspective. So we outperformed this year in call it modest recovery within the electronics market last year, we outperformed units on the way down as well.
Josh Spector: So I think you've seen us do better.
Josh Spector: In weaker periods, and do better and stronger periods, and that's really a product of our penetrating the fastest growing.
Josh Spector: Sub segments of the electronics hardware market.
Josh Spector: A step back we had record EBITDA in 2024.
For element solutions, and Thats had a period, where MSI is way dislocated from its prior peak smartphones are way off of their prior peak PCB square meters are below their prior peak and so.
Josh Spector: <unk> is a complex is clearly outperformed the underlying markets.
Josh Spector: Over.
Josh Spector: A multi year period.
Josh Spector: Rolling that forward.
Josh Spector: Sub segments that we have.
Josh Spector: We've grown in.
Josh Spector: And developed a level of incumbency in.
Josh Spector: The secular growing highest value sub segments of the electronics consumables market and those should continue to outpace the overall market and so I think that we have a high I know we have a high level of conviction that this level of outperformance should continue.
Speaker Change: Your next question comes from the line of the de La <unk> with BMO capital markets.
Ben Gliklich: Hi, good morning, Ben.
Ben Gliklich: Good morning Vivek.
Ben Gliklich: Your business is maybe a short cycle in nature I would guess, it's still early for you to see how the year. It's trending could you add some color around maybe a customer communication or or maybe where you are in some other product development cycles as to what scenario as Youre building and as we think about the lower end and the high end of the EBA.
Ben Gliklich: Range.
Ben Gliklich: Yes.
Ben Gliklich: Well, you're right to point out it's a short cycle business right our customers customers don't know how many products. They are going to sell over the course of how many units they're going to sell over the course of 2025 and so the supply chain has limited visibility in that regard. So when we sit here in the beginning of the year and give guidance its really on the basis of expectations for units, whether that's EMS.
Ben Gliklich: PCB square meter smartphone units and so forth.
Ben Gliklich: Yes.
Ben Gliklich: And I think we articulated what we expect.
Ben Gliklich: From each of those key indicators, what's clear is that.
Ben Gliklich: At the leading edge, there's not enough capacity and so capacity is coming online there's huge investment in huge demand for advanced chips.
Ben Gliklich: And we expect that to continue where theres more uncertainty is in some of the legacy.
Ben Gliklich: What used to be the leading edge things like smartphones, obviously, the industrial market and so forth you get to the high end.
Ben Gliklich: Should there be an accelerated.
Ben Gliklich: Replacement cycle in some of those devices better health in the industrial market, obviously FX can help us.
Ben Gliklich: And the low end is should there be a demand impact from tariffs or a weakening in the industrial markets.
Ben Gliklich: Think we all feel pretty good.
Ben Gliklich: And at the leading edge in our highest value areas is going to continue to be robust through the year.
Ben Gliklich: Thanks.
Speaker Change: As a follow up so there's clearly been a significant amount of talks about of tactics.
Ben Gliklich: In Asia, but also within North America.
Speaker Change: Seeing any impact.
Speaker Change: From that so far the new business.
Speaker Change: Not yet no we haven't seen a real impact obviously theres a lot of discussion.
Speaker Change: There has been supply chain realignment going on over the past several years, where manufacturing capacity is moving to Mexico.
Speaker Change: Being an investment in fab capacity in North America and.
Speaker Change: In Japan, we're seeing PCB and automotive suppliers moving into southeast Asia out of China.
Speaker Change: None of that is new and we're benefiting from that.
Speaker Change: But over the past call. It two months, we havent seen any dramatic changes.
Chris Parkinson: Your next question comes from the line of Chris Parkinson with Wolfe Research.
Speaker Change: Great.
Speaker Change: So Ben I think we can all appreciate the effort of not embedding any meaningful macro recovery 25 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 youre seeing right now or what you expect to see soon enough and what would be.
Speaker Change: The two factors potentially your risks that you are monitoring in terms of how you're progressing throughout the year. Thank you.
