Q2 2022 Materion Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the material on second quarter 2022 earnings conference call.
At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host John .
John Zahradnik, Chief Accounting officer, Sir the floor is yours.
Good morning, and thank you for joining us on our second quarter 2022 earnings Conference call. This is John <unk>, Chief Accounting Officer before we begin our remarks. This morning, I would like to point out that we have posted materials on the company's website that we will reference as part of today's review of the quarterly results.
You can also access the materials throughout the download feature on the earnings call webcast link.
With me today is jugal, <unk>, President and Chief Executive Officer, and Shelly Chadwick, Vice President and Chief Financial Officer, our format for todays conference call is as follows.
Jugal will provide opening comments on the quarter and an update on key strategic initiatives.
Following jugal Shelly will review the detailed financial results for the quarter. In addition to discussing our expectations for the remainder of 2022.
We will then open the call for questions.
Let me remind investors that any forward looking statements made in this presentation, including those in the outlook section and during the question and answer portion are based on current expectations.
The Companys actual performance may materially differ from that contemplated by the forward looking statements as a result of a variety of factors. Those factors are listed in the earnings press release, we issued this morning.
Additionally comments regarding earnings before interest taxes, depreciation depletion and amortization net income and earnings per share reflect the adjusted GAAP numbers shown in attachments four through seven in this morning's press release.
The adjustments are made in the prior period for comparative purposes, and removed special items noncash charges and certain discrete income tax adjustments.
And now I'll turn it over the call to jugal for his comments.
Thanks, John and welcome everyone.
I'm pleased to be with you. This morning to share details on another quarter of record performance from turning on and.
And to cover some significant advancements we've made on our strategic initiatives.
We are well on track to deliver another record year as we continue to reset the bar each quarter.
In Q2, we achieved our highest ever top and bottom line results.
With value added sales up 33% and EBITDA up 44% when compared to an already strong Q2 in the prior year.
Our teams are really delivering on all fronts, resulting in strong organic growth that is well above end market demand.
Fantastic contributions from our HCS electronic materials acquisition and higher profitability with meaningful margin expansion.
As we sit today, we are getting close to our midterm target of 20% EBITDA margins.
Our team's efforts are even more impressive when we consider some of the challenges faced including the impact of the Shanghai Lockdown inflation currency headwinds and higher interest rates.
Despite these we delivered record earnings per share of $1 28, and set the stage for even stronger performance in the back half of the year.
In addition to our outstanding performance in the quarter.
I'm excited to highlight two new organic advancements that will accelerate our growth in strategic markets.
First we have jointly commissioned a molten salt purification plant with our long term partner payrolls at our al more Ohio location.
The facility is now entering the startup phase for the commercial production of fly.
A multi salt coolant used in nuclear energy production.
Maturing on is the only domestic supplier of the beryllium fluoride component for fly.
A key component of this energy solution that will help enable the world's transition to clean energy.
Second as we announced earlier this week mature neon has established a new advanced chemicals facility in Milwaukee to.
To develop and manufacture products for the most advanced semiconductor chips and electric vehicle battery solutions.
Within this facility a leading EV battery customer is funding $6 million to establish a prototype line for the production of advanced chemicals for next generation battery solutions.
We are also working with a number of other leading battery customers to help meet their goals of longer battery life faster charging times and improved safety.
These important relationships are helping to further strengthen our position as a critical supplier to the automotive industry.
These recent announcements are just examples of the many advancements we have made a drive significant above market organic growth and seed the pipeline for the future.
Our investments in R&D commercial excellence and deep customer partnerships continue to expand our portfolio and helped to deliver consistent double digit organic growth.
We have nearly doubled our R&D spend since I joined the company in 2017, and this has allowed us to ensure we are serving not only our customers current needs, but staying ahead of the curve offering next generation solutions for the evolving complexities of the markets we serve.
As a result of our investments we've seen 13% organic growth sort of date.
And we're up 20% on an annualized basis from our pre pandemic levels in 2019.
With the exception of the four quarters around the 2020 downturn.
We have shown year on year organic growth in every quarter. Since we started on our transformation journey to 2017.
To continue to provide more visibility into the way we are serving important end markets aligned with fast growing megatrends.
I want to spend some time diving a bit deeper into a market that holds significant potential for continued organic outgrowth.
