Good day, ladies and gentlemen, and welcome to the Materion Second Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Zaranec, Chief Accounting Officer. Sir, the floor is yours.

Good morning, and thank you everyone for joining us on our second quarter 2022 earnings conference call. This is John Zaranec, Chief Accounting Officer. 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 also access the materials throughout 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. Our format for today’s conference call is as follows. Jugal will provide opening comments on the quarter and an update on key strategic initiatives. Following Jugal, Shelly will review the detailed financial results for the quarter in addition to discussing our expectations for the remainder of 2022. We will then open up the call for questions. Let me remind investors that any forward-looking statements made in this presentation, including those in the outlook section and during the question-and-answer portion are based on current expectations. 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 this morning. 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 four through seven in this morning’s 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.

Thanks, John, and welcome, everyone. I’m pleased to be with you this morning to share details on another quarter of record performance from Materion and to cover some significant investments we’ve made on our strategic initiatives. We are well on track to deliver another record year as we continue to reset the bar each quarter. In Q2, we achieved our highest ever top and bottom line results with value added sales of 33% and EBITDA of 44% when compared to an already strong Q2 in the prior year. Our teams are really delivering on all fronts, resulting in strong organic growth that is well above end market demand, fantastic contributions from our HCS-Electronic Materials acquisition and higher profitability with meaningful margin expansion. As we said, today, we are getting close to our midterm target of 20% EBITDA margins. Our team’s efforts are even more impressive when we consider some of the challenges faced including the impact of the Shanghai lockdown, inflation, currency headwinds and higher interest rates. Despite these, we delivered record earnings per share of $1.28 and set the stage for even stronger performance in the back half of the year. In addition to our outstanding performance in the quarter I’m excited to highlight two new organic advancements that will accelerate our growth in strategic markets. First, we have jointly commissioned a molten salt purification plant with our long term partner Kairos and our Elmore, Ohio location. The facility is now entering the startup phase for the commercial production of fly. A molten salt coolant used in nuclear energy production. Materion is the only domestic supplier of the beryllium fluoride component for fly, a key component of this energy solution that will help enable the world’s transition to clean energy. Second, as we announced earlier this week, Materion has…

Thanks Jugal and good morning, everyone. During my comments, I will reference the slides posted on our website this morning starting on slide 13. As Jugal outlined we did see record quarterly value added sales adjusted EBITDA and earnings per share again in the second quarter. Value added sales, which excludes the impact of pass through precious metal costs were 277.2 million for the quarter, up 33% from the prior year. Organically VA sales increased 12% driven by strong demand across most of our end markets, including semiconductor, industrial, aerospace and energy. Q2 marked our second full quarter of HCS-Electronic Materials contributions, which again exceeded our expectations. We delivered adjusted earnings per share of $1.28 of 41% as compared to the prior year. Looking at slide 14, adjusted EBITDA in the quarter was 47 million up 44% from last year. Our adjusted EBITDA margin of nearly 17% represents a 120 basis point improvement from the same period a year ago. Increase in EBITDA was largely driven by strong volume, positive price mix, as well as the contribution from our HCS-Electronic Materials acquisition. These drivers were partially offset by investments in R&D, commercial investments to support the growing business and increase travel as we get back to normal levels of activity. Our precision cloud strip facility startup costs were a headwind as expected, but slightly higher than the first quarter as we get closer to full ramp. We were also negatively impacted by the Shanghai lockdown which began at the end of the first quarter and persisted into the beginning of the second quarter, primarily impacting our precision optics business. Now, let me review second quarter performance by business segments, starting with our performance materials business on slide 15. Value added sales were a record 134 million, an increase of 23%…

Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question for today is coming from Daniel Moore. Please announce your affiliation then pose your question.

Thank you. Good morning Jugal, good morning, Shelly. It’s Daniel Moore from CJS Securities. Good morning. And congrats on the solid results. I will start with some of the new initiatives, new facilities, maybe the new facility in Milwaukee. What is the total CapEx you expect? And can you elaborate it all on the prototype and anything specific about more specifics about the functionality being targeted within EV batteries and the TAM or any color on the size of the opportunity from a revenue perspective?

