Q4 2019 Earnings Call

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Greetings and welcome to the material year end 2019 earnings conference call.

At this time.

All participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference call. Please press star and zero on your telephone keypad.

Please note this conference is being recorded.

I'll now turn the conference over to Steven Shamrock. Thank you you may begin.

Good morning.

Shamrock Vice President corporate controller in Investor Relations with me today is to go <unk>, President and Chief Executive Officer, Joe Kelley, Vice President and Chief Financial Officer.

Format for todays conference call is as follows.

Do you ever get will provide opening comments on the company's 2019 performance and the outlook as we move forward into 2020.

Following jewel Joe Kelley will review the detailed financial results for the quarter and full year highlights 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 or based on current expectations. The company's actual future performance may materially differ from that contemplated by the forward looking statements as a result, they variety of factors.

Those factors are listed in the earnings press release, we should this morning.

Additionally comments with regard to operating profit net income and earnings per share reflect the adjusted GAAP number showing an attachment number five in this mornings press release.

So for me in both the current year and prior year periods for comparative purposes.

Special items, non cash pension charges and certain income tax adjustments.

Now I'll turn it over to July 1st College.

Thanks, Steve and welcome everyone.

I'm pleased to report another year or a record financial results.

We delivered earnings of $3.19 chair.

It's a 34% year over year improvement and it's the third consecutive year of more than 30% earnings growth.

Our P.S.G.P. she businesses achieved record operating profit margins.

All three of our businesses reported double digit operating profit margins for the second year.

I'm very proud of our global paying for quickly embracing the one of the tree on multiple strategy to deliver transformational financial performance for the past three years.

We finished the year at 11% operating profit margin.

That's a 540 basis point improvement over the last three years.

Our why she came in at 15% eight 900 basis points.

And in 2019, we generated approximately $100 million <unk> operating cash flow.

As you can see from these metrics, we have emerged as an advanced materials company.

Our goal team is fully engaged and remain enthusiastic to deliver long term sustainable profitable growth leveraging our differentiator product portfolio and unique technical capabilities.

I will cover additional financial details for the quarter and the full year.

No I will provide an update on card business conditions.

We had a very successful 2019.

Despite challenging market conditions, which intensified in the fourth quarter and several of the end markets.

Prayed CHRW situational and China continued to be a drag on sales, particularly in the telecom and data center and Mark.

We continue to see the effects of inventory de stocking and sluggish demand and several other end markets.

Including automotive industrial and energy.

These factors are continued to impact order entry heading into the current year.

According to virus outbreak is expected to part of the pressure near term outlook.

This time, it's very difficult to quantify the impact due to the evolving nature of the situation.

Most importantly, none of our global employees are packed with the virus and we're taking every major work to ensure we protect the health and safety or people.

Despite all these macro challenges with anything 2020 with momentum in our aerospace and defense and semiconductor end markets.

Based on the funds should remain a strong performer and 2020, well the application wins and strong end market demand in defense, which is expected to offset softness in aerospace.

In the semiconductor market, we believe that we're starting to see a market recovery after two years of market downturn.

We're also introducing an exciting new products in this market.

Aluminum scanned didn't targets, which are critical to Fiveg Mems devices.

These products provide a competitive performance advantage for our customers.

As I've noted before and it's our intent increased funding R&D to support long term growth.

In 2019, <unk> increased R&D spending by 20%.

And the last three years, we've increased R&D spending 43%.

An important example of this is our engagement with cause whats engineering in Europe, the build and internal combustion engine using material components and perform testing to generate application data, which demonstrates the superior performance of on the trains.

In addition, we've expanded relationships with universities and think tanks specializing in material science to explore additional opportunities.

We'll continue to increase it investments in R&D to drive long term organic growth, which is our top priority.

Lastly, I would like to thank our entire global team worked diligently let the progress for the last three years.

Their passion for solving customer problems and embracing a one of the tree on multi color strategy is inspiring.

I have never been more excited about the companys long term growth potential.

I look forward to providing updates our progress in future calls now I'll turn the call over to Joe to cover financials.

[laughter], Thank Andrew goal and welcome everyone joining us on the call today. During my comments I will cover full year and fourth quarter 2019 financial highlights reveal profitability by segment.

