Q3 2023 Materion Corp Earnings Call
[music].
Greetings and welcome to the material third quarter 20 twenty-three earnings call.
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Tell her manager Investor Relations.
Sir you may begin.
Good morning, and thank you for joining us on our third quarter of 2023 earnings Conference call.
Keller manager Investor Relations.
Four 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 quarterly results. You can also access to materials through the download feature on the earnings call webcast link.
With me today is Google <unk>, President and Chief Executive Officer, and Jelly, Chadwick, Vice President and Chief Financial Officer.
Our format for today's conference call is as follows Google will provide opening comments on the quarter as well as an update on key strategic initiatives.
Jugal Shelley will review the detailed financial results for the quarter. In addition to discussing our expectations for the remainder of 2023. We will then opened up the call for questions.
Let me remind investors that any forward looking statements made in the presentation, including nosy and the outlook section in during the question and answer portion are based on current expectations.
The company's actual performance may materially differ from that contemplated by the forward looking statements as a result of a variety of factors those.
Those factors are listed in the earnings press release, we issued this morning.
Additionally comments regarding earnings before interest taxes, depreciation depleted and amortization net income and earnings per share reflect the adjusted gap number shown in attachments four through nine in this morning's press release.
The adjustments are made in the prior year period for comparative purposes, and remove special items non-cash charges and certain discrete income tax adjustments.
And now I'll turn the call over to Jubal for his comments.
Thanks style and welcome everyone.
It's great to be with you today.
A record performance in the third quarter is a testament to the strength of our company the effectiveness of our strategy.
Talent of our people.
We are successfully leveraging a diverse portfolio and unique technical capabilities to capitalize on new organic growth opportunities.
In addition, a global team continues to raise the bar for operational excellence deliver.
Delivering for our customers and executing on our our quote initiatives, while pursuing targeted cost improvements and driving improved performance across our class.
These sprang so offsetting the impact of software demand conditions in the semiconductor and industrial and market.
<unk> to deliver in a challenging environment.
The third quarter represented are false.
Consecutive quarter of your over your earnings growth.
Record earnings $1.51 per share.
There was also the second consecutive quarter outperforming our adjusted EBITDA margin target of 20%.
Excluding the continue softness in the semiconductor market value at her sales were up 8%, which speaks to the substantial diversity guard portfolio and the significance of the contributions from our organic pipeline.
Strength in aerospace, including the emerging space market Defence Telecom, a data center and meaningful contributions from precision class.
The differentiator performance.
We continue to benefit from improved aerospace build rights and more importantly are increasing content for planes.
In addition, we're gaining significant content and emerging space market.
For Telecom and data center, increasing five G adoption is fueling our girls an undersea cable market.
Ask for the semiconductor market.
Softness has persisted into the third quarter, pushing the recovery out beyond our previous expectations as we can.
You know to see inventory correction in memory logic and communication devices.
We believe the third quarter was a low point for software sent me demand and remain encouraged by some positive signs of recovering we've seen in the broader industry as well as a modest recovery and an order rates.
Alright expectation is that we will start to see gradual improvement in demand in the fourth quarter.
A broader recovery next year.
As we have said before we are extremely excited about opportunity in the semiconductor market, including are expanding content for chair.
We also recognize that 70 cycles can lead to strong upfront and we remain well positioned to support that volume as in touch.
Leveraging our diverse portfolio our team continues to unlock new organic growth opportunities Ah line with global Mega trends.
One such friend is the emerging space market is driving significant new opportunities for us.
Our sales into this growing market have more than tripled in the last two years.
Let me highlight a few of the exciting opportunities.
To start we recently secured a third order to supply critical materials for space propulsion systems.
$13 million that brings the total amount of water to $35 million for the past year.
Our partnership with this important customer is strengthening and we see the potential for additional orders in the coming year.
We're also projecting that are tough my product sales into the space market will double to approximately $10 million next year.
We have new customer commitments for this important material is the highest rank and corrosion resistant properties have proven to be ideal for next generation space applications, which require robust performance and exceptionally harsh conditions.
Girls in this market is also benefiting a precision optics business, which is secure approximately $8 million a new contrast across both the space and defense markets.
Optical components, Sir is key enabling technologies essential for space space instrumentation and imaging across various applications.
We continue to be an important supplier, but critical defense progress, bringing a unique expertise and technically demanding materials.
Recently notified Avenue 10 million dollar award of supply critical materials for his face related defense program.
I'm also pleased to announce that we have received 5 million dollar investment from the U S Air Force Research Laboratory.
To accelerate the development of our additive manufacturing capabilities.
No known as three D printing.
<unk> and aluminum beryllium Alice.
Additive manufacturing capabilities will enable significant advantages and the production and performance of optics structures guidance systems, and thermal management applications used in defence and aerospace markets.
This investment will propel us into a new phase of development that will accelerate our ability to operationalize the specialized manufacturing techniques.
I'm very proud of our team performance and I remain confident in her ability to execute and deliver another year of record the results.
With the winds we've achieved through our diverse portfolio are uniquely relevant technical capabilities and our teams unrelenting focus on operational excellence, we are continuing to bill on earnings power of material.
Now, let me turn the call over to Shelly to cover more details on the financials.
<unk> good morning, everyone.
Comment, although reference to slide posted on our website. This morning, starting on slide 10.
If you don't outline we delivered record earnings in the third quarter.
Value added sales.
<unk> precious metal cost for 275 million for the quarter down 5% from prior year, but up sequentially.
Excluding the semiconductor market darkness, the remainder of the business with approximately 8% year on year.
This process driven by strong demand in the aerospace and defense.
Telecom and data center and markets.
Now with meaningful contribution from the precision Kladstrup business.
We delivered adjusted earnings of $1.51 per share in the third quarter Accordingly record for the company and up 15% as compared to the.
Prior year.
Moving to slide 11, adjusted EBITDA quarter, with $55.4 million or 25 per cent of value added sales at 14% from the prior year with margin expansion of 330 days.
Significant increases driven by favorable pricing and next as well as strong operational performance, partially upset at a slight decrease in volume.
Are targeted cost improvement initiatives also contributed to the step up and Ernie.
Forming a mid term EBITDA margin target at 20 per cent to the <unk>.
Second Street corner.
Moving to Slide 12, let me review the third quarter performance by business days Ma'am.
Starting with our performance materials fitness.
He might've sales for 168.9 million.
13% compared to prior year.
Strong results in aerospace consumer electronics Telecom and data center interested in Sidestroke job this increase.
EBITDA, excluding special items with 46.5 million or 27.5 per cent of value added sales.
41% when compared to 33 million and the third order of 2022 with an impressive 530 days imagine expansion.
This is primarily due to higher volume from our outgrowth initiatives favorable pricing and a strawberry.
Combined with benefits from our operational excellence initiatives.
Moving to the outlook, we expect a strong fourth quarter led by aerospace defense and Telecom and data center.
<unk> contribution some precision cloud strife.
Next turning to electronic materials on July 13th.