Yes. Dan we are really excited about this facility. This is a build on to what we do today in our existing facility. We have a facility in Milwaukee. And this is a great add on to that. Both the items that we talked about the battery work as well as the ALD work is something that we actually do in our current facilities today. And what we’ve been able to do is work with our customers on both sides and continue to grow through our organic growth initiatives. So let me take the first ALD product portfolio. We’ve actually been working on ALD for a number of years now. And we have a number of customers that we work with. This is a great, great exciting technology that is used in the most sophisticated semiconductor chips that are being produced. And the outlook is very strong for this technology. So as we work with our customers we see a greater pipeline and then therefore we need more capacity and we’re working with our customers first to install that capacity so that we can certainly grow that business. On the battery side, we’ve actually been working again, with a number of customers over the last few years. There is always next generation batteries that are being required. Those next generation batteries, whether it’s longer life or faster charging just range issues, packaging, etc all those are very, very important criteria for battery manufacturers and we have been working with them on providing samples and prototypes for advanced chemicals. Now, we have an opportunity to actually expand that and put a prototype line in place. Really interesting thing and great thing about this is that our customer that we are working with, will actually contribute $6 million, approximately $6 million to put the prototype line in place, we will contribute a little bit of money as well. Obviously, we’re contributing the facility and the knowhow, and the people, certainly that so that we can produce those prototype samples and continue to help develop with this customer and then we’re working with a number of other battery manufacturers as well. So we expect this is, I think, as we announced, this is 150,000 square foot facility. So it has really good floor space for us to be able to expand in not only the ALD in the battery, but we do advanced chemicals for a number of different other applications as well. So we can certainly expand there also. So we’re very, very excited about this because this is right down the alley of the megatrends that we have been talking about over the last several quarters, and I think it supports our strong push into the organic growth that we’ve been talking about.

Very helpful, and maybe just step back and talk more generally about the chips act and what that could do for semiconductor capacity in North America and how you see it impacting your potential growth trajectory over the next few years?

Yes, well semiconductor is a market that we have put a lot of focus on over the last few years. I mean, if I just go back to our journey, I mean, we were really very focused on more of the precious metals and I would say primarily that gold, precious metals, targets business. Several years back, we invested a lot of money on the R&D side to build out a stronger portfolio on the non-precious metals. And I think that business has been growing substantially and particularly the aluminum scandium that we’ve talked about a number of times in our calls. We made a major acquisition, as you know, at the end of last year, giving us capability on tantalum and niobium pepper products. Tantalum, in particular is a very growth activity for us. And then, of course, this ALD that we just spoke about. So we have been developing a very robust, comprehensive portfolio for deposition materials that can be used in this growth to support the North America market and of course, the chips act as it’s going forward we’ve heard a lot of investment announcements from a number of different fab companies, and then we certainly want to be able to continue to support Europe and in Asia, as well. So I think we’re really well-positioned with the facilities that we have. And then this new facility, I think, is going to give us even more opportunity to support this fantastic opportunity. So, we’ve got a great group of customers, I think, that we work with and we’re excited about it.

Lastly, just quickly, Shelley, I wonder if you have any color on cadence as we think about Q3, Q4 for the balance of the year relative to the guidance? And thanks again for the caller.

Yes, sure. Great question. So as we think about the rest of the year, we’re excited that we’ll be able to take a meaningful step up both in sales and earnings. I think you’ll see us take kind of measured steps up in Q3 and Q4 that’ll look about the same. So you’ll keep seeing sequential improvement in both Q3 and Q4 as the organic initiatives continue to play out and especially the clad strip project continues to come online.

Perfect, thank you again.

Your next question is coming from Phil Gibbs. Please announce your affiliation then pose your question.

Hi, KeyBanc Capital Markets, sale team 3. Good morning. The question is on clad and you had the almost $5 million in startup costs this quarter. Clearly a drag on margins and clearly expected. But in terms of that cadence in progress. Do those startup costs go away completely in the third quarter? When do we get to the point where it’s generating positive operating income?

