Welcome to Materion's First Quarter 2024 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Kyle Kelleher, Director, Investor Relations and Corporate FP&A. You may begin.

Good morning and thank you for joining us on our first quarter 2024 earnings conference call. This is Kyle Kelleher, Director of Investor Relations and Corporate FP&A. 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 access the materials through 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. Following Jugal, Shelly will review the detailed financial results for the quarter in addition to discussing our expectations for the remainder of 2024. We will then open up the call for questions. 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 yesterday. 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 4 through 8 of the press release. The adjustments are made in the prior year period for comparative purposes and remove special items, noncash charges and certain discrete income tax adjustments. And now, I'll turn the call over to Jugal for his comments.

Thanks, Kyle, and welcome, everyone. It's nice to be with you today to discuss our first quarter performance as well as our current outlook for 2024. Our results for the first quarter fell far short of our expectations. While we were expecting to be roughly in line with Q1 of '23, some operational challenges, mainly in our Performance Materials business and some pockets of slowing end market demand led to lower sales and earnings. I'm proud of our team's quick actions to mitigate these short-term headwinds, delivering roughly flat EBITDA margins year-over-year, despite a nearly $40 million sales decline. We've taken a number of targeted cost actions that are benefiting not only our short-term results, but are providing longer-term structural improvements that will enhance profitability as key markets recover. Looking more closely at the sales performance, continued semiconductor weakness represented roughly half of the year-over-year decline. In addition, the expected inventory restocking of our beryllium nickel product used in nonresidential construction had a meaningful impact. Our results were further limited by delayed shipments due to the operational challenges mainly in Performance Materials. While we had anticipated the softness in some of our end markets, demand in commercial aerospace and automotive was softer than we expected due to reduced aircraft build rates and slowing growth for electric vehicles. Airplane deliveries were down significantly year-over-year in the first quarter and are expected to be depressed for the year. Offsetting these declines we saw strong growth across space and defense, where we are providing critical materials for space propulsion systems and on a growing number of defense platforms. Short-term operational challenges further impacted sales on a temporary basis in the quarter. Addressing some yield and equipment issues our operations team responded quickly to address the issues and return our assets to normal output levels. Operational excellence initiatives have been core to our performance as we deal with market headwinds and other short-term challenges. We have taken multiple targeted actions to adjust our cost structure while continuing to invest in these areas that drive organic growth for our business. These important moves have helped to deliver strong margin performance in a softer end market environment. Despite the decline in sales, our overall EBITDA margin for Q1 was roughly flat on a year-over-year basis, representing a strong 20% decremental margin. Our laser focus on driving margin improvement in Electronic Materials delivered EBITDA expansion of approximately 500 basis points in the quarter even with a 25% VA sales decline. This strong performance leaves us extremely well positioned to drive even higher levels of performance as markets recover. Our focus on managing the business through some short-term headwinds is complemented by our relentless efforts to invest for the future as we continue to see the pipeline for long-term organic growth. We remain confident in our strategy and believe that our robust organic pipeline and portfolio of cost improvement initiatives will help drive earnings growth for the balance of the year. We expect to see continued strength in the space and defense markets as we move through the year. Many of our advanced materials are engineered to perform in the harshest environments, making them an ideal fit for these demanding applications. New defense business wins in addition to the previously announced R&D partnerships for various government-funded projects further solidify our position as a key supplier for advanced materials across aerospace, defense and new energy markets. In the semiconductor market, near-term growth in memory and logic chips used in high performance computing is expected to drive the rebound in our sales this year, with the demand for power and industrial chips coming back later in the cycle. We believe Q1 was the bottom of the downturn for us, as we see order rates picking up coming into the second quarter, giving us confidence that our top line will continue to improve as we move through the year. The industry is continuing to prepare for the global shift toward broader AI adoption and Materion is a vital part of that supply chain. We continue to advance our broad portfolio of semiconductor products and are investing to increase capacity in key production areas to ensure we are ready to support that increased demand. The Precision Clad Strip project continues to be a significant driver of organic growth for us, and our partnership with our customer is strong. The expansion of our new facility remains on track to start up late this year. As the customer's global rollout progresses and our teams have driven higher levels of output and performance at our new facility, we will now begin to ramp down production at our legacy facility. Our customers indicated an adjustment to their inventory levels for the second half of the year, which will impact our shipments. This adjustment does not correlate to weaker end product sales as the customer's global rollout remains on track and their projections support a robust long-term outlook for our business. Our team has done an exceptional job of steering the company through some short-term challenges while maintaining a longer-term focus that will further position Materion for sustainable growth and value creation. With the start of the recovery in semiconductor and improved operational performance, we expect to deliver a much stronger Q2 with additional step ups in the third and fourth quarter, resulting in another record year for Materion in 2024. Now let me turn the call over to Shelly to cover more details on the financials.