Provide brief comments on the balance sheet cash flow and modeling assumptions and finally cover the earnings outlook for 2020.

Following my remarks, we will open the lines for questions.

Let me first briefly comment on full year 2019 consolidated financial performance.

Full year 2019, adjusted operating profit totaled $82.4 million, an all time record and a 25% year over year increase primarily due to performance improvements across the company related to commercial execution on product sales mix and then.

Fruit manufacturing productivity and cost reductions.

Expressed as a percentage of value added sales adjusted operating profit was a record a 11%.

Value added sales, which excludes the impact of pass through precious metal cost totaled $733.7 million for the full year 2019 relatively flat compared to $739 million in 2018.

Full year 2019, adjusted earnings totaled $3, a 19 cents per share up 34% versus 2018 adjusted earnings of $2.38 per share.

Now moving to the fourth quarter.

Given the macro environment fourth quarter 2019 was challenging from a top line perspective.

Fourth quarter 2019 value added sales were $162.5 million down, 12.5% compared to $185.8 million and the prior year fourth quarter.

We had another excellent quarter in aerospace and defense up 24% year over year, driven by a combination of program wins strong demand and the timing of a large defense order.

The semiconductor end market sales also increased approximately 7% versus the prior year.

As we are cautiously optimistic this end market is starting to turn positive after two years of declines.

These gains however were more than offset by significant weakness in a number of end markets, particularly automotive industrial and telecom and data center.

In addition, we did not record any hydroxide shipments in the fourth quarter of 2019.

Paired to approximately 10 million in the third quarter of 2019, and 5 million in the fourth quarter of 2018.

Gross profit was $55 million or 33.8% of value added sales in the fourth quarter versus an adjusted gross margin of $64.2 million in the prior year.

The drop in gross profit compared to the prior year is due primarily to lower sales volume offset by improved sales mix.

Selling general and administrative expense totaled $31.4 million down 6.3 million or 17% compared to the prior year fourth quarter with reductions in variable expenses and aggressive cost management actions aligned with.

Business volumes.

As a percentage of value added sales SGN, a was 19% in the current quarter compared to 20% in 2018.

R&D expense was $5.2 million up over 50% compared to the prior year as we continued to make R&D investments as part of our one material strategy to drive long term growth.

Operating profit totaled $16.6 million in the fourth quarter of 2019.

Excluding $500000 of special items related to external M&A costs, and a legacy environmental matter adjusted operating profit was $17.1 million or 11% of value added sales compared to adjusted operating profit of 18.1 billion or.

10% or value added sales in the prior year.

We have now delivered six consecutive quarters of double digit operating profit margins. Despite the decrease in sales volume operating profit margins expanded year over year as our profitable growth strategy and performance based culture has driven improved product mix and agree.

Yes, the operational cost and efficiency management.

Looking at income taxes, we recorded income tax expense of $1.7 billion in the fourth quarter of 2019.

Resulting in an effective tax rate of 10%.

Excluding special items related to equity compensation and a state tax law change the effective tax rate for the quarter was 17%, bringing the full year adjusted tax rate to 18.4% inline with our previous guidance.

Adjusted net income for the fourth quarter totaled $14.1 billion or 68 cents per diluted share up 5% from an adjusted 65 cents per share recorded in the fourth quarter of 2018.

This is the 12 consecutive quarter of year over year, adjusted EPS growth and validates the commercial and operational improvements we have been making as part of our one material multi pillar strategy.

Now, let me review 2019 fourth quarter performance by business segment.

Starting first with performance alloys and composites.

Value added sales were $91.3 million compared to 110.1 billion in the prior year.

Aerospace and defense end market sales continued to remain strong for the reasons I mentioned earlier.

However, this strength was more than offset by significant decreases and the telecom and data center and automotive end markets.

<unk> Telecom and data center markets continued to be impacted by the ongoing tariff and trade situation with China, while automotive connector demand remained soft in Europe and Asia.

In addition, there were no beryllium hydroxide shipments in the quarter.

Operating profit in the fourth quarter of 2019 totaled $13.6 million compared to adjusted operating profit of $18 million and the prior year.

The decrease in operating profit was driven by lower sales volume in the quarter offset by meaningful commercial and operational performance improvements.

As a percentage of value added sales fourth quarter operating profit was 15%.