Yes. Shelly, I’m sure will comment on the financials. Let me just give you a little bit of perspective on our status of the project. So as we’ve indicated, second quarter was really focused on getting approvals with our customers, and it has been a very, very good quarter for that. We have been working with the customer diligently and we have been able to get approvals with them. \ And so I think the project is progressing as we had planned. Q3 is really now the ramp, so we’re starting to build our production level units. And then that ramp as you know, with any new plant will continue every week. Each week, our expectation is to produce more than the prior week, and support the customer. So that’s progressing and then it’ll continue into Q4. Our expectation, of course, for Q4 will be certainly a lot better and a lot more sales than we have in Q3. So the project is progressing as we have talked, and kind of as we have planned.

Yes, maybe just to talk about the costs a little bit. If you think about the startup costs they’re kind of two components. The main one is normal operating costs that will be ongoing. So those will get absorbed by additional volumes and create better profitability. The other piece is material that maybe out of spec or something that we’re running trial runs, and you need to write that off. So I would see the kind of scrap material costs coming down but that is the smaller portion of the startup class and the operating costs will continue. With this kind of a project it’s about yields and efficiencies. So as yields improve, and we become more efficient the profitability will improve. So I think we’ll see that continue to move forward through the third quarter and even better in the fourth.

Is there any way to think about utilization on the asset or target utilizations? Is the third quarter somewhere around a 50% utilization? And then we think we’re getting at by the fourth quarter or can you just frame it up in that way?

Well, I think that you certainly you can look at it that way. Keep in mind in Q3, as I said our goal is to be able to produce more each week and get more out to the customer, good product out to the customer. And so as you kind of take that and you kind of take the average of that I can see its 50% the right number, I don’t know, but I think probably maybe even maybe a little bit less than that’s a third to a 50 could be a range, I think, because of the fact that you’re averaging out in Q3 with all the initial ramped, it’s a little bit better ramp towards the end of Q3 and then probably about a three quarters away, I would say, in Q4.

That’s helpful. And then as you announced these projects in Milwaukee and then with Kairos, here and your Elmore. What could those two projects collectively mean, either to sales or revenue or profitability? I mean, they seemed like decent size proclamations, particularly as it relates to Milwaukee because you’re putting in capital for a very, very large, it’s seeming to me it’s a large facility. So I don’t want to gloss over it. They seem like things that could be needle movers, maybe not next year, but ‘24, ‘25?

Yes. No, clearly, like you said I think next year this year, next year, is really getting the facilities, the equipment installed, the facilities up and running, and we really would start to see some impact towards the end of last, end of next year, I’d say beginning of ‘24, certainly is going to be impactful I think for the company. I would see that the way that we have planned at the plant because we’ve done 150,000 square foot, we purposely made sure that we’ve got enough capacity to be able to leverage that organic growth about these two things that we’ve announced, which is the battery project as well as the ALD project along with other customers that we can get there and as well as other advanced chemicals products. I think both of these can be to your point meaningful impacts to us in the ‘24, ‘25, ‘26 timeframe, particularly, I would say the longer cycles certainly the battery side and because that next generation work need some development work, since this isn’t more in the prototype phase whereas the ALD is much more production phase, but I could see a combined scenario where it’s an easily in the ‘24, ‘25 timeframe double digit at North a double digit type of figures from there. But as far as the fluoride salt cooling facility, the MSP up that we talked about our Elmore, Ohio facility that one is up, I would say even a little bit longer term in terms of development, but it’s a very important step in this prototype phase. Probably you’re looking at $1 million to $2 million worth of prototype type sales perhaps in later this year, into next year. And then maybe reaching mid single digits the following year, etc. So that type of a small ramp to support the prototype development activity for that facility.

And then last one, just a clarification. I think you said almost an 80% increase in content per vehicle. And it may only accelerate from here. So is that 77% increase? Is that relative to 2017? Is that relative to when you came into the company? I’m just trying to figure out what the baseline is for the comments.

