Materion Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 12 speakers on the call.

Operator

Greetings, and welcome to the Materion Third Quarter 2023 Earnings Call. Participants are ready to listen only. I will now turn the conference over to your host, turn the call over to Karl Kelleher, Manager, Investor Relations. Sir, you may begin.

Speaker 1

Good morning, Thank you for joining us on our Q3 2023 earnings conference call. This is Kyle Kelleher, Manager, Investor Relations. 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. Participants are available on the webcast. With me today is Jugal Vijayvargiya, President and Chief Executive Officer participants

Speaker 2

are in the line with our Chief Financial

Speaker 1

Officer and Chief Financial Officer. Our format for today's conference call is as follows. Jugal will provide opening comments on the quarter as well as 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 2023. We will then open up the call for questions.

Speaker 2

Participants are in the call.

Speaker 1

Let me remind investors that any forward looking statements made in the presentation, including those in the outlook section and during the question and answer portion are based on current expectations. 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, prior year's earnings call, taxes, depreciation, depletion and amortization, net income and earnings per share reflect the adjusted GAAP numbers shown in attachments 4 through 9 in this morning's press release. Participants are made in the prior year period for comparative purposes and remove special items, non cash charges and certain discrete income tax adjustments.

Speaker 1

Participants are ready to turn the call over to Jugal for his comments.

Speaker 3

Thanks, Kyle, and welcome, everyone. Participants are ready to take questions. Our record performance in the Q3 is a testament to the strength of our company, participants are ready to capitalize on new organic growth opportunities. In addition, our global team continues to raise the bar for operational excellence, delivering for our customers and executing on our outgrowth initiatives, while pursuing targeted cost improvements and driving improved performance across our plants. These strengths are offsetting the impact of software demand conditions in the semiconductor and industrial end markets participants are in a challenging environment.

Speaker 3

The 3rd quarter represented our 12th consecutive quarter of year over year earnings growth, participants are participating in the Q2 of 2019. We are also pleased with the progress we made in the quarter. We are pleased with the progress we made

Speaker 4

in the quarter. We are pleased with the progress

Speaker 3

we made in the quarter. We are pleased with

Speaker 5

the progress we made in the quarter. We are pleased with the progress we made in the quarter. We are

Speaker 3

pleased with the progress we made in the quarter. Participants are now ready. Excluding the continued softness in the semiconductor market, our value added sales were up 8%, participants are participating

Speaker 2

in the range of

Speaker 3

$1,000,000 which speaks to the substantial diversity of our portfolio and the significance of the contributions from our organic pipeline. Strength in aerospace, including the emerging space market, defense, telecom and data center and meaningful contributions from Precision Cloudstrip participants drove the differentiated performance. We continue to benefit from improved aerospace build rates and more importantly our increasing content per plane. Participants are in the range of $1,000,000 in the current quarter. For telecom and data center, Softness has persisted into the Q3, pushing the recovery out beyond our previous expectations as we continue to see inventory correction in memory, are encouraged by some positive signs of recovery we've seen in the broader industry as well as some modest recovery in our order rates.

Speaker 3

Participants are ready to begin the Q4 with a broader recovery next year. As we have said before, we are extremely excited about opportunities in the semiconductor market, including our expanding content per chip.

Speaker 2

Participants are ready to take questions.

Speaker 3

We also recognize that semi cycles can lead to strong upturns and we remain well positioned to support that volume as it returns. Leveraging our diverse portfolio, our team continues to unlock new organic growth opportunities aligned with global megatrends. One such trend is the emerging space market that is driving significant new opportunities for us. Our sales into this growing market have more than tripled in the last two years. Let me highlight a few of the exciting opportunities.

Speaker 3

Participants are ready to take questions. To start, we recently secured a 3rd order to supply critical materials for space propulsion systems, valued at $13,000,000 That brings the total amount awarded to $35,000,000 for the past year. Our partnership with this important customer is strengthening participants are in the range of $1,000,000 and we see the potential for additional orders in the coming year. We're also projecting that our ToughMed product sales into the space market will double to approximately $10,000,000 next year. We have new customer commitments for this important material At the high strength and corrosion resistant properties have proven to be ideal for next generation space applications, participants are in the range of $1,000,000 which acquired robust performance in exceptionally harsh conditions.

