MATERION Corp Q1 FY2026 Earnings Call

Greetings. Welcome to the Materion First Quarter 2026 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 2026 earnings conference call. This is Kyle Kelleher, Director, 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 also access the materials via 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 in addition to discussing expectations for the remainder of 2026. 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 this morning. Additionally, comments regarding earnings before interest, taxes, depreciation, depletion and amortization, net income and earnings per share reflect the adjusted GAAP numbers shown in Attachments 4 through 8 in this morning's press release. The adjustments were made in the prior year period for comparative purposes and removed 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 good morning, everyone. I'm pleased to be with you today to discuss our first quarter performance and share what we're seeing for the remainder of the year. Value-added sales were up 10% year-over-year, excluding precision clad strip, reflecting strong demand across most of our end markets. Electronic Materials sales increased 18% versus last year, driven by AI-led demand for high-performance memory and data storage applications, along with strengthening demand in power applications and communication devices. Precision Optics delivered 43% year-over-year top line increase with new business coming online across multiple end markets and applications. While Performance Materials sales were roughly flat, excluding precision clad, this was primarily due to shipment timing. The order book continues to build driven by strong demand in aerospace and defense, energy and telecom and data center. We expect a meaningful step up in sales in Q2 and throughout the rest of the year. As for precision clad strip, the production ramp-up is progressing well and remains on schedule. We are now producing at the same rate as before the quality issue. We also delivered strong earnings in Q1 with EBITDA margins exceeding 20%, a record for our first quarter, given our typical seasonality. Electronic Materials continues to be an outstanding performer, achieving record profitability on very strong sales. Precision Optics continued to exceed expectations delivering its fifth consecutive quarter of profitability improvement through strong execution on its expanding top line. Turning to our end markets. It's encouraging to see most markets in the high single-digit to low double-digit growth rate. Even more importantly, our order book continues to strengthen. We exited the first quarter with the highest backlog in our company's history. Order backlog is up more than 20% year-over-year and 15% since the start of the year. Defense orders remain strong with $60 million received in the first quarter, and we have more than $300 million in open RFQs. Over the last 12 months, aerospace and defense order rates are up 50%, energy is up 20% and semiconductor is up 10%. We are seeing clear acceleration across many of our end markets, and our teams are preparing to meet the higher levels of demand. Going a layer deeper. I want to step back and frame a broader trend that is having a significant impact on Materion, the rapid proliferation of AI. When people think about our role in AI, they often focus on our semiconductor deposition materials and with good reason. We are a leading supplier of advanced electronic materials that enable advanced node chips and data storage devices. We're in the midst of an AI-driven semiconductor growth cycle and that strength is evident in our Electronic Materials performance. But our impact on AI extends far beyond the chip itself. Materion has become a critical enabler of the AI ecosystem not at the edges, but at the core. AI acceleration depends on advances in semiconductor performance, high-speed connectivity, next-generation optics and high-reliability energy and space systems. Each of our three businesses provides foundational materials for these applications. Our Performance Materials business plays a strategic role across the infrastructure powering AI. From advanced data centers to global connectivity networks and next-generation energy systems, our engineered alloys and beryllium-based materials enable performance, reliability and safety at scale. We supply growing nickel materials for fire protection systems and data center build-outs and specialty alloys for connector technologies and high-speed semiconductor fab equipment. Our materials support the wireless backbone that carries AI-driven data, including towers, undersea cables and base stations. In energy, our beryllium alloys enable breakthrough nuclear reactor technologies needed to deliver the continuous power AI will require and are widely used in oil and gas drilling and processing equipment. In space, our materials are integral to propulsion systems, spacecraft structures and launch components supporting global connectivity and observation networks. Our Precision Optics business provides advanced optical coatings and engineered components essential for data center expansion, immersive AR/VR technologies and advanced semiconductor manufacturing. Our solutions support connectivity and semiconductor equipment applications, and we supply optical filters and systems for satellite technologies that enhance communication and earth observation capabilities. As semiconductor devices become smaller and more complex, advanced optics have become increasingly important for lithography, inspection and metrology, improving accuracy, boosting yield and enabling scaling for next-generation chips. Our Electronic Materials business sits at the center of semiconductor innovation, supplying the advanced deposition materials and engineered targets required to manufacture chips at the most sophisticated nodes. These materials power both high-performance computing and data storage devices used in data centers as well as the semiconductor components that enable global connectivity. Beyond deposition, we provide a range of high-value niche materials supporting AI, including alloys for next-generation nuclear reactor technologies, specialty metals for base station applications and chemicals used in satellite heat shield tiles. While smaller in scale, these applications highlight the depth of our capabilities and our ability to solve complex materials challenges in high reliability environments. As AI workloads scale, demand for the engineered materials we produce is rising rapidly, and we are already seeing that momentum reflected in customer demand, order rates and new business wins. Looking ahead to the remainder of 2026, we are energized by the growth our businesses are experiencing and the opportunities emerging across our markets. We're seeing momentum build across the company in our end markets, our incoming order rates and the new business opportunities our teams are securing. Our results reflect their hard work and commitment. We now see a path to delivering low double-digit top line growth for the year while continuing to seize opportunities for the future. This gives us even greater confidence in delivering results toward the high end of our earnings guidance provided in February. I want to express my gratitude to our global teams for their dedication and unwavering commitment to excellence. Their work, driving innovation, ensuring quality and supporting our customers is the foundation of Materion's success. And finally, I'd like to thank our customers and shareholders for their continued trust and partnership. With that, I'll turn the call over to Shelly to review the financial details.

Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website this morning, starting on Slide 11. In the first quarter, value-added sales, which exclude the impact of pass-through precious metal costs, were $261.8 million, up 10% from the prior year when excluding Precision Clad Strip. All in, value-added sales were up 1%, reflecting broad-based demand across our portfolio. Growth was led by semiconductor and aerospace and defense, consistent with the momentum Jugal outlined. Electronic Materials delivered another very strong quarter with 18% growth, supported by continued strength in semiconductor applications and new business wins. Precision Optics grew 43%, driven by new programs across multiple end markets and marking its highest quarterly sales since 2021. Adjusted earnings per share were $1.27, up 12% from the prior year. Turning to Slide 12. Adjusted EBITDA was $52.9 million or 20.2% of value-added sales, a record first quarter margin for Materion and an increase of 9% year-over-year. We delivered 140 basis points of margin expansion, driven by higher volume, favorable price/mix and strong operational performance, particularly within Electronic Materials and Precision Optics. Moving to Slide 13. Let me review first quarter performance by business segment. Starting with Performance Materials, value-added sales were $139.5 million in the quarter, down 13% year-over-year, but up 5% sequentially. This year-over-year decline was driven by lower precision clad strip sales as production levels ramped through the quarter. Outside of clad, we saw strength in aerospace and defense and telecom and data center, partially offset by timing in energy orders. Adjusted EBITDA was $28 million or 20.1% of value-added sales, down 32% compared to the prior year period. This decrease was driven by the lower clad strip volume and the impact of operational challenges in the back half of 2025 that amortized into this year. Looking ahead, we expect meaningful sequential improvement in the top and bottom line, driven by stronger aerospace and defense sales and higher PMI shipments with momentum building into the second half. As Jugal highlighted, the order backlog continues to expand, and we are well positioned to support higher demand levels throughout 2026. Turning to Slide 14. Electronic Materials delivered another exceptional quarter. Value-added sales were $91.6 million, up 18% year-over-year, driven by semiconductor strength as our materials continue to enable advanced node technologies and AI-related applications. Adjusted EBITDA reached a record $25.9 million, up 95% year-over-year with more than 1,000 basis points of margin expansion and a record adjusted EBITDA margin of 28.3%. The meaningful improvement reflects higher volume, favorable price/mix and strong execution across the segment. For the remainder of 2026, we expect to see continued growth, supported by semiconductor market outgrowth and contributions from new business wins. On Slide 15, Precision Optics value-added sales were $30.7 million, up 43% year-over-year, driven by new business wins and growth across every end market. This marks the segment's strongest quarter since 2021 and its fourth consecutive quarter of top line growth. Adjusted EBITDA was $5.5 million or 17.9% of VA sales with significant year-over-year margin expansion. This reflects higher volume, favorable mix and continued execution on the business transformation. The segment has now delivered five consecutive quarters of bottom line improvement. We expect both top and bottom line growth to continue in 2026 as new business ramps in key high-growth markets and the transformation progresses. Now moving to cash, debt and liquidity on Slide 16. We ended the quarter with a net debt position of approximately $474 million and $192 million of available capacity on our existing credit facility with leverage slightly below the midpoint of our targeted range at 2.1x. We strategically built inventory in Q1 to support expected sales growth in Q2 and into the second half, which temporarily constrained free cash flow generation. We continue to expect strong free cash flow for the full year as volume increases and working capital normalizes. Finally, turning to Slide 17. Our record backlog and strong order rate momentum exiting Q1 give us increased confidence in our full year outlook. We now expect low double-digit top line growth for 2026 and are affirming our adjusted EPS guidance of $6 to $6.50 with growing confidence in delivering toward the upper end of that range. With the strong start to the year, we also remain committed to making progress toward our midterm EBITDA margin target of 23% while generating strong cash flow over the balance of 2026. This concludes our prepared remarks. We will now open the line for questions.

