Greetings and welcome to Materion Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode; a question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Steve Shamrock, Interim Chief Financial Officer. Thank you, you may begin.

Good morning. This is Steve Shamrock, Interim Chief Financial Officer. With me today is Jugal Vijayvargiya, President and Chief Executive Officer. Our format for today's conference call is as follows. Jugal Vijayvargiya will provide an update on COVID-19 and key strategic initiatives. Following Jugal, I will review detailed financial results for the quarter, and then 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 earnings before interest and taxes, net income, and earnings per share reflect the adjusted GAAP numbers shown in attachment number 5 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 income tax adjustments. And now, I'll turn it over to Jugal for his comments.

Thanks, Steve, and welcome everyone. I hope all of you and your loved ones continue to remain healthy and safe during these unprecedented times. Today, I'll first review the impact of COVID-19 and follow that up with an update on our key strategic initiatives. Health and safety of our people continues to remain our overriding priority. We continue to take input from all available sources to ensure appropriate measures are taken to protect our people around the world. A majority of our office employees are working from home, and all of our factories are operating. As you would expect, we continue to experience the impact of COVID-19 in a number of our key end markets, particularly in aerospace, energy, and industrial. Despite very challenging market conditions, we delivered sequential earnings growth for the second consecutive quarter, and all three of our businesses reported double-digit profit margins. Semiconductor sales continued on a positive trajectory with sequential and year-over-year growth led by commercial performance initiatives related to new products and stronger demand. We have actively managed our costs in response to the downturn. Sequentially, earnings increased 12% with a sales increase of 4%. I will now transition and review some of our key strategic initiatives. I'm excited to report consolidated quarterly financial results, which include Optics Balzers for the first time. The combination with Optics Balzers creates the world's leading thin film optical coatings provider with a highly complementary geographic, product, and end market portfolio. Our teams are fully engaged with integration activities, which are going very well and according to plan. Our commercial teams are starting to work together on identifying synergistic customer opportunities in support of our overall growth objectives. Our engineered clad strip project, which I announced earlier this year, remains on schedule. As a reminder, we entered into a business arrangement with a new customer to expand our manufacturing capacity for a highly engineered clad strip product, which will be used in a next generation model of an existing product. The total investment of the project is expected to be approximately $85 million, with the customer pre-funding approximately $70 million. In September, we received an additional $14 million from the customer for a total of $45 million since the start of the project. In support of this program, we are actively working to establish a new leading-edge manufacturing facility for future product supply. In addition, we're making good progress on negotiating a long-term supply agreement and expect to finalize in the fourth quarter. We are also on track for a shipping product in the fourth quarter from our existing facility. Lastly, I will provide a quick update on the PAC facility consolidation project. This project remains on schedule to complete all activities by year-end. We completed the closure of the Detroit, Michigan service center in the second quarter. In the third quarter, we shut down production at our Fremont, California location. We expect to complete relocation and installation activity in the fourth quarter. In closing, I want to sincerely thank our global team, who is persevering through this pandemic with a determination and focus, and the drive in turning on forward on our transformation into an advanced materials business. Now, I will turn the call over to Steve to cover the financials.

