Q2 2020 Materion Corp Earnings Call
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At this time, all participants are in listen only mode.
A brief question answer session will follow the formal presentation.
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That's a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Steve Shamrock interim Chief Financial Officer. Thank you you may begin.
Good morning.
Shamrock interim Chief Financial Officer with me today is Jubilee VJ.
President and Chief Executive Officer.
Format for todays conference call is as follows.
Yeah, we'll provide an update on Kobin 19, and key strategic initiatives.
Joel I will review detailed financial results for the quarter and then we will open up the call for questions.
Before we begin let me remind investors that any forward looking statements made in personnel.
Including those in the outlook section and during the question and answer portion based on current expectations.
Ladies actual future performance may materially differ from that contemplated by the forward looking statements as a result, they blighty factors.
Doctors are listed in the earnings press release, we issued this morning.
Additionally, comments with regard to earnings before interest and taxes.
Net income and earnings per share reflect the adjusted GAAP numbers shown in attachment number five in this mornings press release.
The adjustments are made in the prior year period for comparative purposes.
No special items, non cash charges and certain income tax adjustments.
And now I'll turn it over to Joe for his comments.
Thanks, Steve and welcome everyone.
All of you and your loved ones remain healthy and safe as we continue to manage through these challenging times.
Today I'll provide a cobot 19 status followed by state how key strategic initiatives.
Health and safety you are people continues to remain our overriding priority.
Well, it's very difficult time, we've taken input from all available sources and implemented protect a major spar people.
To date 11 of our employees have tested positive for the virus.
And I'm happy to report that they're all going well at this time.
Nine people have returned to work well to our country that their home.
In majority of our office employees can try to work from home.
Wow all of our factories continues to operate.
As you would expect we felt the full impact of cold with 19.
A number of our key end markets in the second quarter.
Eating.
Consumer electronics, and energy industrial automotive and aerospace.
Despite these very challenging market conditions.
We delivered sequential value added sales and earnings call.
Defense end market sales rebounded in the second quarter.
We continue to see strong demand going forward.
Sales in the medical market.
Particularly health care equipment used in the fight against Cobot 19.
Contributor to sequential growth.
We expect this to continue into the third quarter.
In response to reduce demand, we actively managed care costs, which you can see in our financial results.
Sequentially, our sales increased 2% <unk> earnings increased 14%.
Let me now transition to providing an update on our one attorney on multi color profitable growth initiatives.
Once again I have some exciting news to share.
You will recall, we held a special announcing the finding optics falters acquisition.
Our teams have worked diligently to close the acquisition in just six weeks.
This week I'm excited to officially welcome.
Good sponsors to the maturing on family.
The combination of our two companies creates the world's leading thin film optical coatings provider.
Highly complementary geographic product at the end market portfolio.
Well this acquisition the tree on significantly expands the geographic reach extending beyond its core of North America.
To include Europe and Asia.
Optics malls, there's maintains a very strong European presence with two R&D and manufacturing locations and look to shine in Germany.
In addition.
Hopkins falls or <unk> recently launched a state of the arc manufacturing facility.
Later.
Which has been a key enabler for growth in Asia.
Complementary technologies across the electromagnetic spectrum.
Boost the capabilities. The combined then film optical coatings portfolio.
Position, we're turning on to capitalize on key Mega trends in the area is a life science consumer and industrial.
We're excited to get started on the value creation opportunities.
Our engineered class to project, which I announced in the last call remains on schedule.
As a reminder, we entered into a business arrangement with a new customer to expand our manufacturing capacity for highly engineered kladstrup product, which will be used and next generation model on existing product.
The total investment the project is expected to be approximately $85 million.
You'll recall, we had received $12 million the approximately $70 million a customer will fund.
Now I can report to you, but the customers paid us $31 million.
In addition payments scheduled to be made over the next year.
In support of this customer program, we are actively working to establish new leading edge manufacturing facility.
But your product supply.
We're making progress on negotiating in long term supply agreement.
And still expect to finalize later this year.
Lastly, a quick update on P.C. facility consolidation project.
[laughter] prove our cost structure.
We completed the closure of the Detroit, Michigan sort of a shot up and the second quarter.
And remain on schedule to exit the pretty much California location by the end of this year.
In closing.
We remain committed to take all necessary precautions to protect our people.
I'm extremely proud of the dedication to our company during these difficult times.
Despite all of the macroeconomic challenges we're facing.
We are continuing to course to follow her one maturity on most people are profitable growth strategy.
Now I'll turn the call over to Steve a couple of the financials.
Thank you to go and good morning, everyone joining us on the call today.
