Q1 2020 Earnings Call

Greetings and welcome to the maturity on first quarter 2020 earnings Conference call. At this time all participants are they listen only mode. The first question on the other session off all the oral presentation.

Oh sure acquire operators at the start of the conference. Please press Star zero telephone keypad.

As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr., Steve Shamrock Vice President corporate controller and Investor Relations. Thank you Sir you may begin.

Morning.

Steve Shamrock Vice President corporate controller in Investor Relations with me today is do you will be <unk>, President and Chief Executive Officer, and Joe Kelley, Vice President Finance, the Chief Financial Officer.

Format for todays conference call is as follows.

You will be Jackie I will provide opening comments on Kobin 19, and an update on key strategic initiatives.

Following jewel Joe Kelley will review detailed financial results for the quarter and then we will open up the call for questions.

Before we begin let me remind investors that any forward looking statements made in this announcement, including those in the outlook section and during the question and answer portion are based on current expectations. The companys actual future performance may materially differ from that contemplated by the forward looking statements as a result that they variety of factors. Those factors are listed in the earnings press release.

You should this morning.

Additionally comments with regard to earnings before interest and taxes net income and earnings per share reflects the adjusted GAAP numbers shown that attachment number five in this mornings press release.

Yes, that's are made in the prior year period for comparative purposes, and for those special items non cash charges and certain income tax adjustments.

Now I'll turn it over to juggle for his comments.

Thanks, Steve and welcome everyone I.

I hope all of you and your loved ones for sake of your progress to the unprecedented times.

Today I will first shared the impacts of 19 to our company.

An update you on some key strategic initiatives.

Health and safety or people has been and remains our overriding priority.

Over the last three years, we have reduced recordable injuries like 77%.

Keen focus on prevention.

16 of our global facilities have had zero injuries in the past year.

That's cool the 19 started to emerge we employed the same level of focus to protect our people.

We have listened to all available resources and have an accent changes globally.

Three people have been come from positive and our global maturing on family.

And they're doing well at this time.

We have majority or office employees working from home.

All of our factories are operating in support of the essential products and services, we provide to critical industries, such as healthcare telecommunications defense and energy.

In particular, we're proud to support the flight I guess this virus.

Hi, supplying products for health care equipment used by medical staff around the world.

For example.

Our precision coatings business supplying optical filters, which are used in medical systems to test for coal with 19, as well as critical skill to gas detection and kept novelty and ventilator applications.

Our PC business supplying copper beryllium script products, which are used for ventilators.

We have seen increased demand for these products and are determined to maintain supply to help the fight against covert 19.

Well, we see increased demand in these products.

Experiencing significantly lower demand and automotive.

Oil and gas aerospace and industrial end markets.

Semiconductor and defense end market demand, it's continued to hold at this time.

In total, we expect second quarter demand to be comparable or slightly better than first quarter demand.

Despite the challenges presented like over 19.

Our teams have been focused on moving the company forward.

Let me share what do you some exciting progress towards our one maturing on multi pillar profitable growth strategy.

As you know investing for organic growth has been our top priority.

We have ramped up R&D spending and made significant commercial investments to align with future growth opportunities.

And our last earnings call I highlighted the growth and aluminum skandia, bringing targets.

Today I'm excited to share another major both opportunity.

This time engineered clad strip product line.

We have unmatched capability, the custom design glad material solutions and solve the most pressing challenges our customer space and thermal management.

Screen vibration and high voltage.

Our engineered clad shred it Houston electronic applications, which serves the variety of end markets, including consumer electronics automotive.

Energy and industrial.

I'm very pleased to report.

We have entered into a business arrangement with a new customer to expand our manufacturing capacity for a highly engineered cloud script.

This material will be used in a next generation model I'm going to existing product.

Therefore, the overall end market demand exists today.

We expect to fulfill this market demand and support increased demand.

The customers and product continues to gain acceptance globally.

The customer has also provider a $12 million pre payment towards establishing a new leading edge manufacturing facility for future product supply.

We anticipate finalizing the long term supply agreement with exciting new opportunity later this year.

At the same tie that we're driving profitable growth and I'll go forward portfolio.

We're also taking the tough decisions exit nonstrategic businesses.

Today, I'm announcing our intent to sell the large area coatings business.

This action will allow our teams to focus their efforts on growing the remaining precision coatings business.