The automotive market.
There are significant mega trends in play at a line ideally with our company's strengths and capabilities.
For years maternity on has been a leading provider of important materials for automotive applications, including connectors switches and relays.
All of which are used in both internal combustion engine vehicles and electric vehicles.
As the industry shifts towards more electric.
We see an even greater need for our materials with products like cell to cell Interconnects and fast DC charger connectors.
We are known for our ability to deliver products with superior conductivity and thermal management properties.
Both of which are crucial to safety and reliability in the electric vehicle.
Building upon our strong product offering we have taken several steps to build out our portfolio of products that enable the pervasive megatrends of emissions reduction connectivity and autonomous driving.
With the outlook for electric vehicle production expected to more than quadruple by 2030.
We have made purposeful investments in R&D focused specifically on the <unk> space and we form deep relationships with leading automotive companies to accelerate their next generation solutions.
These efforts have resulted in the important partnerships, we mentioned with electric vehicle battery companies to support their quest for faster charging times longer battery life and enhance safety.
As the industry pushes closer to self driving cars are contributions become even more meaningful.
As these vehicles will require all the materials previously mentioned plus an expansion of our sensing technologies.
We are a key provider of thin film optical filters for sensing and detecting and high performance coatings for components within Lidar systems head up displays digital instruments and night vision.
All of these capabilities will be critical to supporting the strategic shift in the industry and our acquisition of optics balls are only strengthened our position in this market.
To address the demand for faster and enhanced connectivity.
The semiconductor industry will continue to face significant demand from the automotive industry.
Following our recent acquisition of HCS electronic materials, and our recently announced expansion into atomic layer deposition products in Milwaukee.
We have strengthened our position as a leading supplier to the global semiconductor industry.
And are well positioned to benefit from the shift.
The average electric vehicle will require twice the number of semiconductor chips versus a traditional vehicle.
With autonomous vehicles, requiring eight to 10 times the number of chips to power its many functions.
Our strategic efforts to serve this market are already delivering as we have grown our sales for the auto market by 50% since 2019.
While the number of vehicle units produced globally has decreased by 12%.
All of this resulting in a 77% increase in content per vehicle.
I am confident this growth will only accelerate as the industry evolves and our people and our products become even more critical to enabling the automotive industry of the future.
As I reflect on the many organic opportunities in our pipeline.
Execution of our organic strategy and are expanding record backlog.
We remain on track to exceed $1 billion in VA sales in 2022 for the first time in our company's history as.
As we grow our business and continue to outpace our end markets.
With that in mind, we are affirming our earnings guidance for the full year.
I remain highly confident that we will drive record value added sales and earnings as we take another step forward on our transformation journey.
As I close let me stress how proud I am of what our team has accomplished throughout this first half of 2022.
Delivering record performance followed by integrating the acquisition of HCS electronic materials.
Dressing on our strategic organic initiatives and setting the stage for another record year in 2022.
Now, let me turn the call over to Shelly to cover the financials.
Thanks, Joel and good morning, everyone. During my comments I will reference the slides posted on our website. This morning, starting on slide 13.
As jugal outlined we achieved record quarterly value added sales adjusted EBITDA and earnings per share again in the second quarter.
Value added sales, which excludes the impact of pass through precious metal costs were $277 2 million for the quarter up 33% from the prior year.
Organically sales increased 12% driven by strong demand across most of our end markets, including semiconductor industrial aerospace and energy.
Q2 marked our second full quarter of HCS electronic materials contributions, which again exceeded our expectations.
We delivered adjusted earnings per share of $1 28.
Up 41% as compared to the prior year.
Looking at Slide 14, adjusted EBITDA in the quarter was $47 million up 44% from last year.
Our adjusted EBITA margin of nearly 17% represents a 120 basis point improvement from the same period a year ago.
The increase in EBITDA was largely driven by strong volume positive price mix as well as the contribution from our HCS electronic materials acquisition.
These drivers were partially offset by investments in R&D.
Partial investments to support the growing business and increased travel as we get back to normal levels of activity.
Our precision clad strip facility startup costs were a headwind as expected, but slightly higher than the first quarter as we get closer to full ramp.