The six consecutive quarter of operating profit margins of 15% or greater.

We remain optimistic about the long term growth potential of this segment based on our highly differentiated product portfolio and the commercial and R&D investments we're making.

We are targeting 15% or better full year 2020 operating profit margins.

Looking at the advanced materials business segment.

Value added sales in the fourth quarter 2019 were $52.8 million consistent with the prior year.

We finally began to experience a year over year increase in the semiconductor end market sales and our cautiously optimistic we have experienced the bottoming out of this market.

These increases were offset by market weakness in industrials as well as reduced sales and the medical end market.

Operating profit totaled $5.3 million compared to adjusted operating profit of $4.9 million in the prior year.

The 8% improvement in operating profit was led by cost reduction actions, partially offset by unfavorable product mix.

As market conditions improve we expect to make progress toward returning this business to historical operating profit margin levels.

Turning now to the precision coatings segment.

Fourth quarter value added sales were $19.2 million compared to 24.2 million in the fourth quarter of 2018.

Due to lower sales of large area coatings products into the medical end market as previously communicated.

Operating profit for the precision coatings segment totaled $1.6 million in the fourth quarter of 2019 compared to $2.4 million in the fourth quarter of 2018.

The year over year decrease in operating profit was due to lower medical sales volumes, partially offset by cost savings generated from third quarter restructuring actions.

If you recall, we mentioned on our third quarter conference call that medical sales volumes for this segment, we are forecasted to Cline related to the sustained increase cost of palladium.

And lower medical reimbursement rates.

In the third quarter, we recorded non cash goodwill and asset impairment charges as well as a restructuring charge to rightsize the cost structure for the lower sales volume.

Looking ahead, we expect continued growth in our optical filter product line of this segment.

Which were partially offset the expected year over year decline in blood glucose test strip sales.

We are targeting double digit profit margins for 2020 for this segment.

Moving now to the balance sheet and cash flow.

We generated cash flows from operations of $99 million, an all time record due to strong operating results and a significant reduction in inventory levels.

As a result, we ended the year in a net cash position of $123 million and have significant available liquidity to support capital allocation priorities, including organic growth opportunities inorganic growth opportunities and consistently returned capital to show.

Shareholders.

For financial modeling purposes in 2020.

Cash outflows for capital spending should run approximately $30 million.

Mine development investments should be approximately $10 million to $12 million.

Annual depreciation and amortization should run approximately $35 million.

The effective tax rate should be 18% to 20%.

And finally now the earnings outlook for 2020.

We had a very successful 2019 delivering record level profits. Despite a significant slowdown in the fourth quarter due to macroeconomic headwinds impacting several key end markets, including automotive telecom and data center and energy.

These headwinds are expected to continue into the first quarter of 2020.

Along with the added uncertainty of the economic impact of the Corona virus outbreak.

At a more company specific level, we remain focused on making commercial and operational investments to drive profitable long term growth.

Based on these factors we are guiding full year 2020 earnings to range from $3 or 15 cents the $3.30 per share.

Using the midpoint of this range it would represent the fourth consecutive year of earnings growth.

From a quarterly guidance perspective, the first quarter will be challenged by the low incoming order rate experienced in late 2019.

The lower fourth quarter production volumes, which pressure manufacturing costs.

And the uncertainty related to the impact of the Corona virus and business levels.

We expect the first quarter of 2020 earnings to be sequentially down approximately 10% to 15% versus the fourth quarter of 2019 adjusted earnings.

Most if not all of these challenges in the first quarter, we view as temporary in nature.

And the remaining quarters of 2020 are forecasted to rebound to profit levels more comparable to those experienced in the first three quarters of 2019.

This concludes our prepared remarks, we will now open the line for questions.

Thank you.

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

If you would like to ask a question. Please press Star then one on your telephone keypad.

I was a confirmation Tom will indicate your line is in the question Q you May press star into if you'd like to remove your question from the Q4 participants using speaker equipment and may be necessary to pick up your headset before pressing any keith.

Once again to join the question could you. Please press Star then one.

Our first question comes from Edward Marshall of Sidoti and company.

Hi, gentlemen, good morning.

Good morning, Ed.

So one of the speak on the beryllium and the no shipments in the quarter I'm wondering if there's anything contractually.

