Good day, ladies and gentlemen, and welcome to the Materion Third Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a 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 at Materion Corporation. Sir, the floor is yours.

Good morning, and thank you for joining us on our third 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 and 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 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 record quarter for Materion. And to cover some significant advancements we have made on our strategic initiatives. We remain on-track to deliver another record year, as we have continued to reset the bar each quarter for the last two years. In Q3, we achieved our highest ever top-line results, with value-added sales up 35% compared to the prior year. Our organic outgrowth initiatives combined with continued strength across most of our end-markets led by semiconductor, industrial, aerospace and energy delivered a robust 15% organic growth in the quarter. The new Precision Class 3 facility contributed largely as expected with a plant now fully qualified by our customer. And HCS-Electronic Materials continues to perform well with strong sequential growth, meeting continued robust customer demand. We also achieved record EBITDA and EPS for the quarter, primarily due to higher sales and improved pricing. EBITDA margins were approximately 17% performing close to our mid-term target of 20%. During the quarter, we did face some short-term headwinds that caused our profitability to fall short of our expectations. While our semiconductor related sales were up organically, our mix within semiconductor was weaker-than-expected due to lower precious metal target sales into a software consumer device market. The balance of our expanding portfolio is focused on the growing segments of semiconductors, such as Logic, Communications and other advanced chip applications, leading to increased demand for our non-precious metal products. We also felt the impact of higher chem from raw material costs in the quarter. As noted earlier, the demand of our HCS-Electronic Materials products remains very strong. However, with inherited customer contracts that are still being renegotiated, we were not able to pass along the unusual raw material price…

Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website this morning. Starting on Slide 10. As Jugal outlined in his opening remarks, we achieved another record quarter of value-added sales adjusted EBITDA and earnings per share in the third quarter. Value added sales which exclude the impact of pass-through precious metal costs were 290.4 million for the quarter, up 35% from the prior year. Organic VA sales, excluding the impact of both acquisitions and foreign currency increased approximately 15% compared to the prior year. This significant market outgrowth was driven by strong demand across several of our end markets, particularly semiconductor, industrial, aerospace and energy. Our HCS- Electronic Materials acquisition continues to surpass top-line expectations, and it performed well despite the short-term unmitigated tantalum raw material cost increases, experienced in the quarter. Despite the market and operational headwinds Jugal outlined, we delivered adjusted earnings of $1.31 per share up 14% as compared to the prior year, even with a $0.20 increase in interest expense. Taking a look at Slide 11, adjusted EBITDA in the quarter was 48.8 million, up 18% from last year and up 29% with comparable mine amortization add back. This item is an immaterial change to the quaternization of the mine amortization add back in performance materials to better align with its cost of goods sold impact. Prior to Q4 last year, we reflected EBITDA figures using a mine amortization add back tied to raw material production and not to our actual cost timing. Within any 12-month period, the add back was roughly the same, but the impact between quarters could be lumpy based on the timing of our mining activities. Starting in Q4 of '21, we began reflecting our EBITDA amounts using an add back methodology aligned…

[Operator Instructions]. Your first question for today is coming from Dan Moore. Please announce your affiliation and then post your question.

This is Stefanos Chris calling in for Dan. Thanks for taking our questions. Can you just update on what your semi customers are telling you about their expansion plans, as it relates to the Inflation Reduction Act? Any change either in the scope or timing of potential capacity additions?

Well, I think in general, I mean, as some of the customers have made their announcements, couple of them have indicated that they will maybe back-off on some CapEx investments into the New Year, perhaps in the '23, '24 timeframe. But I would say that there has not been a wholesale announcement from everybody on decreases, based on the economic conditions. So there is some minor announcements, but I don't think there is anything major. From what we are seeing with our customers, we are continuing to see good growth. Our semi business is quite diversified. Not only do we serve the memory market, which is an area that I know has been challenged here in the near-term, but we serve very well the data storage, communication, power devices, logic devices, et cetera. So we are a very diversified semi base for us the business that we have. And so, I think from our side, we are not seeing the type of things that maybe some of some of the folks have announced. But overall, I would say longer-term in terms of investments, nothing substantial, minor, minor announcements from some of the semi players.

And just a follow-up on the tantalum cost. Was it simply just a matter of just a lag of timing in passing those through? And when do you expect those to return to a normalized level?