Speaker Change: Yes, thanks for the question, Chris well the single biggest variable that's been.
Speaker Change: I would call it the most volatile over the past several months has been FX. So.
Speaker Change: We've got about $15 million headwind.
Speaker Change: Year over year using end of January rates, it's a little bit lower today as the dollar has weakened a bit since the end of January it was as high as $20 million in the past two months and if you go back to the end of September it was a $10 million tailwind.
Speaker Change: We've seen a $30 million swing just from currency over the past several months and so that is the single biggest variable I'd point to when you look at.
Speaker Change: Organic or units.
Speaker Change: The automotive market is a critical market for us.
Speaker Change: And.
Speaker Change: While it's not unhealthy per se from an overall unit perspective.
Speaker Change: Types of units that are being made are not necessarily beneficial from a mix standpoint rates are low value electric vehicles in China as opposed to high value.
Speaker Change: Vehicles made in the west So some health a recovery in western automotive would be a tailwind and smartphone units, while they are less core to our growth than they were several years ago, given the emergence of high performance computing and how much volume we have going into that.
Speaker Change: Market today, there is still relevant and a.
Speaker Change: Our replacement cycle and growth in units above what's expected would be a tailwind.
Speaker Change: I would point to is.
Speaker Change: Risk again as I was just mentioning to buyback is industrial production and as that gets weaker.
Speaker Change: <unk>.
Speaker Change: That would be.
Speaker Change: The risk not contemplated in our guide.
Speaker Change: That's very helpful and just as a quick follow up when I think about your exposure.
On for EV and smartphone across your portfolio.
And I look at basically that your mix between China, and non China Oems, how should we be thinking about the trends in those markets for.
Speaker Change: 25, and perhaps even a little bit of a longer term comment as well. Thank you so much.
Speaker Change: Sure so.
Speaker Change: We have more value in western ex Chinese smartphones than in domestic Chinese smartphones.
Speaker Change: But we still have some value.
Speaker Change: In.
Speaker Change: Smartphones from Chinese Oems and we saw a benefit from growth in those units in 2024.
Speaker Change: But the mix is.
Speaker Change: Skews a bit more towards ex Chinese Oems with regards to.
Speaker Change: Electric vehicles or automotive in general, we've got a better penetration ex China.
Speaker Change: And in Evs also ex Chinese EV Oems, but we're making really good progress in both.
Speaker Change: The broader Chinese OEM automotive OEM markets and in particular in high end Chinese electric vehicles, where our power electronics technology has been adapted adopted and we're seeing real growth from from them, which is a really nice tailwind and earnings driver in 2020.
Speaker Change: Five <unk>.
Speaker Change: Units at high end Chinese Evs are rolling out using our technology.
Speaker Change: Your next question comes from the line of Michael Harrison with Seaport Research partners.
Speaker Change: Yeah.
Michael Harrison: Hi, good morning.
Speaker Change: Good morning was hoping that you could give us a little bit more color on your expectations in the PCB market.
Speaker Change: Im curious if youre seeing kind of a similar bifurcation, where the advanced side of thing.
Speaker Change: You guys have a better position.
Speaker Change: Our growing faster, whereas maybe some some trailing edge boards are not growing as quickly maybe just a little bit.
Speaker Change: More color on your expectations for that Assembly business next year.
Speaker Change: Absolutely.
Speaker Change: It's a great question and it's.
Speaker Change: It's a great observation, it's both our circuitry business and our assembly business and I'll speak to them in order.
Speaker Change: PCB square meters grew.
Speaker Change: Mid single digits last year, our circuitry business grew 10% last year and so what explains that divergence.
Speaker Change: The legacy lower Tech circuit boards that go into consumer electronics in cars.
Speaker Change: Had far less growth in units than higher value more complex circuit boards that go into IC substrates. So thats in advanced packaging application or server boards for high performance compute and Thats, where we have a.
Speaker Change: Disproportionate position.
Speaker Change: And that's why we outperform that market.