Structured in the contract that you signed a few years ago with the customer the may have caused that or whether it was timing or.

Or maybe just destocking in the market if you could elaborate a little bit please.

Yes.

The contract that we signed with our customer is more on an annual basis in terms of what the what the sales would be on an annual basis, we typically model, but it would go across the four quarters, but there is no requirement quarter to quarter. So there is timing and it just depends on what the need to may be at their level and and what our production.

Rate can be and so the combination of the two is what we end up using to deliver so there is no contractual issue there.

Theres no specific guidance, especially shoe, it's just a matter of how things worked out.

As we as we as we manage 2019 got it. So they just took their minimums earlier in the year than they normally would yes that's in effect.

What happened got it.

When I look at the.

As you know the third quarter was very strong in that area of course court in fact, the whole year has been pretty strong it looked like they from both as it to the first three quarters.

When I look at a Ahmed.

I can see the improvement on on on on the revenue I'm curious if you could kind of talk about.

The gross margin that continue continues to decline a little bit I'm wondering if that is competitive forces whether that's.

Pricing.

Giving up on pricing or or just kind of operational issues as you kind of come off the bulk of the lower base.

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So on am we've made significant progress in fact, I would say on the operational front as you know we went to a a cost reduction efforts in our European facility. We made good progress on that and we got that in place.

So the operational side I think continues to perform well on the IBM side.

We continue to face, though is a little bit of a mix issue.

Good.

With the semiconductor business along with some of the other the other areas are largely targets business, which is which is one of the components of that business actually had a very strong year that business.

It doesn't generate the same level of returns that maybe some of the other businesses in that and that in that segment do and so I think the mix was was was it big contributing factor on the and but I would say on the operational front thing that continue to improve and our expectation is that that business well, we'll get back.

Historical margins as the market recovery, particularly in semiconductor continues to happen.

We.

We have we have a lot of ramp actually of the some new products that were that were in the process of by doing so some of those sometimes as you know during the ramp up there is some ramp up costs that happen.

So aluminum skandia is one of the areas that that we talked about in fact in the in the prepared remarks earlier as well.

So I expect that business.

Over time to get back to historical margins.

And just to be clear does the R&D run through the specific.

Segment level or does it run through through and I know this wouldn't affect gross margin, but there is a run through the segment level or does it runs for the corporate level.

It ran through each of the segment levels Okay.

So if I step back for a second talk about the gross margin that business.

Are you alluded to the fact that most of the operational changes have already been in place heavy lifting spin been done and as we see the mix shift back to semi we should ultimately see the gross margin rebound and that brings you back to historic levels. So yes. It was I would I understood. Yes units as you know semi had a really a two year significant downturn and.

We started to see just very very small signs of pick up here in the fourth quarter. Our expectation is that maybe the the pickup flow will now start to get little bit bigger and bigger every quarter.

One of the things that of course everybody's facing right now in the full grown a virus thing. So we'll have to see what if there is if there is this delay okay in the pickup.

That was starting to that was starting to come through the other thing that I think as an important factor for US is the new product introductions that are at a much better profitability level, then that some of the outgrowing our products as well. So I think combination of the semiconductor pick up the macro environment with the virus.

Subsiding and then the new product introductions are launching those those are all contributing factors to improving the margins.

Got it.

As far as the health concerns are concerned are related.

Hey, I'm as your biggest exposure I guess to.

Maybe even from sourcing perspective, and a shipment perspective.

Well I mean, yes.

From a from a direct China held the perspective, you know we do have we do have a manufacturing plants at an business, we actually have manufacturing plant for our precision coatings business as well we've been monitoring that almost daily from here. We've got a few leaders in China and in Asia that are monitoring it and and as of right. Now we are we can say the we accrue.

I mean.

And we're doing everything we can to support our employee base there in terms of the customer impact.

For the business impact supply chain impact I think it actually goes across all three of our businesses because I am certainly from the electronics in the semiconductor side, but a lot of RP business, particularly strip products. They end up in in the China market.

And then and then we of course that a plan for precision coatings business in our in our displays a business. So actually all three of our businesses would have direct and indirect impact for the for the virus situation.

Okay.

Final one for me the coating products for Fiveg that you mentioned the new products.

Is that.

In house developed under the traditional.