Speaker 3

Growth in this market is also benefiting our precision optics business, participants have secured approximately $8,000,000 in new contracts across both the space and defense markets. Participants are in the range of 2.5 times.

Speaker 2

Our optical components serve as key

Speaker 3

enabling technologies essential for space based instrumentation and imaging across various applications. We continue to be an important supplier of the critical defense programs bringing our unique expertise and technically demanding materials. Participants are in the range of $10,000,000 award to supply critical materials for a space related defense program. I'm also pleased to announce that we have received $5,000,000 investment from the U. S.

Speaker 3

Air Force Research Laboratory that will enable us to accelerate

Speaker 4

the development our additive manufacturing

Speaker 3

capabilities also known as 3 d printing for beryllium and aluminum beryllium alloys. Participants will enable significant advantages in the production and performance of optic structures, guidance systems products are available on the call and answer session. This investment will propel us into a new phase of development that will participants will accelerate our ability to operationalize these specialized manufacturing techniques. I'm very proud of our team's performance participants are in the range of $1,000,000 and I remain confident in our ability to execute and deliver another year of record results. With the wins we've achieved through our diverse portfolio, our uniquely relevant technical capabilities and our team's unrelenting focus on operational excellence, we are continuing to build on the earnings power of Materion.

Speaker 3

Participants are now ready to turn the call over to Shelly to cover more details on the financials.

Speaker 6

Thanks, Jugal, and good morning, everyone.

Speaker 2

Participants are in the line with the operator.

Speaker 6

During my comments, I will reference the slides posted on our website this morning starting on Slide 10. As Jugal outlined, we delivered record earnings in the 3rd quarter. Value added sales, which excluded the impact of pass through precious metal costs, participants were $270,500,000 for the quarter, down 5% from prior year, but up sequentially. Excluding the semiconductor market softness, participants are in the range of $1,000,000,000. The remainder of the business was up approximately 8% year on year.

Speaker 6

This growth was driven by strong demand in the Aerospace and Defense

Speaker 2

participants are participating in the Q3 and telecom and data center

Speaker 6

end markets, along with meaningful contribution from the Precision Cloud Strip business. We delivered adjusted earnings of 1 point participants are participating in the Q1 of 2019.

Speaker 2

Moving to Slide 11, adjusted EBITDA in

Speaker 6

the quarter was $55,400,000 or 20.5 percent of value added sales, participants are currently experiencing a strong quarter of $1,500,000,000 up 14% from the prior year with margin expansion of 3.30 basis points. This significant increase was driven by favorable pricing and mix participants are in the range of $1,000,000 as well as strong operational performance, partially offset by the slight decrease in volume. Our targeted cost improvement initiatives also contributed to the step up in earnings, outperforming our midterm EBITDA margin target of 20% for the 2nd straight quarter. Moving to Slide 12, let me review the Q3 performance by business segment. Starting with our Performance Materials business, participants are in the range of $1,000,000 and $1,000,000 up 13% compared to prior year.

Speaker 6

Strong results in Aerospace, participants are in the range of $1,000,000,000 in the range of $1,000,000 in the range of $1,000,000 in the range of

Speaker 2

$1,000,000 in the range of $1,000,000 in the range of $1,000,000 in the range of $1,000,000 in the range of $1,000,000 in the range of $1,000,000 in the range

Speaker 6

of participants are participating in the call. EBITDA excluding special items was $46,500,000 or 27.5 percent of value added sales, participants are up 41% when compared to $33,000,000 in the Q3 of 2022, with an impressive 5.30 basis points of margin expansion. Participants are in line with the guidance. This growth was primarily due to higher volume from our outgrowth initiatives, favorable pricing and a strong mix, combined with benefits from our operational excellence initiatives. Moving to the outlook, we expect a strong 4th quarter

Speaker 2

participants are in line with the presentation led by Aerospace, Defense and Telecom

Speaker 6

and Data Center with continued contributions from Precision Cloud Strip. Next, turning to Electronic Materials on Slide 13. Value added sales were $75,500,000 participants are down 29% compared to the prior year, resulting from the slowdown in the semiconductor market where our customers continue their inventory correction. EBITDA excluding special items was $13,000,000 or 17.2 percent of value added sales in the quarter. Participants are in line with our expectations.