Yes, that’s relative to 2019. So roughly in 2019, I think one of our slides that we’ve shared Phil, we had sales in the automotive sector of about $60 million, and there was about 90 million vehicles produced in that year. Last year, our sales were roughly 90 million and then the number of units was down to about 76 million. And so the content per vehicle over that timeframe was increased by approximately 80%, as you said. So we would, our goal is to continue to drive this, continue to drive not only the overall automotive sector but really play a lot on the EV side, the emission reduction, the connectivity, the autonomous vehicles. So those megatrends, we’re really making sure that our portfolio is much more aligned to those and then we can continue to drive growth in that area.

Thanks so much. Just last question for Shelly. Networking capital I mean, clearly for you all, and for most everyone I’ve seen in the industrial universe, there’s been a pretty big building inventory associated with some pickup in demand, but also a lot of inflation in raw materials and things of that nature. So maybe talk about networking capital progression in the second half. Thanks.

Yes, sure. Good question. And with increased organic demand, of course, we get increased working capital. So it’s a good problem to have, but certainly something we spend time talking about. It is driven by a few things, you mentioned inflation. So we do have some higher priced materials, especially around the metal space. Also as you can imagine, we’ve had to add materials and inventory for the clad strip project. So that’s a little bit of a step forward as well, as we’ve added a little bit of inventory in HCS, to plan for some growth there. But as we look at the second half, we have very targeted initiatives, really, I would say on the base, both in inventory and AR and AP to make sure that working capital is positive in the second half. So we are looking for positive contribution overall from working capital in second half.

You next question for today is coming from David Silver. Please announce your affiliation, then pose your question.

Yes, hi, good morning. Silver, CLK. Thank you. Yes, I have a number of questions. I think maybe I’ll start with the financial guidance one first but thank you for clarifying kind of reiterating your full year guidance. And I was wondering if you could indulge me a little bit, but I believe you set the initial range 550 to 590 in late April with your first quarter results. And I’m not a global economist, but I’ll fake it here. But since then, I mean, I would say that the macro environment has kind of changed meaningfully I think. The potential for currency headwinds has increased, interest rate levels have risen and there’s more uncertainty regarding the global economic outlook may be more people anticipating a general slowdown. So when I think about you reiterating your full year guidance, I mean, I’m kind of scratching my head, and I’m saying is it a fact, a function of the fact that the outlook for your base business back your base economic assessment, your base assumptions back in April haven’t changed? Or is it the case where your assumptions internally have actually improved while the macro environment and the risk system, higher interest expense or negative currency translation have been offset? So just maybe a thought on maintaining or reiterating the guidance over a period where the macro outlook has changed.

Yes. So, David, I think all the points that you’ve made are really great points. Clearly, there’s been a lot of change that’s happened whether it be inflation, interest rates, just the macro environment, the global situation, the geopolitical situation situations. I think all those. I think all of those are definitely a factor and we’re experiencing all of those. But at the same time, I think there’s really, really great work that’s going on in our company that we are very proud of. When you look at our order rates that we continue to receive from our customers, they continue to be positive. You look at our backlog. Our backlog has improved again, in the second quarter. We noted that our backlog had improved in the first quarter from year end by roughly $30 million, $35 million. We have another step up of $30 million, $35 million of backlog improvement in Q2. If you look at our backlog, over the last six quarters, we’ve roughly doubled our backlog over the last six quarters. So if you go back to probably end of ‘20, beginning of ‘21. So just from those factors, I think give us confidence. Our organic growth pipeline continues to be very strong. The work that’s going on with our customers, our ops excellence activities, as you know, we went through significant new hires over the last four to five quarters. Most companies have gone through that. I think our team has been doing a great job of getting those new hires in place, and then getting them trained so that we can actually deliver better ops excellence as we go forward. The full price impact, frankly we’ve been very focused on making sure that we’re positive on a price cost equation. And sometimes those pricing impacts don’t come into the same quarter as the cost. But I think our team has done a nice job of making sure those prices are being put in place. And then so we’re having the full effect of that. Our performance on the HCS acquisition continues to be really well. We’re very impressed with what the team has been able to do there. I think not only do we get a great business, but we got a great set of people that I think are focused on accelerating the growth curve for that business. So I think all the headwinds that you outlined, believe me, we are facing all of those headwinds. Shelly talked about that in her prepared remarks. But I think at the same time, we’ve got a number of things that our teams are involved in, that we feel good about. And that’s why we’ve been able to hold our guidance for the balance of the year and really for the full year.

