Materion Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 10 speakers on the call.

Operator

Please note, this conference is being recorded. I will now turn the conference over to your host, Kyle Kelleher, Director, Investor Relations and Corporate FP and A. You may begin.

Speaker 1

Good morning, Thank you for joining us on our Q1 2024 earnings conference call. This is Kyle Kelleher, Director, Investor Relations and Corporate FP and A. Before we begin our remarks this morning, I would like to point out that we have posted materials on the company's website that we will reference as part of today's review of the quarterly results. You can access the materials through the download feature on the earnings call webcast link. With me today is Jugal Vijayvargiya, President and Chief Executive Officer and Shelly Chadwick, Vice President and Chief Financial Officer.

Speaker 1

Our format for today's conference call is as follows. Jugal will provide opening comments on the quarter. Following Jugal, Shelly will review the detailed financial results for the quarter in addition to discussing our expectations for the remainder of 2024. We will then open up the call for questions. Let me remind investors that any forward looking statements made in the presentation, including those in the outlook section and during the question and answer portion are based on current expectations.

Speaker 1

The company's actual performance may materially differ from that contemplated by the forward looking statements as a result of a variety of factors. Those factors are listed in the earnings press release we issued yesterday. Additionally, comments regarding earnings before interest, taxes, depreciation, depletion and amortization, net income and earnings per share reflect the adjusted GAAP numbers shown in attachments 4 through 8 of the press release. The adjustments are made in the prior year period for comparative purposes and remove special items, non cash charges and certain discrete income tax adjustments. And now I'll turn over the call to Jugal for his comments.

Speaker 2

Thanks, Kyle, and welcome everyone. It's nice to be with you today to discuss our Q1 performance as well as our current outlook for 2024. Our results for the Q1 fell far short of our expectations. While we were expecting to be roughly in line with Q1 of 2023, some operational challenges mainly in our Performance Materials business and some pockets of slowing end market demand led to lower sales and earnings. I'm proud of our team's quick actions to mitigate these short term headwinds delivering roughly flat EBITDA margins year over year despite a nearly $40,000,000 sales decline.

Speaker 2

We have taken a number of targeted cost actions that are benefiting not only our short term results but are providing longer term structural improvements that will enhance profitability as key markets recover. Looking more closely at the sales performance, continued semiconductor weakness represented roughly half of the year over year decline. In addition, the expected inventory destocking of our beryllium nickel product used in non residential construction had a meaningful impact. Our results were further limited by delayed shipments due to the operational challenges mainly in Performance Materials. While we had anticipated the softness in some of our end markets, demand in commercial aerospace and automotive was softer than we expected due to reduced aircraft build rates and slowing growth for electric vehicles.

Speaker 2

Airplane deliveries were down significantly year over year in the Q1 and are expected to be depressed for the year. Offsetting these declines, we saw strong growth across space and defense where we are providing critical materials for space propulsion systems and on a growing number of defense platforms. Short term operational challenges further impacted sales on a temporary basis in the quarter. Addressing some yield and equipment issues, our operations team responded quickly to address the issues and return our assets to normal output levels. Operational excellence initiatives have been core to our performance as we deal with market headwinds and other short term challenges.

Speaker 2

We have taken multiple targeted actions to adjust our cost structure while continuing to invest in the areas that drive organic growth for our business. These important moves have helped to deliver strong margin performance in a softer end market environment. Despite the decline in sales, our overall EBITDA margin for Q1 was roughly flat on a year over year basis representing a strong 20% decremental margin. Our laser focus on driving margin improvement This strong performance leaves us extremely well positioned to drive even higher levels of performance as markets recover. Our focus on managing the business through some short term headwinds is complemented by our relentless efforts to invest for the future as we continue to see the pipeline for long term organic growth.

Speaker 2

We remain confident in our strategy and believe that our robust organic pipeline and portfolio of cost improvement initiatives will help drive earnings growth for the balance of the year. We expect to see continued strength in the space and defense markets as we move through the year. Many of our advanced materials are engineered to perform in the harshest environments making them an ideal fit for these demanding applications. New defense business wins in addition to the previously announced R and D partnerships for various government funded projects further solidify our position as a key supplier for advanced materials across aerospace, defense and new energy markets. In the semi market, near term growth in memory and logic chips used in high performance computing is expected to drive the rebound in our sales this year with demand for power and industrial chips coming back later in the cycle.