Speaker 6

Despite this year over year decline, we saw 110 basis points of margin improvement compared to prior year. This was driven by a favorable mix As we look forward to the Q4, we expect incremental improvement in semiconductor sales as well as the continued benefit from the cost improvement initiatives we've implemented. Finally, turning to the Precision Optics segment on Slide 14, value added sales were $26,100,000 are down 7% compared to the prior year. This decrease was mainly driven by the reduced TCR filter demand, The discontinued product application and general softening in the consumer electronics market slightly offset by strength in defense. EBITDA excluding special items was $3,400,000 or 13 percent of value added sales.

Speaker 6

The decrease in volume was a meaningful driver of this year over year decline, offset by positive mix and the benefit of our targeted cost improvement initiatives. Participants are

Speaker 2

in the range of

Speaker 6

$1,000,000 from a sequential standpoint, we saw EBITDA growth along with 2 60 basis points of margin expansion. Participants are participating in the Q4. Looking out to the Q4, we expect new opportunities across defense, space and automotive to contribute to top line growth. Moving now to cash, debt and liquidity on Slide 15. We ended the quarter with a net debt position of approximately 445,000,000 participants are in line with our expectations and $151,000,000 of available capacity on the company's existing credit facility.

Speaker 6

Our leverage at 2 times remains participants are slightly below the midpoint of our targeted range. Lastly, let me transition to Slide 16 to address the full year outlook. Participants are ready to take questions. With accelerating contributions from our organic pipeline, our strong operational performance and the continued benefit of our cost reduction actions, participants are in the range of $2,000,000

Speaker 2

We remain confident in our

Speaker 6

ability to execute and finish out another record year. With that, we are affirming the midpoint of our prior guide participants are at $5.80 per share, an increase of 10% from 2022. We look forward to closing 2023 on a high note, participants are now delivering another year of record results and long term sustainable value creation for our stakeholders. This concludes our prepared remarks. Participants

Speaker 2

are ready to take questions.

Operator

Thank you. At this time, we will be conducting a question and answer session.

Speaker 2

Participants will be ready for questions.

Operator

Thank you. Our first question is coming from Dan Moore with CJS Securities. Your line is live.

Speaker 7

Hi, good morning. It's Pete Lucas for Dan. First one for me. How is the Clad Strip project good morning. How is the clad strip project performing relative to your expectations and has there been any change in timing regarded expected ramp in Phase 2?

Speaker 4

Yes. Let me start with the second part first here. So our timing is in line with what we have communicated before, which is that We expect to have ramp starting at the end of 2024, low volume ramp and then full volume production in the 2025 timeframe. Our equipment installation and validation will go on over the next year or so as we go through participants are getting that qualified. In terms of our current program, I would say it's going really well.

Speaker 4

We are producing at our new facility. We produced at the legacy facility as well and it's delivering participants are participating in the Q1 of 2019. So with the top line and the bottom line are contributing as we had planned, and that's reflected in our results.

Speaker 7

Very helpful. Thanks. And then looking at the various program awards you noted, I think it was on Slide 5 of the presentation. When do you expect to begin layering in revenue for each of these awards? And do you expect to record the full amounts listed in fiscal 2024?

Speaker 7

Are those likely will be read over the next 1 to 2 years.

Speaker 4

Yes. Well, first of all, I just want to say, I think it's just another testament to our team delivering participants have a fantastic organic growth opportunities. As you know that we've done that over the last several years and our team just continues to bring in new opportunities. Let me highlight on a few of those that are on this page. So first of all, the $13,000,000 order to participants will be conducting a number of critical materials for the space propulsion systems that we expect to be in the 2024 timeframe.

