Greetings and welcome to the Materion Corporation First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host today, Mr. Mike Hasychak, Vice President, Treasurer and Secretary. Thank you, sir. You may begin.

Good morning. This is Mike Hasychak. With me today is Dick Hipple, President, Chairman, and CEO; and Joe Kelley, Vice President of Finance and Chief Financial Officer. Our format for today’s conference call is as follows: Joe Kelley will review the financial results for the first quarter and the outlook. Following Joe Kelley, Dick Hipple will provide comments. Following Dick, we will open up the call for questions. A recorded playback of this call will be available until May 14 by dialing area code 877, the number is 660-6853 or area code 201, the number is 612-7415. The conference ID number is 13634124. The call will also be archived on the company’s website, materion.com. To access the replay, just click on Events & Presentations on the Investors page. Any forward-looking statements made in this announcement, including those in the outlook section and during the question-and-answer portion, are based on current expectations. The company’s actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of those factors. Those factors are listed in the earnings press release issued this morning. And now, I’ll turn it over to Joe for comments.

Thank you, Mike, and good morning to everyone for joining us on the call today. During my comments, I will cover our first quarter 2016 financial highlights, review first quarter profitability by segment, make some brief comments on the balance sheet and cash flow and finally cover the earnings outlook for the remainder of 2016. Following my comments, Dick Hipple, President, Chairman and CEO, will provide comments on the company’s key strategic initiatives. Let me start with the first quarter financial highlights. First quarter 2016 financial results were in line with our forecasted earnings and guidance provided to the Street. Although both sales and earnings in the first quarter of 2016 fell short of our strong performance in the same period last year when economic and end market conditions were much stronger, we did begin to experience a rebound in sales in a majority of our end markets versus the fourth quarter of 2015. First quarter 2016 value-added sales, which exclude the impact of pass-through metal costs, fell 12% from the prior year first quarter value-added sales and were flat sequentially with the fourth quarter of 2015 at $143.9 million. The year over year decline in value-added sales was across the majority of our end markets, with decreased demand levels coming from the oil and gas market and a broader slowdown in China demand, particularly in the connector market. Looking at the flat value-added sales sequentially from the fourth quarter of 2015 to the first quarter of 2016, we started to see some encouraging signs. The flat sales is reflective of a $4.7 million or 3.4% increase in value-added product sales, offset by a $4.2 million decrease in sales of raw material beryllium hydroxide. The sequential increase in value-added product sales is encouraging, as our sales into the Asia market,…

Thank you, Joe. By many measures, it was a tough going for Materion in the first quarter, especially compared to a year ago. But coming off a challenging third and fourth quarter, it was in the range of what we expected as we realized the full impact of the strengthened US dollar combined with the lack of foreign exchange rate hedge gains and in a number of places, the quarter produced some promising sequential improvement as product sales grew across the majority of our end markets. Touching on a few of our markets, we continue to face the headwinds of oil and gas and the slower conditions in China, but not as the negative velocity experienced in earlier quarters. Our slight increase in the order book for oil and gas indicate that the market may have finally bottomed. We have also seen a modest increase in demand from Asia, particularly in the telecommunication infrastructure end market. In auto, recognizing that our sales are down from last year’s first quarter, we saw a nice increase in sales from the fourth quarter to the first. The defense market remains very robust, although we can see significant shipment variability between quarters, particularly with our high DE business where individual programs create lumpy sales timing. One of the more difficult markets to get a good read on is the consumer electronics sector, particularly smartphones. We saw a modest increase in sales in the first quarter from the fourth, but based on recent reports from Apple and the earthquake disruptions in Japan, we might see the normal sales lift in the second quarter ship to the third quarter. As we look forward, we have targeted major macroeconomic and technology trends as growth drivers for our new product and technology platforms. To cite a few examples…

[Operator Instructions] Our first question comes from Edward Marshall with Sidoti & Co.

The question I wanted to ask is the suspension of the pit opening mine in beryllium, and is there not a need for this material, do you have too much of this material and how does that relate to kind of your prospects for the timing of the stock pile depletion in Kazakhstan?

I actually won’t read very far into it in the sense that we are just currently suspending the investment. We’re going full speed ahead and we actually moved some working capital efficiency improvements in the supply chain between the mine, the open pit mine, and the end product sales going through our chemical processing plant. And so when we look at that with the working capital efficiency improvement, we were able to suspend the investments in this mine. And appreciate, this is very, very long term. So we have sufficient ore and working capital in the pipeline to meet our demand. So I really won’t read – I would read, the number one issue is working capital efficiency utilization improvement before this delay and the orders of beryllium hydroxide. So said differently, from a cash flow modeling purpose, Ed, I think that investment will probably just be pushed out to perhaps next year.