Thank you, Jugal, and good morning to everyone joining us on the call today. During my comments, I will cover third quarter 2020 financial highlights, review profitability by segment, provide brief comments on the balance sheet, cash flow and modeling assumptions, and finally cover the earnings outlook for the fourth quarter of 2020. Following my remarks, we will open the line for questions. Despite the ongoing COVID-19 pandemic, I am pleased to report third quarter results, which exceeded the second quarter. Third quarter value-added sales, which exclude the impact of pass-through precious metal costs, were $167.5 million, up 4% compared to second quarter value-added sales of $161 million, and down 11% versus the third quarter of 2019. Compared to the second quarter, the incremental sales related to the Optics Balzers acquisition and growth in the semiconductor end market. This was partially offset by softer demand in markets impacted by the COVID-19 pandemic including aerospace and industrial. Telecom and data center end market sales were also lower due to lower demand related to the continued impacts of tariffs and COVID-19. Gross margin was $46.6 million in the third quarter compared to $48.1 million in the second quarter. The third quarter gross margin included $7.3 million of mine development costs. As you may recall, we have historically accounted for these investments as capital expenditures. However, in the third quarter, we returned to expand an existing pit in production for the first time based on the cost to extract the ore and ore purity. Despite the fact that these costs are of the exact nature and type as previous mine development activities, technical accounting rules require us to treat these costs as period costs. We incurred $7.3 million of expense in the third quarter and expect to incur an additional approximately $6 million in the fourth quarter. Once these mine development activities are completed, we expect to extract ore from this pit into 2023. We also do not expect to incur additional mine development costs until sometime later into 2022. Based on these factors in a historical treatment, we identify these costs as special. Excluding mine development and other special items related to COVID-19 and the Optics Balzers acquisition, adjusted gross margin was $55.1 million, or 33% of value-added sales, a 200 basis point improvement compared to the second quarter adjusted gross margin of 31%. Our manufacturing team has continued to drive significant operational improvements despite lower sales. Selling, general and administrative expense totaled $35.7 million, up versus the second quarter of $32.9 million. Excluding special items related to the acquisition and integration of Optics Balzers, COVID-19, and the forfeiture of non-cash stock-based compensation, adjusted SG&A expense totaled $32.2 million. As a percentage of value-added sales, adjusted SG&A expense was 19% in the quarter, consistent with the second quarter. We continue to aggressively manage our SG&A expenses in response to current demand trends. Research and development expense was approximately 3% of value-added sales in the third quarter, consistent with the second quarter, as we continue to make investments to drive long-term profitable growth through the development of new products and applications. In the third quarter, we recorded restructuring expense of $2.6 million related primarily to the previously announced closure of our Detroit and Fremont facilities for relocation costs and severance. As you may recall, we recognized a $2.2 million unrealized foreign exchange gain in the second quarter related to the purchase of Optics Balzers, which was denominated in Swiss Francs. We also reported an additional $1.1 million foreign exchange gain in the third quarter related to the same item, which we also classified as special. We reported third quarter earnings before interest and taxes of $1.8 million. Excluding special items I mentioned previously, adjusted EBIT was $15.4 million or 9% of value-added sales. Looking at income taxes, we recorded an income tax benefit of $6 million in the third quarter of 2020. Excluding the tax impact of special items and special tax expense items of $5.8 million, our adjusted tax expense was $2.8 million or an effective rate of 19.8%, in line with our previous guidance. The tax special items primarily relate to the acquisition of Optics Balzers and federal tax law changes enacted in the quarter. Finally, net income in the third quarter totaled $6.5 million. On an adjusted basis, we reported net income of $11.3 million or $0.55 per diluted share, compared to $0.49 per share in the second quarter. The increase compared to the second quarter was due primarily to manufacturing performance improvement, aggressive cost management and the addition of Optics Balzers. Now let me review 2020 third quarter performance by business segment. Looking now at our Performance Alloys and Composites business, value-added sales were $81.9 million, a decrease of $7.9 million compared to the second quarter. The sequential decrease is due to a continuation of soft demand in select end markets impacted by COVID-19, particularly aerospace and industrial. In addition, raw material hydroxide sales were down $3 million compared to the second quarter. EBIT excluding special items was $10.4 million or 13% of value-added sales, compared to $12.3 million or 14% of value-added sales in the second quarter. The sequential decrease in EBIT is due to lower sales volumes, partially offset by manufacturing performance improvement. This business has been impacted the most by the ongoing global pandemic given the exposure to the aerospace, energy, industrial and automotive end markets. Although, we are focused on making further improvements to EBIT margins, we've made tremendous progress in this business. PAC reported double-digit EBIT margins for the 11th consecutive quarter. I also remind investors that at comparable sales levels in 2016, this business reported EBIT margins which averaged in the low single digits. Moving to advanced materials. Value-added sales in the third quarter of 2020 were $57.6 million, up 5% versus the second quarter and 4% versus the prior year, driven by growth in the semiconductor end market as commercial performance initiatives and increased end market demand drove the growth. EBIT excluding special items was $6 million in the quarter, compared to $5 million in the second quarter. EBIT margins also improved sequentially from 9% in the second quarter to 10% in the third quarter. The improvement in EBIT margins was due to favorable sales mix and manufacturing performance improvement, and we remain focused on continuing to improve this metric going forward. Turning finally now to the precisions coatings segment. Third quarter value-added sales were $28.3 million, up 59% compared to the second quarter due to the acquisition of Optics Balzers and strength in our Legacy Precision Optics business, partially offset by lower sales of blood glucose test strip products in our large area coatings business and reduced demand for projection display products. As you may recall, we announced our intention to sell our Large Area Coatings Business in the first quarter. After going through the sales process, we have made the determination to wind down the operations of the business and sell individual assets. We expect to substantially complete these actions by the end of the year. EBIT, excluding special items was $3.5 million or 12% of value-added sales, compared to $2.4 million in the second quarter. The increase in EBIT was due primarily to higher optical filter product sales. Moving now to the balance sheet and cash flow. The company ended the third quarter of 2020 with a net debt position of only $10.9 million and approximately $234 million available on the Company's credit facility. We continue to have more than adequate liquidity to manage in this challenging environment. Our capital spending increased in the first nine months to $46 million. The increase versus the prior year is related to the customer-funded engineered strip growth opportunity Jugal mentioned. For financial modeling purposes in 2020, capital spending should run approximately $25 million net of customer prepayments related to the new engineered strip project. Annual depreciation and amortization should run approximately $42 million and assume an 18% to 20% effective tax rate, excluding special items. And finally, now the earnings outlook for the fourth quarter. The impact of the COVID-19 pandemic continues to create heightened levels of uncertainty, making it very difficult to predict the extent to which our business results of operations, financial condition or cash flows will ultimately be impacted. We will continue to aggressively manage our cost structure in the current environment. At this time, based on current order entry levels, we expect fourth quarter adjusted earnings to be slightly better than the third quarter. This concludes our prepared remarks. We will now open the line for questions.