Speaker 4

We announced actually a Phase 1 and Phase 2 of that. One was $10,000,000 another one was $12,000,000 earlier and those are being delivered to the customer as we speak. So this $13,000,000 is another order coming into a total of $35,000,000 with this customer. So this opportunity is becoming a really great parties are ready for us and I would expect more orders in the New Year for 'twenty four and perhaps 'twenty five timeframe. So very much looking forward to that.

Speaker 4

When I look at the precision optics contracts, the $8,000,000 for space and defense, those I would see as multiyear contracts in the 2024, 2025 timeframe. So Very much looking forward to those. The ToughMed materials for space applications, as you know, ToughMed is Very, very important material for us. We have number of applications in commercial, aerospace, oil and gas, participants are ready for that material. And this material has been now adopted into the space applications just based on the qualities that it offers.

Speaker 4

We have been supplying that material this year. As you can see from the chart, that's roughly about $5,000,000 worth of sales this year and we expect participants are ready to double those into 'twenty four, so an incremental $5,000,000 into the 'twenty four timeframe. The notification that we speak of, of the $10,000,000 of the critical materials for the defense related applications, that we expect This year partly and then into next year. So we're very much looking forward to that. That just builds on to our capabilities and materials parties that we provide for defense applications.

Speaker 4

The neat thing about this is this is a space related application participants are ready for defense. And then the $5,000,000 investment, this is an award an investment award that we are receiving from the U. S. Air Force Base for additive manufacturing, this will be done over a 2 year time period. We've had a number of different initiatives that we've participants are participating in the Q1 of 2019.

Speaker 4

Over the last 3 to 4 years, we've invested quite a bit of money ourselves in our facility. And this award just will accelerate our development regarding beryllium and aluminum beryllium based materials for additive manufacturing. So We're very much looking forward to that over the next 2 years. So great opportunities to continue to drive organic growth for our company.

Speaker 7

Extremely helpful. Thanks. And just finish it with one housekeeping question here. What tax rate is assumed for your Q4 implied EPS guidance? Participants are in the range of $1,000,000,000 and what's a good rate as we look out to fiscal 2024?

Speaker 6

Yes, that's a great question. Thanks for asking it. We participants saw the benefit of a reduction in our year to date and our effective tax rate, which we were really pleased with. On top of already strong operating results, we saw the tax rate come down participants are participating in the first Our estimate of the production credit has increased slightly due to the increase in the pure beryllium related products that we have participants have been selling. We talked a lot about a strong mix.

Speaker 6

Some of that is from our pure beryllium related products. Those then drive the production credit and that's tax free. So all of that income, we're able to take tax free. In addition, we're seeing higher foreign tax credits based on the global mix of earnings. So in a sense, we took our tax rate down from, call it, mid- participants are in the range of 15% to roughly 15%.

Speaker 6

And in Q4, what I've assumed is 15.5%, and we'll see how the year shakes out once we have actuals.

Speaker 7

Great. Thank you. I'll jump back in the queue.

Speaker 4

Thank you.

Operator

Thank you. Our next question is coming from Mike Harrison with Seaport Research Partners. Your line is live.

Speaker 8

Hi, good morning.

Speaker 4

Hey, good morning, Mike.

Speaker 8

I was wondering if we can talk a little bit about the Performance Materials margin and some of the sources of strength. I know in your comments, you mentioned That mix was particularly strong. And then Shelly, you just mentioned here that the production credit price has increased, which I believe flows through that segment level EBITDA line. But maybe just talk in a little more detail on the puts and takes that we should be thinking about as we look at that margin in the PM segment for Q4 and as we get into

Speaker 4

Yes. Mike, let me start on that and then Shelly can jump in, especially when it comes to I think that business, as you know, over the last several quarters has continued to perform well. One of the things that we are Continue to be very focused on for that business is value based pricing, making sure that we're getting the right price for the value that we're providing to our customers. It's an important part of our initiatives company wide, but I would say particularly for that business we continue to do that. And then certainly mix has been a very important factor as well.

