Q3 2022 Materion Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the materials third quarter 2022 earnings Conference call.
At this time, all participants have been placed on a listen only mode and the floor will be open for questions and comments after the presentation.
It's now my pleasure to turn the floor over to your host John <unk>, Chief Accounting Officer at material Corporation.
Sir the floor is yours.
Good morning, and thank you for joining us on our third quarter 2022 earnings Conference call. This is John <unk> <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 attachment four through seven in this morning's press release.
Adjustments are made in the prior year periods for comparative purposes, and removed special items noncash charges and certain discrete income tax adjustments.
And now I'll turn 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 record quarter for material.
And to cover some significant advancements we've made on our strategic initiatives.
We remain on track to deliver another record year as we have continued to reset the bar each quarter for the last two years.
In Q3, we achieved our highest ever topline results with value added sales up 35% compared to the prior year.
Our organic outgrowth initiatives combined with continued strength across most of our end markets led.
Led by semiconductor industrial aerospace and energy delivered a robust 15% organic growth in the quarter.
The new precision glass facility contributed largely as expected with a plant now fully qualified by our customers.
And Acs electronic materials continues to perform well with strong sequential growth meeting continued robust customer demand.
We also achieved record EBITDA and EPS for the quarter.
Primarily due to higher sales and improved pricing.
EBITDA margins were approximately 17% performing close to our midterm target of 20%.
During the quarter, we did face some short term headwinds that caused our profitability to fall short of our expectations.
While our semiconductor related sales were up organically are mixed within semiconductor was weaker than expected due to lower precious metal target sales into a software consumer device March.
The balance of our expanding portfolio is focused on the growing segments of semiconductor such as logic communications and other advanced chip applications, leading to increased demand for our non precious metal products.
We also felt the impact of higher 10 from raw material costs in the quarter.
As noted earlier the demand of our HCS electronic control products remains very strong however, with inherited customer contracts are still being renegotiated.
We're not able to pass along the unusual raw material price increases experienced.
The market for tantalum has typically been quite stable, but it did see a run up over the past few months due to labor shortages at the mines.
That pricing has started to come back closer to normal levels.
And lastly, one of our largest performance materials facilities had some challenges with staffing and reduced yields.
The team is working diligently to improve the yields in the near term while delivering for our customers.
We expect that each of these short term headwinds will be mitigated moving into next year as we continue to drive our organic initiatives and deliver on operational excellence.
Despite challenges incurred in the quarter, our teams performed well and continued to execute on our strategic initiatives, while building a pipeline of outgrowth opportunities for the future.
Organic outgrowth initiatives have become a cornerstone of the turnaround strategy.
They have accelerated our top and bottom line, leading to consistent outperformance versus our end markets.
When we think about the economic uncertainty that is prevalent across most industries today, we feel confident about our ability to continue to outperform because of the robust pipeline of projects and customer partnerships, we have established.
Let me give a short update on some of the major projects. We currently have underway.
We are pleased to share that our precision classroom facility was fully qualified by our customers.
We are continuing to ramp into Q4 and plan to be operating at expected levels by year end.
In addition, the second phase of the precision Klatch. The project continues with asset procurement and project management on pace with the expected timeline.
We anticipate startup in second half of 2024.
Our Acs electronic materials business continues to accelerate growth as we have meaningfully increased head count and output from the facility.
The recently announced $20 million capital investment to expand capacity and capabilities is on track and will support our growth objectives for that business.
Construction has begun and equipment is on order for the next generation electric vehicle battery material opportunity at our new facility in Milwaukee.
And as it relates to our molten salt purification project production of Flied has started and we expect to ship material to the customer later this year.
These announced initiatives and several others that are in the development stage will drive continued outflow as we move into 'twenty three and beyond.
Moving ahead to expectations for the fourth quarter.
I expect that our performance will be stronger to finish out a fantastic record year.
We like what we have seen for October sales leads.
Taking into account mainly the impact of the short term headwinds we are adjusting our guidance to $5 20 at the midpoint.
This represents a roughly 30% increase in EPS versus last year.
While we're not ready to guide for 'twenty three.
Confident that our organic growth portfolio and operational excellence initiatives will deliver another year of strong.
In closing as I reflect on our strong customer partnerships strategic acquisitions and the many exciting organic opportunities in our pipeline I'm really proud of the progress we've made and the dedication and commitment of our 3600 team members around the world.