Well, we have exciting opportunities without a differentiator optical coatings expertise.

We anticipate the sale and closing to occur later this year.

In parallel to driving significant organic growth.

And aligning the portfolio, we're continuing to improve our cost structure.

Today, I'm announcing the closure of two facilities.

And consolidating the work and one of our existing facilities.

This will be a significant structural cost reduction the P.C. business.

Well, we are the only when we vertically integrate or beryllium producer in the world.

We are closing a service center in Detroit, Michigan.

And we'll be closing it manufacturing facility in Fremont, California later this year.

We expect this action to improve our cost structure, my $4 million to $5 million annually.

I would like to thank our global team.

Who has risen to the challenges posed by this global endemic.

With their dedication we're supplying key components used for critical medical equipment in the fight against Cobot 19.

In addition, our teams are more broadly focused on continuing to transform attorney on into an advanced materials business.

Now I'll turn the call over to Joe covered the financials.

Thank you do go and welcome to everyone joining us on the call today.

In my comments I will cover first quarter 2020 financial highlights review profitability by segment.

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

[noise] following my remarks, we will open the line for questions.

Let me start with a summary of our first quarter financials. We delivered adjusted earnings of 43 cents per share on $158.7 billion value added sales.

We continued our strong cash generation with $9.1 million of cash flow from operations.

We ended the quarter with $107.6 million in cash a record for any first quarter.

[noise] going into more financial detail.

First quarter 2020 value added sales, which exclude the impact of pass through precious metal costs were $158.7 million down, 2% compared to the fourth quarter and down 15% versus the $187.7 billion in the first.

Quarter of 2019.

The recovery in the semiconductor end market continued into the first quarter as value added sales in our largest end market increased 10% sequentially and 4% versus the prior year.

The second consecutive quarter of year over year gross.

Aerospace and defense end markets fails, we're heavily impacted due to timing of defense orders and the continued weakness in the aerospace market.

In addition, the cobot 19 pandemic impacted demand.

From a number of end markets, including energy automotive industrial and telecom and data center.

Gross profit was $45.6 million into first quarter compared to $69.3 million in the prior year first quarter.

Excluding a non cash 1.3 million dollar write down for oil and gas specific inventory in our P.A.C. business.

And other nonrecurring items related to the cobot 19 situation adjusted gross profit was $47.1 billion or 30% of value added sales.

The decrease in gross profit and margin was driven by lower sales volumes and resulting manufacturing inefficiencies.

Selling general and administrative expense totaled $30.7 million.

Decrease of 9.4 million versus the prior year of $40.1 billion.

Due to a combination of aggressively managing cost in response to the current business conditions.

And lower variable compensation expense.

As a percentage of value added sales SGN, a expense was 19% in the quarter down 200 basis points from 21% in the prior year period.

Research and development expense of $4.2 million increased 12% versus 2019.

As we continued to make investments to drive long term profitable growth through development of new products and new applications.

During the quarter, we recorded restructuring expense of $2.2 million related to the plant closure of our Detroit in Fremont facilities.

Merely for employee severance and other facility closure obligations.

Based on the plant sale of the LTAC business as you go mentioned, we classified the L.A.C. business as held for sale.

As a result, we recorded non cash impairment charges of $10.8 million to write off the remaining L.A.C. goodwill balance of $9.1 million and adjust the remaining net assets to fair value.

As a change from past practice, we are moving to utilize earnings before interest and tax EBIT.

To measure of profitability to maintain compare ability given the changes in the company pension plan moving from 2019 2020.

We reported a 3.6 million dollar loss before interest and taxes in the first quarter of 2020.

Compared to the prior year first quarter EBIT of $21.1 million.

Excluding special items related to noncash asset impairments restructuring charges for facility closures and other nonrecurring items, adjusted EBIT was $10.9 million or 7% of value added sales.

Looking at income taxes, we recorded an income tax benefit of $800000 in the first quarter of 2020.

Excluding the tax impact of special items adjusted tax expense was $1.9 billion or an effective tax rate of 18%.

Inline with our previous guidance.

Our net loss for the first quarter of 2020 totaled $3.1 million.

On an adjusted basis, we reported net income of $8.8 million or 43 cents per diluted share.

Compared to $16.9 million or 82 cents per share in the prior year.