That you added sales were $75.5 million down 29% compared to the prior year, resulting from the slowdown in the semiconductor market for our customers continue their inventory correction.
EBITDA, excluding special items with $13 million or 17.2% a value added.
<unk>.
Despite this year over year decline with 710 days with myself margin improvement compared to prior year.
This is driven by a favorable next plus the benefit of our targeted cost reduction initiatives, which do include some short term action.
As we look forward to the fourth quarter, we expect incremental improvement semiconductor sales.
Well as it continues to benefit from the cost improvement initiatives.
<unk>.
Finally, turning to the precision optics statement on slide 14th value added sales were $26.1 million down 7% compared to the prior year.
This decreases mainly driven by the reduced G. T. R filter demand the discontinued product application and general softening in the consumer electronics market slightly upset by strength and defense.
EBITDA, excluding special items was $3.4 million or 13% a diabetic sales.
<unk> in volume with a meaningful driver of this year over year decline.
Bypass it at night and the benefit of our targeted cost improvement initiatives.
Okay sequential standpoint, restart EBITDA growth, along with 260 days appointment margin expansion.
Looking out to the fourth quarter, we expect new opportunity depressed defense.
An automotive you can trade is top line growth.
Moving out of cash and liquidity on 515, we ended the order with a <unk> physician of approximately $445 million and $151 million available capacity on the company's existing credit facility.
Our leverage it two times remained slightly below the midpoint of our targeted ranch.
Lastly, let me transition to slide 16 to address the full year outlook.
With accelerating contributions from our organic pipeline are strong.
<unk> operational performance and the continued benefit of our cost reduction action, we remain confident in our ability to execute and finish up another record here.
With that we are affirming the mid point of our prior guy at $5.80 per share an increase of 10% and 2022.
We look forward to closing 2023 on a high note deliver it another year of record results and long term sustainable value creation for our stakeholders.
That concludes our prepared remarks, we will now open the lines for questions.
Frankie.
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Thank you are.
Our first question is coming from more C. G. S Securities. Your line is nice.
Hi, Good morning, it's P Lucas for Dan.
First one for me.
<unk>.
<unk>.
How was declared strip project performing relative to your expectations and has there been any change in timing regarded expected ramp in phase two.
Yeah, Let me start with the second card first here. So our timing is in line with what we have communicated before which is that we expect to have a ramp starting at the end of 24 low volume ramp and then full volume production and the and the 25 timeframe.
Our equipment installation and and validation will go on over the next year or so uhm as we go through.
Getting that uhm qualified.
In terms of our our current program I would say, it's going really well we are producing at our new facility. We produced at the legacy facility as well and and it's delivered to to our expectations. So with the the top line and the bottom line of contributing you know as we had.
As we had plan.
And that's reflected in our results.
Ah very helpful. Thanks.
And then looking at the various program awards. He noted I think it was on slide five of the presentation.
When do you expect to begin layering in revenue for each of these awards and do you expect <unk> to record the full amount listed in physically with 24 are those likely spread over the next one to two years.
Yeah, well first of all I just wanted to say I think it's just another testament or team delivering fantastic organic growth opportunities. It should know that we've done that over the last several years and our team just continues to bring a new opportunities.
Let me highlight on a few of those they're on this page. So first of all the the the 13 million dollar order to supply of critical materials for the space propulsion systems that we expect to be in in the 24 timeframe, we announced actually a phase one and phase two of that one was $10 million. Another one it was $12 million.
Earlier, and those are being delivered to the customer you know as we as we speak so there's $13 million is another order coming to a total of $35 million with his customers. So this this this opportunities becoming a really great opportunity for us and I would expect more orders and the new Europe 424.
And and perhaps twenty-five timeframe, so very much looking forward to that when I look at the precision optics contracts the $8 million for space and defense those I would see as as multiyear contracts and the 24 25 timeframe. So very much looking forward to those the <unk> materials for space applications.
As you know tough met at a very very important material for us we have a number of applications in a commercial aerospace.
Oil and gas et cetera for for that material and.
This material has been and now adopted into the space applications are just based on the the quality that it offers we have been supplying that material. This year as you can see from the chart, that's roughly about $5 million worth of sales this year and we expect a double dose into 24 so.
<unk> $5 million into the 2024 timeframe.
The notification that speak of of the $10 million of the the critical materials for the defense related applications Uhm that we expect this year, partly and then and then into our next year. So we're very much looking forward to that that just build onto our our capabilities and materials expertise that we provide for for defense applications.
The the the neat thing about this is this is a space related application uhm for for defense and then the the 5 million dollar investment and this is this is an award of an investment award that we were receiving from the U S. Air Force base for additive manufacturing Uhm, let's would be Donald <unk> to your time period, we've had a number of different the initial.
We've taken ourselves on the additive manufacturing over the last three to four years, we've invested quite a bit of money ourselves in our facility and this award just will accelerate our development regarding beryllium and aluminum earlier based materials relative manufacturing. So we're very much looking forward to that over the next over the next two years.
So great great opportunities to continue to drive organic growth for a company.
Extremely helpful. Thanks, and just finish it with one housekeeping question here what tax rate is assumed for your Q4 apply G. P. S guidance and what's a good rate as we look out to physical 24.
Yeah. That's great question. Thanks for asking it you know we the benefit of a reduction in our year to date and are effective tax rate, which we were really pleased with on top of already strong operating results. We saw the tax rate come down by a combination of things the first being the production credit production credit.
Has gone are estimated production credit has increased slightly due to the increase in the pure burley unrelated products that we have than selling you know we talked a lot about a strong next some of that is from our pure barely unrelated products.
Then drive the the production credit and that's tax free so all of that income you know, we're able to take tax free. In addition, we were seeing higher foreign tax credits based on the global next of earnings. So in a sense. You know we took our tax rate down from call at mid 16th two roughly 15 and in queue for what I have.
Operator: Greetings and welcome to the Materion 3rd quarter 2023 earnings call. At this time, all participants are on a listen-only mode and a question and answer session will follow a platform of presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded.
15, and a half and we'll we'll see how the ear shakes out once we have actual.
Great. Thank you jump back in the queue.
Thank you.
Kyle Kelleher: I will now turn the conference over to your host, Kyle Kelleher, Manager Investor Relations. Sir, you may begin. Good morning and thank you for joining us on our third quarter 2023 earnings conference call. This is Kyle Kelleher, Manager Investor Relations. 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.
<unk>. Our next question is coming from Mike Harrison with Sea Port Research Partners. Your line is nice.
Kyle Kelleher: You can also access the materials through the download feature on the earnings call webcast link. With me today is Jugal VJvargiya, President and Chief Executive Officer and Shelly Chadwick, Vice President and Chief Financial Officer. Our format for today's conference call is as follows. Jugal will provide opening comments on the quarter as well as 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 2023.
Hi, good morning.
One of my.
Was wondering if we can talk a little bit about the performance materials Margaret and some of the sources with <unk> with your comments you mentioned the next words particular will be strong and then surely you just mentioned here that the the production crew.