During my comments I will cover second quarter 2020 financial highlights.
Do you profitability by segment.
My brief comments on the balance sheet cash flow and modeling assumptions.
And finally cover the earnings outlook for third quarter 2020.
Oh, My remarks, well open up the line for questions.
In the midst of a global pandemic I'm pleased to report second quarter results, which exceeded the first quarter.
Second quarter value added sales, which exclude the impact of pass through precious metal costs were 161.6 million.
Two per cent compared to first quarter value added sales of 158.7 billion and down 17% versus second quarter of 2019.
Compared to the first quarter defense Telecom and data center and medical end market sales improve which offset reduced demand in markets impacted by the cold 19 pandemic.
Including automotive consumer electronics aerospace and industrial.
We also had higher raw material hydroxide sales on a sequential basis approximately 4 million.
On a year over year basis, all major end markets, except semiconductor were down due to the impact of the pandemic.
With the consumer electronics, industrial energy and aerospace end markets. The most severely impacted.
Gross margin was 48.1 million in the second quarter compared to 69.6 million in the prior year second quarter.
Excluding special items related to cope with 19, adjusted gross margin was 50.8 million or 31% of value added sales.
An improvement compared to the first quarter adjusted gross margin of 30%.
Versus the 2019 second quarter.
Gross margin was down due to lower sales volumes and resulting manufacturing inefficiencies.
Selling general and administrative expense totaled 32.9 million decrease of 7 million versus the prior year up 39.9 million.
Excluding special items related to the acquisition of optics falters.
Adjusted <unk> expense totaled 31.5 million.
As a percentage of value added sales.
Adjusted EPS DNA expense was 19% in the quarter down 100 basis points from 20% in the prior year period.
We continue to aggressively manage our core SGN expenses in response to current demand trends.
Research and development expense of 4.59 increased 11% versus 2019.
As we continued to make investments to develop new products and applications to drive long term profitable growth.
In the second quarter, we recorded restructuring expense of 2.4 million related to the previously announced closure of our Detroit and Fremont facilities.
Barely for relocation costs and severance.
We also reported a 2.2 million dollar foreign exchange gain related to a special item regarding our purchase of optics falters.
The purchase price was denominated in Swiss franc.
So we entered into a foreign currency hedge one we signed the agreement the limit our exposure.
We reported second quarter, either 9.6 million.
Paired with the prior year second quarter, EBIT 19.6 million.
Excluding special items related to cope with 19.
Restructuring charges and the acquisition of optics falters.
Adjusted EBIT was 13.9 million or 9% value added sales.
Looking at income taxes, we recorded income tax expense of 1.6 million in the second quarter of 2020.
The effective rate of approximately 19.5% in.
In line with our previous guidance.
Finally, net income in the second quarter totaled 6.7 million.
On an adjusted basis, we reported net income up 10 million or 49 cents per diluted share compared to 43 cents per share in the first quarter.
The increase compared to the first quarter was due primarily to commercial performance improvements driving higher gross margins.
Compared to the prior year decrease was driven by lower value added sales, partially offset by spending cost controls.
Now, let me review 2022nd quarter performance by business segment.
Looking now at our performance alloy composites business.
Value added sales were 89.8 million.
An increase of 6.1 million or 7% compared to the first quarter, but down versus 115.3 million in 2019.
The sequential increase is due to stronger demand in defense.
Compared to the prior year decrease in sales can be attributed to lower demand across all major markets, primarily as result of cobot 19.
EBIT, excluding special items was 12.3 million or 14% value added sales.
Compared to EBIT of 8.2 million in the first quarter and 19.1 billion in 2019.
The sequential improvement in EBIT is due to commercial initiatives to drive higher sales and improved mix.
The decrease in EBIT versus 2019 is due to lower sales and reduced manufacturing efficiency related to lower production volumes.
Despite the global pandemic CAC managed to deliver the 10th consecutive quarter of double digit profit margins and sequentially improved EBIT margins by approximately 400 basis points compared to the first quarter.
Moving to advanced materials.
Got it sales in the second quarter of 2024 54.7 million.
Versus 58.3 million in the prior year.
Semiconductor end market sales were up 4% versus the prior year.
The third consecutive quarter with a year over year increase.
However, the impact of the pandemic on the energy industrial and automotive end markets more than offset this increase.
EBIT, excluding special items was 5 million in the quarter.
Fair to 6.1 million in 2019.
The decrease in profitability was due primarily to the decrease in sales volumes.
And on favorable manufacturing performance.
Compared to the first quarter EBIT margins improved from 8% to 9% due to favorable product mix and aggressive cost management.