We were also negatively impacted by the Shanghai, Lockdown, which began at the end of the first quarter and persisted into the beginning of the second quarter, primarily impacting our precision optics business.
Now, let me review second quarter performance by business segment, starting with our performance materials business on slide 15.
Value added sales were a record $134 million, an increase of 23% compared to the prior year.
The increase was driven by strong performance in the industrial energy consumer electronics and aerospace end markets. In addition to the impact of the HCS acquisition.
EBITDA, excluding special items was $27 2 million or 23% of value added sales compared to $22 3 million in the second quarter of 2021.
The increase in EBITDA was primarily due to favorable volume and price, partially offset by the new facility startup costs previously mentioned.
The full year outlook remains strong with an expanding backlog and our precision cloud strip project is on track to contribute meaningfully in the second half of the year.
As previously shared we expect to start up costs to fall off throughout the remainder of the year as the plant ramps in volume and efficiencies.
Next turning to electronic materials on slide 16.
Second quarter value added sales were $114 2 million up 71% versus the prior year and up 17% organically.
VA sales were again, a record for any quarter, even before the impact of HCS electronic materials.
The increase was driven primarily by our accelerating growth initiatives that Hubert talked about paired with strong end market demand in semiconductor energy and industrial.
EBITDA, excluding special items was $22 8 million or 20% of value added sales in the quarter.
<unk> to $10 4 million in the second quarter last year, an increase of 119% and a 450 basis point improvement.
The increase was driven largely by increased volume and price, which more than offset inflationary headwinds.
HCS also contributed to margin expansion with a strong quarter of results.
As we look forward to 2022, we expect electronic materials business to deliver a full year of strong outgrowth, particularly within the semiconductor space.
And a full year of HCS will deliver a meaningful step up in both value added sales and earnings.
Finally, turning to precision optics on slide 17.
Value added sales were $29 4 million down 10% compared to the prior year due to lower PCR demand and the discontinued consumer electronics applications as expected.
As we noted in Q1, those first half headwinds are starting to subside.
In Q2 sales were up 3% sequentially and up 10% when adjusted for currency and the impact of the Shanghai shut down.
EBITDA, excluding special items was $3 6 million or 12, 2% of value added sales.
Down from the prior year as a result of the sales volume impacts.
Sequentially EBITDA increased 50% with a 390 basis point margin improvement.
As we noted earlier in the year, we expect continued improvement into the back half of 2022 supported by the increasing backlog and new business pipeline expected to materialize in the third and fourth quarters.
Moving now to cash debt and liquidity on slide 18.
We ended the quarter with a net debt position of approximately $465 million and $124 million of available capacity on the company's credit facility.
Our pro forma leverage at two six times remains within our targeted range improving from the first quarter.
With strong free cash flow and higher EBITDA expected for the remainder of 2022.
We expect this leverage ratio to be nearing two times a year end.
Transitioning now to slide 19, let me cover our outlook.
With the excellent start in the first half of the year combined with a record backlog progress on our organic initiatives and the performance of HCS electronic materials business. We are affirming our full year outlook, even when considering current economic headwinds. We have also updated some of our other assumptions for you.
In closing Q2 fantastic first half of the year, we are extremely proud of our global teams contributions and look forward to delivering an even stronger second half of 2022.
This concludes our prepared remarks, we will now open the line for questions.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we ask that while posing your question you. Please pickup your handset if listening on the phone to provide optimum sound quality.
Please hold while we poll for questions.
Your first question for today is coming from Daniel Moore. Please announce your affiliation then pose your question.
Thank you good morning, Hugo Good morning show, It's Dan Moore from CJS Securities.
Good morning, Dan good.
Good morning.
Congrats on solid results start with some of the new initiatives new facilities.
Maybe the new facility in Milwaukee.
Total Capex you expect.
Can you elaborate at all of the prototyping anything specific about more specifics about the functionality being targeted within EV batteries.
Maybe the Tam or any color on the size of the opportunity from a revenue perspective.
Yeah.
And then we're really excited about this facility. This is a build on to what we do today in our existing facility. We have a facility in Milwaukee and this is a great add on to that.
Both the items that we talked about the <unk>.
<unk> work as well as the <unk> work is something that we actually do in our current facilities today.