Yes. Tantalum is something that has been a fairly stable material, one that we and in fact our previous owners, the business had never really thought much about, I think. And then there was a run up that happened in a fairly short period of time. It was a result of labor shortages. Labor had been diverted to 10 mines, which happened to be located nearby the tantalum mines. And as a result, there was a run up on the price. That price has started to come down. As we just look at our inventory turns and just kind of how we process things, I would say that probably in the first quarter of the new year, we would start to see the positive effects of the price, that's coming down for tantalum. I think the second thing that's important to note is the contracts. I mean, I think as you know, we've talked about it on many calls. We absolutely do not want to be the sponge, when it comes to inflation related pricing from our supply base. We have worked very hard to make sure that our contracts are aligned with our customers in a way that we can recover pricing. These contracts, which are legacy contracts that we inherited from the buyer, were not structured in that way. And so we are working very hard to restructure those contracts, we've made good progress on that. And I would expect that in the New Year, those contracts will be, you know, in a way that will allow us to be that will allow us to pass the costs as we incur them in, which would be more in line with the type of contracts that we have with many of our customers. And so that is exactly where we're headed and so we would really see a turnaround here in the New Year. So we really see this as a short-term, a very short-term item, one that we expect, as I said, to be recovered from in the New Year.

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

It's Phil Gibbs, KeyBanc. Just sticking once, how much do you think, relative to where your new contracts could be and where these costs went that misalignment? How much did that impact the quarter? Was it 5 million? Was it 1 million? It seem pretty sizable to me in some [indiscernible]?

Phil, it is a sizable impact and just to give you an idea. The tantalum pricing was approximately in this one up, went up about 50%. So fairly sizable increase, when you look at our cost of goods sold for tantalum, it's roughly about a 75% cost of goods sold for tantalum related products is the actual cost of the tantalum. So when you look at that type of impact, I mean, it's in the neighborhood of about $4 million, in the impact that we faced. So a very sizable impact in our expectation was that we would be able to recover that. I mean, as I indicated, in my earlier comments, I think our team has done a really a fantastic job of being able to recover, inflation related, cost related items from our customers, and we, through various discussions, to surcharges, to price adjustments, we just based on the contractual arrangements that we have, we just were not able to execute on that. It wasn't for a lack of crying, I can assure you of that. And, we will have this issue fixed and taken care of, so that we were not having to incur this type of situation. In case, if there's ever a run up in the future. But as I noted, the cost of tantalum is starting to come back down and we want to make sure that we have a win, win situation with our customers. So obviously, if the cost comes down, then the customers will feel the benefit of that. But if the cost goes up, and the customers will have to participate in that.

Well, incrementally in Q4, and is this misalignment expected to continue at that magnitude, or is the misalignment easing row to the Q3?

Look, I think the misalignment first of all is going to continue, and we can talk about the magnitude or the misalignment is going to continue just based on the fact that, we're buying and there's a lag time from the time that we're actually buying the raw material, processing the raw material, getting through our inventory turns and then getting that over to our customers. So I think that takes time, and so it will continue into Q4. I think the magnitude I would say it's probably in the similar neighborhood is what I would expect. Probably, improving that perhaps towards the end of the year and then certainly into the New Year, but it will be a sizeable magnitude still in Q4.

Is that going? Do you think that that goes away in Q1 or is it just sort of a glide?

It's a glide, I really would see a improvement in Q1 and then really, I think by Q2. Our expectation is to really have this issue fully addressed, but we got to continue to work through it here over the next couple of quarters. But as I indicated, this is not something that we're going to have to deal with in the future. We know how to manage these types of things, we manage them on a daily basis on all of our other materials and that we're going to make sure that this is managed properly, going forward.

So I think, right, there's two elements to the easing, and I think we will touch on both of them. It's the new pricing coming in, or the new contract being implemented, as well as working through the inventory of that higher price channel. And so that's why you don't see just kind of a switch over one.

Appreciate all the detail on that. As it relates to just the overall order book, what's the texture of what you're seeing just across the business in its entirety. And what are your order books telling you at this point, it goes through markets?

Yes. Look, our business continues to do really well. I mean, we delivered as you saw 35%, year-over-year growth and 15% organic for the quarter, which I think is very substantial. And we expect our organic growth to continue, or order books continue to be strong. And certainly there are some areas that are perhaps a little bit more challenged. On the semiconductor side that are parts of semiconductor, that are probably a little more challenging as we go into Q4 and perhaps into the new year. But like I indicated, in my earlier comments, we were a very diversified portfolio for semiconductor. So we believe we're going to continue to outperform the market. Automotive, there seems to be some issues regarding inventory correction, I think there was a lot of buy that happened in anticipation of semiconductor chips, availability, that chip availability has been slow. And so I think there's been some usage of the inventory that's going on. So automotive is a bit of a little bit more challenge for us, than we probably would have expected at the beginning of the year. But I think in general, we have a really good growth in our aerospace business and our energy business, we continue to do well and industrial, our semiconductor business says that the rest of the business of semiconductor continues to do well, Telecom has continued to do well. I mean, when you look at our order book, from, just from end of last year to kind of where we're at right now, and we're our order books up about 13% from end of last year to now and I think it's just a testament to the type of organic growth, our teams are driving the projects that our teams are driving. So, we continue to see good progress on the organic side. So I would say Q4 is a good continued progress of our growth, and when you look at, in fact, our overall order book, I mean, it's been it's been pretty much stable even in the Q3 timeframe.

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

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

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