Thank you, Jugal, and good morning everyone. During my comments I will reference the slides posted on our website last night starting on Slide 9. In the first quarter value added sales, which exclude the impact of pass-through precious metal costs, were $257.8 million, down 14% from prior year. Despite strength in aerospace and defense and consumer electronics, our sales were negatively impacted by declines in semiconductor and automotive plus the expected inventory correction for our nonresidential construction material. Additionally, as Jugal commented, some temporary operational challenges limited our shipments, particularly in Performance Materials. Our teams have made meaningful progress in mitigating these challenges and expect more normal levels of output in the second quarter. When looking at earnings per share, we delivered adjusted earnings of $0.96 in the first quarter, down 28% from prior year. Moving to Slide 10, adjusted EBITDA in the quarter was $45.2 million, 17.5% of value added sales, down 15% from the prior year with roughly flat margins. Despite the significant sales decline, the strong margin performance was driven by positive price and the benefit of our cost improvement initiatives partially offsetting the volume decline. Moving to Slide 11, let me now review first quarter performance by business segment. Starting with Performance Materials, value-added sales were $155.6 million, down 7% from prior year. This year-over-year sales drop was driven by lower demand in automotive, commercial aerospace and the nonresidential construction application within industrial. Space and defense remains a bright spot with significant contribution from the emerging space market and strong defense demand more than offsetting declines in commercial aerospace. EBITDA, excluding special items, was $35.7 million or 22.9% of value-added sales, down 17% from the prior year period. This decrease was driven by the lower volume, partially offset by targeted cost improvement initiatives. Moving to the outlook, we expect space and defense to remain strong throughout the balance of 2024 and again, expect the operational challenges to improve as we move into the second quarter. Next, turning to Electronic Materials on Slide 12, value-added sales were $77.6 million, down 25% compared to the prior year as a result of continued weakness in the semiconductor market. EBITDA, excluding special items, was $14.5 million or 18.7% of value-added sales in the quarter. Despite significantly lower volume, operational performance and cost improvement initiatives helped mitigate the semiconductor slowdown, which drove approximately 500 basis points of margin expansion year-on-year. As we look out to the rest of the year, we expect a gradual semiconductor recovery from Q1 with sequential improvement as we move through the balance of the year. Finally, turning to Precision Optics on Slide 13, value-added sales were $24.6 million, down 8% compared to the prior year. This year-on-year decrease was mainly driven by reduced demand in industrial and automotive, partially offset by strength in space and defense. Precision Optics also saw some operational challenges, which delayed some shipments out of Q1. EBITDA, excluding special items, was $0.4 million or 1.8% of value-added sales. The decrease in volume was a significant driver of this year-over-year decline in addition to unfavorable product mix. Looking out over the next few quarters, we expect a meaningful step-up in margin performance in Q2 with stronger demand and continued focus on cost improvement initiatives. Moving now to cash, debt and liquidity on Slide 14, we ended the quarter with a net debt position of approximately $462 million and approximately $130 million of available capacity on the company's existing credit facility. Our leverage at 2.2x remains just slightly below the midpoint of our target range. Lastly, let me transition to Slide 15 and address the full year outlook. Despite the slow start to the year, we expect to deliver another year of record results with our organic and operational initiatives more than offsetting some market softness. Since our initial guide for 2024, the outlook for commercial aerospace and electric vehicles have softened. And as Jugal mentioned, we are expecting some inventory correction from our Precision Clad Strip customer in the back half of the year. We also expect slightly higher interest expense based on the current rate outlook. While we will work to mitigate much of these headwinds, we are adjusting our full-year guide to a wider range of $5.60 to $6.20 adjusted earnings per share, a 5% increase from the midpoint versus the prior year. Despite the mixed market environment, Materion remains poised to deliver another year of strong execution and record results in 2024. This concludes our prepared remarks. We will now open the line for questions.