Speaker Change: Substantially in 2024, and we expect that same trend to continue in 2025 right. So the high end Circuit Board market is healthy the low end is suffering along with weak industrial production and we expect that to continue and so we expect to outperform that market in 2025.
Speaker Change: Again.
Speaker Change: The assembly business is a bit different.
Speaker Change: We're selling assembly materials that go into a broader set of the electronics market than our circuit board business and so the assembly business.
Speaker Change: Didn't grow to the same rate.
Speaker Change: As our circuitry business.
Speaker Change: And that's really driven by its exposures, but we were still able to drive profit growth pretty significant profit growth from the assembly business.
Speaker Change: And that's because the higher value applications and assembly once again are in higher technology.
Speaker Change: Segments of that market.
Speaker Change: And then when you think about this X metal because metal prices increased over the course of the year, but but our profit percent in that business improved and our profit dollars improved.
Speaker Change: Because of where the growth came from in.
Speaker Change: Our assembly.
Speaker Change: Product portfolio.
Speaker Change: Portfolio and again, we would expect that to continue in 2025.
Speaker Change: Alright, Thanks for that and then you referenced the potential to put some capital to work this year and the balance sheet being in pretty good shape can you talk about the M&A market and are you seeing more targets out there and valuations may be getting a little bit more reasonable than they have been in the past couple of years.
Speaker Change: Thank you.
Speaker Change: Yeah, absolutely so our balance sheet is as good as it's been since we founded element when you take into consideration the proceeds from the graphic sale, which would be coming in pretty soon here and.
So we are on the front foot looking for opportunities to deploy that balance sheet to compound earnings.
Speaker Change: In M&A is on the table the types of businesses, we're looking for.
Speaker Change: Are really high quality, just like our business there arent that many businesses that sort of pass that bar.
Speaker Change: Out in the market and so were out.
Speaker Change: <unk> relationships.
Speaker Change: Try to activate that all the time and I do expect we should be able to find some attractive tuck ins over the course of the year at reasonable values.
Speaker Change: That meet our criteria, but we still have capacity beyond that.
Speaker Change: Our repurchase a bit of incremental debt paydown.
Speaker Change: With the balance sheet as it is I don't think we are limited in terms of what we can do over 2025 always with an eye towards compounding per share value.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of John Roberts with Mizuho.
Speaker Change: Okay.
Speaker Change: Thank you one of your peers Integrous has consolidated its segments to two.
Speaker Change: Thank dupont's electronics spend is just going to have two segments do you think about consolidation within your electronics portfolio, maybe to just two segments like maybe pulling together the advanced.
Speaker Change: Packaging and wafer level packaging stuff all in one place.
Speaker Change: Interesting question, Jonathan and thought about that we have won electronics segment with three verticals.
Speaker Change: And as we've done more investor education about our electronics business, we've actually tried to break it out further.
Speaker Change: To clarify what we have in front and what we have in back end.
Speaker Change: We havent circuitry and what we have in assembly.
Speaker Change: Within circuitry Theres, even a bifurcation in that market as we just went through with.
Speaker Change: With the higher end IC substrate market in server board market versus some of the legacy market. So I think if anything we will be providing more clarity around.
Speaker Change: What we do within our verticals rather than less.
Speaker Change: And I don't see any desire to.
Speaker Change: Yeah.
Speaker Change: To re segment.
Speaker Change: Okay, and then secondly.
Speaker Change: Big comfortable running with a lot higher leverage in the past do you have a timeframe in mind, how long youll run with relatively low leverage.
Speaker Change: We've always been opportunistic with regard to capital allocation it will be.
Speaker Change: I would say that we have no.
Speaker Change: Our capacity doesn't burn a hole in our pocket, we have no desire to rush to deploy capital, we're going to be very thoughtful and prudent about.
Speaker Change: With regard to capital deployment from here and it will depend on what opportunities are available and while we have a leverage targeted leverage ceiling of three five times that doesn't mean, we want to run the business there.
Speaker Change: So we're very comfortable with with our balance sheet as it is today and the flexibility it provides to us.
Speaker Change: Your next question comes from the line of John <unk> with C. J S Securities.