Thank you. Our first question is from Marco Rodriguez with Stonegate Capital Markets. Please proceed.

Good morning. Thank you guys for taking my questions. I was wondering if maybe you could spend a little bit of time on Optics Balzers here. First, if perhaps you can provide what sort of a revenue benefit it had in Q3, and then from a bigger picture standpoint, just wondering if you can talk a little bit about the sales team's efforts there. How that integration is going? What that structure is going to sort of look like to drive the top line synergies you're looking for? And then if maybe you could touch on any sort of incentive structures that might be somewhat different to try and drive that line out of there for the acquisition.

Yes, Marco. First, let me give you a quick update on the integration activity. As you know, we had a day one for this business, and since then, we are really excited about the integration led by teams from both Optics Balzers and Materion. I can tell you that the integration has gone extremely well. We have several external firms assisting us, and a seasoned integration leader has been put in place to drive this effort. I’m happy to report that everything we anticipated so far is progressing as planned, though it’s still early in the process. Regarding revenue, we only had about 10 weeks into the quarter when we took over this business, so it wasn’t a full quarter. We don’t specifically disclose revenue, but if you look at our historical data, you might get a high-level idea, keeping in mind that past figures didn’t account for COVID impacts. This business is being integrated with our Precision Coatings Business, which is approximately half the size of the overall Precision Coatings business. We will continue to manage and report on this as a business unit within Precision Coatings. On the sales structure, this is an exciting phase right now. We are working with a firm that Optics Balzers has previously collaborated with to enhance some sales activities, and we’re employing that firm to help integrate our sales organizations. It’s progressing well as we develop a global organization with overarching customer accounts while still providing needed regional service. The team has outlined the structure, and we are beginning to assign names to positions and identify initial projects to work on. However, our first priority is ensuring we have the right structure and names in place before we start driving the sales synergies we’re eager to capture from this acquisition. As for the incentive structure, this will be a key aspect going forward. We’ve established a disciplined incentive structure for the Materion side over the past couple of years. Our HR and sales teams are examining the incentive frameworks for both Optics Balzers and Materion employees, and we will explore merging them if it makes sense to encourage growth. Overall, everything is going well, and I’m looking forward to sharing more progress in future calls.

Understood. Can you describe the training efforts related to merging the sales teams of Materion and Optics Balzers in the PC segment? Is the cross-training process challenging, or is it relatively straightforward when it comes to cross-selling?

I believe the cross-selling will be relatively straightforward because both organizations are highly skilled in optical filters and their technology. Many of our customers are the same, and we can utilize local expertise in our regions, so extensive training isn't necessary. I see this as a positive beginning with the current team, and I don't anticipate a long process. I expect team members to quickly learn from one another and advance, and from a customer perspective, I believe the teams will be able to act efficiently.

Got it. And then Jugal in your prepared remarks, I didn't quite catch all of it, but you had made a mention about one of the pillars of your strategy on commercial excellence and specifically brought out some new products and some strong demand, I guess, kind of helping out the quarter. Can you maybe provide a little more color around that statement there?

Yes. I mean, when we look at the quarter, couple of areas that I think we have good positive movements for us, one, clearly the semiconductor side continues to be a strong market in general, both from a general market pull standpoint as well as products that we're introducing. So, we've talked about an aluminum scandium product a couple of times, actually on the calls, and we continue to be quite excited about that product. That's the one that can be used for 5G and for other semiconductor applications and so we continue to see robust demand on that, and that has, I think helped in some of the offsetting from the downturn that we've had with the other markets. When you look at some of our pickup in the consumer application considering from an electronic side, some of the mobile handset devices and applications, that we have some pick ups there with some of our new products. There is some softness that's also happened in the consumer electronic side with some of our projection display business. So, the net isn't necessarily as strong as the semiconductor side, but we have a segment of the consumer side that is doing well on a sequential basis.