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

Obviously, you gave a lot of color, Jugal, but always good to talk. Start with semi. Maybe just talk about the cadence of order rates exiting Q1 and into Q2. And obviously, you talked about many of the different applications. Just a sense of how your customers see the outlook for kind of '27 and beyond maybe relative to what those expectations would have looked like 6 or 9 months ago?

Yes. As you know, Dan, semiconductor was a really good quarter for us here in Q1, up 16% on a year-over-year basis. In fact, up about 40% if you exclude some of the China business, which we know has been going through some changes, and we've talked about that over the last 12 to 18 months. So a very strong Q1 for us. We expect semiconductor to continue to be very strong in Q2 and then the rest of the year. Our order rate for semiconductors has been improving sequentially. I would say that our exit out of Q1 was stronger than the exit out of Q4, and we expect that trend to continue. The great thing with semiconductor for us is we really do play in all the areas, so whether it's power semiconductor or communications, data storage, logic devices, memory devices. We are seeing growth across all of those areas, so it's not concentrated in one or two areas. We expect it to be broad-based growth in the remaining quarters as well. When we look at, for example, our high-performance memory and our data storage, which is much more aligned toward AI applications, our sales were up 47% on a year-over-year basis in Q1, and we expect that to continue as well. On the profitability side, the business that houses most of semiconductor activity, Electronic Materials, has performed very well, and our profitability in this business is improving substantially on a year-over-year basis as well. So we expect this to continue. We'll see what 2027-2028 brings to your point about customer expectations, but for the rest of the year, we expect strong order intake and a very good growth curve on a year-over-year basis.

Really helpful. Switching to aerospace and defense, orders up 50% year-over-year. Obviously, you announced the CapEx funded projects for the large prime last quarter. Just how does the war in Iran change your outlook and growth expectations? And just maybe a little bit of kind of under-the-hood dialogues with customers, not necessarily for the rest of this year, but looking out into '27 and beyond as well?

Yes. Defense, in general, was getting a lot of attention even prior to the conflict that started, and there was discussion about higher budgets for this year or next year. I think the war has strengthened that talk in Washington. What I'd say we're seeing—and we've been discussing this over the last two or three quarters—is the open RFQs. A couple of quarters ago we had about $100 million in open RFQs; it increased to about $150 million, and at this stage we sit at more than $300 million in open RFQs. These are inquiries that have come in from various primes from different countries on the defense side of our business. The $60 million that we booked in Q1 is a record for us; we haven't had a $60 million Q1 before. The momentum has certainly shifted even more. It was there before the conflict, but that has aided the order rate as well as the open RFQs on the defense side. We expect this trend to continue during the rest of the year and probably across the next three- to five-year window as well, which plays into our overall aerospace and defense market. Some of our space activities are related to defense and we see the same trends in that area as well. In general, defense is a strong market and I think will continue to be very strong, possibly becoming stronger over the next one to two years.

I'll sneak one more in and jump back in queue. But—and I know you don't guide quarterly, but just looking at the low double-digit top line growth for the full year, obviously a meaningful inflection from what we saw in Q1. So just how do we think about the cadence of that growth? Do you think about kind of double-digit growth starting in Q2 or do you see it maybe a little bit more back-end loaded?

Considering the fact that overall our business was about 1% in Q1, and certainly up 10% year-over-year excluding precision clad, we're already seeing double-digit growth even in Q1 when you exclude precision clad. We expect double-digit growth for each of our quarters, and while it will be more concentrated in the back half of the year, we expect strong growth throughout the year.

And maybe just to add, Jugal, on how that translates through to the bottom line: we think we'll see probably a 15% to 20% step-up from an EPS perspective next quarter, but even much more meaningful step-ups in the back half as that flows through. So we're looking at a really strong outlook for the rest of the year.