And what we've been able to do is work with our customers on both sides and continue to grow through our organic growth initiatives. So let me take the first the <unk> product portfolio, we've actually been working on <unk> for a number of years now and we have a number of customers the work with <unk>.
Great Great exciting technology that is used in.
Most sophisticated semiconductor chips that are being produced.
And the outlook is very strong for this technology. So as we work with our customers, we see a greater pipeline and then therefore, we need more capacity and we're working with our customers to install that capacity until the weekend certainly grow that grow that business.
Business on the battery side, we've actually been working again with a number of customers over the last few years.
There is always next generation batteries that are that are being required those next generation batteries, whether it's longer life for faster charging.
This range issues of packaging et cetera, all those all those are very very important.
Criteria for battery.
The manufacturers and we have been working with them on providing samples and prototypes for advanced chemicals now.
Now, we have an opportunity to actually expand that and put a prototype line in place.
The really interesting thing and great thing about this is that our customer that we are working with will actually contribute.
$6 million approximately $6 million to put the prototype line in place will contribute a little bit of money as well, obviously, we're contributing the facility and the knowhow and the people.
Certainly that so that we can produce those prototype samples and continue to help develop.
With this with this customer and.
And then we're working with a number of other battery manufacturers as well.
So we expect.
I think as we announced this is a 150000 square foot facility. So it has really good floor space for us to be able to expand.
And not only the ILD in the battery, but we do advanced chemicals for a number of different other applications as well. So we can certainly expand.
There also so we're very very excited about this.
Because this is right down the right down the alley of the Mega trends that we have been talking about over the last several quarters and I think it supports our strong push into the organic growth that we've been talking about.
Very helpful.
And maybe just step back.
And talk more generally about the chips act and what that could do for semiconductor capacity in North America, and how you see it impacting your potential growth trajectory over the next few years.
Yes, well as you know semiconductor is a market that we have put a lot of focus on over the last few years I mean, if I just go back to our journey I mean, we were really.
Very focused on more of the precious metals I would say primarily the gold precious metals targets business. Several years back we invested a lot of money on the R&D side.
To build out a stronger portfolio on the non precious metals and I think that business has been growing substantially in particular, the aluminum scandium that we've talked about a number of times in our calls.
We made a major acquisition as you know at the end of last year, giving us capability on the tantalum and niobium type of products to handle them in particular is a very growth.
Activity for US and then of course the L. B.
Just spoke about so we have been developing a very.
Robust comprehensive portfolio for deposition materials that can be used in this in this growth to support.
North America market and of course, if the chips act as its.
Going forward.
We've heard a lot of.
Investment announcements from a number of different.
Fab companies and then we certainly want to be able to continue to support Europe and in Asia as well. So I think we're really well positioned with the facilities that we have.
And then this new facility I think is going to give us even more even more opportunity to support this.
Fantastic.
Opportunity. So we've got we've got a great.
A group of customers I think that we work with.
And we're excited about it.
Perfect.
Lastly, just quickly Shelly I wonder if you have any color on cadence as we think about Q3 Q4.
For the balance of the year relative to.
The guidance.
Thanks again for the color.
Sure Great question. So as we think about the rest of the year. We're excited that we'll be able to take a meaningful step up both in sales and earnings I think youll see us take kind of measured steps up in Q3, and Q4 that will look about the same so youll keep seeing sequential.
Improvement in both Q3 and Q4 as well.
The organic initiatives continue to play out and especially the cloud strip project continues to come online.
Perfect. Thank you again.
Your next.
Question is coming from Phil Gibbs, Please announce your affiliation and pose your <unk>.
Keybanc capital markets field team three good morning.
Morning.
Question is on.
Question is on clad and you had you had almost $5 million in start up costs this quarter clearly.
Clearly a drag on margins and clearly expected, but in terms of that cadence and progress through those startup costs go away completely in the third quarter. When we when do we get to the point where it's.
Generating positive operating income.
Yes.
So.
Shelley I'm sure will comment on the on the.
Financials, let me just give you a little bit of perspective on our status of the projects. So as we've indicated.
Quarter was really focused on getting approvals with our customers and that has been a very very good quarter for that.
We have been working with the customer diligently and we have been able to get approvals with them and so I think the project is progressing as we had planned Q3 is really now the ramp so we're starting to build.