It is their commitment that is driving long term value creation for our customers our shareholders and for our people 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 10.
As jugal outlined in his opening remarks, we achieved another record quarter of value added sales adjusted EBITDA and earnings per share in the third quarter.
Value added sales, which exclude the impact of pass through precious metal costs were $294 million for the quarter up 35% from the prior year.
Organic sales, excluding the impact of both acquisitions and foreign currency increased approximately 15% compared to the prior year.
This significant market outgrowth was driven by strong demand across several of our end markets, particularly semiconductor industrial aerospace and energy.
Our HCS electronic materials acquisition continues to surpass topline expectations and it performed well despite the short term unmitigated tantalum raw material cost increases experienced in the quarter.
Despite the market and operational headwinds jugal outlined we delivered adjusted earnings of $1 31 per share up 14% as compared to the prior year, even with a 20% increase in interest expense.
Taking a look at slide 11, adjusted EBITDA in the quarter was $48 8 million up 18% from last year and up 29% with comparable mine amortization add back.
This item is an immaterial change to the quarter rotation of the mine amortization add back in performance materials to better align with its cost of goods sold impact.
Prior to Q4 last year, we reflected EBITDA figures using a mine amortization add back tied to raw material production and not to our actual cost timing.
Within any 12 month period, the add back was roughly the same but the impact between quarters can be lumpy based on the timing of our mining activities.
Starting in Q4 'twenty, one route began reflecting our EBITDA amounts using an add back methodology aligned with the cost to them.
Given Q3 of 'twenty, one with the last quarter under the previous method, we provided the EBITDA growth with comparable mine amortization add back to better illustrate the year over year business performance, which drove a 29% increase in adjusted EBITDA year over year.
This increase was largely driven by strong volume meaningful price mix and positive contribution from our HTS electronic materials acquisition.
As jugal shared earlier in the call. These growth drivers were partially offset by unfavorable semiconductor mix and yield challenges at a large performance materials facility as well as the delayed recovery timing in our precision optics segment.
Commercial and R&D investments increased year over year as expected as we continue to support our organic growth initiatives in the near and mid term.
Now, let me review third quarter performance by business segment, starting with our performance materials business on slide 12.
Now you've added sales were a record $148 8 million, an increase of 29% compared to the prior year.
The increase was driven by strong performance in the industrial energy and Aerospace end markets. In addition to the impact of the precision Plaid strip opportunity contributing approximately $20 million of sales in the quarter.
EBITDA, excluding special items was $33 million or 22, 2% of value added sales compared to $28 8 million in the third quarter of <unk> 21, or 25 5 million with comparable mine amortization impact.
The increase in EBITDA was primarily due to the increased volume and positive price cost, partially offset by the yield challenges previously mentioned.
Moving to the fourth quarter outlook, our order book remains strong and we expect another quarter of above market growth.
With our precision strip facility ramping and our teams working together to improve yields we expect sequential EBITDA improvement as well.
Next turning to electronic materials on slide 13.
Third quarter value added sales were $113 9 million up 63% versus the prior year and up 10% organically.
Aside from strong VA contribution from the HCS electronic materials acquisition.
The organic increase was primarily driven by stronger demand in the semiconductor and industrial end markets.
EBITDA, excluding special items was $17 2 million or 15, 1% of value added sales in the quarter, an increase of 52% from the prior year.
The increase was driven largely by higher organic volume and positive price costs offset by the unfavorable precious metal mix within semiconductor.
HCS contributed meaningfully despite short term channel alone raw material headwinds.
As we look to the fourth quarter, we expect the electronic materials business to deliver another strong quarter of year on year growth attributed to our diversified semiconductor portfolio as well as organic initiatives on pace to deliver continued above market rents.
Finally, turning to the precision optics segment on slide 14 value added sales were $28 million down 10% compared to the prior year.
We experienced foreign currency headwinds of $2 million on the top line for this business. So when excluding the currency impact sales were down 4% compared to the prior year.
The decline is due to the discontinued consumer electronics application.
Certain timing of defense projects.
Which were slightly offset by stronger performance in the medical market.
EBITDA, excluding special items was 4 million or 14, 5% of value added sales down.
Down from the prior year due to lower volume.
Sequentially EBITDA increased 11% with a 230 basis point margin improvement.
Pertaining to the fourth quarter outlook, we expect sequential improvement supported by growth in defense and space.