Fight the sequential decline in value added sales.
Looking ahead, we continue to focus on improving manufacturing performance in this business.
Turning finally doubts the precision coating segment.
Second quarter of value added sales were 17.8 million down compared to 23.1 billion in the second quarter of 2019.
Primarily due to lower sales of the large area coatings product for the blood glucose test strip market.
As you May recall, we announced our intention to sell this business on our first quarter earnings call.
We continue to expect to complete the sales process later this year.
Excluding the L.A.C. business.
Second quarter 2020 value added sales were 15.1 million.
Down 2% year over year.
Due to lower market demand in industrial and consumer electronics related to covert 19th.
EBIT, excluding special items was 2.4 million a 13% value added sales.
Compared to 1.2 million in the first quarter and 3.9 million in the second quarter of 2019.
Compared to the first quarter EBIT, excluding special items improved by 1.2 million due to higher optical filter sales and manufacturing performance improvements.
The decline in profits versus the prior year was entirely driven by the decrease in sales with any legacy business.
Partially offset by cost reduction actions.
Moving now through the balance sheet and cash flow.
The company ended the second quarter of 2020 with a net cash position of 113.3 million.
And 179.1 million available on the company's credit facility.
We continue to have more than adequate liquidity to manage in this challenging environment.
Despite everything that has happened this year.
I want to point out that we've improved our net cash position by over 41 million compared to second quarter of 2019.
Even with the optic falters acquisition.
Our pro forma leverage ratio at the end of the second quarter is only 0.4.
Well below our targeted level of 1.5.
Our capital spending increased in the first six months to 32 billion.
The increase versus the prior year is related to the customer funded engineered strip growth opportunity to go covered.
We also increased our dividend in the second quarter for the eighth consecutive year.
For financial modeling purposes in 2020.
Capital spending should run approximately 30 million.
Net of the customer pre payments related to the new engineered strip project.
Mine development investments should be approximately 14 million.
Annual depreciation and amortization should run approximately 40 million.
And assume that 18% to 20% effective tax rate excluding special items.
And finally now the earnings outlook for 2020.
The impact of the Cobot 19 pandemic continues to create unprecedented levels of uncertainty.
Making it very difficult to predict the extent to which our business results of operations financial condition or cash flows will ultimately be impacted.
Therefore, we are only providing a near term outlook.
At this time order entry levels remain approximately the same as the second quarter.
We continue to expect demand headwinds in several key end markets.
Including consumer electronics, industrial automotive energy and aerospace.
Demand for defense and medical should remain strong.
We will continue to aggressively manage our cost structure in the current environment.
Assuming current conditions continue we expect third quarter adjusted earnings to be comparable for slightly better than the second quarter.
This concludes our prepared remarks, well now open the lines for questions.
Thank you we will now be conducting a question and answer session.
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Thank you. Our first question comes from line of Phil Gibbs with Keybanc. Please proceed with your question.
Hey, good morning.
Good morning, Phil.
The.
Question that I had was around optics and the the acquisition that obviously closed here.
Very recently in your guidance commentary for the third quarter you anticipating this Ah this deal to be accretive is there any purchase price accounting that that we need to be.
Aware of.
You know any help on that would be would be good and then.
Are you still have the a of the opinion at this is a.
20 million dollar EBITDA business and not in the next two two to three years.
Yeah, Phil first of all I can tell you that as I indicated you know our team has done just a wonderful job I'm getting this thing done in such a short period of time six week, even though we're in the middle of a pandemic. So I you know teams gotta be congratulated and we're extremely pleased to have.
Optics falter, so the people onboard.
We're excited about what I think the future goals as we've indicated in our call. The we added a few comments I made already all your pure you know with regard to how we move forward here, obviously, they're going to they're gonna be not Q3 for about a couple of months. So we'll have we'll have that in there I don't expect I don't expect really any meaningful and.
Pat hearing to Korea, as we just got kind of bring them onboard.
But I think you know we're committed as we've indicated I think.
And our early recall that we would expect this business to be accretive first year of for here of ownership.
That's our that's our plan a work continues on that plan as Weve also indicated this is really a girl play for US we really want to have our two teams work together and and drive the maximum possible goal. They can that's what we're going to be quite focused on that.
But in general.
You know I expect this business to a to be a they said I'm.
Not really a meaningful impact here in two three months, but then really starting to hit the ground running here in Q4.
And what I would add to fill your comments on purchase accounting, obviously I mean, we've we've only owned the company for less than a week. So you know that's something that we're really focused on here in Q3, and obviously can give you a better update on that on the next call relative to the impacts of purchase accounting so.