Our first question is coming from Phil Gibbs from KeyBanc.

Can you please up the message here a little bit? I hear you talking about inventory reductions at the customer and ramping down of the legacy facility, but you're also saying nothing changed on long-term demand and you still plan on Phase 2 being a meaningful contributor in the future. So can you just help maybe lay out the land a little bit better here for us? It seems to have some things moving in different directions.

Yes, Phil. As you know, this program has been a great success for us over the last couple of years. Our team has done a fantastic job of driving yield improvement and operational improvements in our new facility, while we continue to deliver from our legacy facility. What we're talking about is a short-term issue where the customer has looked at the launch phase and is making sure they have the right levels of inventory to support their global rollout. The second part is the substantial improvement our team has made on our new facility that has allowed us to deliver at a rate that is satisfactory to the customer. So a combination of those factors has led the customer to make some adjustments for the back half of the year to ensure they are properly positioned. We would expect demand to continue to be robust in 2025 and we will continue to support them in a meaningful way. All of these things tie together, and that's why we say Phase 2 is on track. It's going to contribute into 2025. We've been saying that it would start late 2024, with meaningful deliveries contributing into 2025, while continuing to support Phase 1. Over the last 12 to 18 months there have been questions about when we would stop producing from the legacy facility. Considering the customer's adjustments for the back half of the year, it is an appropriate time to start slowing down production at the legacy facility to support the yield and performance improvements at our new facility. So this is a natural evolution of the program with a couple of quarters of adjustments, but continued long-term success.

And then on the commercial aerospace side, you talked about some slowing and builds down. I think the only meaningful place where we've seen builds down is on the MAX program, but I know you also have a lot of maintenance exposure to the commercial side as well and maintenance has been strong.

As we look at commercial aerospace, we see a build challenge across both major customers, Airbus and Boeing. If you look at the build rates we track, Q1 of last year the combined build rate was around 250 to 260 planes. This Q1 it was around 225. By contrast, Q4 build rate was over 350. So there was a substantial decrease in Q1 across both manufacturers. Airbus has discussed some supply chain issues they are facing, and Boeing is adjusting production processes to ensure quality is at the forefront. So the significant decline in Q1 was more than we anticipated. As we think about the recovery for the rest of the year, I would expect build rates to improve, but not to the levels seen over the last year. I expect commercial aerospace to be challenged. This is not a share issue. We have been gaining content across multiple materials and products on single-aisle and widebody planes. Our content growth and share are intact; we just need these two major customers to increase their build rates. We will monitor the situation, but view this as a caution for the full year.

And then lastly for me, the operational challenges that you cited several weeks ago and then talked a little bit about today. Can you pinpoint when some major issues started to occur and what gives you confidence that they're behind you?

I'll take that one. The majority of that issue was in Performance Materials. We saw some yield challenges emerging from an early production process that impacted many downstream product lines in Performance Materials. That started early in the quarter and we began to see we were not going to be able to service all of the demand and orders on the books, which is when we reevaluated and issued an early caution. That situation is getting better. The team moved quickly to get yields back up so we can service the full order book. There were a couple of other items: delays at an outside tolling partner and some small yield challenges in Precision Optics. So we had a few things that fell under the bucket of operational challenges that we believe we've addressed. They were big enough to discuss on the call.

I would add that as we look at Q2, we expect a significant step-up from Q1. Getting those operational challenges behind us is core to that. Based on how we have been running in April and how we expect to run for the remainder of the quarter, we have made a marked improvement in those operational challenges.

Your next question is coming from Daniel Moore from CJS Securities.

In the prepared remarks you mentioned the start of the recovery in semiconductors. Maybe just elaborate on conversations with customers and your confidence that demand should continue to improve sequentially beyond Q2 for the next few quarters?

This market has been challenging for the entire industry, with starts and stops on when the bottom would be. We do believe, based on orders and conversations with our customers, that Q1 was the low point for us. We see improvements going into Q2 and in the first few weeks of the quarter as well as for the next couple of months. Our discussions with customers and external indicators continue to show that logic and memory are starting to lead the recovery, and I expect them to lead in Q3 and Q4 as well. The power side faces some challenges because of slowing EV growth, which will take more time. Looking at our order backlog, it has improved over the last couple of months; from about three months ago to today we have seen a double-digit order backlog improvement for the semiconductor business. That gives us confidence for Q2 and for the back half of the year. This is the first time in a few quarters that we see data giving us confidence for a recovery starting in Q2, with Q1 being the low point and improvement continuing in Q3 and Q4.