Speaker 2

We believe Q1 was the bottom of the downturn for us. As we see order rates picking up coming into the Q2 giving us confidence that our top line will continue to improve as we move through the year. The industry is continuing to prepare for the global shift toward broader AI adoption and Materion is a vital part of that supply chain. We continue to advance our broad portfolio of semiconductor products and are investing to increase capacity in key production areas to ensure we are ready to support that increased demand. The Precision Cloud strip project continues to be a significant driver of organic growth for us and our partnership with our customer is strong.

Speaker 2

The expansion of our new facility remains on track to start up late this year. As the customers global rollout progresses and our teams have driven higher levels of output and performance at our new facility, we will now begin to ramp down production at our legacy facility. Our customers indicated an adjustment to their inventory levels for the second half of the year which will impact our shipments. This adjustment does not correlate to weaker end product sales as the customers global rollout remains on track and their projections support a robust long term outlook for our business. Our team has done an exceptional job of steering the company through some short term challenges while maintaining a longer term focus that will further position Materion for sustainable growth and value creation.

Speaker 2

With the start of the recovery in semi and improved operational performance, we expect to deliver a much stronger Q2 with additional step ups in the 3rd Q4 resulting in another record year for Materion in 2024. Now let me turn the call over to Shelly to cover more details on the financials.

Speaker 3

Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website last night, starting on Slide 9. In the Q1, value added sales, which exclude the impact of pass through precious metal costs were $257,800,000 down 14% from prior year. Despite strength in aerospace and defense and consumer electronics, our sales were negatively impacted by declines in semiconductor and automotive, plus the expected inventory correction for our non residential construction material. Additionally, as Jugal commented, some temporary operational challenges limited our shipments, particularly in performance materials.

Speaker 3

Our teams have made meaningful progress in mitigating these challenges and expect more normal levels of output in the Q2. When looking at earnings per share, we delivered adjusted earnings of $0.96 in the 1st quarter, down 28% from prior year. Moving to Slide 10, adjusted EBITDA in the quarter was $45,200,000 or 17.5 percent of value added sales, down 15% from the prior year with roughly flat margins. Despite the significant sales decline, the strong margin performance was driven by positive price and the benefit of our cost improvement initiatives, partially offsetting the volume decline. Moving to Slide 11, let me now review Q1 performance by business segment.

Speaker 3

Starting with Performance Materials, value added sales were $155,600,000 down 7% from prior year. This year over year sales drop was driven by lower demand in automotive, commercial aerospace and the non residential construction application within industrial. Space and Defense remains a bright spot with significant contribution from the emerging space market and strong defense demand more than offsetting declines in commercial aerospace. EBITDA excluding special items was 35,700,000 or 22.9 percent of value added sales, down 17% from the prior year period. This decrease was driven by the lower volume, partially offset by targeted cost improvement initiatives.

Speaker 3

Moving to the outlook, we expect Space and Defense to remain strong throughout the balance of 2024 and again expect the operational challenges to improve as we move into the Q2. Next, turning to Electronic Materials on Slide 12. Value added sales were $77,600,000 down 25% compared to the prior year as a result of continued weakness in the semiconductor market. EBITDA excluding special items was $14,500,000 or 18.7 percent of value added sales in the quarter. Despite significantly lower volume, operational performance and cost improvement initiatives helped mitigate the semiconductor slowdown, which drove approximately 500 basis points of margin expansion year on year.

Speaker 3

As we look out to the rest of the year, we expect a gradual semiconductor recovery from Q1 with sequential improvement as we move through the balance of the year. Finally, turning to Precision Optics segment on Slide 13. Value added sales were $24,600,000 down 8% compared to the prior year. This year on year decrease was mainly driven by reduced demand in industrial and automotive, partially offset by strength in space and defense. Precision Optics also saw some operational challenges, which delayed some shipments out of Q1.

Speaker 3

EBITDA excluding special items was $400,000 or 1.8 percent of value added sales. The decrease in volume was a significant driver of this year over year decline in addition to unfavorable product mix. Looking out over the next few quarters, we expect a meaningful step up in margin performance in Q2 with stronger demand and continued focus on cost improvement initiatives. Moving now to cash, debt and liquidity on Slide 14. We ended the quarter with debt position of approximately $462,000,000 and approximately $130,000,000 of available capacity on the company's existing credit facility.