The $8.1 million year over year decrease in earnings resulted from a 29 million dollar decrease in value added sales offset by aggressive cost management.

Decremental margins were 28%.

On a 15% decrease in value added sales.

Now, let me review 2021st quarter performance by business segment.

Looking now at a performance alloys and composites business.

Value added sales were $83.7 million compared to 100, a $9.6 million in 2019.

The decrease in sales.

Can be primarily attributed to lower demand across all markets as a result of cobot 19.

Continued tariff impacts and the timing of defense sales.

EBIT, excluding special items was $8.2 million or 10% of value added sales compared to EBIT of $18.8 million in 2019.

The decrease in profit and margin compared to 2019 is due to lower sales and reduce manufacturing efficiency related to the lower production volumes.

Despite the current challenging environment.

Okay see managed to deliver the eighth consecutive quarter of double digit profit margins far north of historical profit levels at comparable sales volumes.

Moving to advanced materials.

Value added sales in the first quarter 2020 were 59.2 million up 3% versus the prior year amount of 57.5 million.

Semiconductor end market sales increased 12% sequentially and 8% compared to the first quarter of 2019.

As commercial performance initiatives specific to new products combined with increased end market demand drove the growth.

EBIT, excluding special items was $4.9 million in the quarter compared to 7.1 million in 2019.

Manufacturing inefficiencies on new product launches combined with unfavorable product mix led to the profit decrease.

The demand for the new products is strong and we are focused on improving manufacturing efficiency related to these existing new launches.

Turning finally now to the precision coating segment.

First quarter value added sales were $17 million down 24% compared to the $22.5 million in the first quarter of 2019.

Primarily due to lower sales of the larger your coatings product for the blood glucose test strip market.

Excluding the L.A.C. business first quarter 2020 value added sales.

Were $14.3 million down 3% year over year led by Cobot 19 issues.

EBIT, excluding special items was $1.2 million compared to $2.1 million in the first quarter of 2019.

The decline in profits was entirely driven by the year over year decrease in sales within the L.A.C. business.

Which now is classified as held for sale.

Moving to the balance sheet and cash flow.

The company ended the first quarter of 2020, with a net cash position of $105.5 million and $345.8 million available on the company's credit facility.

This compares to a net cash position of $39 million at the ended the first quarter of 2019.

We spent $14.8 million on capital investments in the quarter.

The increase versus 2019 is related to the customer funded engineered strip growth opportunity, which jubal covered.

Additionally, $6.8 million was spent on the repurchase of 158000 shares of common stock.

For a financial modeling purposes in 2020 capital spending should run approximately $30 million that of customer pre payments related to the new engineered strip project.

Mine development investments should be approximately $10 million.

Annual depreciation and amortization should run approximately $40 million.

I assume an 18% to 20% effective tax rate excluding special items.

And finally now the earnings outlook for 2020.

The impact of the cobot pandemic is fluid and continues to evolve and therefore, we cannot predict the extent to which our business results of operations financial condition or cash flows will ultimately be impacted for these reasons. We are withdrawing our previously announced.

Full year earnings guidance of $3 or 15 cents to $3.30 per share.

Related to our near term outlook, we are cautiously optimistic about second quarter results based on current order entry levels certain end markets are expected to be more adversely impacted by the current economic environment, such as energy automotive aerospace and industrial well.

Other end markets are seeing steady or improving demand like semiconductor medical and defense.

Assuming our factories remain operational and the rapidly changing fight against Cobot 19.

We expect second quarter results to be comparable or slightly better than first quarter.

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

Thank you will not be conducting a question and answer session.

I'd like to ask a question. Please press star one on your telephone keypad confirmation telling more indicate your line is in the question Q. You May proceed starts to if you'd like to your questions in the queue for participants using speaker, but then maybe necessary to pick up your hands that before passing the Sarkies one moment. Please wake welfare question.

[noise]. Our first question comes from the line of Edward Marshall with Sidoti and company. Please proceed with your question.

Hi, Jubal, Joe Steve Good morning, I Hope I got on your family I Hope everyone on your families are doing well.

Yes in this period.

Can you can you talk about the new customer you give a lot of detailed I'm curious could you give what market this new customers and.

Yeah.

Let me let me start on that so first of all I Hope you and your family are safe in this very difficult situation that we're all facing.