Speaker 4

We continue to drive more focus on products that generate more value for us frankly than products that don't. And so we're making sure that we're utilizing our assets to drive the best mix participants are still in the process of getting into the Q3. Yes.

Speaker 6

Just a couple of other things. Participants are running really well. And so when our plants are running well, we get better operating performance and that's helped the mix And the margin as well. Jugal talked about mix and we've highlighted Space and Defense this quarter and that is definitely a mix up for us participants will see that last into the Q4. And then the production credit, as we just talked about, we previously said roughly $8,000,000 for the year.

Speaker 6

Participants are in the range of $10,000,000 for the year. So you think about $3,000,000 in each of the last two quarters of the year. So really a nice benefit for that business.

Speaker 8

All right. And then in terms of the Electronic Materials participants are in the line with our business. It seems like kind of the pace of recovery here is a little bit slower than we might have hoped. Can you give us a little more color time and start 2024.

Speaker 4

Yes. As you know, Mike, we've all been waiting for this inventory correction participants start to slow down so that the rates build rates can start to pick back up. But unfortunately, the inventory correction at our customers has taken A little bit longer than I think they had all estimated. That inventory correction, of course, or the slowdown of that translates into slower orders for us. Our expectation was that maybe towards the end of Q3, we would start to see a little bit of Recovery, I think that expectation is now shifted to Q4.

Speaker 4

We're starting to see as we're listening to some of the earnings calls from our customers, Some small positive incremental benefits that they're highlighting. We're also starting to hear some things from our customers directly, some of our orders, so depending on the semiconductor types, Order rates are starting to see a little bit of a uptick maybe for Q4. So I would say it seems like Q3 part of the call is the low point and Q4 would be a small incremental uptick for us. And I think that trend that part of the call is in line with what the semi companies are saying as well. So that's just kind of how we see it.

Speaker 4

This is a As you know, this is an extremely, extremely good business for us. It's roughly a third of our company and we're very much looking forward to the uptick. We're prepared participants are ready to go. We've made sure that our workforce and our materials, our inventory, participants are ready to go as the uptick starts. So we're very much looking forward to that.

Speaker 8

Well, hopefully that comes sooner than later. Last question I have is regarding part of your cost actions that you've been taking this year. Just curious, are most of these complete or should we think of Q4 is maybe showing some additional benefits. And I guess if you can maybe help us quantify Better think about what portion is structural cost takeout and what portion is more temporary or a reduction in discretionary spend that they could come back next year? Thanks.

Speaker 6

Yes, that's a great question, Mike. And we look at it that way too, the way you're talking about it, meaning what are the permanent reductions that we're making to improve our business long term, what are the things that are temporary to address the current actions and what that really breaks down into 2 buckets. Some of that's headcount related on the temporary side, but some of it too is just tightening the belt a little bit and controlling costs until we see the market pick up. Participants are in the range of $1,000,000,000 So I would say it's roughly, call it, sixty-forty in the permanent to temporary. And of the temporary actions, Probably, I don't know, 3 quarters, 1 quarter in terms of the people related versus belt tightening, if that makes sense.

Speaker 8

Sure. That's helpful. And I guess just to my question about Q4 and the benefits being

Speaker 6

Yes. So we're always looking at the organization to see what we can do to improve. I would say parties have been done and we saw most of that impact in Q3. There'll be a little bit that comes into Q4. So I wouldn't see a meaningful step change in Q4.

Speaker 8

Perfect. Thank you very much.

Speaker 6

Thank you.

Operator

Participants are ready. Thank you. Our next question is coming from Phil Gibbs with KeyBanc. Your line is live.

Speaker 9

Hey, Phil. Hey, good morning.

Speaker 1

Good morning, Phil.

Speaker 9

Regarding CLAD Phase 2, when do you actually start commissioning the plant for initial trials.