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

I was hoping you could address a couple of questions on the Performance Materials segment. In terms of the precision clad strip quality issue, it sounds like there was some amortization of that impact dragging into Q4, and it also impacted Q1. How should we think about Performance Materials earnings in the second quarter compared to what is obviously some unusual weakness in Q1? And can you also give some additional color on: is this quality issue fully resolved? What changes had to be made? You said you ramped back to where you were before the issue came up. How much additional capacity or capability do you have beyond what you had before this issue came up?

Let me start with the quality issue and where things stand and then Shelly will jump in on the financials and expectations for Q2. Our team has made significant progress working with the customer and resolving the quality issue. We indicated previously that we were back up and running, and in Q1 the team ramped production. We are back to running at the rate prior to the quality issue, producing and starting to ship at those rates. The team is excited about Q2, Q3 and Q4. We made changes to our manufacturing processes and captured learnings that we are applying across the company to continue improving. We have capacity beyond what we used prior to the issue, so if the customer wanted higher volumes, the capacity is there and we can support that. We're working with the customer on volumes for the rest of the year and expect the rest of the year to be at or better than pre-quality issue production levels.

From a profitability perspective, it's great to see production back to normal rates. However, that ramp occurred during the quarter, so there was underutilization of the plant, which impacted Q1. We're taking a few more steps that are temporarily impacting profitability, but we expect a really strong step-up on the top line in Q2 and then very normalized top and bottom line in the back half for clad specifically. Looking at Performance Materials overall, we expect a meaningful top line step-up next quarter and more than a couple of hundred basis points improvement in profitability. As we work past the operational issues and the clad item, we'll see even better profitability.

All right. Very helpful. Then a broader question on Performance Materials. How should we think about pricing going forward? You have a portion of the business that's more beryllium-based—arguably there aren't substitutes for some of those products and there aren't many alternative sources either. Can you help us understand what portion of your sales are more beryllium and harder to substitute versus products that are alloys and may be subject to competition or substitution?

Yes. Roughly about half of our sales are beryllium or beryllium-based materials and the other half are non-beryllium. Beryllium tends to be a richer mix business for us; it is longer cycle and stickier, and it generally supports better profitability and sales security. There is substitution risk, but it typically takes longer because beryllium's performance far exceeds alternatives. Pricing has been an important enabler for this business over the last five years and remains important. We continue to focus on pricing opportunities. Overall, we like the direction of the business and the market mix for beryllium across defense, aerospace and energy. As Shelly indicated, PM had a Q1 downturn driven by specific items, but we expect the business to return to prior levels in short order.

In terms of the defense RFQs and the $300 million number, are you the incumbent in most of those applications, or are many of them new technologies? And do these quotes represent business that could come in the next 12 to 24 months, or could it be spread over a much longer period?

It's a mix. In many cases we are the incumbent because primes and governments seek to produce more of things we already do. But we also have new activities, both in optics and Performance Materials, some related to defense and some outside the U.S. When we win business, it typically fits a 12- to 24-month window, though some orders can be multiyear (three- to five-year). We view most of these opportunities in the next 12 to 24 months. This $300 million figure has grown from about $100 million over the last two to three quarters, and increasing the bookings feeds into our record backlog at the end of Q1. That's how we see the business playing out over the next 12 to 24 months.

One last one on Electronic Materials gross margin strength. Q1 was almost 1,000 basis points higher than the gross margin rate in 2022 or 2023. How much of that strength is attributable to mix that might normalize versus how much is sustainable? Should we be modeling something north of 40% gross margin going forward?

Over the last couple of years we made significant operational and cost improvements in the Electronic Materials business while the semiconductor market was challenged. That work has benefited us as volumes come back. In Q1, EM volume was over $90 million and the flow-through has been strong because of those improvements. That has been a key contributor to margin expansion.

A few years ago we felt EM margins were below where they should be, so there was upward potential. The work done has been impactful, and now with volume coming in we're seeing margins closer to what I would call typical Electronic Materials margins. This quarter was particularly strong and mix is positive right now and will move around a bit, but we expect the trend of stronger margins in EM to continue.

Your next question is coming from Samuel McKinney from KeyBanc Capital Markets.

The business transformation and cost initiatives have obviously been the focus in Precision Optics recently, but the first quarter value-added sales was the best quarterly figure for that segment in years. Can you talk about what's driving that top line improvement and the associated operating leverage within that business?

As we've highlighted, the team has made great progress transforming Precision Optics in a short period. Q1 showed 43% year-over-year top line growth, the highest since 2021, and nearly 18% EBITDA margin. Historically the business peaked around a 20% EBITDA margin. The turnaround is driven by top line recovery from both market improvement and significant new business activity across semiconductor, automotive, defense and other key markets. Closing new business has translated into sales in Q1 and positions the segment well for Q2 and the rest of the year. Operational and cost transformation efforts have been important enablers.