Henry Kris, which I believe.
Through that segment level EBITDA line, but maybe you're just talking a little more detail about the puts in pigs. So we should be thinking about as we look at the margin in the PM segment for two Ford is reputed 2024.
Kyle Kelleher: We will then open up the call for questions. Let me remind investors that any forward-looking statements made in the presentation, including those in the outlook section and during the question and answer portion are based on current expectations. The company's 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 the amortization, net income, and earnings per share reflect the adjusted gap numbers shown in attachments 4 through 9 in this morning's press release. The adjustments are made in the prior year period for comparative purposes and remove special items, non-cash charges, and certain discrete income tax adjustments.
Yeah, let.
Let me start on that and then and then surely can jump in especially when it comes with a production credit and things I think you know that businesses you know over the last several quarters is continue to perform well you know one of the things that we are continue to be very focused on for that business is value based pricing, making sure that we're <unk>, we're getting the right price you know for the <unk>.
Providing to our customers. So that's an important part of our initiatives company wide, but I would say, particularly for that business. We can choose to do that and then certainly mix. It has been a very important factor is what we can turn to drive more focus on products to generate more value for us frankly, then products that that adult and so we're making sure the word.
Utilizing our assets to drive the best mix.
Jugal Vijayvargiya: And now I'll turn the call over to Jugal for his comments. Thanks, Kyle, and welcome everyone. It's great to be with you today.
Possible and and that also helped us of course on operational excellence, but yeah. Just a couple of Everything's you know the plans had been running really well and fell when our plans are running well, we get better operating performance in and that helps the next and the margin as well you will talked about mix and we'd highlighted space.
Jugal Vijayvargiya: Our record performance in the third quarter is a testament to the strength of our company, the effectiveness of our strategy, and the talent of our people. We are successfully leveraging our diverse portfolio and unique technical capabilities to capitalize on new organic growth opportunities. In addition, our global team continues to raise the bar for operational excellence, delivering for our customers and executing on our output initiatives while pursuing targeted cost improvements and driving improved performance across our plants. These strengths are offsetting the impact of software demand conditions in the semiconductor and industrial end markets, and enabling maternion to deliver in a challenging environment.
This quarter and that is definitely a mix up for us and we will see that last into the fourth quarter and then the production credit you know as we just talked about.
Crazy if I said, you know roughly $8 million for the year now we're looking at roughly 10 million for the year. Sir you think about 3 million in each of the last two quarters of the year, So really a nice benefit.
Alright, and then in terms of the electronic materials business.
Like kind of the the piece of recovery here is a little bit slower then we might have hoped to be give us a little more color on what you're hearing from your customers.
Jugal Vijayvargiya: The third quarter representative are 12th consecutive quarter of year-over-year earnings growth, achieving record earnings of $1.51 per share. It was also the second consecutive quarter outperforming our adjusted EBITDA margin target of 20%. Excluding the continuous softness in the semiconductor market, our value-editor sales were up 8%, which speaks to the substantial diversity of our portfolio and the significance of the contributions from our organic pipeline. One. Strength and aerospace, including the emerging space market, defends telecom and data center and meaningful contributions from precision cloud strip drove the differentiator performance.
The logic and memory side about their production rates as we get into urine and start 2024.
<unk>.
Yeah, you know.
As you know Mike we've all been waiting for this inventory correction to start to slow down. So that you know the the the rates are bold rates can start to pick back up but unfortunately, the inventory correction and our customers is taking a little bit longer than I think you know they had all estimated that inventory correction of course or the slow down to that transferred.
Sent to a slower orders for us our expectation was it maybe towards the end of two three we would start to see a little bit of recovery I think that expectation has now shifted to queue for.
Jugal Vijayvargiya: We continue to benefit from improved aerospace build rates, and more importantly, our increasing content for playing. In addition, we're gaining significant content in the emerging space market. For telecom and data center, increasing 5G adoption is fueling our growth in the undersea cable market. As for the semiconductor market, softness has persisted into the third quarter, pushing the recovery out beyond our previous expectations as we continue to see inventory correction in memory, logic and communication devices.
Noting to see us we're listening to some of the yearnings calls from our customers some small positive incremental benefits.
Highlighting we're also starting to hear some things from our customers directly some of our orders so depending on the semiconductor types.
Order rates are starting to see a little bit of a uptake maybe for for Q4. So I would say you know it seems like two three is the is the low point and and two four would be a small incremental uptake for us and I think that <unk> that you know.
Jugal Vijayvargiya: We believe the third quarter was the low point for software semi-demand and remain encouraged by some positive signs of recovery we've seen in the broader industry, as well as some modest recovery in our order rates. Our expectation is that we will start to see gradual improvement in demand in the fourth quarter, with a broader recovery next year. As we have said before, we are extremely excited about opportunities in the semiconductor market, including our expanding content for chip.
In line with what the semi companies are saying, saying as well so that that's just kind of how we see it you know this is as you know this is extremely extremely good business for us that's roughly a third of our company and we're very much looking forward to the uptake we're prepared to address the uptake we've made.
Jugal Vijayvargiya: We also recognize that semi-cycles can lead to strong upturns, and we remain well positioned to support that volume as it returns. Leveraging our diverse portfolio, our team continues to unlock new organic growth opportunities aligned with global mega trends. One such trend is the emerging space market that is driving significant new opportunities for us. Our sales into this growing market have more than crippled in the last two years.
Sure that our workforce and our materials or inventory everything is everything is ready to go you know as the uptake as the uptick start so we're very much looking forward to that.
Well hopefully that come sooner than later last question I have is regarding some of your your cost of options that you've been taking this year I'm. Just curious are are most of these complete.
Jugal Vijayvargiya: Let me highlight a few of the exciting opportunities. To start, we recently secured a third order to supply critical materials for space proposal systems, valued at $13 million. That brings the total amount awarded to $35 million or the past year. Our partnership with this important customer is strengthening, and we see the potential for additional orders in the coming year. We are also projecting that our tough met products sales into the space market will double till approximately $10 million next year.
Or should we think of two four is maybe showing for the additional benefits and I guess, if you can maybe help us quantify.
Or better figure about what portion is structural cost takeout and what.
What portion is more temporary or or a recapture the discretionary spend that they could come back next year.
Yeah, that's a great question at <unk>, and we look at it that way to you know the way you're talking about it meaning what are the permanent reductions that we're making to improve our business at longterm what are the things that are temporary to address.
Jugal Vijayvargiya: We have new customer commitments for this important material as the high strength and corrosion resistant properties have proven to be ideal for next generation space applications, which require robust performance in exceptionally harsh conditions. Growing this market is also benefiting our precision optics business, which has secured approximately $8 million in new contrast across both the space and defense markets. Our optical components serve as key enabling technologies essential for space-based implementation and imaging across various applications.
Current actions and what you know that really break sandwich to back at some of that Ted calculated on the temporary tie that sounds it to assist tightening the belt with a little bit and controlling cost until we see them to market in a pick up so I would say you know, it's roughly call. It 60, 40, and the permanent too temporary and.