Understood. And then you, in the past you guys have talked about the R&D pipeline, new products as far as a percentage of overall revenue, whether that's trailing three months or trailing three years. Do you have any other data in terms of that kind of points to your movement there on the R&D side?

Well, I think the main data point I would talk about is the actual R&D spending. One of the things that we've really focused on in the last three quarters is to ensure that we do not sacrifice R&D spending in this very, very challenging time. We have maintained, and in fact, even increased R&D spending where necessary so that we can continue to fuel our development that's going on in the new product area. We do and we have talked about that, which is a new product sales sort of metric, that metric I mean, for this year, I mean, one of our biggest areas for that was clearly ToughMet and all the new product activity that we had on ToughMet. As you know, the ToughMet is a very, very high growth area for oil and gas and for aerospace segments, both of which have been significantly hit this year. And so that metric, unfortunately, of course, is lower compared to our prior years, but it's specifically driven by the market demand in oil and gas and aerospace and not related to new products and new product introductions in general that we're making across the company. So, we'll continue to fuel our new product pipeline, making sure that our R&D spending stays intact, and it's our intent to every dollar that we can find, we're going to continue to spend toward R&D.

Got it. And just lastly a quick kind of a housekeeping item here. I believe I caught it, but just want to confirm here, the gross margin impact that you guys saw in the PAC side, at least on a reported basis, you had the mine development costs, which is a one-time item, that was a particular impact that caused the decrease sequentially in year-over-year on the gross margin side of the PAC side. Just kind of wanted to confirm that. And, then also if I heard correctly, that there is going to be another roughly $6 million same sort of impact in Q4?

That's correct Marco.

You understand correctly.

Got it. Great, thanks a lot guys. I appreciate the time.

All right. Thanks, Marco.

Our next question is from Phil Gibbs with KeyBanc Capital Markets. Please proceed.

Hey, good morning.

Good morning, Phil.

Morning, Phil.

For Advanced Materials, it was good to see the margin progress that you're making in the year. Is your goal, Jugal, to still try to get that business back to mid-teens operating profit, and what do you think it's going to take to get there, particularly given the fact that semi demand has been really strong?

Yes. Well, I think, first of all, from a goal standpoint, absolutely. I mean, our objective, really are at a company level. We've talked about it at the company level that we would like to continue our journey toward an advanced materials company, and we believe an advanced materials company is one that is in more of a mid-teens type of a margin company. So, all of our businesses have to deliver good strong margins for us to be able to then have mid-teen type margins at the company level. So, yes, absolutely. Our goal is to do that. And of course, as you know, we're on the road to progress, and then, due to some of the challenges that we faced here recently, we had a setback, but we have continued to make progress. Just reported 10% double-digit margins, which was, I think, a great milestone for this business, and we will continue to work that. Where I see a couple of things happening, one, I think we got to continue to drive our manufacturing improvement, our yield improvements, our new product launch improvement. I mean one of the reasons that we're seeing the demand sales, as you said, we're seeing in this business is because of the number of new products that the team has been working on and launching those new products from aluminum scandium to ALD products to products that go into the memory market. So, there are a number of new products, and so as those continue to launch and as we continue to ramp those products up, we expect better yields and therefore better performance. I think the other is continue to make sure our portfolio is strong. So, any area that we feel needs to be pruned, so it could be a customer, for example, it could be a specific product or something. I mean if there is something that we have to make any adjustments on, we will continue to do that so that we have the right type of mix and the portfolio as we go forward. And, then we're paying a lot of attention to our customer portfolio as well, and ensuring that we have the right type of customers that we can work with where we know that they value the sort of skills and capability that we bring to the table. So, I think all of those things will be important factors as we move forward in driving this business to the mid-teens margins.

So in terms of a timeline, Jugal, when do you think that you can start to see more, I guess, sustainable improvement getting to 11, getting to 10 that sort of thing, just in terms of the timeline, so we don't get ahead of ourselves.

Yes. If it weren't for the pandemic, I believe I could provide a more specific timeline. However, the uncertainties regarding Q4 and Q1, including the possibility of a second wave, complicate things. Our goal is to achieve consistent improvement in this business. We aim to continue driving growth into 2021 and reach mid-teens margins. While I can’t provide a specific date or quarter at this moment, I can assure you that it remains a crucial focus for us.