Speaker 3

Our leverage at 2.2 times remains just slightly below the midpoint of our target range. Lastly, let me transition to Slide 15 and address the full year outlook. Despite the slow start to the year, we expect to deliver another year of record results with our organic and operational initiatives more than offsetting some market softness. Since our initial guide for 2024, the outlook for commercial aerospace and electric vehicles has softened. And as Jugal mentioned, we are expecting some inventory correction from our precision clad strip customer in the back half of the year.

Speaker 3

We also expect slightly higher interest expense based on the current rate outlook. While we will work to mitigate much of these headwinds, we are adjusting our full year guide to a wider range of $5.60 to $6.20 adjusted earnings per share, a 5% increase from the midpoint versus the prior year. Despite the mixed market environment, Materion remains poised to deliver another year of strong execution and record results in 2024. This concludes our prepared remarks. We will now open the line for questions.

Operator

Thank you. At this time, we will be conducting a question and answer Our first question is coming from Phil Gibbs from KeyBanc. Phil, your line is live. You may proceed.

Speaker 4

Hey, thank you. Good morning.

Speaker 2

Good morning, Phil.

Speaker 4

On Clay, can you tease off the message here a little bit? I hear you talking about inventory reductions at the customer and ramping down as a legacy facility, but you're also saying nothing changed on long term demand and you still plan on Phase 2 being a meaningful contributor in the future. So can you just help maybe lay out the land a little bit better here for us? It seems to have some things moving in different directions.

Speaker 2

Yes. Well, Phil, as you know, this program has been really a great success for us over the last couple of years. I mean, our team has just done a fantastic job of driving yield improvement, operational improvements. In our new facility, while we continue to deliver from our legacy facility, I think what we're talking about is really a short term issue where the customer has continued to look at if they've gone through the launch phase, how do they make sure that they've got the right levels of inventory to support their global rollout. So that's one part of it.

Speaker 2

I think the second part of it is just the great improvements that frankly our team has made on our new facility that has allowed us to deliver at a rate that I think is very, very satisfactory to the customer. So the combination of that, I mean, they're just looking at the back half of the year and looking at making some adjustments to make sure that they're properly positioned. And then we would expect that in the New Year from 2025, because their demand will continue to be robust and we will continue to support them in a meaningful way. So I think all of these things actually tie together and that's why we say the Phase 2 is on track. It's going to contribute into the 2025.

Speaker 2

We've been saying that I think all along that it would be late 2024 really nothing of substance or meaningful deliveries here at the end of the year, but really contributing into 2025 and at the same time making sure that we can continue to support from the Phase 1. And then we've talked of course over the continue to support from the Phase 1. And then we've talked of course over the last year, year and a half because I think the questions have been there about, okay, when are you going to stop producing from the legacy facility. And I think considering some of the adjustments that the customer is looking at for the back half of the year, it's about the right time to be able to start doing that and in support of course of the yield and performance improvements at our new facility. So I think it's just a natural sort of evolution of where the program is at with some corrections here for a couple of quarters, but continued success on a long term basis.

Speaker 4

Thank you, Jugal. And then on the commercial aerospace side, you talked about some slowing and builds down. I mean, I think the only meaningful place where we've seen builds down, at least to our knowledge has been on the MAX program, but I know you also have a lot of maintenance exposure to the commercial side as well and maintenance has been strong. Does this or should this suggest to us that you just have more exposure to Boeing at this point or are you seeing other program adjustments?

Speaker 2

Phil, as we look at commercial aerospace, I mean, there we see really a build challenge across both of the major customers, both Airbus and Boeing. I mean, if you look at some of the data, for example, that we track for for build rates, if you go back to Q1 of last year, the build rate combined was around 250, 260 planes. This Q1, it was around 225. If you look at Q4, Q4 build rate on a combined basis was over 350. So the number is probably around 370, I think, for build rate.

Speaker 2

So substantial decrease here in Q1 across actually both. There's a number of supply chain issues that frankly Airbus has talked about very openly that they are facing. So more of a supply chain issue on the Airbus side. And of course, we know the challenges that Boeing is facing, not only on the 737 MAX, but I think in general, I would say that they have really, really looked at their production processes to ensure that quality is at the forefront and are really taking steps I think to adjust their build schedule as necessary. So significant down in the Q1 for Commercial Aerospace, which I would say is more than what we had anticipated.