You know at the temporary action you know probably.
Jugal Vijayvargiya: We continue to be an important supplier of the critical defense programs, bringing our unique expertise and technically demanding materials. We have recently notified of a new $10 million award to supply critical materials for a space-related defense program. I'm also pleased to announce that we have received $5 million investment from the U.S. Air Force Research Laboratory that will enable us to accelerate the development of our added and manufactured capabilities, also known as 3D printing.
I don't know three quarters, one corner and turns out the people related versus belt tightening if that makes sense.
Sure that's helpful and and I guess just for my question about two four and the independence.
Greater than Q3.
Yeah. So you know we're always looking at the organization you know just to see what we can do to improve I would say largely the reductions have been done and we saw amounts of that impact in Q3, uhm there'll be a little bit that comes in the queue for so I wouldn't see a meaningful step change anything for it.
Jugal Vijayvargiya: For brilliant and aluminum brilliant hours. Edited manufacturing capabilities will enable significant advantages in the production and performance of optics structures, guidance systems, and thermal management applications used in defense and aerospace markets. This investment will propel us into a new phase of development that will accelerate our ability to operationalize these specialized manufacturing techniques.
Perfect. Thank you very much.
Thank you.
<unk>.
Next question is coming from so Gibbs Keybanc your line is life.
That sounds good morning.
Oh no.
Regarding the phase two when do you actually start commissioning the plan for for for initial trials.
Jugal Vijayvargiya: I'm very proud of our team's performance and I remain confident in our ability to execute and deliver another year of record results. With the wins we've achieved through our diverse portfolio, our uniquely relevant technical capabilities, and our team's unilenting focus on operational excellence, we are continuing to build on the earnings power of Materia.
Yeah, I would expect that fill that probably you know towards the end of and a Q1, we would start to do some trials and start to produce material that we can share with our customer.
Shelly Chadwick: Now, let me turn the call over to Shelly to cover more details on the financials.
That you know they would go ahead and start to evaluate and then.
Shelly Chadwick: Thanks, Jugal, and good morning everyone. During my comments, I'll reference the slides posted on our website this morning starting on slide 10. As Jugal outlined, we delivered record earnings in the third quarter. Value added sales, which excluded the impact of task through precious metal costs, were 270.5 million for the quarter, down 5% from prior year, but up to punchily. Excluding the semiconductor market softness, the remainder of the business was up approximately 8% year on year.
Q2, Q3, just continue to do that as well, let's start to do our own low volume production just to get the equipment test it out and then and then like we've said in queue for you know have some have some low volume production.
That the sale of production that we would do.
And this is this is going into the existing.
<unk> that phase one of them.
Yes. This is basically <unk> yeah, yeah exactly. This is this is in the same building Saint facility.
Shelly Chadwick: This growth was driven by a strong demand in the aerospace and defense and telecom and data center and markets, along with meaningful contributions from the precision cloud strip business. We delivered adjusted earnings of $1.51 per share in the third quarter, a quarterly record for the company, and up 15% as compared to the prior year. Moving to slide 11, adjusted EBITDA of the quarter was $55.4 million, or 20.5% evaluated sales, up 14% from the prior year, with margin expansion of 330 basis points.
You know the the the great thing about it is we are able to leverage the expertise of our folks that have been working this program now for the last couple of years of course, you know the workforce that is going to be needed will be will be <unk>.
Shelly Chadwick: The significant increase was driven by favorable pricing and next, as well as strong operational performance, partially offset at a slight decrease in volume. Our target cost improvement initiative also contributed to the step up in earnings, outperforming our midterm EBITDA margin target of 20% for the second straight quarter.
Mostly new but many of our engineering development supply chain overall general management those resources will be resources that have been with a plant for the last couple of years.
Okay.
And then you had a lot of color and commentary on the space and Defense Awards, which was which was great and you highlighted that well in your presentation, but just to be clear.
You are you are saying that 2024.
Is going to have nicely higher value added sales in the pocket relatively 20th 23 is your face with some of these awards.
Shelly Chadwick: Moving to slide 12, let me review the third quarter performance by business segment, starting with our performance materials business, the value added sales were 168.9 million, up 13% compared to prior year. Strong results in aerospace, consumer electronics, telecom and data center, and precision cloud strip drove this increase. EBITDA excluding special items was $46.5 million, or 27.5% evaluated sales, up 41% when compared to $33 million in the third quarter of 2022, with an impressive 530 basis points of margin expansion.
Yeah, well I think space has been an important market for US you know we highlighted it about a year or so ago I think in our calls as well you know I would say step one over the last couple of years, we've tripled our sales into the space market, which is which is fantastic and then I would see incremental benefits going into 24 uhm as well.
<unk>. This one very important customer this $13 million order for example, which I expect to be in the in the 24 time frame and it's our expectation as we continue to work with this customer that we will secure additional orders of course those are not security yet, but we're gonna continue to work with our customer to to do that and it will continue to.
Shelly Chadwick: This growth was primarily due to higher volume from our outgrowth initiatives, favorable pricing and a strong banks combine the benefits from our operational excellence initiative. Moving to the outlook, we expect a strong fourth quarter led by aerospace, defense, and telecom and data center, with continued contributions from precision cloud strip.
Other materials that we can try to you know make sure that we get into this market. So this is a this is a high growth you know I almost kind of like a mega trend type of a market for us and one that I can tell you a really across all three of our businesses were very very much focused on.
Thank you and then just lastly.
In terms of not working capital what are you anticipating for for the fourth quarter.
Shelly Chadwick: Next, turning to electronic materials on slide 13. Value-outed sales were 75.5 million, down 29% compared to the prior year, resulting from the slowdown in the semiconductor market where our customers continue their inventory corrections. Ibiza excluding special items was 13 million, or 17.2% of value-outed sales in the quarter. Despite this year-over-year decline, we saw 110 basis points of margin improvement compared to prior year. This was driven by a favorable next plus the benefit of our targeted cost reduction initiatives, which to include some short-term action. As we look forward to the fourth quarter, we expect incremental improvement in semiconductor sales, as well as the continued benefits from the cost improvement initiatives we've implemented.
Yeah, I'll take that so and so you know one of the things that you mentioned with that we're ready for the semi upturn and he might see in our results that inventory is up a little bit you know we've taken some raw material and pushed that through the web to be ready so that when we get customer orders were not starting at you know from raw materials. So we.
Felt a little bit of inventory Darren I expect will hold that through the end of the year and it's been a bit of a bright spot and I expect that will the cash inflow as we finish up the year in two four and a T was a negative for the part or side effects will get some of that back in queue for as well. So it should be a slight positive, but you know not meaning.
Bringing down inventory before the end of the year.