Materion or is that from the acquired harass business. Thanks, No that is that is in house from that's primarily led by our Milwaukee business that and and produced in one of our facilities here in North America and so it's the it's part of the R&D effort that we really have to to drive.

To drive growth.

Organic growth and so it is something that in the that let's call. It the legacy material business great. Thank you very much for all your time, okay. Thanks.

Our next question comes from Martin Englert of Jefferies.

Hi, good morning, everyone.

Good morning, Martin Martin.

So some of that you touched on in your prepared remarks, but I wanted to circle back on it when thinking about your guidance can you discuss some of the end markets here and maybe provide a little bit more granular detail on what end markets you expect to see growth year on year end 2020, and value added sales and Conversely, those that you've factored in kind of flat and or negative.

Yeah, so from an end market perspective.

As we ended the year and and then also into the new year, we see as I indicated a little bit of a light at the end of the tunnel so to speak on semiconductor after two years of tough tough going there. So semiconductor is a market that we see I think on on more the positive side I think defense is going to be a strong continued to be a strong market.

For us.

We may have some challenges in terms of year over year comps, because we had a very strong 2019, particularly with a couple of very large orders out towards the end of the year. So year over year comps, maybe challenge, but in general and still be we expected to be strong.

Market.

But then the other markets, albeit the automotive telecom datacenter energy.

Medical.

You name it I mean, I think those markets, we would we would expect neutral to negative.

It is what our expectation is for fourth quarter this year.

We're just not we're just not seeing the uptake you take automotive for example reports out last night that.

China was down 18% in January.

But taishan you know from the European Auto manufacturers Association, the Europe, maybe down 2% this year.

Et cetera. So they were just not we're just not seeing the signed yet in some of these other areas oil and gas rig count continues to go down as of just the here a few days ago thing was below 800, which is levels that had not been seen since three years ago March of 17.

So some of those markets I think we would see as neutral to negative with semiconductor being on the perhaps on the plus side with and defense I would say being a little bit on the plus side as well.

And then related to semiconductor is of course, consumer electronics, which which we would perhaps see as a small uptick as well.

Okay and that kind of taking all those together.

Does it are you anticipating value added sales will be down year on year as a result to some of these segment more challenged on markets. When you kind of some everything up.

Yeah as you know Martin we don't comment on value added sales and we provide guidance at the earnings level, but I think based on the earnings level that we have provided the performance improvement that we'll continue to drive.

The that some of the market challenges that we just mentioned the new product introductions that we have I would expect us to be able to still deliver some level of modest growth.

But it is going to be a very challenging year.

Okay got it understood and looking at.

Value added sales within aerospace and defense can you provide a little bit more detail on what the mix is associated with commercial aero.

Yeah as you know commercial Aero is something that has been a challenging market for us for 19, and we expect those challenges to continue because one of our largest customers is is a large customer that is facing some difficulties right now.

Whereas the defense side is it's fairly fairly robust interrupted the size of the defense versus the aerospace component, but almost say almost kind of look at two to one ratio maybe defenses defense is more like a two thirds and.

And the aerospace is about a third I think of.

Of the split but that we continue to see challenges on the aerospace I'm side.

And then as I said on defense that we expect to have some tough year over year comps, but still a bit market.

Okay, and if I could one last one here and you touched on this before and noted that factoring in risk around the viruses pretty difficult to quantify but is there some aspect of your quarter on quarter earnings are full year that you're baking in some type of earnings headwinds associated with the grown virus.

Yeah. So I think on that first quarter with this 10% to 15% sequential guide down that we have indicated we're factoring in some level of I'll say direct and indirect impact.

But on a full year basis, I mean, our expectation at this time is that the recovery will happen.

And then this impact is this a short term impact recovery will happen and they will get recovered whatever losses. The that the market would would does show us and the beginning of the Euro would get we'll get it recovered. So obviously if those assumptions don't come true then we'll we'll have that we look at the guidance, but but at this stage our expectation ended.

What we have communicated as we have we're trying to factor in for Q1, but for the full year.

We're expecting for recovery.

Okay I appreciate all the detail and congratulations on another solid year of earnings growth.

Okay. Thanks Mark.

Our next question comes from Marco Rodriguez of Stonegate capital. Please go.