Okay.

There’s other bucket of inventory between the mine and the chemical plant, the chemical plant operations and we’ve really taken a critical look of how we’re managing all those inventory buckets. We can be hell of a lot more efficient, so they just backed up to the front end.

That’s continuing to [change theme I think you put in] for the last couple of years here. If I looked in the Q, am I going to see any changes in the raw material entries there in the inventory component or is that too small for me to notice?

Associated with this, again, on the mine development side, when we’re opening a pit, Ed, as you know, that goes into the mine development and it’s capitalized in the fixed assets. When we extract the ore, it gets removed from fixed assets into inventory through amortization. So we will continue our normal historically forecasted depreciation and amortization is going to be around $40 million to $45 million and so that will be relatively flat with what we previously guided to. So what you’re going to see compared to our model is just a delay in the investment in the mine development. It won’t be a change in the inventory.

And then when I look at the mix of the business, you gave good detail on the individual segments, noting that consumer electronics is 26%, we’ve seen some of the larger component guys out there report, do you think – and I heard your comments about maybe Q3 weighted, do you think more of your guidance is probably second half weighted than it was originally thought when you entered 2015 or 2016 rather?

Actually our original guidance, we don’t give quarterly guidance for the most part of the quarter or the full year, but it was back end loaded. I referenced in my comment we do have, as you’re familiar, some of our large high purity beryllium shipments are scheduled for the back half of the year. As you recall, I think if you look at our performance back in 2014, we had heavy back half of the year beryllium shipments and those all run through the performance alloys and composites segment, so you can study and see those results. So it’s really the consumer electronics, I think, that may – end markets that you referenced that may have – moving within the quarter. As Dick mentioned, there’s maybe a little bit of Q2 into Q3.

I guess asking a different way, do you think Q2 is a little softer than maybe your expectations heading into the year and therefore a little bit more back half weighted with your guidance than you originally thought based on some of the comments in the prepared...

Yes.

Okay. With defense trends, some good trends there, I’m wondering if there is anything you can provide us to help out with our modeling here because it’s probably difficult for you, but it’s even more difficult for us, if there’s some kind of backlog or some kind of number there that we can kind of use to try to get a sense as to how this kind of builds throughout the year and maybe even in 2017 as we kind of think out?

When we look at some of these defense orders and also sometimes it goes into medical end market for nuclear medical applications. To help you think about and help you model that, we try to just be specific when we’re talking about our annual guidance and give you an indication of when that will hit and when that will be heavy. Because at the end of the day, our beryllium business, the sales as we say are lumpy and the profit margin on these high purity beryllium businesses will cause a mix shift and therefore substantial improvement in profitability or deterioration if any looking sequentially, if large substantial medical shipments of high purity beryllium or not. So I guess what we’re trying to do to help you with your modeling is give you the specific guidance that there are several large percent of orders including the DLA itself scheduled for the back half of the year.

And oil has had a nice rebound and I know that was an important market for you in 2014, maybe not so much in 2015. And I kind of think about have you seen any kind of early indications that there is any rebound looming with the improvement in oil prices? I think probably [indiscernible],

I would say that it’s really hard to predict, but I would say right now that the increase in oil price has nothing to do with the lift that we’ve seen. I think we’re just at a point where you’ve had this inventory adjustments going on. And they’ve run out of inventory in some of the supplies in certain specific areas and now they actually have to order something. I mean, it’s just mind-boggling to think that it wasn’t too long ago that there were 1,800 rigs in operation and today it’s under 400. So obviously there’s a big lift going on here. So we’re watching carefully, but I think we’re – it’s the old – I don’t want to call it’s a dead cat bounce because that means it goes back down. It’s just that it – it’s coming off in extremely low level because I think now we’re in the spot price where they’ve actually run out of certain areas of inventory. But I would like to make one advertisement because – not an advertising because it’s true, is we’re going to see growth in this market higher than what kind of – whatever the heck is going to go on residual, because of those new products that I had mentioned, we will even at a low market situation, since we’re gaining applications, we should be doing better than whatever the market is because we’ve just introduced three new exciting products in the oil and gas fields that they’re going to be using us in preference of some other metals.

Our next question comes from Marco Rodriguez with Stonegate Capital Markets.

Kind of wanting to follow up a little bit with the end markets, strength I guess you called in the Asia market a little bit on the connectors and the telcos, you’ve seen sequential improvements there. Can you provide any color or any specific information from end customers or is it just kind of looking at your bookings?