Speaker 2

And then as we think about the recovery for the rest of the year, I would expect that the build rates are going to improve. But certainly those build rates are not going to get to that. At least we don't think that they're going to get to the levels that they were over the last year or so. So I do expect commercial aerospace in general to be challenged. This is absolutely not a share issue at all.

Speaker 2

As you know, we have been gaining content across multiple materials and products that we have on both single aisle and wide body planes. So our content growth is there. Our share is there. We just need these 2 mega companies to increase their build rates as we go forward. So we'll just we'll monitor the situation, but we do see this as a caution for the full year.

Speaker 4

And then lastly for me, the operational challenges that you cited several weeks ago and then talked a little bit about today. You maybe pinpoint some major issues there? When they started to occur, what gives you confidence that they're behind you?

Speaker 3

Thanks. I'll take that one. So as we mentioned, the majority of that issue was in Performance Materials. And really what we saw there was some yield challenges coming out of an early production process that impacts many of our downstream product lines in Performance Materials. That started really hyper early ish in the quarter, if you would.

Speaker 3

And we started to see that we weren't going to be able to service all of the demand, all of the orders that we had on the books, which is when we reevaluated and then came out with a bit of the early caution. That is getting better. The issues are being addressed. I think the team got together quickly to make sure that we could get those yields back up to be able to service the full order book. There were a couple of other items.

Speaker 3

We had some delays at an outside tolling partner that were an impact and then some small yield challenges in precision optics. So we just had a

Speaker 5

few things that kind of fell under

Speaker 3

the bucket of operational challenges that we think we've got addressed, but they were big enough to talk about.

Speaker 2

Yes. And Phil, I would add that as we look at our Q2 and as we've indicated, we expect Q2 to be a step up, a significant step up from Q1. Getting those operational challenges behind us is core to that. And based on how we have been running here in the month of April and how we expect to run the rest of the quarter, I would expect that we're we've made a marked improvement in those operational challenges. Thank you.

Speaker 2

Thanks, Phil.

Operator

Thank you. Your next question is coming from Daniel Moore from CJS Securities. Daniel, your line is live. Please go ahead.

Speaker 6

Thank you, Jugal. Thank you, Shelley. Good morning. Good morning, Dan. Jugal, in the prepared remarks Good morning, Dan.

Speaker 6

Thank you. You mentioned the start of the recovery in semi. Maybe just elaborate on conversations, dialogues with customers, your confidence that demand should continue to improve sequentially beyond Q2 for the next few quarters?

Speaker 2

Yes. Well, as you know, this market has been a very challenged market, not only for us, but for the entire industry, right. And there have been some starts and stops and thinking when is the bottom. We do believe based on orders and based on conversations with our customers that Q1 was the low point for us. We see improvements going into Q2.

Speaker 2

We see improvements here in the 1st few weeks of the quarter as well as I think what we see for the next couple of months as well. Our discussions with the customers as well as I think what we hear externally continues to indicate that logic and memory in particular is starting to lead the recovery and I think it will continue to lead the recovery in Q3 and Q4. There are some challenges on the power side, those challenges being frankly the slowing growth of the EV. I think that's going to take a little bit more time for the power side, but logic and memory, I think, are making are starting to make more of a recovery. When I look at our order backlog, our order backlog has continued to improve over the last couple of months.

Speaker 2

We see probably from about 3 months ago to where we are today, approximately, I'm going to say double digit order backlog improvement for the semi business, which gives us confidence not only for Q2, but I think it gives confidence for the back half of the year. So I would say, if I look at the last few quarters, it's the first time that I can sense a little bit more data that gives us confidence for the recovery to start to happen here in Q2 with Q1 being a low point and then continuing in Q3 and Q4.

Speaker 6

Very helpful. And just pulling on that string as we think about 'twenty five and beyond and, I guess it's probably more into 'twenty six, but the build rates expected for a lot of the fabs that are expected to come online, just talk about your confidence. When do you expect a more meaningful inflection in that sort of core end market as far as when we might see the uptick to longer term high single digit type growth?

Speaker 2

Yes. So I think when you look at the build rates in terms of the fabs and some of the investments that are being made, we certainly saw some of the investment slowdown commentary over the last 12, 18 months as the overall market started to become more challenged. However, what we are seeing now I think is starting to have some more positive discussions around the investments. We're seeing some of the investments in the U. S, for example, some of the government investments coming into play, some recent announcements at large companies with the aid the government is providing.