Production level units, and then that ramp and as you know with any new plant will continue every week each week, our expectation is to produce more than the prior week and.
And support the customers. So that's that's progressing and then it will continue into Q4, our expectation of course for Q4 will be certainly a lot better a lot more sales than we have in Q.
Q3, so the project is progressing as we have talked in kind of as we have as we've planned.
And maybe just to talk about the cost a little bit if you think about the startup costs and other kind of two components. The main one is normal operating costs that will be ongoing so those will get absorbed by additional volumes and create better profitability. The other piece is material that maybe out of spec or something that we are running trial runs in.
You need to write that off so I would see the cost.
Scrap material costs coming down, but that is the smaller portion of the startup cost and the operating costs will continue with this kind of a project, it's about yields and efficiencies so as yields improve and we become more efficient that profitability will improve so.
I think we'll see that continue to move forward through the third quarter and be even better in the fourth.
Is there any way to think about utilization on the asset or targeted utilizations. There is the third quarter.
Third quarter.
We're around 50% utilization and then we think we're getting to 80 by the fourth quarter.
Can you just frame it up in the future.
Well I think I think you certainly can look at it that way keep in mind in Q3 as I said, our goal is to be able to produce more each week and get more out to the customer the product of the customer and so as you kind of take that and you kind of average.
Average of that I could see us 50% of the right number I don't know, but I think probably maybe even though maybe a little bit less and thats a third to 50 could be could be a range I think because of the fact that youre averaging out in Q3 with all the initial ramp to a little bit better ramp towards the end of Q3, and then and then probably about three quarters away.
I would say in Q4.
Okay.
That's helpful and then as you.
Announce these projects in Milwaukee, and then with Cairo's here in your <unk>.
One more.
What could those two projects collectively meaning either to sales or revenue or profitability and then they seemed like.
Decent sized proclamations, particularly as it relates to Milwaukee because.
Youre, putting in capital for a very very large accumulate to me it is a large facility.
<unk>.
I don't want to gloss over it they seem like.
Things that could be needle movers, maybe not next year, but 'twenty four 'twenty five yes.
Yes, no clearly like you said I think next year. This year next year is really getting the facilities.
The equipment installed the facilities up and running and we really start to see some impact towards the end of last at the end of next year I should say beginning of beginning of 'twenty. Four certainly is going to be is going to be.
Impactful I think for the year for the company I would see that the way that we have planned that the plant because we've done 150000 square foot. We purposely made sure that we've got enough capacity to be able to leverage the organic growth of these two things that we've announced which is the battery project as well as the ELV project along with other customers that we.
Can get there and as well as other advanced.
Advanced chemicals products I think both of these can be to your point no meaningful impact to us in the 'twenty four 'twenty five 'twenty six timeframe, particularly I would say the longer cycle is certainly the battery side because that next generation work that may need some development.
Work since this isn't one of the prototype phase where the ALJ is much more of a production base.
But I could see a combined scenario where it's.
Easily in the 'twenty four 'twenty five timeframe at a double digit at north of double digit type of figures.
From there as far as the.
The the fluoride assault.
Salto cooling facility the MSP that we talked about.
Our Ohio facility that one is up.
I would say, even a little bit longer term in terms of development, but it's a very important step in this prototype phase.
Probably you are looking at.
$1 million to $2 million worth of prototype type sales. Perhaps later this year into next year and then maybe reaching.
Mid single digits.
Following year.
So that type of a small ramp to support the prototype development activity for that for that facility.
Okay, and then on <unk>.
Last one just a clarification I think you said almost an 80% increase in content per vehicle.
It may.
Really accelerate from here so is that 77% increase is at relative to.
2017 is that relative to when you came into the company I'm just trying to figure out what the baseline is for further comments.
Yes, that's all of the 2019, so roughly in 2019 I think one of our slides of what we've shared is that we had sales in the automotive sector of about $60 million and there was about 90 million vehicles.
Produced in that year last year, our sales were roughly $90 million and then the number of units was down to about $76 million and so the content per vehicle over that timeframe was increased by approximately 80% of your site.
So we would our goal is.
As to continue to drive this continue to drive not only the overall automotive sector, but really play a lot on the EV side, the emission reduction the connectivity of the autonomous vehicles, so those mega trends.