Shelly Chadwick: Finally, turning to the precision-optic segment on slide 14, value-outed sales were 26.1 million. Down 7% compared to the prior year. This decrease was mainly driven by the reduced TCR filter demand, the discontinued product application, and general softening in the consumer electronics market, slightly offset by strength and defense. Ibiza excluding special items was 3.4 million, or 13% of value-outed sales. The decrease in volume was a meaningful driver of the benefit of our targeted cost improvement initiatives. From a sequential standpoint, we saw Ibiza growth along with 260 basis points of margin expansion. Looking out to the fourth quarter, we expect new opportunities across defense, space, and automotive to contribute to top-line growth.
Thank you.
Mhm.
<unk>.
Our next question is coming from David Silver with C. L. King your line advice.
Yeah. Good morning, Thank you morning, David morning.
Good morning.
For several questions and.
I'm going to apologize in advance the wording of these are probably alternatively gonna film like hopelessly naive or I.
I don't know a little.
Nine or whatever but that's not my intention but.
<unk> performance materials, I mean, it seems like the spin.
Not just good results this year, but and accelerating.
Book of business or you know successful contract wins.
Shelly Chadwick: Moving now to cash, debt, and liquidity on slide 15, we ended the quarter with a net debt position of approximately 445 million, and 151 million of available capacity on the company's existing credit facility. Our leverage at two times remains slightly below the midpoint of our targeted range.
Couple of angles on this but firstly do you have you know a traditional backlog figure for performance materials and maybe how is it looking now.
Compared to let's say, maybe the beginning of the year or a year ago. However, you you typically track it.
And then you know again naive question warning, but.
Shelly Chadwick: Lastly, let me transition to slide 16 to address the full-year outlook. With accelerating contributions from our organic pipeline, our strong operational performance, and the continued benefit of our cost reduction actions, we remain confident in our ability to execute and finish out another record year. With that, we are affirming the midpoint of our prior guide at $5.80 per share, an increase of 10% from 2022. We look forward to closing 2023 on a high note, delivering another year of record results in long-term sustainable value creation for our stakeholders.
What would you attribute your seemingly graders success and these new contract wins, particularly I guess aerospace and defense.
You know you've always had a commanding position, let's say in beryllium in this area.
So has there been a shift maybe in your value proposition or the way you go to market, but what would you say you know is the mix of factors that's leading to the.
You know the record performance, but that's really the symptom of the cause which is your becoming a preferred.
Kyle Kelleher: This concludes our prepared remarks. We will now open the line for questions. Thank you.
[noise] supplier for these high value opportunities.
Operator: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question key. You may press star two if you would like to remove your question from the key. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions, here.
Long winded question, but maybe just the the mixer factors that are at play here and.
<unk>, you know and I'll just stop there, but yeah. The mix of factors you would say thank you.
Yeah, well first of all I think I'll <unk> like you have indicated you know has done really really well not only just in the last year, but I think you know if you look back five six years and what the what the businesses are done in terms of the growth the top line growth of the businesses Cheaped as well as the bottom line performance you know the businesses is done.
Peter Lucas: Our first question is coming from Don Moore with CGS Securities. Your line is life. Hi, good morning. It's Peter Lucas for Dan. First one for me. How is the Clad strip project? Good morning. How is the Clad strip project performing relative to your expectations? And has there been any change in timing we guarded expected ramp in phase two? Yeah, let me start with the second part first here. So our timing is in line with what we have communicated before, which is that we expect to have ramps starting at the end of 24 low volume ramp and then full volume production in the 25 timeframe.
Quite well you know when you think about when you think about I think the parts about about the new business. So let's just talk about that first you know cause <unk>. You. You you highlighted you know what's what's different I would say I think our team is doing a really really good job of of getting the.
Marketing of our materials out you know the great performance I think the most of the materials that we have the material science expertise that we have so our technical sales our our business development efforts that we have I think a cross.
These markets, particularly I would say the growth market. So like for example space. Let me. So just you know we're highlighting space today. So I'll talk about that but of course, that's isn't that by the way that this applies to all the markets but.
Peter Lucas: Our equipment installation and validation will go on over the next year or so as we go through getting that qualified. In terms of our current program, I would say it's going really well. We are producing at our new facility. We produce at the legacy facility as well and it's delivered to our expectations. So with the top line and the bottom line of contributing, you know, as we had planned. And that's reflected in our results.
Understanding the materials getting on materials out there, helping the customers understand the value of our materials and then providing you know great value propositions at the end of the day and I think I think the team has just done a wonderful job of that at that I think that I think has helped tremendously.
Tremendously so our you know our teams or teams have been focused on understanding what the needs are for the customers and then finding the right solutions for those those neat and they've just L. A.
Tastic job of that which by the way he kind of leads directly to your question on the backlog you know we do look at a backlog. It's one of the metrics that we look at but we look at many different metrics as you can imagine you know from our growth perspective, there's always put some take some backlogs some of the markets are down like industrial you know, which we which we know space.
Peter Lucas: Very helpful. Thanks. And then looking at the various program awards, you noted, I think it was on slide five of the presentation. When do you expect to begin layering in revenue for each of these awards? And do you expect to record the full amounts listed in fiscal 24 or those likely spread over the next one to two years? Yeah, well, first of all, I just want to say I think it's just another testament to our team delivering a fantastic organic growth opportunities as you know that we've done that over the last several years and our team just continues to bring in new opportunities.
The market that that.
There is also a backlog also has a has a key component of backlog as lead times. If you go back to kind of the 21 22, timeframes or lead times for somewhere materials were extremely long as we were.
Peter Lucas: Let me highlight on a few of those that on this page. As a first of all, the $13 million order to supply critical materials for the space project systems that we expect to be in the 24 timeframe. We announced actually a phase one and phase two of that. One was $10 million and another one was $12 million earlier and those are being delivered to the customer as we speak. So this $13 million is another order coming into a total of $35 million with this customer.
Ramping up after the the the Covid Euro about 2020.
Getting the workforce in you know our lead times have improved significantly which has as you can imagine has a negative impact on backlog, but that doesn't mean that our business is actually declining I mean does your senior our sales are up. So you know we look at a number of different metrics backlog as one of the methods that we look at but in general I mean, the teams have been driving more.
A new opportunities and and really all the market using using our <unk> our superior.
<unk> superior materials.
Peter Lucas: So this this this opportunities becoming a really great opportunity for us. And I would expect more orders in the new year for 24 and and perhaps 25 timeframe. So very much looking forward to that. When I look at the precision optics contracts, the $8 million for space and defense, those I would see as the as multi or contracts in the 24 25 timeframe. So very much looking forward to those. The tough met materials for space applications.
Okay. Thank you.
My next question would be on electronic materials and you you have commented on.
You know the lingering cause customer inventory issues.
I you know I was hoping you could maybe.
Talk about it from a somewhat broader perspective so.
Currently you've been spending some discretionary capital to build out your capabilities in that area in Milwaukee.
Peter Lucas: As you know, tough met is a very, very important material for us. We have a number of applications in commercial aerospace oil and gas, etc. For that material. And this material has been now adopted into the space applications, just based on the qualities that it offers. We have been supplying them material this year. As you can see from the chart, that's roughly about $5 million worth of sales this year. And we expect a double dose into 24.