Speaker 4

Yes, I would expect that Phil that probably towards the end of part of the Q1, we would start to do some trials and start to produce material that we can share with our customer participants are ready to take questions. That they would go ahead and start to evaluate. And then in Q2, Q3, just continue to do that as participants will start to do our own low volume production just to get the equipment tested out. And then like we've said in Q4, have some low volume production of that saleable production that we would do.

Speaker 9

And this is going into the existing facility that Phase 1 is in?

Speaker 4

Yes. Participants This

Speaker 10

is basically Yes,

Speaker 4

exactly. This is in the same building, same facility. The great thing about it is we're able to leverage the expertise of our folks that have been working this program now for the last couple of years. Of course, the workforce that is going to be needed will be mostly new, but many of our engineering, development, participants are in the same store. Supply chain, overall general management, those resources will be resources that have been with the plant for the last couple of years.

Speaker 9

Okay. And then you had a lot of color and commentary on the Space and Defense Awards, which was great and you highlighted that well in your presentation. But just to be clear, you are saying that 2024 Is going to have nicely higher value added sales in that bucket relative to 2023 as you phased in some of these awards?

Speaker 4

Yes. Well, I think space has been an important market for us. We highlighted it about a year or so ago, I think in our calls as well. I would say step 1, Over the last couple of years, we've tripled our sales into the space market, which is fantastic. And then I would see incremental benefits Going into 2024 as well, I highlighted this one very important customer, this $13,000,000 part of the order, for example, which I expect to be in the 'twenty four timeframe and it's our expectation as we continue to work with this customer that we participants will secure additional orders.

Speaker 4

Of course, those are not secured yet, but we're going to continue to work with our customer to do that and then we'll continue to participants have other materials that we can try to make sure that we get into this market. So this is a high growth, Almost kind of like a megatrend type of a market for us and one that I can tell you really across all three of our businesses we're very, very much focused on.

Speaker 9

Thank you. And then just lastly, in terms of net working capital, What are you anticipating for the Q4? Thanks.

Speaker 6

Yes, I'll take that, Phil. Participants are ready for the semi upturn and you might see in our results that inventory is up a little bit. Participants are ready to take questions. We've taken some raw material and pushed that through to WIP to be ready so that when we get customer orders, we're not starting From raw material base, so we've built a little bit of inventory there and I expect we'll hold that through the end of the year. AR has participants are in a bit of a bright spot and I expect that will be a cash inflow as we finish out the year in Q4.

Speaker 6

And AP was a negative for the quarter, so I expect we'll get some of that back in Q4 as well. So should be a slight positive, but not meaningfully bringing down inventory

Speaker 2

participants are ready to take

Operator

questions. Our next question is coming from David Silver with CL King. Your line is live.

Speaker 11

All So several questions and I'm going to apologize in advance. The wording of these are probably alternatively going to sound participants are not like hopelessly naive or I don't know, a little snide or whatever, but that's not my intention. But participants are in the line with performance materials. I mean, it seems like there's been not just good results this year, but an accelerating Book of business or successful contract wins, couple of angles on this. But firstly, participants are in the line with us.

Speaker 11

Do you have a traditional backlog figure for Performance Materials and maybe how is it looking now Compared to, let's say, maybe the beginning of the year or a year ago, however you typically track it. And then again, naive Question warning, but what would you attribute your seemingly greater success in these new contract wins, particularly, I guess, Aerospace and Defense. You've always had a commanding position, let's say, in beryllium participants are in this area. So has there been a shift maybe in your value proposition or the way you go to market, but what would you say Is the mix of factors that's leading to the record performance, but that's really the symptom Long winded question, but maybe just the mix of factors that are at play here and I'll just stop there. But yes, the mix of factors you would cite.

Speaker 11

Thank you.

Speaker 4

Yes. Well, first of all, I think our Performance Materials segment, like you have indicated, has done really, really well. Not only just in the last year, but I think participants are in the range of 5, 6 years and what the business has done in terms of the growth, the top line growth of the business has achieved as well as the bottom line performance, the business has done quite well. When you think about, I think, parts about the new business. So let's just talk about that first, because that you highlighted what's different.