We're really making sure that our portfolio is.
Much more aligned to those and then we can continue to drive growth in that area.
Thanks, and then just last question for Shelley.
Net working capital clearly for you all and for most everyone I have seen in the industrial universe.
Been a pretty big build in inventory associated with it.
Some some pickup in demand, but also a lot of inflation in raw materials and things of that nature. So maybe talk about networking capital progression in the second half.
Yes sure good question.
The increased organic demand of course, we get increased working capital.
Good problem to have but certainly something we spend time talking about and it is driven by a few things you mentioned inflation. So we do have some higher priced materials, especially around the metal space.
Also as you can imagine we've had to add materials and inventory for the cloud strip project. So that's a little bit of a step forward as well as we've added a little bit of inventory in HCS to plan for some growth there, but as we look at the second half we have very targeted initiatives really I would say on the base both in inventory and AR.
To make sure that working capital is positive in the second half. So we are looking for positive contribution overall from working capital in second half.
Thank you.
So for today is coming from silver please announce your affiliation and pose a question.
Yes, hi, good morning, CL King.
Good morning, Dan.
Thank you, yes, I have a number of questions I think.
Maybe I'll start with the financial guidance one first.
But.
No.
Thank you for.
Clarifying kind of reiterating your full year guidance.
I was wondering if you could indulge me a little bit, but I believe you.
Set the initial range $5 50 to $5 90 in late April right with your first quarter results.
And I'm not a not a global economists, but ill fated here, but.
Since then I mean, I would say that the macro environment has kind of changed meaningfully I think.
The potential for.
Currency headwinds as increase interest rate levels.
Risen and Theres more uncertainty regarding the global economic outlook, maybe more people anticipating a general slowdown.
So when I when I.
Think about you reiterating your full year guidance.
Scratching my head and I'm, saying.
Is it is it effect or function of the fact that.
The outlook for your base business back your base.
Economic your base assumptions back in April .
Haven't changed or is it the case, where the euro assumptions internally have actually improved.
While the macro environment.
The risks of some higher interest expense or negative currency translation.
Have have been offset.
Just maybe a thought on maintaining or reiterating the guidance over a period where.
The macro outlook has.
Has changed.
Yes.
So.
David I think all the points that you've made are really great points.
There's been a lot of change.
Happened, whether it be inflation interest rates, just the macro environment. The global situations geopolitical situations I think all of those I think all of those.
Our are definitely a factor right and we're experiencing all.
All of those but at the same time I think there is really really great work that's going on in our company that we are very proud of.
When you look at our order rates that we continue to receive from our customers that they continue to be positive.
You look at our backlog our backlog has improved.
Again in the second quarter.
That our backlog had improved in the first quarter from year end by roughly $30 million to $35 million.
We have another step up of $30 million to $35 million of backlog improvement in Q2, if you look at our backlog over the last six quarters.
Roughly doubled.
Our backlog over the last six quarters. So if you go back to probably end of 'twenty beginning of beginning of 'twenty one.
Just from those factors I think gives us confidence our organic growth.
Pipeline continues to be very strong the work that's going on with our customers.
Our ops excellence activities as you know we went through significant new hires over the last four to five quarters. Most companies have gone through that I think our team has been doing a great job of getting those new hires in place and then getting them trained so that we can actually deliver better ops excellence as we go forward.
The full price impact quite frankly, we've been very focused on making sure that were positive.
The price cost equation.
And sometimes those pricing impacts don't come into the same quarter as the cost, but I think our team has done a nice job of making sure those prices.
<unk> put in place.
And then so we're having the full effect of that.
Our performance.
Performance on the ACS acquisition continues to be really well, we're very impressed with what the.
The team has been able to do there I think not only do we get a great business, but we got a great set of people that I think are focused on accelerating the growth curve for that for that business. So I think all the headwinds that you outlined and believe me we are facing all of those headwinds Shelley talked about that in her prepared remarks.
But I think at the same time, we've got a number of things that our teams are involved in that we feel good about.
And and that's why we've been able to hold our guidance for the balance of the year really for the full year.
Okay great.
Second question would be about the Milwaukee expansion I read the press release, a couple of days ago with.
Great interest and I was wondering if you could maybe just talk about the Genesis I guess of the decision I assume it's been some time in coming but.