Hi, Good morning, guys. Thank you for taking my question.

One of markup.

I wanted to follow up again or on the advanced materials section just the semiconductor area. Obviously, you talked about the mix issues that sort of impacted the margins and how your thought is that.

Once that mix sort of switches then it'll be a lot easier for you guys to obtain that historical operating margin perspective, but wondering if maybe you can talk a little bit more about that mix aspect.

Is this something that is controlled by you in terms of sales initiative.

Is it a particular product line that at the moment is depressed because of.

A lot with semiconductor market inside an expectation is that comes back or is it new product is supposed to overtake the mix issue.

Yes, so I think as we look at on a go forward basis I'd say the combination right. One we are doing a lot on new product introductions, and pushing our salesforce and our and our development teams to work with our work with our customers and introduce new products and new technologies I mentioned this aluminum scan them as as a an example.

We'll have something that.

But we are right we are really pushing.

Going and knocking on doors and and trying to make sure that we get a strong foothold as that technology takes off so it definitely is I think things that we can do from that front and then and then the second part of course is just the market recovery, we need the market. After two years of continue downturn to to have a meaningful recovery I mentioned that we're starting to see.

Some signs of it but those signs were right towards the end of last year.

And I would say very very small signs.

And then now with this virus impact you know I decided that may there may be another gap and we'll have to wait and see so I think it's a combination where we can control.

With new product growth, the new product introductions and that we are doing.

And market recovery, but I would say a meaningful market recovery versus just the initial signs that we started to see.

Understood and is there an expectation in terms of your guidance.

At least for that segment penis materials that.

Towards the tail end of fiscal 20 that you you start to hit those mid teen type operating margins or does something maybe is a 2021 event.

Yeah I think.

Clearly we have we have.

We have internal expectations, but I think I think in just in terms of our general expectation for that business. I mean are our objective is to continue to make progress every quarter in that business and and at some point, whether it's in 20, or perhaps and 21 be able to get to those get to those historical livestrong margin. So we don't have a spin.

Perfect timeline, the we're ready to communicate at this stage, but we just want to make sure. We can demonstrate progress every quarter.

I'll just add if you look I know a full year basis, we did expand the operating profit margin of that business that segment.

19 full year 19 over 18, so we're starting to make some progress.

Absolutely absolutely. Okay, then switching gears here on to the the difficult aspect of looking at the current a virus and its impact you mentioned you have a couple of plants in China.

Are they open are they running right now are they still shutdown.

Yes, So we took an extra week.

Where we had shut those plants down similar to many other facility in many of the company that.

So we restarted on February 10.

However, I will tell you that we do not have a full workforce at this stage theres a number of people that we have made sure.

We are following through with some sort of home quarantined.

Because we want to be extra cautious for them as well as there are co workers. So right now we are open with those two plants on a limited basis and would expect that over the next couple of weeks there would be back to back to full production, but it also depends of course on orders and order entry that we get but we will be prepared to do.

A full production in a couple of more weeks.

Got it and maybe you could share had any sort of.

Conversations with.

End market customers, just any sort of sense in terms of what they're thinking about in terms of supply chain impact because obviously, there's going to be some some push out.

Some people are starting to come back some people aren't.

I don't think it necessarily youre going to lose orders, but it's just it's definitely question to the right.

Yeah, So you're right now as you know.

We we are typically a tier two tier three in many cases, so we don't feel the impact.

Right away, but we started to see some some effects of it in terms of just like you said general general wording in some some general.

Commentary, so we are starting to hear from our customers.

That they are very concerned of course.

In terms of actual orders and orders declining.

We have not receive those order declines I would say as of today, but our expectation is that I think we will we will we will see impact here in the in the very youve near future.

Got it and then last quick question if I might.

Expectations for the hydroxide shipments in the in fiscal 20.

Bill a kind of flatline across all four quarters or any sort of indication from.

Customer in terms of how you might ordered this year.

Yeah. It's as you know, we expect that to be basically flat on a year over year basis, I mean typical $15 million to $20 million you know the we the we estimate the for modeling purposes, we estimate that to be a basically every quarter all four quarters.

However, we know that there could be some timing issues here and there based on what the with the customer decides to do but at this stage we've modeled it for our purposes as if it's 12 year.

Got it thanks, a lot guys appreciate your time.