Your I appreciate the existing clad investment is isn't tactics like your timeline. There was like 21 early 22, but you do have existing assets that are our prime to perhaps ship ship greater material into this.
Opportunity later this year in early 21, maybe give us an update on what you're seeing.
There you should be should we anticipate any contribution later this year early next year or could it be or could it be meaningful.
Yeah. So I can tell you what we refer to as sort of short term project to be able to fulfill some near term demand for our customer.
We are taking existing capacity, we are having to update that capacity as we mentioned last time. So we're spending some money to like about capacity actually able to produce this this product. We expect that will be we'll be doing that fewer later and later this year and and if if if if there was an issue I really look I mean.
Pandemic later or anything that would be early next year, but but we really hope we're going to be able to later this year.
Have some I have some sales and and then really just comes down to the sooner. We can get started the sooner. We can have an impact there will be up there will be a ramp because you can imagine. So you know if we can get started today than we might be able to have a reasonable impact you're not to four but but if it's later no. Much later in the year that you may not be able to have a meaningful impact in two.
For [laughter], that's one of the reasons why you know we thought we really just provide a more of a near term near term overall company guidance. So the project is on track and just to answer that maybe anticipating up though what kind of question for they've done the longer term.
Uh-huh project, it's on track as I indicated already that we received a $31 million from the customer versus a 12 million. The we reported last time, so very very good progress and that despite again everything that's going on around US. The team is just make really really good progress feel that that.
At the end of next year, perhaps as you know early grew 22.
The last question just just housekeeping, Steve you mentioned I believe.
The mind a mine mine spending this year was gonna be 14 million. What's what is your gross gross capex before that and that number.
Yeah. So so Phil we split that out even in terms of providing guidance. So you know what we said on the I'll say, our normal Capex, we're still forecasting about a $30 million run rate that if you exclude the oh the project that a that yuval referenced earlier for engineered Kladstrup. So if you if he segregate that you know we were at a.
10 million before on mine development now, we're forecasting 14, and that's really just based on the fact that we finalized our pet opening approach strategy.
And actually that the minimize overall cost, but actually it's accelerating some of the timing into this year versus next year. So and if you know that that a mine development expenditures can fluctuate a lot from year to year. Unlike our I would say are more steady state normal capex. So.
[laughter] soldiers. So its 30 million of Capex 14 million of development plus the project like the prepayments.
Correct.
Okay. Thanks.
Mhm.
As a reminder, if he would like to ask the question Press Star one on your telephone keypad.
Our next question comes from the line of Marco Rodriguez with Stonegate Capital. Please proceed with your question.
Good morning, guys. Thank you for taking my questions One party Marco.
Oh, it's been a follow up on the on the prior question in regards to the the client for the expansion. It was a pretty nice benefit to your cash from operations were receiving the prepayments and then obviously your capex up roughly 32 million year to date I'm just kind of wondering if you can kind of walks through the impact your goal.
Good to see for on your cashless statements in the prepayments and then how that kinda dovetails into the additional Capex do you need poor report that arrangement.
Yeah, so mark or what I would say as you know, what's you're going to continue to see even going forward is a in our operating section of the cash flow will continue to get a additional pre payments from the customer. So that number will continue to grow a and then as you've seen already from a capex, our capex line and the cash flow statement, it's a up significantly versus yet.
Last year due to this project. So are you basically going to see a gross up a you know of both lines there as we kind of progress throughout the year. So.
Hopefully that's helpful from that perspective so.
And I apologize if I missed it but did you segment. The 32 million that you you spent year to date between what is metairie on normal run rate versus the the prepayment.
No, we're not breaking that out separately, but obviously, that's a significant driver of the increase a year over here. So.
Okay, and then kind of sticking along with the the P. segment I'm, just kind of wondering looking at the.
End market Breakouts that you provided in your press release automotive well, obviously down year over year doesn't seem to be out significant does some of the other areas and just kind of given the fact that.
Most of the automatic automotive manufacturers or at least in the U.S. and then obviously yet at times in Europe or were shut down completely just kind of wondering how I would've expected a much larger decline year over year can you maybe talk a little bit about that segment that and what you're kind of seen there.
Yeah, I think what you're looking at that perhaps you know you're doing the you're doing a year over year comparisons a bear so part of that I think it's just the baseline comparisons a market that does that you're seeing and part of it as you know, which which always that we deal with them, which which customers. So it's really just also depending on a on back I mean as Weve talked before.
I mean, our automotive businesses, mainly outside the U.S. So some of the some of the shutdowns that I've heard a you know in the U.S. didn't have as much impact on us as a as perhaps the a the outside so for example, you know Asia I was starting to we're starting to come back and so some of our businesses in Asia and a net and then of course and I grew up so that.