Second question would be about the Milwaukee expansion. I read the press release a couple of days ago with great interest. And I was wondering if you could maybe just talk about the genesis, I guess, of the decision. I assume it’s been some time and coming. But I was thinking in particular about the idea that you already have orders in hand. I think I forget the precise wording. But did the ALD opportunity and the decision to expand in Milwaukee I mean, is that a function of I guess your base business? Is that a function of HCS? And maybe some cross selling or some synergies there and then secondly in terms of my sense is if you are expanding into kind of a leading edge areas such as ALD, there’s going to have to be a certain amount of support R&D, technical type of support that that goes along with the physical equipment and whatnot. So just a couple of, a little bit of a background on how the ALD opportunity materialized would be helpful. And then apart from the physical assets, what else do you need to put in place in Milwaukee or elsewhere to kind of ensure the success of that important initiative? Thank you.

Yes. As I indicated earlier we’re really excited about I think this expansion and the investment that we’re making in our customer is making this is a growth area, very high growth areas semiconductors and EV battery space. This is just a no, this is not related to our business that we acquired the tantalum, and they will be in business, the HCS-Electronic Materials. This is really based on, I think, the work that our teams have been doing for a number of years. As I indicated earlier we have been focused on developing a portfolio for ALD. We feel ALD deposition technology is something that’s going to continue to increase in fact, I would say increase at a much faster rate than maybe the typical semi space as it provides really great coverage for these higher type of products. And so we have invested in it, and we’re going to continue to invest in it. I think to your point about having investment beyond the physical we’ve been doing that as I indicated, I mean, our R&D, and I’m speaking about R&D and total for the company we’ve doubled almost the R&D spend for the company over the last few years. And a part of that is exactly on the ALD space, a part of that is on the battery space as we have been working with a number of different customers on the battery side. So I think it’s a combination of things, and we look forward to putting capacity in that facility in both areas and growing that business.

And just to follow up. So to the ALD opportunities, maybe I didn’t word it really well, initially. But that’s maybe more an extension of your sputtering type of technology as opposed to maybe something related to the barrier layer operations of HCS.

Yes.

Thank you for that. I was just wondering if we could, if you could provide a little more clarity, or qualitatively, just some extra in color on the battery opportunity that you discussed? So you did say it’s advanced chemicals for next generation batteries? And I’m just, I am not super, I admit, upfront, I’m not super familiar with your range of chemical activities currently. But is this related to the electrolyte function within the battery or is this maybe more of a materials type of activity that you’re being asked to develop and supply?

Yes. So as I indicated we have been working on this, for a number of years, with a number of different customers. We now are at a stage where one of the customers is going to be making the investment approximately $6 million of investment to prototype line in place. We aren’t able to talk specifically about the material. So to your point about the electrolyte or other parts of the battery I think that’s something that we’ll continue to have the battery manufacturers’ talk about that. I mean, this is a very competitive space, as you know. Various companies are always trying to figure out how to get that next generation battery with that longer range and faster charging and smaller packaging and etc. And so our goal is to make sure that we take all of our advanced chemicals, expertise, and shared with them, and then be able to help support their cause, their overall cause for these next generation of batteries. So as you said, it’s quite exciting, because it’s certainly a high growth segment. And one where we have a number of different customers that were involved in discussions with it, so the potential that’s there, over the years down the road as we kind of get through these various prototype phases and discussions with the customers on this could be substantial. But we have to see as we go through the initial phases.

All right, and then last one, for me would be just on customer reaction to the consolidation steps that you’ve taken adding HCS and whatnot. But it’s been a theory of mine or a belief of mine that on the electronic materials side, the customers actually want the industry to consolidate pretty much everywhere so that they’re dealing with fewer stronger, more committed counterparts, that will likely translate into faster development cycles and just greater success overall. I was wondering if you could I know it’s early, but I’m wondering if you could just share customer reactions to-date from the combination of HCS with your legacy, electronic materials, activities, and whether you can decide or you’re confident that the revenue synergy potential that maybe you envisioned initially maybe you could just comment on whether that continues to progress?