Yeah. This is an exciting opportunity for us as you know over the last couple of years, we've been talking about investing more in R&D.

Really our top priority being organic growth.

And I think this as a result of of great work done by our team over the last year plus.

Yeah. This is up there is the perfect match up where we have some great capability and we've been able to leverage that capability into a it really a market that you know we've not play too much in the past. So we can't specifically talk to you about what market.

This is but what I can tell you is that it is a market that I think it's an exciting market it'll be a hopefully long term activity for us its not intended to be a cyclical or a or a seasonal type of a an activity, but it is something that you know we're very excited about.

And one that I think it will be will be an important part of our company going forward and ER and then and it's a great example, I think the work that our team is doing.

Would the R&D collaboration that we've been trying to drive out within the company.

Do service market already.

Well, we serve the broader market you know that this happens to fall and already yes. So yes, we sort of the broader market, but I you know each each market has various curious sub segments and and I would say you know a sub segment that this happens to fall and it's something that is new for us and so it's quite.

An exciting.

Got it so I'm moving onto the a textbook business. That's a if I remember correctly, it's about a 30 million dollar revenue line and was that included.

Annually by the way Angela was not included in Twoq and the one key results and will it be to Q and and to divest that business or sell that business or have you divested that.

Just curious discontinued sales.

Ed Yes.

Joe I want you take that.

Yes. So you are correct that this was a historically approximately 30 million dollar business you recall some of the changes that took place last year at the back half a 19 and so it is included in our Q1 results and we'll be in our Q2 results, but the business today is relatively immaterial a indices.

Since that the value added sales were less than $3 million in Q1, and the profit was not.

That does not have a material impact on materials Q1 profits. So from a divestiture standpoint going forward it won't be a change to our current baseline.

Got it got it.

[noise] the or the cost savings that you put in place do you have to timing of that 45 million when it rolls through.

Yeah, Let me first just talk about I think the cost savings in general as you know Ed I mean, we've been driving operational improvement that's been back one of our pillars of our strategic profitable growth objectives. We've had for the company and we've been driving operational improvements across the company, but in particular and our PC business, just because of I think where that business was.

You know few years back in the you've seen the growth.

But that business it delivered and profitability and so this is just a continuation of of the operational improvements that we're driving a that we're driving in the company. So I think that's it we've been talking about it actually for the last several months and then you know really were able to a pull that off as I indicated you know the first part of the the close.

<unk> is a is now it basically finishing up it's our Detroit to service Center. The second part will actually be later later this year, which is the Fremont, California sites and so we would expect that both of those will be completely completely done by the end of the year and therefore I think the full run rate of the savings should be should be in effect after that.

Got it next year okay.

And then you Didnt mention hydro beryllium hydroxide sales was there beryllium hydroxide sales or was that puts further like it was in Q4.

There were a brilliant.

Okay.

We continue to have I think a a relationship with our customer and and therefore, we did have sales in Q1, and I think our progress with them. This year, we should we would expected to be the same as kind of what we've communicated to you before.

A final one for me the guidance that you provided I.

Just so I'm clear you talked about relatively flattish quarter to quarter potentially slightly up where are you referring to revenue.

<unk>, rather value added revenue and EPS or were you referring to just one specific item just curious.

Obviously, you know S is related to the value added sales have been directly related to value added sales and so I would say in general I think our business.

We believe will be comparable or slightly better than Q1, and so I think it probably encompasses.

Both elements.

Perfect. Thanks, very much guys I appreciate the all your comments B C b well.

Thanks, Eric said.

Thank you. Our next question comes from the line of Marco Rodriguez with Stonegate. Please proceed with your question.

[noise] Mr. Rodriguez Your line is no.

Oh, sorry about that guys. Thanks for taking my questions I I've heard I was on mute there.

You hear me.

Yeah.

Okay, Great wanted to.

Talk a little bit more here about.

The.

The manufacturing efficiencies that you guys kind of called out I'm on the call earlier, you specifically mentioned the P. S. E business. There were some manufacturing inefficiencies, which I'm assuming was mostly on a volume basis, but that only advanced materials. You did have higher volumes, but I believe you spoke about new product launches as well.

DNA.

Manufacturing inefficiency there maybe you can talk a little bit more about those two specific areas and and if you can on them bass materials side at least help I was kind of think about the quantification of the that drag that you saw from the new product launches.

