Greeting and welcome to the Materion Corporation Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host today, Mr. Stephen Shamrock. Please begin sir.

Good morning. This is Stephen Shamrock, Vice President, Corporate Controller, and Investor Relations. With me today is Dick Hipple, Chairman, President, 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 quarter and the outlook. Following Joe, Dick Hipple will provide his comments on end markets and key strategic initiatives. Following Dick, we will open up the call for questions. Before we begin, let me remind investors that 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 factors. Those factors are listed in the earnings press release we issued this morning. Additionally, comments with regard to operating profit margin, net income and earnings per share reflect the adjusted numbers shown in attachment number five in this morning's press release. The adjustments are made in both the current year and prior year periods for comparative purposes and remove non-recurring cost reduction actions, certain legacy legal and environmental matters, merger and acquisition costs, and certain income tax adjustments. And now, I’ll turn it over to Joe for his comments.

Thank you, Steve and good morning to everyone joining us on the call today. During my comments, I will cover our fourth quarter 2016 financial highlights, review profitability by segment, including fourth quarter and full year 2016 results, make some brief comments on the balance sheet, cash flow, and modeling assumptions, and finally cover the earnings outlook for 2017. Following my remarks, Dick Hipple, Chairman and CEO will provide comments on the company’s key strategic initiatives. I am pleased to report that our adjusted fourth-quarter 2016 financial results were inline with our forecasted earnings and guidance provided to the Street. Fourth quarter 2016 value-added sales, which excludes the impact of pass-through precious metals, increased 1% versus the prior year fourth quarter value-added sales to $145.1 million. We continued to see positive momentum with our new product value-added sales, which totaled $25.7 million or 18% of total value-added sales in the quarter. This level of new product value-added sales represents an impressive 47% growth rate over the prior year fourth quarter. In addition, we also experienced year-over-year demand increases in our two largest end markets, consumer electronics and industrial components. Offsetting this positive momentum, we recorded no raw material beryllium hydroxide sales during the quarter, and late in the fourth quarter a significant medical customer began transitioning from a legacy product to a next-generation product. The combination of these two factors negatively impacted 2016 fourth quarter value-added sales by approximately $6 million when compared to the prior year fourth quarter. Gross margins were $44 million in the fourth quarter of 2016, an increase of 2% from $43.1 million in the prior year fourth quarter. Expressed as a percentage of value-added sales, gross margins expanded 20 basis points from 30.1% in the fourth quarter of 2015 to 30.3% in the fourth quarter…

Thank you, Joe. I would like to provide an update on some strategic initiatives underway within Materion that are expected to create new momentum on our path to stronger results in 2017 and beyond. Our focus on a number of structural actions we are taking to lower our cost and reshape Materion for the future provide an update regarding our pending acquisition as well as new products and technologies and share some insights around a few of our key markets. The Materion team has moved aggressively on factors within our control this includes reducing our overhead expenses without compromising our ability to serve customers and to grow as conditions improve. In recent weeks we have scale backed and consolidated some of our corporate services to better align our corporate cost with the current profit levels of the business. Some staff and vacant positions have been eliminated and responsibilities have been combined. In addition to these actions our overall budget have been trimmed. In the performance, composite segment there is follow through with the profitability improvement plan that began last year with a reorganized management structure in the allied product business. Our manufacturing base and supply chain have been evaluated and continue to be scrutinized for new opportunities to reduce cost and strengthen margins. As part of that review the Fukaya, Japan alloy service center which has seen lower volumes for several years will be permanently closed. Other options are being explored including how to best re-balance the model for being a supplier of highly differentiated beryllium hydroxide material into a provider of higher value semi-finished cash beryllium containing products to the same supply base. Additionally, the company continues to re-position through smart acquisitions. During the past two investor calls an update has been provided for the planned acquisition of Heraeus…

[Operator Instruction] Our first question comes from Edward Marshall with Sidoti & Company. Please proceed with your question.

Hey guys, how are you? Good morning.

Morning.

So I wanted to ask about the guidance and I wanted to understand if you included any benefit from the acquisition of Heraeus in those numbers?

Yes, Ed. Heraeus is included in those numbers. I would tell you it's a range of probably $0.05 to $0.10 per share.

$0.05 to $0.10, okay. The mine development cost has gone down. And I understand, I think, in prior calls you mentioned that you’ve been able to get higher yield out of existing open mine. I am curious as we move forward and we talk about or you guys talk about the shortages of supply around the globe. I am curious as to why the dollar value at the mine is for development is continuing to decrease just from cash projections.