Yes. Well, David, as you know, when we announced the acquisition, one of the main things that we talked about was exposure to the customers, because we, between our legacy business, and then now this new business, we have exposure to the top 15 semiconductor manufacturers in the world. So it’s been a fantastic, I think, addition. And I would say, the discussions with our customers have been very, very positive. Our goal has been to make sure that we’re out there. We’re talking about our entire portfolio, I mean, just getting back to what I just talked about ALD premium targets, non-premium, or non-precious metal targets, precious metal targets, the tantalum niobium business, etc. So we’ve got a really, really comprehensive portfolio and our customers, I think, value that. We receive calls from our customers all the time wanting to now talk about that whole comprehensive portfolio. And frankly, we’re out visiting the customers as well and talking about it. So I would say the reaction has been extremely positive. And part of that I’m sure is maybe what you’re talking about, which is, maybe those chip manufacturers looking for consolidation but I think I would like to just look at it as we’re providing a much broader value equation to the chip manufacturers and I think they very much appreciate that.

Your next question is coming from Marco Rodriguez. Please announce your affiliation, then pose your question.

Good morning. This is Marco Rodriguez for Stonegate Capital Markets. Thank you guys for taking my questions. Most of my questions have been asked and answered. So I just have kind of a couple follow ups, if you will. Maybe if I can ask one question in a slightly different way. When it comes to guidance, and the conversations you’re having with your customers, obviously, a lot has changed on the macro economic landscape. Inflation is still an issue, which you guys have called out. And there’s more risk of recessionary environments for a lot of different places. But it definitely sounds as if perhaps your demand is increasing because maybe you’re taking market share, or your new products are really just accelerated a much faster pace. But can you kind of bounce those conversations or those comments with any sort of discussions you’ve had with your customers where maybe you’re noticing a shift in their sentiment to become perhaps maybe a little bit more defensive just kind of given that macroeconomic backdrop?

Yes, I think Marco, the important thing for us is the organic growth initiatives that we have so that if there are any type of defensive conversations then they’re really being offset by the number of initiatives that we have going on. I think if we just look at kind of the a couple of the markets, in the normal market demand, aerospace continues to progress. There continue to be more builds, every quarter. I mean, we’ve had fifth consecutive quarter of growth on the aerospace side. Oil and gas is another one that has now it’s the sixth consecutive quarter of growth for us. So there’s a couple of markets that we have content increase going on. So, we actually have more types of products actually being used in both aerospace and oil and gas along with the fact that the market continues to move forward. Perhaps if there was some discussion, I mean, I would say maybe in the industrial side or perhaps on the automotive side, but an automotive only because of maybe chip demand. If there continues to be some pressure from the chip side for automotive, but when we listen to some of the automotive commentary, the customers are tending to be more positive for the second half. And so I think right now, I would say the general discussion continues to be positive, but I think more importantly, our organic growth initiatives are being very supportive for us.

Got it. And then last quick question for me just on the cash flow question prior, just trying to get a sense, as you do see improvement in the second half in your cash flow from operations. Is there an expectation that you’re going to be generating free cash flow in the year?

I’d expect we’re putting a lot of cash to work in CapEx. So if we were out, doing M&A with that money, if cash flow free cash flow would be much more positive. I think it’s probably going to be a little bit of a push after we put the investments in CapEx that we’re planning but the organic projects are going to provide great returns. So we’re looking at this year as a year of investment and we’re comfortable with where we’re going to land.

Got it. Thank you guys very much for your time. Appreciate it.

There are no further questions in queue. I would like to turn the floor back over to John Zaranec for any closing remarks.

Thank you. This concludes our second quarter 2022 earnings call. Recorded playback of this call will be available on the company’s website materion.com. I’d like to thank you for participating on the call this morning and your interest in Materion. I will be available to answer any follow up questions. My direct number is 216-383-4010. Thanks again.

Thank you. Ladies and gentleman this does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.