I think those those factors contribute to us maybe perhaps from your your view you know maybe not having ad.
A dramatic have an impact or.
Got it that's helpful and then switching over to the Am segment last quarter, you got to talk little bit about yeah. The negative impacts you saw in Q1 due to a new product launches kind of weighing on on manufacturing efficiencies. Just maybe if you could talk about ER or update us there or whether or not those new.
Product launches that sort of worked away up the rapid there's lots of an impact on your margins there or anything you can kind of provide in terms of color would be appreciated.
Yeah. So I would say that you know in general we're continuing to make progress you know as you can imagine the progress is is not as much as we would like because if I could some of the challenges we're facing of course on condemning side. So one of the thing that we're having to do a in our manufacturing facilities and implement many many safety procedures and protocols can.
Protect our people social distancing [laughter] structure changes and other things. So there's a lot of I'll call negative impact that happen across the board not just in a thing in our advanced material, but.
No of course, we're offsetting that and continue to drive performance improvements on advanced materials. So just to give you an idea.
Sequentially, our sales or were down 8% on advanced materials. However, our earnings were up 2%.
So you know just like 8% down in sales, we actually were able to improve earnings and and that is really due to the to due to the improvements that are high teens or make any of course, because they settled improvements are being masked by all the a you know somebody other issues are we there were dealing with as well as you know the a the sales drop.
Roughly 8% that I mentioned so progress.
Well actually and we but we'll continue to make progress you know into Q3 to four et cetera from that perspective.
Got it and then on the the optics, Oh balls or is acquisition.
Maybe just if you can kind of paint the picture here in terms of a blueprint. If you will in terms of the integration effort that you'll start to undergo here and then how you're kind of thinking about the synergies I know that we talked before that the expectation is to have those those synergies in the in a few years to such that it's a 20 million dollar.
EBITDA type business, maybe if you're going to talk a little bit more now that the company is under your umbrella now.
Yeah.
So so as we have as we have a you know just brought the company or did you said sort of using those words under our umbrella you know this week. Our teams have started to work very actively together, we have a integration team that we form.
With an integration director, we recently hired just within the last week or so a executive that has come on board will lead to the integration efforts dedicated to this this very very important I should do in that integration team, we have a workstream owners from various functions and from various regions.
At that we've defined what the out but the level of integration, we're gonna do as well as what the level of synergy that we will accomplish our you you can imagine you know integration involved.
Synergy related items, and then I'll call non synergy related items right. So just making sure that our teams for example can work together effectively where we were starting to drive maybe some kind of processes and common tools at the same time driving more top line improvements and perhaps some cost level improvements and attend those more of them are quantifiable synergy item. So we have any.
Integration team.
<unk> has been established a they've started to me.
They're developing there I'm you know sort of 30 60, 90 day a meal six month 12 month type a plan and then it is our intent to drive that drive that you know in a very very disciplined I basis, you know with regard to date to the synergies as has been in general that we that we've talked about in the past as well its our objective that so we really want to focus all of our.
Attention on on growth and being able to profitably grow a combination of objects falls or send our business and I can tell you that that's one of the key work streams that we haven't integration process.
We're starting to look at what kind of Jefferson can set for ourselves for next year into your beyond so that I'm. So that the teams going to enter you know put energy around you know those are those objectives. So it's very very exciting but of course very preliminary right now with the justice having it here in the and the first week and we look forward to.
Be able to provide you and others update I'm you know in in future calls.
And last question, just kind of housekeeping item I'm on the balance sheet inventory levels had been.
Picking up here sequentially for the last few quarters can maybe just talk a little bit with the drivers there.
Yeah sure Marco I would say from my side, you know if you think about it, especially with coven 19 in some of the shutdowns that we had in the second quarter I think basically there were a lot of customer orders that were cancelled. So you know from that perspective are you know it left us in a little higher inventory position I can tell you you know looking forward looking ahead, we are clearly focused on managing.
Our working capital a and actually I point out if you look at our cash flow statement, we actually had less use of working capital this year versus last year. So again, it's something we're very focused on and you know I expect to try to work out or those inventory levels in the second half a year. So.
Got it thanks, a lot guys appreciate your time.
Thanks Maher.
We have no further questions at this time, Mr. Shamrock I would now like turn floor back over to you for closing comments.
Thank you.
Steve Shamrock and this concludes our second quarter 2020 earnings call.
A report I recorded playback of this call will be available on the company's website Materion dot com, 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 263, Athree 40 year old one zero. Thank you very much.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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