Speaker Change: Hi, just one question from me. Thank you one of your larger legacy <unk> customers experiencing significantly weaker sales entering the year are you factoring that into your expectations and do you expect growth.
Speaker Change: In those end markets on a net basis, considering that one large customer.
Speaker Change: Yes, so our.
John Roberts: Power electronics business, John which I think is what you're referring to.
Speaker Change: <unk> has done a very good job of winning new business with.
Speaker Change: Both western electric vehicle Oems and emerging Chinese electric vehicle Oems the electric vehicle market continues to grow and so our power electronics business should continue to grow nicely in 2025.
Speaker Change: The units that.
Speaker Change: Could potentially be lost by any one customer being absorbed by others as we see it and so.
Speaker Change: I think our guidance holds.
Speaker Change: In light of that.
Speaker Change: Whatever dynamics it is that you're specifically referring to.
Speaker Change: Got it thank you very much.
Speaker Change: Thank you Sir.
Speaker Change: Your next question comes from Steve Byrne with Bank of America.
Rob Hoffman: Hi, This is Rob Hoffman on for Steve Byrne.
Speaker Change: Speak about <unk> in a bit more and when do you expect <unk> copper pages to become more commercial products.
Speaker Change: Yes, so as you would've seen in our slides and how we are defining success in 2025.
Speaker Change: Continuing to gain traction commercially and improve our supply chain capability for these emerging technologies could brown chief amongst them is one of the criteria for success in 2025.
Speaker Change: <unk> effort around active copper, which is a product that cooper.
Speaker Change: <unk> has.
Speaker Change: Has been exceptional and customer demand is through the roof.
And the number of <unk>.
Speaker Change: <unk> locations projects, we're working on continues to grow and.
Speaker Change: And the product is performing.
Speaker Change: Our energy over the past couple.
Speaker Change: A couple of quarters and for the next several quarters is on supply chain. So that's building our capacity for active copper production.
Speaker Change: And supporting our customers for developing their applications know, how and process for high volume manufacturing using active copper and that.
Speaker Change: Is moving along reasonably well I expect to have reasonable revenue in 2025 and.
Speaker Change: EBITDA contribution.
Speaker Change: In 2026, which has always been our indicative timeline for for active copper that's unchanged.
Speaker Change: And our confidence in the viability of active copper as a product in the performance.
Speaker Change: The market Paul.
Speaker Change: Grows every grows every quarter.
Speaker Change: And then as a follow up have metallize surfaces within auto parts and household products gaining share or is there a shift to other surface sites.
Speaker Change: Yes, it's a great.
Speaker Change: Great question right. So in our industrial solutions business, we sell functional and decorative surface treatment rates of functional anti corrosion and protective.
Speaker Change: Materials that improved performance in decorative is.
Speaker Change: Thin film of nickel.
Speaker Change: On a piece of plastic for an automotive application, whether thats, the grill or hood ornament or a car or also as you said sanitary like sinks in.
Speaker Change: Theres been a trend over the past couple of years away from.
Speaker Change: That that metal finish towards painted finished in automotive right and so youre seeing more black painted grilles as opposed to chrome looking grills.
Speaker Change: Im on the road, we're actually seeing that change, though and so when you look at our results in 2024 for example.
Speaker Change: Anti corrosion business did quite well and our decorative business.
Speaker Change: Was a bit softer because of that fashion trend changing when you talk to our customers. The Oems are saying that chrome finishes are coming back and so we've got several customers that are saying they are fully booked.
Speaker Change: With their plating lines in 2026, after a pretty weak year in 2024, and so we see that trend reversing and that's a tailwind for us over the next couple of years I'm not sure how material it will be in 2025, but over the next couple of years that trend reversing will will.
Speaker Change: We will support the business and growth in the industrial business.
Pete Osterlund: Your next question comes from the line of Pete Osterlund with Trust Securities.
Pete Osterlund: Hey, good morning, Thanks for taking my questions.