Yeah, Let me, let me start with a I think some general comments, Michael and then and Joel can certainly jump in and talk a lot more specifics, but you know when we talk about manufacturing inefficiencies that the company level I think really we're talking about we're talking about three major categories. Yeah won a I would say you know the manufacturing efficiencies that I think Brooks.

Dancing as a result of the called at 19 pandemic is you know we've all had to implement that social distancing ISO and other elements you know to make sure that our employees that are operating in each of our facility to safe because that is our utmost priority and so when I think about what we've had to do we've had to do a shift structure changes we've had been pulled.

Like many other things you know cleaning and other things. So that has resulted in general manufacturing efficiencies in our in our plant. The second part of manufacturing inefficiencies or just generally lower volume I mean, there are certain markets that are.

The end market demand is a is much lower.

And that lower volume resulted in no manufacturing inefficiencies and then the third element as the new product launches, which are which are in the am business, which Ah you know what's exciting to us on the m. businesses that number one we've been talking about semiconductor market for the last couple of years.

And we're starting to see you know we mentioned it in a prior calls as well that when they were starting to see some light at the end of the tunnel without market starting to recover so not only are we seeing a little bit up market recovery, but but I think more importantly, we're really starting to see some of the some of the investments and the R&D that we put in place that is resulting those new products, so that new price.

Trucks, and new activity that we're putting to our plants, it's certainly, causing some manufacturing inefficiencies, which clearly is under our control I can assure you that we're absolutely focused on it because step one is to make sure. We can actually get sales, which you know our team has done a fantastic job getting these new products launched and getting sales with a customer and step two is.

Make sure that we can actually you know producing an efficient banner and get to get the rights to costs and I think that's a you know that's what we're fully fully focused on.

As we as we go through the the that the new launches so I'd, probably put guilt free high level sort of categories. I think of this manufacturing inefficiencies that we encountered here in a in Q1.

Right understood and then in regard to that just.

The plants that you have opened that are delivering product to the essential businesses. Maybe you can kinda talk little bit about what utilization levels kind of look like right now given the fact that you do have to implement a lot of different procedural changes for the social this thinking and then maybe if you can.

Then talk about what your expectation of those facilities might look like if and when you know things start to open up a little bit more I mean, what is that going to kind of look like from a capacity utilization standpoint going for the rest of this fiscal year.

Yeah.

Well I mean, clearly you know utilization is something that has been impacted one decide you know just based on some of the some of the policy that we've had to put in place to protect our people and to just the general lower volume. So I don't I'm a specific number that we typically share in that area. So we don't actually talk about a utilization percentage of our.

Plants, but I can't tell you that it certainly is a is that more and more challenging you know the the plants that we have oh by the way I just want to mention it is really all of our plants. So it's not that some of our plants are open all of our plants are open and a and we continue to ship you know all the demand that's a that's coming in.

To them I mean, so we're on track with this through this quarter would be in support of our customers and then and then when this when this does a you know when this does come back I mean, we we intend to continue the practices that are required to ensure our people are safe, but I think we'll continue to get smarter as well I mean and.

Learn you know more about how to make sure we're driving the proper utilization across all of our plant. So you know I would expect that our utilization will continue to improve actually you know as we as we continue to get more volume through the plant I mean, the key is the key is the market demand a you know coming back coming back stronger I I think that's.

I think thats whats important.

Got it and.

Next I was wondering if maybe you can talk a little bit about what's sort of scenario analysis. You guide crab have conducted entirely not necessary looking here for a specific guidance, but just trying to get a sense as far as how you guys are expecting be environment to sort of play out through the next to this next fiscal year and.

And obviously I understand this is a very difficult question and no one's crystal ball is any better than anyone else, but just just trying to get a sense as far as what you guys are spec expecting promote from a base case standpoint.

Yeah.

Well first of all we have done you know various scenario analysis as you can imagine I'm sure every company is going through in looking at that you know to ensure that that that things can continue I think I want to highlight a few things number one I think our liquidity I mean, we have adequate liquidity you know for our company as you have seen I think the cash generation that we've delivered.

Over the last couple of years than what we've been trying to do.

Ah to continue to drive operational improvements and the company a we feel very blessed that data, we have adequate liquidity to deal with whatever difficult times that the that may be coming forward, but I can also tell you is more near term right I mean as as as we've indicated on the near term basis, you know we've Uh huh.