So what we believe is with respect to the connector market specifically that there was a destocking that went on. We sell a lot though distribution, particularly on beryllium product line and we think the back half of 2015 included some destocking that wasn’t adjusted to the real ongoing run rate. So as we came to an end in Q4 and early in Q1, that started to pick back up for us. And so that’s our view on the connector market in Asia. But when you go to the telecom infrastructure, it’s interesting, while that’s sequentially improving and that’s mainly tied to the 4G build out that we service out of our Singapore operation. We have had record levels with some new product launches in Q1 last year and then that fell off a cliff midway through Q3 of last year, as I think there was a disruption in that overall business environment. And we weren’t the only ones that were impacted. And that only then did pick back up here in Q1. So I think it’s specific to the telecom 4G build at the telecom infrastructure piece and the connector piece is the destocking at our distributors and their customers in the back half of 2015.

And kind of shifting here to the advanced materials segment, when I’m looking at – when I hear your commentary, it sounds like your end markets are kind of stabilizing on a sequential basis, maybe starting to pick up as the year progresses. But just trying to kind of get a better feel for the slow of the value-added sales on advanced materials, when comparing the growth rate year over year compared to last two quarters, it’s gotten a little bit worse. So just kind of trying to understand your expectations for that particular market on the revenue side, value-added side.

So let me calibrate it. In the advanced materials segment, when you do compare year over year the decline as 19%, it’s really – it’s a tough benchmark, because if you look at that business trend, that was the highest quarterly value-added sales that that segment had ever had. And it was similar to kind of what I referenced in the precision coatings business. Last year in the AM business, there were some new product launches. I mentioned the 4G build out. There was also some consumer electronics new product development that was in the ramp up stage that really inflated that. So when we look at the year over year, I would tell you that 19.6% is exaggerated for the overall pullback in the end markets, because in Q1 I think we outperformed the growth of the end markets with those new product launches both in consumer electronics and in the telecom infrastructure.

Then moving on to the precision coatings, just going back to your commentary on the margins, very, very healthy margins in Q1 here of fiscal 2016, but the expectation that those margins are not necessarily sustainable for the back half of the year. Are you thinking just from a modeling perspective that your gross margins on [VHL] kind of mimic or comparable to your overall fiscal 2015 in that mid 30% range, or are you looking for something a little bit higher?

On the OP, let me just talk about the OP margins, I guess if you don’t mind. So from an OP perspective, this business has improved from back in 2013 around 5.5% to 6.5% in 2014, it did 8.7% in 2015. And I think when you look at the full year, we’re going to beat the 8.7% OP to VA that we did in 2015. So I don’t anticipate maintaining the 17% throughout the year, but I do anticipate, we do anticipate the full year profitability of that to improve over the prior year annual level of 9%.

And lastly a question and I’ll jump back in the queue, just coming back here on the acquisition landscape, if maybe you can kind of provide any sort of color in regards to what the valuations you kind of see out there, are they reasonable, are they getting more reasonable, is it still expensive, any sort of color around that would be helpful.

I would say that they’re getting more reasonable, but I think we may have some unique opportunities sooner. I think we have some unique opportunities that are going to help spread our international footprint a bit, but also provide some very unique synergies for the company. Before we’ve done some acquisitions – acquisitions, we’ve done philosophically that kind of broaden our footprint, if you will, for broadening the base of the business from kind of new businesses, if you will. And now, we’re more focused on leveraging what we have and getting some additional businesses that have provided more synergy than we’ve ever had in the past. So I’m kind of excited about some of the things that we’re covering out of the marketplace for us.

Our next question comes from Phil Gibbs with KeyBanc.

I was just jumping off of another call earlier, so I apologize if I missed it. But did you say that the mining capital expenditures this year have been curtailed?

Yes. So historically, Phil, if you recall, we were forecasting to spend $20 million to $25 million in mine development. Here in Q2, we suspended that activity such that we’re forecasting the full year to be somewhere between $5 million and $10 million. And depending on the efficiencies we are achieving in our working capital, supply chain flow and demand levels that mine development may be pushed out until next year or perhaps later.

And how much did you spend in Q1?

We spent about $4.8 million in Q1.

And then in terms of your outlook for the defense market, what are you seeing there for the balance of the year?

I would say that we expect the balance of the year to be stronger in the second half than the first half, because we still have some new platforms rolling in. So we’re very bullish right now in the defense market.

And then in terms of the beryllium pricing momentum right now in the marketplace, have you seen the market from a supply/demand balance tighten or did that dovetail earlier with your comments that I got the back end of – it’s something that it’s building toward?