Moving now to cash debt and liquidity on slide 15, we ended the quarter with a net debt position of approximately $473 million and $127 million of available capacity on the company's credit facility.
Our leverage at two six times remains within our target range.
With strong free cash flow expected in the fourth quarter, we expect this leverage ratio to be approaching lower twos by year end.
Lastly, transitioning to slide 16, let me address our outlook.
While we remain confident in our strong order book and organic initiatives pipeline when considering the impact of the recent short term market and operational headwinds we are updating our full year outlook to the range of $5 15 to.
To $5 25 per share representing a roughly 30% increase year over year.
Among other items the timing of certain defense orders in performance materials with push results to the high end of that range.
As in previous quarters, we have also updated modeling assumptions for you.
In closing we are proud to have delivered another quarter of record results.
Headed into the fourth quarter with good momentum expecting sequential improvement to finish the year on a high note.
This concludes our prepared remarks, we will now open the line for questions.
Ladies and gentlemen, the floor is now opened 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 speaker phone to provide optimum sound quality.
Please hold while we poll for questions.
Yes.
Okay.
Your first question for today is coming from Dan Moore. Please announce your affiliation then pose your question.
Hey, this is stefanos crist, calling in for Dan Thanks for taking my questions.
Hi, there either.
Could you just update on what your semi customers are telling you about their expansion plans as it relates to the inflation reduction Act.
Any change either in the scope and timing of potential cabinet capacity additions.
Sure.
Well I think in general I mean is some of the.
Customers have made their announcements cup.
Couple of them have indicated that they will maybe back off on some capex investments into the new year, perhaps in the 'twenty three 'twenty four time frame, but I would say that there has not been a wholesale.
Announcement from everybody on decreases based on the economic.
Economic conditions so.
There is some minor announcements, but I don't think theres anything major from what we're seeing with our customers. So we're continuing to see good growth.
Our semi business is quite diversified.
Not only do we serve the memory market, which is the area that I know it's been challenged here in the near term, but we serve very well the data storage communication.
Power devices logic devices et cetera, So we're very diversified.
Semi base for us the business that we have and so I think from our side, we're not seeing the types of things that maybe some of the some of the folks have announced but overall I would say longer term in terms of investments.
Nothing substantial minor minor announcements from from some of the semi players.
That's great color. Thank you.
Just a follow up on the task home cost was it simply just a matter of just a lag of timing and passing those through and when do you expect those to return to a normalized level.
Yes, tantalum is something that has been a fairly stable material one that.
<unk>.
In fact, our previous owners.
<unk> had never really thought much about I think.
And then there was a run up that happened in a fairly short period of time that was a result of labor shortages.
<unk> had been diverted to 10 mines, which happens to be located nearby the tantalum mine.
<unk> and.
And as a result, there was a run up on the price that price has started to come down.
As we just look at our inventory turns and just kind of how we process things I would say that probably in the first quarter of.
The new year, we would start to see.
The positive effects of the price.
That's coming down for tablet I think the second thing Thats important to note is the as the contracts I mean, I think as you know we've talked about it on many calls we absolutely do not want to be the sponge when it comes to inflation related.
Pricing from our supply base, we have worked very hard to make sure that our contracts are aligned with our customers in a way that we can recover pricing.
These contracts, which are legacy contracts, we inherited from the from the buyer.
Not structured in that way and so we are working very hard to restructure those contracts. We've made good progress on that and I would expect that in the new year those contracts will be in a way that will allow us to be.
That will allow us to pass the cost.
As we incur them, which would be more in line with the type of contracts that we have with many of our customers and so that is that is exactly where we're headed and so we would really see a turnaround here in the new year. So we really see this as a short term or very short term item one that we.
We expect as I said to be recovered from in the new year.
Great. Thank you for taking my questions.
Thank you.
Your next question is coming from Phil Gibbs. Please announce your affiliation then pose your question.
Hey, it's Phil Gibbs with Keybanc good morning.
Morning, Joe.
On the clinical side, just sticking with that.
How much do you think relative to where your new contract could be.
Okay.
These cost one.
That misalignment.
How much did that impact the quarter.
$5 million.
So im pretty sizeable move.
Thanks.
Yes.
So on the size of that up yes.
Yes, Bill it is a sizable impact just to give you an idea.
The tantalum pricing was approximately in this one up went up about 50% so fairly sizable increase when you look at our cost of goods sold for tantalum.
It's roughly about 75%.