Speaker 2

I think we're starting to see kind of almost starting back up of the investment activity in Asia as well. So we if the investments are happening, but perhaps a slight delay, right, from what they were talking about maybe 2 years ago. So probably a 1 to 2 year delay, but the investments are clearly getting back on track. When I look at the levels that we had in the 2022 timeframe, I mean, that was really a peak of the semi side. The thought was that those levels will start to come into play probably in the half of twenty twenty five.

Speaker 2

Perhaps now they perhaps some of those peaks would be maybe the front half of twenty twenty six. So a slight delay, a couple of steady improvement and recovery in the semi market. Again, I think a steady improvement and recovery in the semi market, again led by logic and memory, but then followed by the other areas as well.

Speaker 6

Perfect. And then last for me and I'll jump back. The incremental capacity that you would have from shifting production from the legacy facility to the new clad strip facility, is that something that you can think about actively selling to alternative potential customers? Or is it more likely to be shuttered? Thanks.

Speaker 2

Yes. So as we indicated, we would be looking at starting to slow down, certainly not stopping production. So the incremental capacity is absolutely something that I think is very usable because it's capacity that we were using prior to starting this program. And so we will simply shift that capacity to other activities in the commercial sector or consumer sector or the automotive sector. So we will make sure that that capacity is being utilized appropriately.

Speaker 2

If for some reason, we have issues with that, we'll take appropriate action to adjust the cost structure. Thanks, Dan.

Operator

Your next question is coming from Mike Harrison from Seaport Research Partners. Mike, your line is live. You may proceed.

Speaker 7

Hi, good morning.

Speaker 2

Good morning, Mike.

Speaker 7

I was wondering, appreciate all the detail you provided on the semi outlook, but just was hoping that maybe we can focus on the performance in the Q1, particularly on the margin side. I know you called out the nice year on year improvement, but I think what was more interesting was the improvement sequentially on essentially the same level of value added sales. Can you talk about what led the margin to be so much better in Q1 than it was in Q4, even though that value added sales level was pretty similar?

Speaker 2

Yes. Let me start with that and then certainly Shirley can add to that. As you know, EM has been a focused area for us for margin improvement, right? We have talked about how we need all of our businesses to contribute so that the overall company is able to get to 20% EBITDA margins or better. The semi decline started to happen, and I'm going to go back to probably Q1 of last year, right?

Speaker 2

Q1 was almost kind of a peak quarter for us in sales. Our margins started to frankly get impacted. We started to make significant cost improvement initiatives starting in the second quarter, but more importantly, I would say in the back half of the year. And as you know, sometimes as you're making those plant improvements and operational improvements, they take a little bit of time to get into play. And so we're starting to see the benefits of that.

Speaker 2

And so I'm really, really proud of think what the team has been able to do and to drive that improvement. I would expect that some of these improvements are going to continue and I can assure you we're not going to back off on that. Some of these improvements are going to continue and we're going to hopefully be able to drive margin enhancement as the market recovery happens. So that's a big part of it. Now certainly there's always sometimes there's a little bit of one time issues or sometimes there's a little bit of mix issues.

Speaker 2

Those things go back and forth every quarter. But I think fundamentally, it's really the core improvements and the operational improvements that our teams have been driving over the last 6, 9 months that are starting to bear fruit and starting to deliver here in Q1. And I would expect that we continue to keep a focus on that. We need our EM business to deliver and contribute towards the 20% objective of EBITDA margins that we have.

Speaker 7

All right. Thank you for that. And then I was also wondering if you can lay out where we are in this inventory correction that's going on in the industrial business, these beryllium nickel springs, I believe for commercial sprinkler systems. Can you just kind of help us understand, I mean, we've seen destocking in a lot of different pockets of the economy, but this seems to be one that kind of cropped up later and just curious if you feel like things are improving or if it's going to be something that's weak for the remainder of the year?

Speaker 2

Yes. This is one that is a kind of a fairly unique product, right, in the industrial sector and it's hard to correlate it to a PMI index or some other type of an index, right, that's kind of a unique product and used for this non residential construction. We are obviously the provider of these for the market. There was a significant growth that happened coming out of COVID. And I think the channel frankly got a little flushed with the inventory.