With the Chinese portion lagging the overall semiconductor business, can you give us an update on progress and when you expect to start deriving benefits from the Konasol acquisition?

Konasol is important for the medium term. We expect some small-scale activity possibly at the end of this year, but meaningful impact in 2027-2028 for semiconductor contributions to EM. The Chinese component is a year-over-year headwind, but other markets are performing very well. As I noted earlier, the business was up 16% in Q1 and 41% excluding China, with strong order intake across our areas of semiconductor. We expect solid growth for the rest of this year, which supports our view of low double-digit growth for the company.

Your next question is coming from David Silver from Freedom Capital Markets.

I had a couple of questions on Electronic Materials. One, was the bulk of the improvement tilted towards Milwaukee versus Newton, or was it very broad-based? Two, is the top line growth mostly due to volume and not price? And three, is tantalum participating as much as sputtering targets and deposition products?

Our semiconductor exposure is best viewed by the type of semiconductors we serve—power, memory (including high-performance memory), communications, data storage and logic. Our factories include Milwaukee, Newton (tantalum), Brewster and Buffalo, and facilities in Singapore and Taiwan that support these businesses globally. We are seeing growth across these areas and strong order intake broadly, so it's not concentrated in a single area. New business initiatives we pursued over the last 18 to 24 months are now contributing as the market recovers; qualification typically takes 18 to 24 months. So the growth is a combination of market recovery, new business wins coming through, and some pricing, though price is not the main component of the growth story for Electronic Materials.

On Performance Materials and guidance, regarding the upper end of $6 to $6.50 EPS and the resumption of normal operations on the precision clad strip line, I believe there was also the possibility of another clad strip line starting up this year. What are the assumptions for that, and do we have clarity on when the large customer might be back and utilizing the more recent clad strip line?

In our facility we have capacity that we are using for that customer and additional capacity beyond that level. We are back to pre-quality issue production levels and supplying the customer. If the customer increases demand this year, we are prepared to raise output. The timing depends on customer orders and their approval processes, which could trigger higher demand. I want to stress that the PM step-up we expect in Q2 and the back half is driven by broad-based recoveries across defense, aerospace, industrial and energy—not solely the precision clad recovery. Our order rates support that broader improvement, and we are well positioned to see a meaningful step-up in Q2 and the rest of the year.

Appreciate the extra slide on Slide 8 highlighting key end uses — very helpful. One other question on CapEx: the budget is $75 million plus $25 million for mine development. Of the $75 million, how much is growth-oriented or discretionary versus sustaining, and where are those incremental resources targeted?

We've had relatively strong capital spending over the last several years to support organic opportunities, and you see that coming through in results. We have projects in each of our businesses focused on expanding capacity and capabilities as well as maintaining and recapitalizing plants to produce at required levels. So the $75 million is spread across Performance Materials, Electronic Materials and some projects in Optics. I wouldn't call it purely discretionary; it's supporting organic growth we expect going forward. Separately, there is a $65 million customer-funded investment to expand capacity in the beryllium side of the business; that will be somewhat additive and not all spent in one year. You'll see that as customer funding and additional CapEx.

Your next question is coming from Dave Stones from an independent research firm.

Just want to circle back to some of the Electronic Materials new business wins. It was mentioned in the prepared remarks and it sounds like a lot of that 12 to 24 months of work is starting to come to fruition. Could you go deeper into what's working and what the sales cycle looks like now? Is the top of the funnel changing? Are you seeing more inbound interest than 12 to 18 months ago?

Are we getting more requests and opportunities from a new business perspective, particularly in Electronic Materials? Yes.

We've been working with customers over the last couple of years on many initiatives and those initiatives are now coming through and contributing to sales increases. That activity is ongoing; it is not slowing down. Typical validation and qualification cycles last 12 to 24 months—12 months for smaller modifications and up to 24 months for new products. Our funnel is strong and will continue to contribute to growth over the next year.

With those new customers, are you seeing more trial relationships where they start with a smaller portion of projects with room to expand, or are they full-scale out of the gate?

We see both. In some cases we enter as a second or third supplier with a smaller share. In other cases, we're brought in for brand-new projects where we handle the majority or all of the volume. It varies across opportunities.

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

Thank you. This concludes our first quarter 2026 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. You may disconnect your lines at this time. Thank you for your participation.