It's somewhat of a broader question, but regarding foreign exchange, the dollar has been weak over the past few weeks. How does that affect your operations?

Phil, from that perspective, I would tell you that we’ve managed that exposure quite well. I mean if you look even in our year-to-date results, right, they really haven't had much of an impact there. As you know, we've got hedging programs in place in terms of our euro-denominated receivables in our euro-denominated sales, I should say, in Europe and then our yen-denominated sales in Asia. So, we really try to balance that out from a risk perspective. So, I don't see any major impacts from that going forward.

And the next question is just on telecom infrastructure, and obviously, we see a lot of headlines backing frothing on Huawei, but how should we think about the telecom infrastructure business over the next couple of years?

Yes, I think we would expect. I think over the next couple of years as 5G continues to take hold, I mean we would expect that market to sequentially increase similar to what had happened, I think, when we went through the last take, which was on 4G. So, I think that's a market that in general, we expect to continue to have improvement sequentially over the next couple of years.

So, you think this is a low point in that business you're seeing right now?

Yes, I don't know if I would necessarily say it's a low point because there are certainly customers that are still ordering, but just not at the level that I think we expected. I mean some of the COVID issues have certainly slowed that down, but I think we expect it to continue to improve over the next couple of years.

Okay. And then lastly, and I apologize if you mentioned this already, but the clad, the clad investment appears like it's on track. We don't have any further information yet and we haven't disclosed the customer and I wouldn't expect you to do that if you haven't done it already. But on your existing business, on your existing capacity, are you still anticipating some sort of pull on from that clad customer in you'll call it Q4 or the first quarter next year?

Yes. We expect that we will have shipments here in the fourth quarter and then into the first quarter. So we're quite excited about it. I mean, our teams are working, I can tell you, I just had a review yesterday and I mean they're working on the clock to ensure that we have good products that we can build and supply to the customer here in the fourth quarter and then into the first quarter.

Our next question is from Christopher Hillary with Roubaix Capital. Please proceed.

Hi, good morning. Thanks for taking the question. Obviously an exciting time for the company with clad strip investments. Could you take a minute or two and just give us some of the qualities that that product will have and maybe what some of the applications might look like, and I appreciate you can't be too specific, but maybe in generalities. And then, either with that or after that if you wouldn't mind then maybe sharing some thoughts on some of the longer-term demand drivers, with both this product and then your broader specialty portfolio, other certain industry trends that you see kind of being the growth drivers over the median term for the company.

Yes, Chris. We're certainly excited about this product, and I just to remind everybody that we do this. We do this today and we do it quite well. We supply to a number of different markets today. We supply to the consumer electronics market that we supply to the automotive market, we supply to a number of different markets and we're going to continue to do that. The issue that I think we've talked about is that as we had basically demand from a customer, we were not able to fulfill that demand with our existing capacity and capability, and so we're putting in new capacity and capability to be able to provide that demand that the customer has asked. So, I think in terms of the applications, I mean there were applications that go across a number of different markets. We are, I mean, our sales team is not stopping here, because one of the things I think that you have, any time you make any investments and anytime you make new facilities that you put in place, is it gives you greater flexibility, greater opportunity to go and market this product and this technology to customers around the world. So we're challenging our sales teams to go out and talk to customers around the world and see what other opportunities we can pick up over the next, one, two, three years. And, hopefully that putting the additional capacity in place will give us some more credibility in fact in the marketplace, and so that's what we plan on doing. And, so we are quite excited about it. It's, as I said, it's the applications in a number of different areas and our sales teams are working those.

And is there anything specific you might flag or look around electric efficiency or the Internet of Things applications or certain parts of the semiconductor market that would give us some, I guess, kind of a pivot point to think about where some of the extra growth is going to be coming from?

Yes. I believe a couple of key areas for us to focus on are the consumer sector and automotive. These are two significant markets for us. For instance, many devices in the consumer space rely heavily on clad strip products, making them essential for those devices. In the automotive sector, particularly in hybrid and electric vehicles, this is also a crucial product segment we can target. So, consumer and automotive are very promising markets for us. Moving forward, we will also explore opportunities in the energy and industrial markets. However, our main emphasis will remain on consumer and automotive, while keeping an eye on other markets like energy and industrial as potential growth areas.

Thank you, and great job managing through a difficult period.

Okay, thanks very much, Chris.

Thank you. This is Steve Shamrock, and this concludes our third quarter 2020 Earnings Call. A recorded playback of this call will be available on the company's website materion.com. We would like to thank all of 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. Thank you very much.

Thank you. This thus concludes today’s conference. You may disconnect your lines at this time. And thank you for your participation.