Speaker 2

As the interest rates and some of the inflation activities and some of the just the general downturn, I think that we all know that that's happening in the overall commercial construction and occupancy. As a result of that, we are just going through that inventory correction. It started to happen late last year, so maybe let's say in Q4. But I would expect that the first half of this year is going to be a meaningful inventory correction that's going to happen in this business and we would expect to start picking back up in the back half of the year, but I would expect the pickup to be, let's say, a slight, but then more meaningful pickup in 2025 as that inventory is worked through. So again, I want to emphasize, I think that this is not a share loss issue.

Speaker 2

This is simply just an inventory correction on a more specific element of what we consider in the industrial sector and we would expect a small turnaround in the back half, but then a meaningful turnaround in 2025.

Speaker 7

All right. Very helpful. And then last question for me is just with your balance sheet, you mentioned just below the midpoint of your target leverage range. Curious if you can give us an update on your acquisition pipeline, what you're seeing in the M and A marketplace and maybe talk about the potential for some acquisition activity later in the year?

Speaker 3

Yes, Mike. So I'll take that one. Yes, as you mentioned, our leverage right now is it's about 2.2 times, which is half between our 1.5 to 3 times targeted range. So we feel comfortable where we are. As you know, we're doing a lot of organic investing, which is really what's kind of keeping that propped up after the acquisition we did of HCS Electronic Materials.

Speaker 3

We've not focused on debt pay down, but rather on organic growth. Given that we've got capacity, certainly, we still can do an acquisition and we're always looking kind of evaluating options and seeing where there might be targets that would add either to our product portfolio to build that out or something that's geographically desirable that would build out our footprint. But it's not I wouldn't say today it's a must do. So I wouldn't say that we're out there saying we've got to get an acquisition done this year, but we certainly want to be opportunistic there and could do that if the right thing comes along.

Speaker 7

All right. Thanks very much.

Speaker 2

Thanks, Mike.

Operator

Thank you. Your next question is coming from David Silver from CL King. David, your line is live. You may proceed.

Speaker 8

Yes. Hi, good morning.

Speaker 2

Good morning, David.

Speaker 8

So, it's a true statement that all of my top questions have been asked. However, that's never stopped me before. But just giving you a warning, this might be a little scattershot. I mean, I do have several issues I wanted to touch on. First would just be a clarification to some of Jugal's earlier comments, has to do with Precision Cloud Strip and the transition, I guess, from Phase 1 in the back half of twenty twenty four to Phase 2 and maybe beginning early 2025.

Speaker 8

So Jugal, I believe you talked about kind of inventory draw downs at the customer back half of this year and then the ramp up of production from the new facility. Can you just clarify, is there a qualitatively or structurally different product that you're supplying from the new precision clad strip unit? In other words, why would if the products were relatively similar, why would the customer need to adjust the legacy, I guess, inventory levels later in this year? Just maybe I'm missing something, but if you could just maybe discuss that transition as you discussed earlier. Thank you.

Speaker 2

Yes. David, going back actually to about I'm going to say almost 3 years ago probably when we started talking about this program, what we've indicated is that the customer has had at that time a product that they had in the marketplace. It used a technology that was not ours. We were not involved in that. The customer introduced a next generation product.

Speaker 2

When they introduced the next generation product, then our technology. So our precision plan that we provide is what is used with that customer. So they have been, let's say, phasing out the older generation and phasing in the newer generation, right, and rolling that out around the world. And so as that ramp up has happened and as they have continued to build inventory and continue to put a product in the marketplace, we have supplied to them. We have supplied to them from the legacy facility and we've supplied to them from our new facility.

Speaker 2

And I think the and I'm really proud of our team for that. I mean, I think the fantastic work that our team has done on the new facility in particular, but driving yield improvements, driving output improvements, I think has been a great support to the customers launch and the rollout that they have been able to do. I think all of that combined with just how are they managing it, the global rollout, they are really making sure that they've got the right levels of inventory now to support their rollout. And that's really kind of where it is, David. And so short term, couple of quarter type of adjustments, but nothing of concern to us because this is a program that as far as we know from the customer and we meet with the customer on a very frequent basis, they see this as a very successful program and one that will continue to be successful for the upcoming years.

Speaker 8

Okay. Thank you for that. Very, very clear. I appreciate the longer term perspective. Maybe a couple for Shelly here.