Pulling on that string as we think about 2025 and beyond, and probably into 2026, many fabs are expected to come online. When do you expect a more meaningful inflection in that core end market such that we might see an uptick to longer-term high single-digit type growth?

When you look at fab build rates and investments, we saw some investment slowdown commentary over the last 12 to 18 months as the market softened. What we are seeing now are more positive discussions around investments. We are seeing investments in the U.S. supported by government incentives and some recent announcements by large companies. Investment activity in Asia appears to be starting back up as well. If the investments are happening but with slight delays, perhaps they are about one to two years later than previously discussed. The levels we saw in 2022 were a peak, and those peaks were expected to come into play in the back half of 2025. Now, those peaks may be more likely in the front half of 2026 — a slight delay. Over the next 24 to 36 months I expect steady improvement and recovery in the semiconductor market, led by logic and memory and followed by other areas.

The incremental capacity from shifting production from the legacy facility to the new clad strip facility — is that capacity something you can actively sell to other customers or is it more likely to be shuttered?

We would look to start slowing down, not stopping production at the legacy facility. The incremental capacity is usable because it is capacity we were using prior to starting this program. We will shift that capacity to other activities in commercial, consumer or automotive sectors and make sure it is utilized appropriately. If necessary, we will take appropriate actions to adjust the cost structure.

Your next question is coming from Mike Harrison from Seaport Research Partners.

I appreciate the detail on the semiconductor outlook, but could we focus on first quarter margin performance? You called out the year-on-year improvement, but what was more interesting was the sequential improvement on essentially the same level of value-added sales. Can you explain what led margins to be so much better in Q1 than in Q4 even though VA sales were similar?

Electronic Materials has been a focus area for margin improvement. We have talked about needing all of our businesses to contribute so the company can get to 20% EBITDA margins or better. As the semiconductor decline started, our margins were impacted. We began significant cost improvement initiatives in the second quarter last year, and more importantly in the back half of the year. Plant and operational improvements can take time to realize benefits, and we are starting to see the benefits now. I'm proud of what the team has been able to do to drive those improvements, which I expect to continue. While there are always one-time or mix issues that vary by quarter, fundamentally it is the operational and cost improvements the team has driven over the last six to nine months that are starting to bear fruit in Q1. We will continue to focus on that and need the Electronic Materials business to contribute toward our 20% EBITDA margin objective.

Where are we in the inventory correction in the industrial business — the nickel springs for commercial sprinkler systems? This destocking seems to have cropped up later. Do you feel things are improving or will it remain weak for the remainder of the year?

This is a unique product in the industrial sector and hard to correlate to broader indices. We are the provider for this market, and significant growth occurred coming out of COVID that left the channel somewhat flushed with inventory. With higher interest rates, inflationary effects and a general downturn in commercial construction and occupancy, we are experiencing an inventory correction. It started late last year, roughly in Q4, and I expect the first half of this year to see a meaningful inventory correction. We expect to start picking back up in the back half of the year, but the pick up will be slight, with a more meaningful rebound in 2025 as the inventory works through. This is not a share loss issue; it is an inventory correction in a specific industrial application. We expect a small turnaround in the back half and a meaningful turnaround in 2025.

Last question: given your balance sheet with leverage just below the midpoint of your target range, can you update us on your acquisition pipeline and the potential for acquisition activity later in the year?

Our leverage sits about 2.2x, which is halfway between our 1.5 to 3.0x targeted range, so we feel comfortable. We're making a lot of organic investments, which is keeping leverage steady after the acquisition of HCS Electronic Materials. We have not focused on debt paydown but rather on organic growth. We still have capacity to do an acquisition and evaluate opportunities that would add to our product portfolio or geographic footprint. It's not a must-do this year, but we remain opportunistic and could pursue an acquisition if the right opportunity arises.

Your next question is coming from David Silver from CL King.