If you go back in time again we started to open larger pits and so if you go back, we spent $10 million this year and the year or in 2016 and back in 2015 we spent over $20 million to open larger pits that expose large ore streams and therefore it's available to process at our mill. And so, the actual investment on mine development is not smooth on an annual basis. I don't think it reflects our view to look at that and imply that, that reflects our view on demand for beryllium would be a false conclusion. It was simply, we opened much larger pits due to the ore stream itself that was being exposed. And so when you think about that going forward, I think again while it will be light in 2017, it will probably pick back up to the call it $10 million to $20 million range in 2018.

Got it. And finally you talked about the dual sourcing and it kind of picked up on you here, unexpectedly in 4Q. When did you expect that conversion to actually take place?

Well we expected that, it's been a tough call for us because the customer himself is going through a transition and actually they themselves didn't know because of some of the qualification issues that they had. So I think, we really expected that to occur this year or 2017 versus late last year.

Got it. And so I am just trying to get understanding of what's causing the weakness in 4Q from that as well as what you expect to see in 1Q. Is it that you have to rationalize your own internal workings and manufacturing to kind of get to a point and so maybe you are carrying a little bit extra labor cost, or is it inventory I am just trying to get a sense as to what's causing the little bit of overhang there.

Yes, we crept up on Materion [ph] actually in the month of December was the pullback in order volume. And we have a large fixed cost component cost structure. So it had slightly greater than negative, slightly greater than $1 million negative impact. I would tell you if you look at Q4 results compared to Q3 or Q4 of the prior year and that negative impact it will continue into Q1 and then it will start to subside going out to Q2 and beyond, within the large area coding business as both the next-generation product will ramp up and some other new product wins that we have in the forecast. So if you think about the segment, the profitability of the precision coding segment will decline year-over-year 2016 to 2017, and probably produce profit margin similar to that they did in 2015, but we fully anticipate to exit the year in Q4 at a profitability level similar to what we delivered in full-year 2016.

Got it, and so just to be clear there is not going to be any changes to the footprint. You have actually filled the production gap with…

The footprint is just one -- yes the footprint of the larger coding business is one facility.

Right but while the price is different while the utilization rate of that facility is you are going to fill that gap with you said new product, new product wins and so…

Yes. And the ramp-up of the next generation volumes.

Right, but I guess when I think about dual source versus single source, how do I -- I mean is it 50/50 split, I mean how the split work? I am just trying to get a sense as to what has come down there?

Big picture yes, they go to the transition. The volume is going to come down artificially low for December and parts of Q1 and then it will start to ramp back up. It will not ramp back up. It's not forecasted to ramp back up to the historical levels for this customer given the dual source versus the single source, however, this is not the only customer of this segment. And as I had mentioned before, within our precious coding business group, this is the most what I would say innovative product offering that we have. Their value added sales new products represent about 30% of value added sales. So there are other customers and product initiatives within the precision coding groups, which will help fill some of that void.

Okay. Thanks guys.

Thank you.

Our next question comes from Marco Rodriguez with Stonegate Capital Market. Please proceed with your question.

Good morning guys. Thank you for taking the question. Wondering if – coming back to one of the earlier questions on the Heraeus acquisition is included in your guidance for fiscal 2017, just curious do their financials change any of your historical seasonality, or is it kind of flow through?

Well their seasonality actually probably is a little bit more smooth than ours, because a big piece of their business is in the construction area building products, which we typically don't have a big participation in. So piece of the business is in the semiconductor area which would reflect ours, but there is a new piece that wouldn't have necessarily the same kind of cyclicality.

Got you. So it's I guess from back of the envelop where we should maybe think about it as kind of a flat line through the year in terms of their performance. I think last quarter you talked about two different divisions or two different groups as far as thinking about it. One was $60 million; one was $20 million in terms of the VA sales?

Correct. And we acquired just one group. At this point in time we won't be -- we will not be acquiring the second piece, because we got into the due diligence it didn't have the synergies that we expected.

Got you. So I am assuming you are taking the bigger piece then? The $60 million?

That's correct. What's what will be closing on?

Got you. Okay and if you can maybe talk a little bit more here in terms of the medical supply client here. I understand that some of the prepared remarks and obviously the response to the prior question, I am just kind of wondering here as you progress through the year, how realistic do you think it is, that you are able to replace all of that business that is going to the source of the other supplier.

I think -- yes we are going to be structuring a little bit lower in that business because of the fundamentally splitting the business going 50/50. In the legacy product, we basically had a 100% as a transition so we will be sharing the business going forward. And then we will be growing with another large customer along the way. So, we do expect some additional uplift, but from the one key customer it will be structurally lower.

Got you. And any update you can provide on the beryllium negotiations with that the major client there?

Yes. We anticipate and included in our guidance is a modest volume increase 2017 over 2016, refraining from disclosing specifics of the individual customers in the forecast sales, but basically we continue to be confident our long term strategic position in the beryllium market. It is clear that our customer has been working through some excess inventory in 2016 and continues to have some of that issue to work through in 2017 as you will recall they bought significant portion back in 2015 actually 2014 and 2015 in anticipation of the end of that 20 year cost plus contract coming to an end. So we continue to be in active negotiations with them, and I would say have this confidence that our long-term strategic position is still valid and this is just a timing issue.