Pete Osterlund: So first I just wanted to ask on your expectations for margin expansion. This year are you expecting mix to continue to drive growth and is there anything else noteworthy youre seeing at this point, whether on input costs or any potential for self help through cost improvements.
Pete Osterlund: Yes, so mix should continue to help there has been some ongoing raw material deflation that should continue to help and we're always working on productivity facility rationalization activities and so that's another lever that we have I wouldn't count on another 120 basis points of margin expansion.
X metal in 2020.
Pete Osterlund: Five, but we should continue to see margin expansion over the course of the year and Thats also not including any real benefit from facility utilization improvement driven by materially higher volumes in the industrial business.
Pete Osterlund: Okay.
Pete Osterlund: Got it thanks, and then just as a follow up you called out that Capex was higher than historically averaged 24 and you're guiding for it to be about the same for 2025. So just was wondering if you could give some color on the capital projects Youre prioritizing for the upcoming year and how they tie to your longer term plans for growth. Thank you.
Speaker Change: Yes, so as Terry said, we were pleased to have the ability to invest as much as we did in 2024, there were some big projects, most notably we doubled our capacity for Argo, Max which is our syndrome silver material used in power electronics, we are building a large research center.
Speaker Change: In India, which is nearing completion and we had some it projects that pushed that number a bit higher in 2024 as we look to 2025. The biggest project I would point out is that <unk> project that we just talked about but there are several other.
Speaker Change: We consider them substantial for us substantial is $10 million to $15 million of investment that we're working on to.
Speaker Change: To support longer term growth in these high value niche is that we've been penetrating.
Speaker Change: The long term run rate is still around 2% of sales even if we're a tick higher for a couple of years here.
Speaker Change: Pete I would just add to that the other thing that's been ticking up that we're excited about is investing in customers' equipment and funding that for our customers to win longer term lock in contracts. So that trend is moving positively and we monitor that keep going.
Speaker Change: That's another way, we support our customers' growth and by helping them finance expansion projects in exchange for long term contracts at high value.
Speaker Change: Of high value products and those are high returning projects that we can do.
Speaker Change: Your next question comes from the line of David Silver with CL King.
David Silver: Yeah, Hi, good morning.
Speaker Change: I had a question I guess about your R&D spend.
David Silver: So.
David Silver: Year over year, if you exclude I guess the coupe prion charge. Your R&D spend is up more than I don't know 2025%.
Speaker Change: I was wondering if maybe you could just highlight some of the areas, where you're putting resources to work there and then should we be penciling in.
Speaker Change: The growth rate to that line, that's somewhat above your topline growth. Thank you.
Speaker Change: Thanks, David So just to clarify one point there is some <unk> spend in 2024 as well, it's not as significant obviously thats a 2023 number what we made the initial purchase price, but there is I think about $4 million in the 2024 number so when you make those adjustments.
Speaker Change: We are seeing R&D tick up slightly as a percentage of sales.
Speaker Change: As Ben mentioned and I mentioned in the prepared remarks.
Speaker Change: Making some investments in labs, we're working on a new.
Speaker Change: Integrated R&D lab in India dosed.
Speaker Change: Are people being added to those facilities and were seeing some increasing costs thats most of our R&D cost as people people on leases.
Speaker Change: The overall trend, though I don't expect that to tick up more than inflation or a sales drop as we go forward I think it's important to note when we look at our R&D expense that we even though on GAAP.
Speaker Change: As reported at these levels, we really think about our development and our technical service.
Speaker Change: <unk>, which shows up in FMT as part of our broader R&D spend and so when you put those two numbers together you see a couple percentage points higher R&D and that's really how we look at the spend and we think it's sufficient.
Speaker Change: For the business, we have as carrier rightly points out our technical service folks and our application centers.
Speaker Change: Are also a critical part of product development, where we're doing local customization to meet local customer needs. There are captured in R&D.
Speaker Change: The other general point I'd make is that with the graphics business, leaving the.
Speaker Change: The envelope.
Speaker Change: We'll have a slightly higher R&D percent.