Cost of cost of goods sold for tantalum related products is the actual cost of the tantalum. So when you look at that type of impact I mean, it's in the neighborhood of about $4 million as the impact of that.
Faced.
So a very sizable impact.
Our expectation was that we would be able to recover that.
As I indicated.
In my earlier comments.
I think our team has done really a fantastic job of being able to recover.
Inflation related cost related items for our customers and we through.
Through various discussions surcharges through price adjustments, we just based on the contractual arrangements that we have we just were not able to.
Execute on that it wasn't for lack of trying I can assure you of that and.
We will have this issue fixed and taken care of so that we're not having to incur this type of a situation in case, if there is ever a run up in the future.
But as I noted.
The cost of tantalum is starting to come back down and.
We want to make sure that we are a win win situation with our customers. So obviously if the cost comes down then the customers will feel the benefit of that but if the cost goes up then the customers will have to participate in that.
So incrementally.
In Q4.
The Smiths alive with expected to continue at that magnitude or is the misalignment.
Relative to Q3.
Yeah look I think the misalignment first of all is going to continue.
We can talk about the magnitude of the Miss alignment is going to continue just based on the fact that we're buying and theirs.
There is a lag time from the time that we're actually buying the raw material processing raw material getting through our inventory turns and then getting that getting that over two to our customers. So I think I think that takes time and so it will continue into Q4 I think the magnitude I would say, it's probably in the similar neighborhood.
As what I would what I would expect.
Probably improving perhaps towards the end of the year and then certainly into the new year, but it will be a sizable magnitude.
Still in Q4.
Is that going do you think that the.
It goes away in Q1 or is it just sort of a glide.
Yes.
Yes, it's Brian .
It's a glide it's a glide I really would see a improvement in Q1, and then really I think I think by Q2 and our expectation is to really have this issue.
Fully.
Fully addressed but we got to continue to work through here over the next couple of quarters.
But as I indicated this is not something that.
We're going to have to deal within the in the future.
We know how to manage these types of things, we manage them on a daily basis on all of our other materials.
And we're going to make sure that this is managed appropriately.
Going forward, yes.
I think you know right, there's two elements to the easing and I think Joe will touch on both of them at the new pricing coming in or the new contract being implemented as well as working through the inventory of that higher priced channel. So that's why you don't see just kind of a switchover one one.
Okay that makes sense I appreciate that.
Appreciate all the detail on that.
As it relates to.
Just the overall order book, what's what's the texture of what Youre seeing just across the board.
Business units.
<unk>.
And I Wonder what are your order books flowing out at this point across your markets.
Yes.
Look our business continues to do really well I mean, we delivered as you've as you saw in a 35% year over year growth and a 15% organic for the quarter, which I think is very substantial and we expect our organic growth to continue our order books continue to be strong. That's certainly there are some areas that are perhaps a little bit more challenged.
The on the on the semiconductor side that there are parts of semiconductor that are probably.
A little more challenged as we go into Q4 and perhaps into the nuclear but like I indicated in my earlier comments, we have a very diversified portfolio of our semiconductor. So we believe we're going to continue to outperform the market.
Automotive there seems to be some issues regarding inventory correction.
There was a lot of buy that happened.
Anticipation of semiconductor chips availability that chip availability has been slow and so I think theres been some usage of the inventory thats going on so automotive is a bit a little bit more challenge for us than what we probably would have expected at the beginning of the year.
But I think in general.
We have we have really good.
Growth in our aerospace business and our energy business.
We continue to do well in industrial.
Semiconductor business as I said, the rest of the business on semiconductor continues to do well Telecom has continued to do well I mean, when you look at our when you look at our order book from just from end of last year to kind of where we're at right now.
Our order books up about 13%.
From end of last year or two now and I think it's just a testament to the type of organic growth. Our teams are driving the projects that our teams are driving.
So we continue to see we continue to see good progress on the organic side. So I would say Q4 is a good continued progress of our growth.
And when you look at in fact, our overall order book I mean, it's been it's been pretty much stable even in even in the Q3.
Q3 timeframe.
Thank you.
Okay.
There are no further questions in queue I would like to turn the floor over to John ceramic for any closing remarks.
Thank you. This concludes our third quarter 2022 earnings call a recorded playback of this call will be available on the company's website if material dot com.
Now I'd like to thank you for participating on the call. This morning, and your interest in material I will be available for any follow up questions. My number is 206.
34010, thanks again.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.