We see or comparable to slightly improving results in the second quarter. So I think you know on a near term with an order entry that we haven't kind of understanding of what the markets are selling us I think we Ah. We can talk about that look on a longer term basis. I mean, I you know I think anybody's guess is in there.

From the what longer term will bring but what I can tell you is that we are focused you know we are focused on making sure that our business is up properly positioned coming out of this thing both from a financial perspective, and a strategic perspective, I mean you saw.

Here today I mean, we've we've announced three very important strategic items that I think a continue to move the business for work in fact significantly forward a from a from or the levels that we've had even over the last three years and as you know the you know you've seen the results over the last three years as well you know for the for the business. So I I.

I think I think in general I mean, we see we see our business continuing to move forward, we're focused on and how I will respond to it when it that comes out I will tell you, though that you know you look at our you look at our results than we had 15%.

Less let's sales and only 20% a detrimental margins I mean, that's you know that's nothing very very healthy considering what's going on you know in the environment. So I think were properly I think were properly position to be able to handle what's what's going to come up but most importantly, we are really we're really focused on.

And able to come out a strong whenever this thing starts to.

Shift and our strategic initiatives that you've heard about today hopefully demonstrate that.

Okay. Thanks for that additional color last question for me just circling back on the a large area coating sale.

Do you have current buyers lined up or is there an investment banker, it's been hard to conduct an option any sort of expectations, though.

Cost savings cash perceive any sort of information you're not going to provide there.

Yeah, I mean, as we've talked I mean this is this is a very important initiative for us as we consider to optimize our portfolio going forward, we want to be able to make sure. We can we can dedicate resources on the go forward precision coatings business, where we have great great expertise right. So we are I would say relatively early in the process.

So we want to make sure the we communicate to you that or it is our intent to sell this business.

And as we as we made progress on it will certainly you know certainly communicate.

And I would add cash flow standpoint, we are if you look at our balance sheet. The assets have been written down to approximately $4 million a the assets held for sale on a net basis.

Yep.

And Mark up before.

Before we go to that because I think you mentioned that was your last time you mentioned that was your last question right.

Yep.

Okay. Yeah before we go to the next question I have an update I really exciting news I'm, just oh getting to a real time, so I'm sharing it with you guys regarding our project you mentioned this customer projects. So I mentioned.

And we've talked about the the prepayment that the customer is making a I want to inform you all that we now have assigned investment agreement actually a fully pull agreement with our customer and in fact I can also share with you that that this a $12 million prepaid.

With that I that I mentioned to you earlier or actually will result in a 70 million dollar investment seven zero million dollar investment by our by our customers Thatll be a prepayment we expect the remainder a up to the $70 million to be in the next 12 months or so that we.

Can go ahead and get this up facility up and running with the expectation of course that that we will be find this product.

On our long term basis in the site and it's really exciting exciting business or that we have so yeah, an uptake I said that the that I'm being handed a that I can share with you are based on based on I think tremendous progress. Our team has continued to make a even though you know the customer and a us of course it didn't miss a very.

Difficult a little bit 19 that situation. So a great news and want to make sure that you have that update 'em as a as sort of I'm getting that are getting that update.

Got that that's an excellent news. Thank you guys for your time, a wishing you and your family or stay safe and well so wishing your employees that are.

Have the court of ours, a a speedy recovery. Thank you guys.

Thanks, Michael.

Yes.

Thank you. Our next question comes from the line, Phil Gibbs with Keybanc capital markets. Please proceed with your question.

Thanks very much.

Good morning is is this 70 million dollar investment by your customers is within a brown side type arrangement with one of your existing facilities or would this be a brand new.

Brand new functionality.

So so Phil we actually have we actually have I think two things that that we're doing to ensure that were properly supporting the launch with this out with this customer in order to support the launch with the customer and a more near term basis, we're taking one of our existing facilities and actually adding capacity in that existing facilities.

We can start to.

Produce products are relatively quickly and start and then and then this investment that the that the customer is a is making with us that's something that we expect to have a new facility. We have been working a you know on that and basically may not the plan. So it'll be a new it'll be a new facility for us.

Okay. So some basically some trialing.

Now getting things getting things bugs out with with your existing assets and then taking it on a bigger scale.