Thank you.

Our next question comes from Michael last shock of Keybanc capital markets. Please go ahead.

Hey, guys good morning.

Good morning.

You talked a little bit about the new products ramping in 2020.

Could you talk about how you see the cadence of these ramp ups throughout the year.

Yes, so when we look at for example, this this aluminum scan them that I spoke about.

Thats something that we started to launch I would say towards the end of last year, but in a very low volume. We expect that we expect that to continue to ramp throughout the throughout the year.

We think we think that that'll.

Continued to ramp this year as well as out into next year next year as well. So I think we I think we see that I think we see that as I said throughout the year when we look at our engineered strip product.

We have we have a project that we're working on with the one of our customers and we would expect that project to launch in the second half of the year. So.

That would be that will be a nice nice pickup for us in the second half the year provided that we can make sure the customer on US we continue with the with the timing.

We have a number of other products that were the were that we're working on but but I would say they're kind of sprinkled.

Sprinkled.

During the year, so theres not a I'm not able to give you any specific.

You know uptake that that would happen in one quarter versus another sharp uptick that would happen in one quarter versus another.

Got it.

Then on the 737, Max just what impact have you seen thus far in is there anything you're you're able to do to kind of mitigate that impact going forward.

So we have seen impact I mean, we don't talk about specific customer or a specific product impact, but but we definitely have we definitely have seen an impact would that but then in general with that customer because it's it's not just it's not just a.

Not just at that particular, a plane the impact I mean, if you look at our Errol business was down 4 million I think in the in the in the quarter, so year over year down down $4 million.

Yes defense business on the other hand was up so what we're really doing is trying to manage that overall aerospace and defense as a market.

By pushing really on the on the defense side while.

This and this temporary setback on the Aero site.

And just wondering on your your M&A strategy could you talk a little bit about how how you view the current environment and is this a consideration in your guidance.

Yeah, I mean, we we are absolutely focused on the M&A front I mean, we know we made significant we made significant progress as you know on the organic side driving performance improvements over the last few years.

And and and were written very very focused on driving topline growth on the organic side, making investments as we indicated on R&D side, 43% increase over the last three years, 20% increase year over year last year. So we continue to push on the organic growth and in our guidance.

And our and the numbers that we communicate to you are clearly based on a more of an organic upfront.

But we are very heavily focused on M&A side.

And and provided that we find the right the opportunity we would would make the necessary move and.

This year.

Okay. Then then lastly from me just a modeling question how should I think about projected pension expense and contribution in 2020 versus 2019.

So as you recall we did.

Freeze our pension plan are defined benefit pension plan switched all employees to one consistent defined contribution plan and so.

Down in other.

Net expense below LP above EBIT.

Just as you by the two to 3 million dollar benefit.

Got it thanks, guys and cash contribution this year will be zero.

Whereas historically as you recall, we've averaged around 15 16 million.

Our next question is a follow up from Edward Marshall of Sidoti and company.

The the P.A.C. Delta on on.

I guess sequentially looking at beryllium hydroxide, just wanted to come back to that for a second it looks like the delta there might be.

And maybe $11 million in revenue or value added revenue.

Yes about 10 million. Okay does the is the delta on the EBIT line for that business all attributable to the.

Beryllium hydroxide, yes, optically it looks like it's pretty close yes, we don't obviously disclose the profitability of individual product lines with individual customers. So.

You can't comment on that I think there's a lot as you know at Theres, a lot of pluses and minuses that happened in the business right I mean, clearly that customer volume down as one but theres various outperformance changes.

As I mentioned earlier in our defense business was up Aero business was down and there's a lot of mix that happens so.

If the number.

Seems to you if it's maybe inline with that type of a number I think it's just a matter a coincidence because because theres a lot of pluses and minuses that happened to to get to the overall profit number.

Recall that energies are pretty good mix item for you in that business as well at that you are correct Youre correct, yes, okay. Thanks very much.

Thanks, Ed.

This concludes the question and answer session.

I will now turn the call over to Mr. Shamrock for closing remarks.

Thank you. This is Steve Shamrock in this concludes our fourth quarter 2019 earnings call recorded playback of this call will be available on the company's website Materion dotcom, we'd 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 206 three athree.

401 zero, thank you very much.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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