Speaker Change: Of sales because the graphics business was less R&D intensive than our other businesses.
Speaker Change: And so that's a modest change, but R&D intensity.
Speaker Change: Our R&D investment for our businesses has been more than adequate to support outsized growth for the future.
Speaker Change: Okay, Great and then one last one for me but.
Speaker Change: You have made some scattered comments about your business in China.
Speaker Change: <unk>.
Speaker Change: You know when I think about the.
Speaker Change: The amount of business you do there and I'm thinking there's some tariff issues Theres I think theres.
Speaker Change: Some currency issues, there and then.
Speaker Change: I don't know.
Speaker Change: Issues, but.
Speaker Change: Broadly speaking could you just maybe speak about how you're thinking about your China business for 2025 so.
The economic activity, there and maybe some currency or other issues that factor into your Youre planning for the full year there. Thank you.
Speaker Change: Yeah, absolutely. So we had a good year in 2024 in China revenue was up in the low teens a lot of that was driven by the export market.
Speaker Change: Some of that was driven by the local Chinese smartphone market.
Speaker Change: And then the Chinese automotive market was healthy our business in China is a local business, we buy products manufacture and sell locally and so tariffs don't impact our P&L directly.
Speaker Change: Where there is risk is should there be an acceleration in tariffs.
Speaker Change: Our customers and our customers' customers might see demand.
Speaker Change: Suffer because of inflation associated with tariffs.
Speaker Change: But as we see our business in China, we see the trends in 2024 continuing.
Speaker Change: Electric vehicle market.
Speaker Change: Is seeing significant growth, we're penetrating it nicely the high end Evs are.
Speaker Change: Adapting our technology and all of that is is a tailwind for earnings as we look into 2025 at the same time.
Speaker Change: Fly chains are diversifying outside of China, both multinational corporations and Chinese companies are building capacity for manufacturing in Indonesia, and Thailand and Vietnam.
Speaker Change: We're seeing a lot of activity in India, and those are markets, where we already have it on the ground presence with commercial people with technical people and can welcome.
Speaker Change: Our customers into those markets. They are higher margin markets for us and so we're seeing quite a bit of growth there and thats a trend that we don't see.
Speaker Change: Tailing off and we view that as a significant market share opportunity and so China was a good story for us in 2024, we expect it to be.
Speaker Change: Our growth vector in 2025 at the same time geopolitics are driving share and value our way over the longer term.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Duffy Fischer with Goldman Sachs.
Speaker Change: Yes. Good morning, just on the graphics, the $30 million over 10 months, that's $3 million a month is it that smooth or is there a seasonality in that and then does that mean, there's roughly $6 million hit next year as well.
Speaker Change: Yes, the graphics business is not.
Speaker Change: Flat line across the year I would say.
Speaker Change: Somewhere between $3 million to $5 million of contribution.
Speaker Change: In the first quarter towards our first quarter guide and that will fall out next year I, presumably.
Speaker Change: Yes.
Okay.
Speaker Change: Then how are you guys thinking about the buyback is it opportunistic where if some of the M&A doesn't come to fruition.
Speaker Change: Is plan B or do you want to do something more systemic.
Speaker Change: And more even with the buybacks. So just I mean in our model roughly how should we think about share count and buybacks.
Speaker Change: Yes.
Speaker Change: We will see what the market serves up to us.
Speaker Change: We've never been formulaic with our approach to buyback and I don't expect that to change.
Speaker Change: Imminently.
Speaker Change: We still don't have the proceeds from the graphic sale yet so it feels early to address that but.
Speaker Change: I think it's reasonable to expect us.
Speaker Change: Be interested and repurchased in 2025.
Speaker Change: Yeah.
Dan: I will now turn the call back over to Dan <unk> for closing remarks.
Dan: Alright, Thank you very much Rebecca and thanks, everybody for joining we look forward to seeing many of you in the weeks and months to come on the road and have a good day.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Dan: [music].
Dan: Yes.
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Dan: Sure.
Dan: [music].
Dan: Yes.
Dan: Yes.
Dan: Yes.