Right now, it’s – I think in my comments I said it’s not a matter or if that’s a matter of when, so it’s – we can’t predict the exact timing of this thing. But whether it’s the end of this year or we expect rolled into next year, but it’s all going to happen. And it’s kind of hard to know exactly what the exact final supply/demand balance is. But we’re – it’s going to happen. So we’re talking a matter of a 6-month movement around here and it’s tough to predict it.

And then lastly...

Let me put it real simple, that also is a matter of you’ve got negotiations going on and pricing is critical to both sides of the party.

Okay. And in terms of the currency situation right now, the dollar has eased a bit relative to both the euro and the yen. Are you seeing that helping you incrementally relative to where we were three to six months ago?

Sure. It did modestly. I’d just tell you our main exposure, Phil, as you know is on the euro and we’re hedged at 80% of our forecasted flow for the year at $1.11 exchange rate. So to the extent that it’s better than that, we will get some benefit in the gross margin that will be offset by the hedge losses in that case. But long term, we stand to benefit, yes, if the dollar continues to weaken against the euro.

I was thinking about more with the yen, I was thinking more in line with the beryllium copper business and...

So as the dollar strengthened against the yen, our competitor got an advantage, you’re correct, we’re at the $1.20. So as that reverses itself here, the advantage that they had let’s just say in 2015 is subsiding. You’re correct.

Our next question comes from Justin Bergner with Gabelli & Company.

I had to hop on a bit late, so I apologize if some of my questions were already addressed. But my first question relates to the sequential improvement in value-added sales of just over 3% excluding sort of the raw material, or I guess you call that some factor that maybe improvement about 3% on a value-added basis. What’s the normal seasonality in the first quarter versus the fourth quarter? And are we sort of trending in line with normal seasonality or better than normal seasonality?

I would say in this world that we’re living in right now, I don’t know what the heck is normal, but I would say that from what I’ve seen in other areas in the electronics area, we’ve actually seen a pickup and others have been flat. So I would say that I think this is better than what the normal seasonality is. So I think it’s a positive. I would generally say all else being equal you see a little pick up in the first quarter, but as I look around the market today that’s not necessarily the case. And that’s in general. So we were quite pleased with about a 3.7% increase quarter to quarter on the value-added sales. So we were very pleased with that and we thought that was above market expectations.

On the capital allocation front, I know a question was asked earlier, when would you be planning to do something more material in the capital allocation front, whether it is return of capital or an acquisition, is there sort of urgency to use the balance sheet a bit more or are you comfortable sort of being patient with the negligible debt position?

As we stated, our priority right now is to focus on really building our acquisition capabilities such that we can deploy some capital towards strategic, primarily strategic bolt-on acquisitions. We are being very prudent in what we’re willing to pay and the returns that we’re expecting on the acquisition side. That being said, we maintain our dividend. We have a track record of increasing that for the past several years. And so we’ll continue the dividend. And then on the share repurchase front, we have a systematic program to repurchase approximately, targeting to repurchase about 150,000 shares this year and then beyond that we have capacity to be opportunistic. But that’s not our priority. Our priority is maintaining that balanced return to shareholders through both dividend and repurchase, but primarily focused on deploying capital in the growth initiatives through acquisitions. So things like this is pushing out of this mine development will help us fund some acquisition targets as well.

Our next question comes from Edward Marshall with Sidoti & Co.

Just a follow up here for you guys, as you think about the second half and just from a modeling perspective [indiscernible] little help, were you thinking more along the lines of like the 60/40 split or kind of how are you thinking about the intensity in the second half of the year?

When I was studying that, I looked back at 2014 and I thought it would be comparable to 2014 such that Q1 and Q2 were – I think Q2 was up slightly over Q1, so Q1 to Q2 should be flat to up a little bit and then the Q3 and Q4 should be comparable, if not a little bit heavier in Q4.

And then secondly, how big of an impact is Japan for you and in a way I would have thought maybe you might have been able to think of some share as well, given some of the [indiscernible] that happened there?

That’s only going to be an impact for us if our particular competitor and their facilities have been impacted and that was not the case. Where they really impacted was, as I mentioned in my comments, to me, I was a little unsettled with that because what it did affect was supply chain within the smartphone market in particular. So all of a sudden you can have some critical components not getting into the smartphone areas and they have to push back their production sequences because of an upset there, which then affects our sales into a market. So we’re keeping a real close eye on that.

At this time, I would like to turn the call back over to management for closing comments.

This is Mike Hasychak. We like to thank all of you for participating on the call this morning. I’ll be around for the remainder of the day to answer any questions. My direct dial number is 216-383-6823. Thank you very much.

This concludes today’s teleconference. Thank you for your participation. Have a great day.