A few items. First, a clarification on Precision Clad Strip and the transition from Phase 1 in the back half of 2024 to Phase 2 perhaps beginning early 2025. You discussed inventory drawdowns at the customer and the ramp-up of production from the new facility. Is there a qualitatively or structurally different product being supplied from the new Precision Clad Strip unit? If the products were relatively similar, why would the customer need to adjust the legacy inventory levels later in the year?

About three years ago when this program began, the customer had a product using a technology that was not ours. The customer introduced a next-generation product that uses our technology. They have been phasing out the older generation and phasing in the newer generation globally. As the rollout progressed we supplied from both the legacy facility and our new facility. The new facility has shown substantial yield and output improvements supporting the customer's launch. The customer is managing the global rollout and making sure they have the right inventory levels. So short-term adjustments over a couple of quarters are expected, but this remains a successful program with continued long-term demand. We meet with the customer frequently and they view this as a successful multi-year program.

A clarification for Shelly on the production tax credit for critical materials: earlier you reduced expectations upon clarification from Treasury. Are you at a point to confidently talk about final expectations for that credit and is there a ballpark for what it could add on an annual basis?

We are excited about that credit as it reduces our overall cost to produce high-purity beryllium products. When the act was first announced the definition of production costs was broader and included raw material costs. Late last year, Treasury used a different definition that would exclude raw materials. There was a comment period and hearings before final guidance, and we have not received updates since. We do not expect final guidance until later this year. We have adjusted our approach and are accruing at a more conservative rate. For context, in Q1 last year we would have recorded about $1 million more of a credit than we recorded this year based on a more conservative methodology. We believe we have taken a middle-of-the-road approach and look forward to more clarity as the year progresses.

On the beryllium side — the line item mine development-new pit opening of $13 million on Slide 15 — is this designed to expand capacity for the mineral required for beryllium production or is it replacement of played-out portions of the mine? In other words, is this to prepare for anticipated growth or just a normal transition?

We operate a mine in Utah and dig various pits to obtain raw material. Mine development is capitalized and amortized as raw material costs over the period of use. I view mine development as raw material costs amortized over production. It is not a separate capital investment to expand capacity per se, but rather the size and amount of the dig and the associated cost, which may be amortized over a different period. We do see an uptick in beryllium processing and related sales opportunities, so we are ensuring sufficient material is being dug to support demand. From an accounting perspective, these costs go on the balance sheet and amortize with production.

On Electronic Materials expansions at Newton and Milwaukee: a few quarters ago you said the slowdown would jive nicely with planned expansions so you would not have to accelerate. Given a possibly more drawn out recovery, has your thinking on completing expansions and timing of startup changed?

No, there is no shift in our thinking. We are continuing to progress on those expansions to ensure we are properly positioned from a capacity standpoint as the market recovers. We will continue to install equipment, qualify with customers and be prepared to support them as the semiconductor segments recover. We are on track and continuing down that path.

Your next question is coming from Dave Storms from Stonegate Capital Markets.

Last call, it was estimated that added sales would be split roughly 45:55 between first half and second half. Does the anticipated step-up in Q2 maintain that ratio, or should we adjust those expectations?

We spend a lot of time thinking about our cadence. We previously discussed a 45:55 split for the year. With our soft Q1, we reexamined that. We expect a significant step-up in Q2, but it will affect the balance of earnings. We now expect to be a little better than 40% in the first half, so think roughly 40:60, maybe 41:59. We are in that zip code based on how we are thinking about the year.

Jugal, you mentioned that with volumes coming down you're not seeing share losses. Has that been because you've had to compete on price? Is there upside to compete on price to maybe get share gains? How are you thinking about the pricing environment given softer volumes?

When I say share situation, for programs like beryllium and nickel, this is not a share issue; it's an inventory destocking issue. Some declines in Q1 were due to operational launches where we couldn't ship product, not order rate declines. Regarding pricing, there is always pressure as customers look for efficiencies and cost savings. We continue to drive operational excellence so we can offset any required price reductions with cost outs. Historically, our business tends to be price positive overall — more price increases than price decreases. We'll continue to focus on value-based pricing and balancing pricing and share. Our sales teams work closely with product teams to understand cost structures and price appropriately.

We have reached the end of the question-and-answer session, and I will now turn the call over to Kyle Kelleher for closing remarks.

Thank you. This concludes our first quarter 2024 earnings call. A recorded playback of this call will be available on the company's website, 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. My number is (216) 383-4931. Thank you again.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.