Yes.
We're thinking in particular about the idea that you already have orders in hand, I think I forget the precise wording.
But it did.
The <unk> opportunity and the decision to expand in Milwaukee, I mean is that.
A function of I guess your base business is that a function of HCS and maybe.
Some cough.
Cross selling or.
Some synergies there.
And then secondly in terms of.
My sense is if you are expanding into kind of a leading edge areas such as <unk>.
There is going to have to be a certain amount of support R&D technical type of support that goes along with.
The physical.
Equipment and whatnot.
No.
Just a little.
A little bit of a background on how the <unk> opportunity materialized would be helpful and then.
Apart from the physical assets, what what else do you need to put in place.
In Milwaukee or elsewhere to kind of.
Ensure the success of that important initiative. Thank you.
Yes.
As I indicated earlier, we're really excited about I think.
Expansion and the investment that we're making in our and our customer is making.
This is this isn't a growth area very high growth areas semiconductors and <unk>.
The battery space.
This is just note. This is not related to our business that we acquired the tantalum and niobium business. The HCS electronic materials business. This is really based on I think the work that our teams have been doing for a number of years as I indicated earlier, we have been focused on developing our portfolio.
For <unk>, we feel <unk> deposition technology is something thats going to continue to increase and in fact, I would say increase at a much faster rate than maybe the typical semi space.
As it provides really a great coverage for these.
No dark sorry, low node type of products.
And so we're up.
<unk> invested in it and we're going to continue to invest in it I think to your point about having investment beyond the physical.
We've been doing that as I indicated I mean, our R&D and I'm speaking about R&D in total for the company, we've doubled almost of the R&D spend.
For the company over the last few years and a part of that is exactly on the AB space are part of that is on the battery.
Space as we have been working with a number of different customers on the battery side. So I think it's a combination of things and we look forward to.
Putting.
<unk> in that facility and both areas in growing that growing that business.
Okay, and just a follow up to the LTE opportunities maybe.
I didn't word it really well initially, but that's maybe more of an extension of your sputtering type of.
Technology as opposed to maybe something related to the barrier layer yes.
Operations of Acos Okay.
Thank you for that.
I was just wondering if we could if you could provide a little more clarity or qualitatively some extra.
Color on the battery opportunity that you discussed so you did say it's advanced chemicals.
For next generation batteries and I'm just.
I am not soup I admit upfront I'm not super familiar with your range of chemical activities currently but is this.
<unk>.
Is this related to the electrolyte function within the battery or is this maybe more of a <unk>.
Materials type of.
The activity that you are being asked to.
To develop and supply.
So as I indicated we have been working on this for a number of years with a number of different customers.
We now are at a stage, where one of the customers.
Going to be making the investment approximately $6 million of investment.
Our pipeline in place, we arent able to talk specifically about the materials. So to your point about the electrolyte or other parts of the battery I think that's something that we'll continue to have the battery manufacturers talk about that I mean, this is a very competitive space as you know.
Various companies are always trying to figure out how to get that next generation battery with that.
Longer range or faster charging and smaller packaging and et cetera, and so we our goal is to make sure that we take all of our advanced chemicals expertise and shared with them.
And then and then be able to to help support their cause the overall cause for these next generation batteries. So it's.
As I said, it's quite exciting because it's certainly in a high growth high growth segment.
And one way or.
We have a number of different customers that we're involved in discussions with them. So.
The the potential that's there.
Over the years down the road as we kind of get through these various prototype phases in discussions with the customers on this.
Could be could be substantial.
But we have to see as we go through the.
The initial phases.
Alright, and then last one for me would be just on customer.
The action too.
Two the consolidation steps that you've taken adding HCS.
And whatnot, but.
It's been a theory, a mine or a belief of mine that.
On the electronic materials side.
Customers actually want the industry to consolidate.
Pretty much everywhere, so that theyre dealing with fewer stronger more more committed counterparts.
We will likely translate into faster development cycles, and just greater success overall.
Was wondering if you could I know, it's early but I'm wondering if you could just share the customer reaction to date.
From the combination of HCS with your legacy electronic materials activities.
<unk> weather.
You can you can studied or you're confident that the revenue synergy potential that may be you envisioned initially maybe you could just comment on whether.