Pardon me.
And in Newton.
And you know I I think you had some expectations for you know the.
The demand levels for when the the new capability you know is available.
And I'm just wondering if you could maybe give us your current thinking about.
Peter Lucas: So an incremental $5 million into the 24 timeframe. The notification that we speak of of the $10 million of the critical materials for the defense related applications that we expect this year, partly, and then into next year. So we're very much looking forward to that that just builds on to our capabilities and materials expertise that we provide for for defense applications. The neat thing about this is this is a space related application for defense.
The transition period here right, the maybe the sluggish our customer demand, which which has persisted at a little bit longer maybe than initially thought. But then you also have you know these new capabilities coming up so is it the case, where you know.
There there might be a little bit of a gap when those new units turn on or is that the kind of case, where.
The products and services that the newer capabilities are designed to serve are really you know maybe next generation or or not.
Peter Lucas: And then the $5 million investment, this is an award of an investment award that we are receiving from the US Air Force base for additive manufacturing. This could be done over a two year time period. We've had a number of different initiatives that we've taken ourselves on additive manufacturing over the last three to four years. We've invested quite a bit of money ourselves in our facility. And this award just will accelerate our development regarding brilliant and aluminum, brilliant based materials for additive manufacturing.
The the market and markets are the applications don't necessarily overlap with where the softness is now so.
Long winded question, but maybe <unk>, how do you think about this current.
Phase of softer demand.
In the context of you know the longer term growth.
Projections that that you're operating the business under thank you.
Peter Lucas: So we're very much looking forward to that over the next two years. So great opportunities to continue to drive organic growth for our company. University. Extremely helpful, thanks. And just finish it with one housekeeping question here. What tax rate is assumed for your Q4 implied EPS guidance and what's a good rate as we look out to fiscal 24? Yeah, that's great question. Thanks for asking it. You know, we saw the benefit of a reduction in our year-to-date and our effective tax rate, which we were really pleased with.
Yeah. So if you look at our two facilities that you mentioned, where we're adding these new capabilities, both in Milwaukee, and Newton or expectation to get the additional volume in place was gonna be the second half of 2024 by the time you know the facilities and the equipment was procured and then we did installation and got got the production going.
So I think the timing is actually gonna work out just perfect.
Because because of the recovery starts to happen here in a little bit in queue for but then into the first half of next year and then and then a much greater recovery the back half of 24, and then into 25, I think we're going to be extremely well position.
Peter Lucas: On top of already strong operating results, we saw the tax rate come down by a combination of things. The first being the production credit, the production credit has gone, our estimate of the production credit has increased slightly due to the increase in the pure, burly and related products that we have been selling. You know, we talked a lot about a strong mix. Some of that is from our pure, burly and related products.
To be able to deliver.
The emerging it'll be products, so that our customers are needing for memory applications in particular out of our Milwaukee facility and then the logic and memory products out of our Newt facility. So I I think that the slowdown is actually in some respects you can say helped us to put our capacities in place.
Peter Lucas: Those then drive the production credit and that's tax-free. So all of that income, you know, we're able to take tax-free. In addition, we're seeing higher foreign tax credits based on the global mix of earnings. So, in a sense, you know, we took our tax rate down from call it mid-16s to roughly 15. And in Q4, what I've assumed is 15 and a half. And we'll, you know, we'll see how the year shakes out once we have actual. Great. Thank you.
What what's happening in 21 and 22 is we were running all of our plans basically full and at the same time, we were trying to figure out how to put these additional capacities in place the slowdown has given us the opportunity to allocate the resources in the right way to put the capacities in place of Milwaukee in Newton <unk>.
Peter Lucas: I'll jump back into Q. Thank you.
So that we can have them ready in the back half of 24 and into 25, you know as a recovery is gonna come in so.
In some respects save it it's interesting yeah.
The slow down I think is is has helped us to make sure we're getting the capacity in the right way but.
Mike Harrison: Our next question is coming from Mike Harrison with C-Port Research Partners. Your line is live. Hi, good morning.
Timing of that I don't think it has impacted at all because it actually lines up with a recovery timing of the of the 70 cycle.
Mike Harrison: Hey, one of Mike. I was wondering if we can talk a little bit about the performance materials margin and some of the sources of strength. I know in your comments, you mentioned that mix was particularly strong. And then, Shelley just mentioned here that the production credit has increased, which I believe flows through that segment level EBITDA line. But maybe just talking a little more detail on the puts and takes that we should be thinking about as we look at that margin in the PM segment for Q4 and as we get into 2024.
[noise] sorry thank.
Thank you for that that was great color.
One more one more maybe from resources are budgeting perspective, but you know I.
Always think a lot of come you know October has went a lot of companies do the budgeting for the coming year or two.
And you know on this call and the previous ones I mean, you've you've outlined the number of kind of incremental new initiatives today was space.
Space and defense a little bit earlier of course, there was the multi step of expansion in electronic materials and.
I did notice a new project.
In precision optics.
Mike Harrison: Yeah. Mike, let me start on that and then, and then, Shelley can jump in, especially when it comes to the production credit and things. I think, you know, that business, as you know, over the last several quarters, has continued to perform well. You know, one of the things that we are, continue to be very focused on for that business is value-based pricing, making sure that we're, we're getting the right price, you know, for the value that we're providing to our customers.
So <unk> you know.
If I was a betting man I I would say that you know the 95 million dollar Capex for this year, you know would have to rise for next year and.
And then you know even beyond just capex I'm thinking of R&D resources.
Technical selling which you cited as.
Mike Harrison: It's an important part of our initiative, company-wide. But I would say, particularly for that business, we continue to do that. And then, certainly, mix has been a very important factor as well. We continue to drive more focus on products to generate more value for us, frankly, than, you know, products that don't. And so, we're making sure that we're utilizing our assets to drive the best mix possible. And that's also helped us, of course, on operational excellence.
An aspect of your success in performance materials, but just in terms of overall resource thing.
What what are you thinking about for let's say 2024 and 2025.
Dollars, you know people I guess R&D technological.
Technological.
Expertise what what's on tap for the next year or two is your is your planning out things now.
Mike Harrison: Yeah, just a couple of things. You know, the plants have been running really well. And so, when our plants are running well, we get better operating performance, and that's helped the mix and the margin as well. You know, Jubal talked about mix, and we've highlighted space and defense this quarter. And that is definitely a mix up for us. And we'll see that last in through the fourth quarter. And then the production credit, you know, as we just talked about, we previously said, you know, roughly 8 million for the year.
Yeah, well first of all you are right on the timing we are starting to think about that and it's starting to put that together and Ah you know, we'll be talking about that to you and to everybody in mid February when we come out with a guide and our plan for 2024, so I'm very much looking forward to that cause I think it's going to be another a exciting year for us.
Along with 25 and so on so all these opportunities that you've indicated we.
We expect to play out in 24, 25 26 timeframe.