Speaker 8

But I was hoping you could just give us the final kind of determination from Materion's perspective on the production tax credit, I believe, or manufacturing credit that you're in line to receive as part of your participation, I guess, with Critical Materials. But you did kind of make a judgment earlier in 2023 that you reduced later in the year upon further clarification, I believe from treasury on the particular details of how the credit would be calculated. So just level set us there though, but are you at a point now where you can kind of confidently talk about the final, I guess, expectations for that credit? And is there kind of a ballpark estimate for what that could add on an annual basis?

Speaker 3

Yes. Thanks for that question, David. It's good to kind of give an update there. As you know, we're really excited about that credit as it gives us a reduction in our overall cost to produce high purity beryllium products. When the Act was first announced, the definition of production cost was a bit more broad and maybe less defined, but did include material raw material costs.

Speaker 3

The update that came from the Treasury Department late last year used a different definition of production costs that would take raw materials out. As you might recall, there was then a comment period and hearings and a number of other items that were being discussed before final guidance is given. We have not gotten any updates since then. We did kind of look at what was said at these hearings and the and are accruing at a more conservative rate. In fact, if you think about Q1 last year, we would have recorded about $1,000,000 more of a credit than what we recorded this year just based on a more conservative methodology.

Speaker 3

But we still believe we've taken a pretty middle of the road approach and look forward to getting more clarity as the year progresses.

Speaker 8

Okay. Thank you with that. And then maybe one more on the beryllium side. But I'm looking at the full year 2024 guidance, sorry, Slide 15. And in particular, on the right hand column, the mine development dash new pit opening $13,000,000 There's always been a smaller moderate amount in that column.

Speaker 8

But I was wondering the new pit opening, is that designed to expand your capacity for the mineral that you require for your beryllium production? Or is this really a replacement? In other words, is the are you investing to prepare for anticipated growth or just is this maybe just the normal transition from a played out portion of the mine to a new part of the mine?

Speaker 3

Yes. I'll start on that one. So as you know, we've got a mine out in Utah that we have dug various pits at really to obtain our raw material. So you've heard Jugal explain this process before. It's basically we have an open pit.

Speaker 3

We dig dirt and process it to get the beryllium products out of the ground. When we do that, we have to capitalize that really from an accounting treatment. So I like to think of mine development as really raw material costs that are amortized over the period in which we use the raw material. So it's I wouldn't think of it as this is a different capital investment, but really it is the size and the amount of the dig and the cost of that, which may be amortized over a different period or certainly more a higher quantity. We do see an uptick in our beryllium processing and our beryllium related sales and opportunities.

Speaker 3

So we're making sure that we're digging enough to have the product to support that demand. But really what you see there is just something that goes on the balance sheet and amortizes off with production.

Speaker 8

Okay, very good. And last one from me and I'll apologize in advance if I misquote Jugal on this. But the topic would be your expansions on the electronic material side at Newton and Milwaukee. But 1 or 2 quarters ago, I believe, Jugal, you talked about I asked you about the timing of completion, has it changed or whatnot? And again, I'm paraphrasing, but I believe you said, well, the slowdown in electronic materials demand that was happening then, you thought it would jibe very nicely with your planned expansions.

Speaker 8

In other words, you wouldn't have to accelerate or anything you could complete the expansions and upgrades at a desired pace. Based on your comments today about maybe a more drawn out recovery or rebound in the core electronic materials portfolio, How are you thinking about that completing that expansion and the timing of the startup with customer demand. Any shift in that thinking?

Speaker 2

No, I would say in whole, there is no shift in our thinking on that. We're continuing to progress on those expansions. We want to make sure that we're properly positioned from a capacity standpoint as the market recovery happens. And I think we'll just continue to work that, David, and make sure that all of our equipment is being installed, is being qualified with our various customers and that we're fully prepared to support them as the recovery happens in the various types of the segments of the semi semi market. So we I would say we're on track and continuing down that path.

Speaker 8

Okay, great. That's it for me. Appreciate all the color. Thank you.

Speaker 3

Thanks, David.

Speaker 2

Thanks, David.

Operator

Thank you. Your next question is coming from Dave Storms from Stonegate Capital Markets. Dave, your line is live. You may proceed.

Speaker 1

Good morning.

Speaker 2

Good morning, Dave.