Several months from now Okay. Yeah, I'm here I would say to look yeah, I would say to little bit more than trialing. Because I think you know we've been we've been involved with the customer for a while now and we've been doing I would say the trialing.

You know that the prototype thing back and forth with with the product at developing I I I think we actually you know our intent is to actually start launching.

On a production on a production basis.

As soon as we can get this increased capacity you know not existing facility and then and then be able to Ah you know launching in the new facility on a much higher scale I mean I'm sure you can imagine that you know theres investment of up $70 million are being made by the customer that you know that that that's a fairly large you know parity.

A large facility as well the large a potential supply that we would we would have with the customer you know what's important to note here is that you know this falls right in line with their capability and expertise will be half of a of making this engineered a cloud strip. So you know we produce engineering class strip products. Today, you know that is one that is these.

Actually no, but we have and one of our businesses and so this is this is really a significant expansion of that capability and so that's what's quite exciting about it and and and the great thing is from a customer standpoint, we believe it's a it's an area that a you know has exists.

Thing demand and where were when I wouldn't be replacing and sort of an existing product and and so I think it's a thing it's a really a nice win win with existing capability existing skill set where we're expanding to a market that is as some existing demand.

Okay. Thank you.

And then.

Because you look out into the second quarter here it sounds like defense medical and semiconductor are strong.

Resilient.

Markets right now, maybe just describe a little bit.

Just about in terms of of what you're what you're seeing is some of this related to cove. It increased government spending surge demand.

You have any you know any texture to maybe the strength in those three through Apple building for the new launch of media anything that you could give on those three markets specifically would be helpful. Thanks, I'll keep it at two and a half.

Yes, so when you look at those key markets for Us I mean, the medical its certainly related to the to the cobot 19 as I indicated we have that we had the privilege sort of very proud of supporting that the the fight against co bid would some of our products, particularly in our precision coatings business as well as in our PC business.

As as indicated earlier defense as you know is lumpy I mean, we know we had a in a one quarter can be can be a really really strong strong quarter and the next quarter, you know can be relatively weak and and so what we expected that sequentially. We expect that the defense to be a stronger quarter for us from Q1 Q.

Too, but I think in defense in general or we are Oh, we are seeing that that that you know the defense contractors are continuing end to end. The demand is a demand as you know should be should be there I think from a semiconductor side. It's really it's really I think the the downturn that that industry faced over the last a couple of years and how that's been.

Summing up you know the pure bitumen semiconductor suppliers that are producing and they seem decreasing you know at capacity and a and we're starting to see the the benefits you know of that you know would there be an impact a down the road due to colder 19 in that area. I mean, obviously, that's anybody's guess if that'll be the case, but so I think.

I think in general I mean, those three areas. A you know seem to have seem to have good good a a solid a you know demand and fundamentals as we as we move forward.

Thank you. Our next question is a follow up from Edward Marshall with Sidoti and company. Please proceed with your question.

Hey, guys I don't know if I've ever gotten a real time up they like that that stuff fantastic I'm, assuming it's and [laughter]. It was an email or something that came through kind of mid conference call Hey, I'm. So it was we did you did.

[laughter]. So so 70 million that's a big investment first I guess, how much of that how much of that investment was in Q1 versus how much was company funded.

Capex.

Yes, that's the first question.

Yeah. So.

The as I've mentioned there are two elements right. There's the near term project that we mentioned, which is the which is the getting the capacity up and running for near term and then there was a larger project and and as I indicated we received this $12 million a pre payment in Q1, Joel I'm why don't you go out and talk to specifics you know under spend there.

So I have the spread Ed if you look at our cash flow statement, approximately 10 million of the capital investment.

This quarter was the spend associated with the 12 billion pre funding that we had already received.

Got it that's the second type agreement that I can remember covering materially on the ones. This route the other one was with the pebble plant.

The I remember correctly, because the spend would come in from the customer, but you still carried the DNA is that the same way that should expect that here with this what this facility.

Yeah, I'm, the a accounting or there are they are similar we are spending the capital, but it's very different from a commercial standpoint, a that was pre funding from the government for the pebble plant then cash that we're receiving Ed is a prepayment and products that we're gonna start shipping.

Oh, you know in the back half of 2021.

Potentially so it is very different in the sense that is a prepayment for products that we're going to ship in the future.