Mike Harrison: Now we're looking at roughly 10 million for the year. So you think about 3 million in each of the last two quarters of the year. So really a nice benefit and then in terms of the electronic materials business, it seems like kind of the piece of recovery here is a little bit slower than we might have hoped. Can you give us a little more color on what you're hearing from your customers in both the logic and memory side about their production rates as we get into year end and start 2024?
With regard to our investments I mean, we've never been shy to invest as you know this is a is a fantastic opportunity for us to continue to invest in a business of we've done that over the last several years and we will continue to do that whether it's R&D resources with it as Catholics resources or any any type of M&A you know that may come up that fits exactly either way we will.
Like you know in our business. So we're going to continue to look at that you know even when you're looking for example, R&D this year, even though even though the markets are significantly slower I mean, we're not slowing down on R&D, we are still investing in R&D and and it's our expectation that will continue to do that and will continue to do that on the capex side as well so I'm very much looking forward to.
Mike Harrison: Yeah, as you know, Mike, we've all been waiting for this inventory correction to start to slow down so that the rates that build rates can start to pick back up, but unfortunately the inventory correction and our customers has taken a little bit longer than I think they had all estimated that inventory correction, of course, or the slowdown of that translates into slower orders for us. Our expectation was that maybe towards the end of Q3, we would start to see a little bit of recovery.
Sharing with you guys you know our plans as we as we put them together.
Okay, Great I'll get back in the queue. Thank you very much.
David.
<unk>. Our next question is coming from deep storms with Stonegate capital markets. Your line is nice.
Good morning.
Mike Harrison: I think that expectation is now shifted to Q4. We're starting to see as we're listening to some of the earnings calls from our customers, some small positive incremental benefits that they're highlighting. We're some of our orders, so depending on the semiconductor pipes, order rates are starting to see a little bit of an uptake maybe for Q4, so I would say, it seems like Q3 is the low point and Q4 would be a small incremental uptake for us, and I think that goes in line with what the semi-companies are saying as well.
Good morning, then.
So just wanted to touch on your end markets I know telecom is probably one of your small sound markets.
It just seems to keep growing up I was wondering if you could just talk to us a little bit about what your customer acquisition environment looks like here and you know if there's gonna be any meaningful impact from that going forward.
Yeah, well, it's not uncommon data center, you're right. It is one of the smaller markets, but it is a market that has you know nine consecutive quarters of growth and and when we're very much looking forward to continued growth in this area may know as you know bandwidth requirements continue to increase.
Data center requirements cloud services requirements continue to increase and that's where this and market you know for US is very important in and we can turn to supply material to this so we expect that these areas <unk> continue to increase over the next three to five to seven years and I think we're very well positioned with our materials the undersea cable.
Mike Harrison: That's just how we see it. As you know, this is an extremely, extremely good business for us. It's roughly a third of our company and we're very much looking forward to the uptake. We're prepared to address the uptake. We've made sure that our workforce and our materials, our inventory, everything is ready to go as the uptake starts, so we're very much looking forward to that. Well, hopefully that comes sooner than later.
Market Uhm is is a key area for us, where we provide roiling based materials and and and and I think it's going to continue to be a strong market for us.
That's very helpful. And then just one more for me if I could where do you see them on the labor front, there's been a lot of the news about the U a W. Labor negotiations it sounds like a shops are running well now if you needed to scale up at any point you know what is your confidence that you could get.
Mike Harrison: Last question I have is regarding some of your cost actions that you've been taking this year. Just curious, are most of these complete or should we think of Q4 is maybe showing some additional benefits? And I guess if you can maybe help us quantify or better think about what portion is structural cost take out and what portion is more temporary or a reduction in discretionary spend that they could come back next year.
More labor on the door, if you needed it.
I think I think our teams did a fantastic job getting labor into our into our factories on the 21 time frame as the ramp up happened and and I would expect that they're gonna do you know a really good job again, you know in 24 as the as the send me a recovery happens I think one of the things that we've stay focused on is making sure retaining.
Mike Harrison: Thanks. Yeah, that's a great question, Mike, and we look at it that way too, the way you're talking about it, meaning what are the permanent reductions that we're making to improve our business long-term? What are the things that are temporary to address the current actions? That really breaks down into two buckets. Some of that's headcount related on the temporary side. But some of it, too, is just tightening the belt a little bit and controlling costs until we see them to market pickup.
Much of the labor as possible. So that we can support the uptake in the 24 timeframe and then of course, if there's additional workforce that's needed.
Mike Harrison: So I would say it's roughly probably 60-40 in the permanent to temporary and at the temporary actions, probably. I don't know, three quarters, one quarter, in terms of the people related versus felt tightening, if that makes sense. Sure, that's helpful, and I guess just to my question about Q4 and the benefits be greater than Q3. Yeah, so, you know, we're always looking at the organization to see what we can do to improve.
Will will rely on our H R department to to bring in the the folks just like they did in 21 and 22, so I'm very confident that we're gonna be able to support any type of an uptick.
That's very helpful. Thank you for taking my question, Sir Good luck on the fourth floor.
Thanks. Thanks. Thanks.
Thank you.
We have reached the end of our question and answer session sorry, when they return the call back over to <unk> for his closing remarks.
Thank you. This concludes our third quarter of 2023 earnings call recorded playback of this call will be available on the company's website materiel dotcom I'd like to thank you for participating on this call and your interest in material I'll be available for any follow up questions. My number is 2163834931.
Mike Harrison: I would say largely the reductions have been done. And we saw most of that impact in Q3. They'll be a little bit that comes into Q4, so I wouldn't see a meaningful step change in Q4. Perfect, thank you very much. Thank you.
You again.
Thank you. This concludes today's conference and you may disconnect. Your lines at this time and we thank you for your participation.
Phil Gibbs: Our next question is coming from Phil Gibbs with Keybank. Your line is nice. Hey Phil. Hey, good morning. Good morning.
Phil Gibbs: Regarding cloud phase two, when do you actually start commissioning the plant for initial trials? Yeah, I would expect that Phil that probably, you know, towards the end of end of Q1, we would start to do some trials and start to produce material that we can share with our customer. That, you know, they would go ahead and start to evaluate. And then, you know, in Q2, Q3, just continue to do that as well as start to do our own low volume production just to get the equipment tested out.
Phil Gibbs: And then, like we've said in Q4, you know, have some have some low volume production that say a little production that we would do. And this is going into the existing facility that phase one is on. Yes, this is basically accurate. Yeah, exactly. This is in the same building, you know, same facility. You know, the great thing about it is we're able to leverage, you know, the expertise of our folks that have been working this program now for the last couple of years.
Phil Gibbs: Of course, you know, the workforce that is going to be needed will be, will be mostly new, but many of our engineering development supply chain, you know, overall general management, those resources will be resources that have been with the plant for the last couple of years.
Jugal Vijayvargiya: Okay. And then you had a lot of color and commentary on the space and defense awards, which was, which was great. And you highlighted that well in your presentation, but just to be clear. You are, you are saying that 2024 is going to have nicely higher value at its sales and that bucket relative to 2023 as you, you phased in some of these awards. Yeah, well, I think space has been an important market for us.