Speaker 4

I would say I think our team is doing a really, really good job of getting the marketing of our materials out. The great performance, I think, of the materials that we have, the material science expertise that we have. So our technical sales, participants are in the range of $1,000,000,000. Our business development efforts that we have I think across these markets, particularly I would say the growth markets, so like for example space, I mean participants are participating in the space today, so I'll talk about that. But of course, that's by the way, this applies to all the markets.

Speaker 4

But parts are being recorded. Understanding our materials, getting our materials out there, helping the customers understand the value of our materials and then providing Great value propositions at the end of the day. And I think the team has just done a wonderful job of that. And that I think has helped tremendously. Participants are very focused on understanding what the needs are for the customers and then finding the right solutions participants are in the range of $1,000,000,000.

Speaker 4

We do look at backlog. It's one of the metrics that we look at, but we look at many different metrics, as you can imagine, from our growth perspective. There's always puts and takes on backlogs. Some of the markets are down like industrial, which we know. Space is a market that's up.

Speaker 4

There's also a backlog also has a key component of backlog is lead times. If you go back to kind of the 2021, 2022 timeframes, I mean, Our lead times for some of our materials were extremely long as we were ramping up after the COVID year of 2020 participants are getting the workforce in. Our lead times have improved significantly, which has, as you can imagine, has a negative impact on backlog, but that doesn't mean that our business is actually I mean, as you've seen, our sales are up. So we look at a number of different metrics. I mean, backlog is one of the metrics that we look at.

Speaker 4

But in general, I mean, the teams have been driving more new opportunities in really all the markets

Speaker 11

Okay. Thank you. My next question would be on Electronic Materials. And you have commented on Yes, the lingering, I guess, customer inventory issues. I was hoping you could maybe talk about it from a somewhat broader perspective.

Speaker 11

So currently, you've been spending some discretionary capital to build out your capabilities in that area in Milwaukee, pardon me, and in Newton. Participants are in the range of $1,000,000,000. And I think you had some expectations for the demand levels for when that new capability is available. And I'm just wondering if you could maybe give us your current thinking about the transition period here, right? The maybe the sluggish customer demand, which has persisted are in the range of $1,000,000,000.

Speaker 11

But then you also have these new capabilities coming up. So Is it the case where there might be a little bit of a gap when those new units turn on? Or is it the kind of case where The products and services that the newer capabilities are designed to serve are really Maybe next generation or not, the market end markets or the applications don't necessarily overlap that you're operating the business under? Thank you.

Speaker 4

Yes. So if you look at our two facilities that you mentioned where we're Adding these new capabilities, both in Milwaukee and Newton, our expectation to get the additional volume in place was going to be the second half of twenty participants are ready to take questions.

Speaker 2

By the time, the facilities and the

Speaker 4

equipment was procured and then we did installation and got the production going. So I think the timing is actually going to work out Just perfect. Because as the recovery starts to happen here a little bit in Q4, but then into the first half of next year and then a much Greater recovery in the back half of 'twenty four and then into 'twenty five, I think we're going to be extremely well positioned to be able to deliver The emerging ALD products that our customers are needing for memory applications in particular out of our Milwaukee facility and then parts are in the logic and memory products out of our Newton facility. So I think the slowdown is actually in some respects you can say participants helped us to put our capacities in place because what was happening in 2021 2022 is we were participants are running all of our plants basically full and at the same time we're trying to figure out how to put these additional capacities in place. The slowdown has given us the opportunity to allocate resources in the right way to put the capacities in place in Milwaukee and Newton, So that we can have them ready in the back half of 'twenty four and into 'twenty five as the recovery is going to come in.

Speaker 4

So in some respect, David, it's interesting. The slowdown, I think, has helped us to make sure we're getting the capacity in, in the right way. But the and the timing of that, I don't think it's impacted at all because it actually lines up with the recovery timing of the semi cycle.

Speaker 11

Sorry. Thank you for that. That was great color. One more maybe from a resources or budgeting perspective. But I always think a lot of October is when a lot of companies do the budgeting for the coming year or 2.