Speaker 9

Just hoping to get a feel for pacing. Last call, it was estimated that value added sales would be split roughly 45%, 55% between first half and second half. Does the anticipated step up in Q2 maintain that ratio? Or should we adjust those expectations?

Speaker 3

Yes. That's a good question. We spend a lot of time thinking about that and really look more at, I guess, think the cadence of our earnings. And we did talk last time about that being kind of a 40five-fifty 5 split as we move through the year. With our soft Q1, of course, we had to kind of take another look at what that might look like.

Speaker 3

We do see the significant step up in Q2, but it will affect the balance of earnings where we'll probably be a little better than 40% in the first half. When we think about Q2, we'll probably do a little bit better than Q2 of last year, but we're going to really see the meaningful step up in Q3 and Q4 to kind of hit the midpoint of our guide. So if you think forty-sixty maybe 41, 59 something like that, we're kind of in that zip code right now at least how we're thinking about it.

Speaker 9

That's very helpful. Thank you. And Jewel, you mentioned with shares coming down excuse me, with volumes coming down, you're not really seeing share losses. Has that been because you've had to compete on price? Is there any upside to competing on price to maybe get some share gains?

Speaker 9

Basically, just how are you thinking about your pricing environment given the softer volumes?

Speaker 2

Yes. Well, when I talk about the share situation, there's a number of different programs that we spoke about. Beryllium nickel was one of them, for example, and making sure that everybody understands that this is not a share issue. It's just simply an inventory destocking issue, right? And I think that's the case for a number of different things.

Speaker 2

Some of the declines that we have in Q1 in sales was simply due to operational excellence. It wasn't due to order rates. It was we just weren't able to get the product out the door. So I think it's a combination of things between those various items. Now when you look at pricing in general, certainly there's always pricing pressure.

Speaker 2

I mean there's no doubt, right? Customers are always looking for ways that we can do things more efficiently and then pass on those benefits to them. So we continue to work that. We continue to drive operational excellence initiatives on our side, so that any type of price down that we have to give to our customers, we're offsetting those with cost downs. But in general, what I will tell you is if you look at our business over the last several years, we tend to be price positive.

Speaker 2

So what I mean by that is we tend to be more, I would say, on the price up than on the price downs across the board. And so we'll continue to keep a focus on that. Our sales teams know very well as they work with our product teams on what the cost structure is that we have in our various businesses and how to properly price the product and making sure that we're looking at appropriate value based pricing. So pricing has been a key important enabler for us. I expect it to continue to be a key important enabler for us.

Speaker 2

And we're always, as I said, managing between what the pricing is and what the share is and how can we make sure that we're properly balancing both of those items.

Speaker 9

That's very helpful. Thank you for taking my questions and good luck in Q2.

Speaker 3

Thank you.

Speaker 2

Okay. Thanks.

Operator

Thank you. We have reached the end of the question and answer session. And I will now turn the call over to Kyle Kelleher for closing remarks.

Speaker 5

Thank you. This concludes our Q1 2024 earnings call. A recorded playback

Speaker 2

of this call will be available on

Speaker 5

the company's website materion.com. I'd like to thank you for participating on this call and your interest in Materion. I'll be available for any follow-up questions. My number is 216 383-4931. Thank you again.

Operator

Thank you. This concludes today's conference

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Key Takeaways

  • Materion reported Q1 value added sales of $257.8 million, down 14% year-over-year, with adjusted EPS of $0.96 (–28%), yet maintained EBITDA margins at 17.5% through targeted cost actions.
  • Roughly half of the sales decline was due to semiconductor market weakness, while additional headwinds included beryllium-nickel inventory destocking and softer commercial aerospace and EV demand, partly offset by strong space & defense growth.
  • Operational excellence and cost improvement initiatives mitigated volume declines, delivering a roughly flat year-over-year EBITDA margin and laying the foundation for further margin expansion as markets recover.
  • Management views Q1 as the downturn bottom, forecasting sequential semiconductor improvement (led by logic and memory), sustained space & defense strength, and the Precision Clad Strip expansion ramping late 2024 to drive stronger H2 performance.
  • The firm ended Q1 with $462 million in debt (2.2× leverage) and $130 million in available liquidity, and raised its 2024 adjusted EPS guidance to $5.60–$6.20, expecting another record year despite market headwinds.
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Earnings Conference Call
Materion Q1 2024
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