Got you. And then, kind taking doing a little bit of deeper dive here on the industrial segment for you guys. Can you maybe if possible talk a little bit more about the specific sort of end markets that you might be most exposed to or you are seeing some strength? I am assuming you are lumping in oil and gas in the industrial side.

The oil and gas is separate. That's in our energy group. So we split that out. But the industrial side is for us quite a bucket of different things that you would classically if you take a look at our other markets, it's kind of like the all other, but the things that would be included in there with we were a big participant in what’s known as the plastics market in automotive and plastic tooling market would be in there. We have products to go into building products, such as the product we have that goes into sprinkler systems and all buildings we have components that go into that. We have that's where we split our heavy equipment in there, sales and the Caterpillar and -- and basically the caterpillar, the [Indiscernible] mining, the mining activities construction activities so those would be examples, they are quite diverse.

Got you. I appreciate your time guys. Thanks.

Thank you.

[Operator Instruction] Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question.

Good morning.

Morning Phil.

I had a question on the oil and gas market, value added sales expectations for 2017 versus 2016, what type of magnitude or momentum are you expecting this year versus last?

We have as I said in my prepared remarks a modest recovery. We are not history would suggest a V shaped recovery in the oil and gas market if you go back in time. We’re not forecasting that. We saw a very modest uptick Q3 to Q4, and we feel that it profited in Q3, and so we are forecasting a modest recovery in 2017 numbers. So as it relates to upside and the guidance and the range and the guidance we could be pleasantly surprised if that is better than what is forecasted. But single digits to 10% improvement is what it looks like.

That's helpful. I appreciate that and are you seeing any green shoots in mining? You just talked about that a little bit, are you seeing any improvement there in terms of more of the MRO side starting to come back?

I would say no.

Okay.

Wait. We have seen in the recent weeks as I mentioned in my comments some recent uptake in our order entry, in line with some other economic statistics around industrial manufacturing. And so, the past three, four weeks has been an uptake in our order entry. Some of that comes through distribution as you know Phil, so it’s a little bit difficult up front to understand the end market that's driving in.

No I understand. I appreciate it, and I also just for your information I did miss the prepared remarks. I was on another call. So I apologize from repeating making you repeat yourself. Any color on the pension expansion 2017 versus 2016 and any color on cash contributions this year?

Yes. Cash contribution this year will be similar to last year and approximately $16 million and pension expense should be slightly down from the prior year less than but they are very close to last year's.

Okay and did you provide a cash from operation outlook for 2017 at all?

Cash from operation will be about 50 -- is forecasted about $50 million to $60 million. I did not provide that. I just did.

And then anything you could add in terms of automotive. I think your automotive sales were actually fairly resilient from sequential perspective in Q4, should we expect that to be the case or any seasonality, any changes that you are seeing there?

At this point in time, we are seeing a nice steady order book coming in from automotive.

Okay. Thanks very much guys.

Thank you

Our next question is follow-up from Edward Marshall with Sidoti & Company. Please proceed with your question.

Yes just a couple of quick follow-ups. The Euro assumptions that are embedded into your guidance for the year.

107

107. Okay and the blood test stripe, blood glucose test stripe what is that as a percentage of codings or is that the entire medical piece of your coding business?

It's not the entire. It's the vast majority of the medical component of our precision coding business segment.

Okay. And so the $6 million, $5 million or $6 million gap down on the quarter, does that reflect the entire shift lower in that particular business for the time being, or do we expect that to be another step down on Q1? Just to get a sense.

We don't provide that specific guidance, but like I said before, I mean it will be Q1 will have negative impact from this transition similar to the fact that Q4 had a negative impact. And the Q1 impact might be a little bit more severe than the Q4 just given the timing, it happened so late in the fourth quarter.

Got it. And the timing of the recovery on the new, are you shipping that new product now or when do you anticipate that the new product will be shipped?

It starts to ramp up going into Q2 and Q3.

Okay. So the initial 2Q and then I guess full run rate 3Q?

It's hard to tell in the medical end market and when the customer is adopting a new product. It's not contingent on our ability to produce it as much as it is their transition.

Got it. And there was a change in technology, is there any R&D that you have to spend in order to kind of adapt or you have already done that R&D.

That's been done over the last; I would say, two years working. Again, this is the medical end markets. It's a long, long sale cycle and so that has already been spent.

And based on the utilization rates that we talked about is there any additional capital that's necessary in order to meet the demand that you anticipate?

No.

Okay. Great guys, thanks.

Thank you, Ed.

Thank you. At this time I would like to turn the call back over to Mr. Stephen Shamrock for closing comments.