Got it but how many will be very similar.

Got it if it if I remember correctly and it's been a wild since I've been out there, but the OMART facility had quite a lot of capacity.

And adjacent capacity and land that you owned around it.

But it sounds like [noise], there's a new greenfield facilities. I'm curious are you are you strategically positioning. This next to another facility as a sole source of supply I'm, just kind of trying to figure out why why that would just be added from the Elmore facility, which has the capacity.

Right right well I mean, we are looking at a number of different options and so we have not settled on eight facility, we know where where I can tell you that I think that's something that we'll be able to who'll be able to announce a in the future I do want to highlight that this is a non beryllium product for us and a and so.

You know one of the things that we're looking at is what's the best location.

To produce plus where do we have the best expertise in this area, which is the clad kladstrup area. So what are coming leverage the expertise the manufacturing expertise that we have.

That that that we can put in place. So that's something that will you don't get announced a sometime in the near future.

I guess, what I'm asking is the are you, giving the customer any kind of a decision power kind of seeing that there's a pre investment here as to maybe strategically located near near near somewhere that might be advantageous to them and ultimately you as well.

Yeah, I'm not sure if I'd say, it's it's a decision power issue I mean, I think the customer obviously realize is relying on US you know for the expertise and the capability to go to manufacture this with with the with the would the with what we have been doing you know for many years. So I think it's more I think it's more what's the best that we can offer them with <unk>.

With expertise and a logistics and everything else now there are certainly involved in the and the discussion I would only be wrong, but but but I think the decision, making up where best to produce it will be something that we'll be making.

Got it and how do we look at the <unk> the revenue ramp on this and potentially the scale, but that this could that this could produce I mean, obviously you have some returning figures that you talk about.

Yeah, we do and I mean, we're certainly not prepared to talk about.

We're not prepared to talk about those figures, but what I can tell you is that you know, we're certainly planning to start a in the near term Ah you know when our existing facility and then it's our intent with this would this investment it's our intent to put the capacity in place and ramp up and supply. This for a for a long period of time.

We expect this to be a very.

You know large project for us by far the largest project that are maturing on as ever.

Her face in terms of supply.

To a customer I mean, that's our intent as we as we work with as we can try to work with the customer and ER and finalize on overall supply terms and conditions.

And finally, I guess would probably look back to your pillars and initiatives that you put in place when you came on board.

You have I mean this has obviously been a focus for you but this is the big this there are big first when I won't say, it's her personal in but it's your big your your first big win what do you think how many of these other opportunities as you look out over the next say 12 24 months are there for you to kind of your either kind of.

Middle innings or or close upon or is this kind of a a standalone just curious.

Well I mean, I think anytime you go through organic growth. You know you have all types right you have the very very incremental you know two cents floor SUNS incremental to to the you know the mid segment to these lets say game changing I mean, I mean, typically the very large opportunities as you have and you put it I mean, you have a number of those in the pipeline.

Not all of those of course come through I mean, you know, you're you're lucky to bat and all that and I don't know maybe it's one out of five or two out of five or something like that you know you're you're you're lucky to bat. So we do have focus on all elements of the organic growth all the way from the you know nickel and dime type of improvements that we can make to these larger opportunities.

I can tell you. We we are working on other larger opportunities I can't get into the to the specifics, but it's our intent to continue to ramp up R&D spending and its aren't tend to continue to drive Ah you know organic growth as are absolutely top number one priority in the company.

Got it got it.

The way do you have any any sense any number that you could provide on the order book or maybe a book to bill.

You talked about how strong in the quarter I'm just curious.

Yeah, Yeah, we don't we don't disclose a a book to bill ratio, but where we can disclose is our current order entry rate is a supportive of the guidance we provided for Q2.

Appreciate it guys. Thanks, very much I know, there's been a lot of questions I think.

Thanks, I see there no further questions at this time I'd like to turn the call back over to Mr. Shamrock for any closing remarks.

Thank you. This is Steve Shamrock on this concludes our first quarter 2020 earnings call. A recorded playback of this call will be available on the company's website material dotcom, we'd like to thank all of you for participating on the call. This morning, and your interest in material.

We'll be available to answer any follow up question. My direct number is 2163 Athree 401 zero. Thank you very much.

Thank you. This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a nice day.