Speaker 11

And On this call and the previous ones, I mean, you've outlined a number of kind of incremental new initiatives. Today was Space and Defense a little bit earlier, of course, there's the multi step expansion in electronic materials. And I did notice a new project in precision optics. If I was a betting man, I would say that the $95,000,000 CapEx for this year would have to rise And then even beyond just CapEx, I'm thinking of R and D Resources, technical selling, which you cited as an aspect of your success in Performance Materials. But participants are in the range of $1,000,000,000.

Speaker 11

Just in terms of overall resourcing, what are you thinking about for, let's say, 2024 2025? So dollars, people, I guess R and D, technological expertise. What's on tap

Speaker 4

come out with our guide and our plan for 2024. So I'm very much looking forward to that because I think it's going to be another exciting year for us along with 2025 and so on. So all these opportunities that you've indicated, we expect to play out in 'twenty four, 'twenty five, 'twenty six timeframe. With regard to our investments, I mean, we've never been shy to invest, as you know. This is a fantastic opportunity for us to continue to invest in our business.

Speaker 4

We've done that over the last several years and we're going to continue to do that, whether it's R and D resources, whether it's CapEx resources or any type of M and A that may come up That's exactly the way we would like in our business. So we're going to continue to look at that. Even when you look at, for example, R and D this year, Even though the markets are significantly slower, I mean we're not slowing down our R and D. We are still investing in R and D and it's our expectation that we'll continue to do that and we'll continue to do that on the CapEx So I'm very much looking forward to sharing with you guys our plans as we put them together.

Speaker 11

Okay, great. I'll get back in the queue. Thank you very much.

Speaker 4

Thanks, David.

Speaker 2

Participants are ready for questions.

Operator

Our next question is coming from Dave Storms with Stonegate Capital Markets. Your line is live.

Speaker 10

Participants are ready to take

Speaker 6

questions. Good morning.

Speaker 4

Good morning, Dave.

Speaker 2

Good

Speaker 10

morning. So just wanted to touch on one of your end markets. I know telecom is probably one of your smallest end markets, but it just seems to keep growing. I was wondering if you could just talk to us a little bit about what your customer acquisition part of the environment looks like here and if there's going to be any meaningful impact from

Speaker 4

that going forward? Yes. Well telecom and data center, you're right. It is one of the smaller markets, participants are in the market that has 9 consecutive quarters of growth. And we're very much looking forward to continued growth in this area.

Speaker 4

As you know, bandwidth requirements continue to increase, data center requirements, cloud services requirements continue to increase and that's where participants are in the market for us is very important and we continue to supply material to this. So we expect these areas participants continue to increase over the next 3 to 5 to 7 years, and I think we're very well positioned with our materials. The undersea cable market part of

Speaker 2

the question is, is a key area for us,

Speaker 4

where we provide beryllium based materials and I think it's going to continue to be a strong market for us.

Speaker 10

That's very helpful. And then just one more for me if I could. What are you seeing on the labor front? There's been a lot of the news about the UAW labor negotiations. It sounds like your shops are running well now.

Speaker 10

If you needed to scale up at any point, what is your confidence that you could get more labor in the door if you needed

Speaker 4

participants are in the process of getting labor into our factories in the 2021 timeframe as the ramp up happened. And I would That they're going to do a really good job again in 2024 as the semi recovery happens. I think one of the things that we've Stay focused on is making sure we're retaining as much of the labor as possible, so that we can support the uptick participants are in the 'twenty four timeframe. And then of course, if there is additional workforce that's needed, we'll rely on our HR department participants are ready to bring in the folks just like they did in 2021 2022. So I'm very confident that we're going to be able to support any type of an uptick.

Speaker 2

Participants will be available.

Operator

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

Speaker 1

Thank you. This concludes our Q3 2023 earnings call. A recorded playback of this call will be available on the company's website, participants are at materion.com. I'd like to thank you for participating on this call and your interest in Materion. I will be available for any follow-up questions.

Speaker 1

My number is 216

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Earnings Conference Call
Materion Q3 2023
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