That continues to progress.
Yes.
David as you know.
When we announced the acquisition one of the main things that we talked about was exposure to the customers because we between our legacy business and then now this new business, we have exposure to the top 15 semiconductor manufacturers in the world. So it's been a it's been a fantastic I think edition and I would say the <unk>.
Discussions with our customers have been very very positive.
Our goal has been to make sure that we're out there we're talking about our entire portfolio I mean, just getting back to what I just talked about.
Premium.
Targets non premium or non precious metal targets.
<unk> metal targets the.
The tantalum and niobium business et cetera. So we've got a really really comprehensive portfolio and our customers I think.
You bet.
We received calls from our customers all the time wanting to now talk about that all comprehensive portfolio and frankly were out visiting the customers as well and talking about it. So I would say the reaction has been extremely.
Positive and part of that I'm sure is maybe what youre talking about which is <unk>.
Maybe those chip manufacturers looking for consolidation, but I think I would like to just look at it as we're providing a much broader value equation too.
To the chip.
Factors and I think they very much appreciate that.
Okay, great. Thank you very much.
Okay.
Your next question is coming from Marco Rodriguez. Please announce your affiliation then pose your question.
Good morning, this is <unk>.
Marco Rodriguez with Stonegate capital markets. Thank you guys for taking my questions.
Hey, Mike Hi, Marco.
Yes.
Most of my questions have been asked and answered.
Just have kind of a couple follow ups if you will.
Maybe if I can.
Ask one question in a slightly different way and when it when it comes to guidance.
Conversations youre, having with your customers.
Obviously, a lot has changed from the macroeconomic landscape and inflation is still an.
An issue, which you guys have called out.
And there is more risk of recessionary environments for a lot of different places, but it definitely sounds like yes.
Perhaps your demand is increasing because maybe you are taking market share or your new products are really just.
Accelerating at a much faster pace, but can you kind of balance those conversations or are those comments with.
Any sort of discussions you've had with your customers, where maybe you are noticing a shift in their assigned to make to become perhaps maybe a little bit more defensive just kind of given that macro economic backdrop.
Yes, I think I think mark of the important thing for US is the organic growth initiatives that we have so that if there are any type of <unk>.
Conversations than really being offset by the number of initiatives that we have going on I think if you just look at kind of a couple of the markets.
The normal market demand aerospace continues to progress continued to be more builds.
Every quarter I mean, we've had fifth consecutive quarter of growth on the aerospace side.
The oil and gas is another one that has announced.
Quarter of growth for us. So there is a couple of markets that we have content increase going on so we actually have more types of products actually being used to both aerospace and oil.
<unk> gas along with the fact that the market continues to move.
Move forward.
Perhaps if there is some discussion I mean, I would say maybe in the industrial side or.
Perhaps on the automotive side.
Out of motive only because of maybe chip demand.
There continues to be.
Some pressure from the chip side for automotive, but when we listen to some of the automotive commentary.
The customers are.
Are tending to be more.
Positive for the second half and so I think right now I would say the general discussion continues to be positive, but I think more importantly, our organic growth initiatives are being.
<unk> been very supportive for us.
Got it and then last quick question from me just on the cash flow question prior.
Just trying to get a sense as you do see improvement in the second half.
In your cash flow from operations is there an expectation that you're going to be generating free cash flow in the year.
Yes, I would expect we're putting a lot of cash to work and Capex right. So if we were out.
Doing M&A with that money cash free cash flow would be much more positive I think it's probably going to be a little bit of a push after.
After we put the investments in Capex that we're planning back those organic projects that are going to provide great returns. So we're looking at this year is a year of investment and.
And are comfortable with where we're going to land.
Alright. Thank you guys very much for your time I appreciate it sure.
There are no further questions in queue I would like to turn the floor back over to John Zahradnik for any closing remarks.
Thank you. This concludes our second quarter of 2022 earnings call.
A recorded playback of this call will be available on the company's website materially dot com I would like to thank you for participating on the call. This morning, and your interest in mature out I'll be available to answer any follow up questions. My direct number is $2 63834010. Thanks again.
Thank you ladies and gentlemen, this does conclude today's conference call you May Jeff.
Phone lines at this time and have a wonderful day.
For your participation.