Jugal Vijayvargiya: You know, we highlighted it about a year or so ago, I think in our calls as well. You know, I would say step one. Over the last couple of years, we've tripled our sales into the space market, which is fantastic. And then I would see incremental benefits going into 24 as well. You know, I highlighted this one very important customer, this 13 million dollar order, for example, which I expect to be in the in the 24 timeframe.
Jugal Vijayvargiya: And it's our expectation as we continue to work with this customer that we will secure additional orders. Of course, those are not security yet, but, you know, we're going to continue to work with our customer to do that. And then we'll continue to have other materials that we can try to, you know, make sure that we get into this market. So this is a, this is a high growth, you know, almost kind of like a mega trend type of a market for us. And one that I can tell you really across all three of our businesses, we're very, very much focused.
Phil Gibbs: Thank you.
Shelly Chadwick: And then just lastly, in terms of networking capital, what are you anticipating for the fourth quarter? Thanks. Yeah, I'll take that so. So, you know, one of the things that Jugal mentioned was that we're ready for the semi-upturn and you might see in our results that inventory's up a little bit. You know, we've taken some raw material and pushed that through to whip to be ready so that when we get customer orders, we're not starting, you know, from raw material base.
Shelly Chadwick: So, we built a little bit of inventory there and I expect we'll hold that through the end of the year. AR is then a bit of a bright spot and I expect that will be a cash inflow as we finish out the year in Q4. And AP was a negative for the quarter, so I expect we'll get some of that back in Q4 as well. So, should be a slight positive, but, you know, not meaningfully bringing down inventory before the end of the year.
Phil Gibbs: Thank you.
David Silver: Our next question is coming from David Silver with CL King. You're learning his life. Yeah, good morning. Thank you. Good morning, David. Good morning.
David Silver: So, there's several questions and I'm going to apologize in advance for wording of these are probably alternatively going to sound like hopelessly naive or I don't know, a little snide or whatever, but that's not my intention. But first was performance materials. I mean, it seems like there's been, you know, not just good results this year, but an accelerating book of business or, you know, successful contract wins. A couple of angles on this, but firstly, do you have, you know, a traditional backlog figure for performance materials and maybe how is it looking now compared to, let's say maybe the beginning of the year or a year ago, however you typically track it.
David Silver: And then, you know, again, naive question warning, but what would you attribute your seemingly greater success in these new contract wins, particularly I guess aerospace and defense. You know, you've always had a commanding position, let's say in this, what would you say, you know, is the mix of factors that's leading to the, you know, the record performance, but that's really the symptom of the cause, which is you're becoming a preferred, you know, supplier for these high value opportunities.
Jugal Vijayvargiya: So long winded question, but maybe just the mix of factors that are at play here and how, you know, and I'll just stop there. But yeah, the mix of factors you would say, thank you. Yeah, well, first of all, I think of performance materials segment like you have indicated, you know, has done really, really well. Not only just in the last year, but I think, you know, if you look back five, six years and what the businesses done in terms of the growth, the top line growth of the businesses achieved as well as the bottom line performance, you know, the business has done quite well.
Jugal Vijayvargiya: You know, when you think about, when you think about, I think the parts about about the new business. So let's just talk about that first, you know, because that you highlight, you know, what's different. I would say, I think our team is doing a really, really good job of getting the marketing of our materials out, you know, the great performance. I think the most of the materials that we have, the materials science expertise that we have.
Jugal Vijayvargiya: So our technical sales, our business development efforts that we have, I think across these markets, particularly, I would say the growth market. So like, for example, space, I mean, so just because, you know, we're highlighting space today. So I'll talk about that. But of course, that's the way that this applies to all the markets. But, you know, understanding our materials, getting our materials out there, helping the customers understand the value of materials and then providing, you know, great value propositions at the end of the day.
Jugal Vijayvargiya: And I think, I think the team is just in a wonderful job of that. And that I think, you know, that I think has helped tremendously. So, you know, our teams, our teams have been focused on understanding what the needs are for the customers and then finding the right solutions, you know, for those, for those needs and they've just done a fantastic job of that. Which, by the way, kind of leads directly, you know, to your question in the backlog, you know, we do look at backlog.
Jugal Vijayvargiya: It's one of the metrics that we look at, but we look at many different metrics, as you could imagine, you know, from our growth perspective. There's always put some taste and backlogs. Some of the markets are down like industrial, you know, which we know space is the market that's up. There's also a backlog also has a key component in backlog is lead times. If you go back to kind of the 21 22 time frames, I mean, our lead times for some more materials, which is extremely long as we were as we were ramping up after the COVID year of 2020.
Jugal Vijayvargiya: Getting the workforce in, you know, our lead times have improved significantly, which has, as you can imagine, has a negative impact on backlog, but that doesn't mean that our business is actually declining. I mean, as you've seen, our sales are up. So, you know, we look at a number of different metrics. I mean, backlog is one of the metrics that we look at, but in general, I mean, the teams have been driving more new opportunities in really all the markets using using our superior material.
David Silver: Okay, thank you. My next question will be on electronic materials, and you have commented on the lingering, I guess, customer inventory issues. You know, I was hoping you could maybe talk about it from a somewhat broader perspective. So, you know, currently you've been spending some discretionary capital to build out your capabilities in that area, in Milwaukee, pardon me, and in Newton. And, you know, I think you had some expectations for, you know, the demand levels for when that new capability, you know, is available.
David Silver: And I'm just wondering if you could maybe give us your current thinking about, you know, the transition period here, right? Maybe the sluggish customer demand, which has persisted a little bit longer maybe than initially thought. But then you also have, you know, these new capabilities coming up. So, is it the case where, you know, there might be a little bit of a gap when those new units turn on or is it the kind of case where the products and services that the newer capabilities are designed to serve are really, you know, maybe next generation or not. They did the market and markets or the applications don't necessarily overlap with where the softness is now.
Jugal Vijayvargiya: So, long-winded question. But maybe how do you think about this current phase of softer demand in the context of, you know, the longer-term growth projections that you're operating the business under. Thank you. Yeah. So, if you look at, you know, our two facilities that you mentioned where we're adding these new capabilities, both in Milwaukee and Newton, you know, our expectation to get the additional volume in place was going to be the second half of 2024.
Jugal Vijayvargiya: By the time, you know, the facilities and the equipment was procured and then we did installation and got the production going. So, I think the timing is actually going to work out just perfect because the recovery starts to happen here a little bit in Q4, but then into the first half of next year and then and then a much greater recovery in the back half of 24, and then into 25, I think we're going to be extremely well positioned to be able to deliver, you know, the emerging ALD products that our customers are needing for memory applications in particular out of our Milwaukee facility and then the logic and memory products out of our Newton facility.
Jugal Vijayvargiya: So, I think that the slowdown is actually in some respects, you can say, helped us to put our capacities in place because what was happening in 21 and 22 is we were running all of our plants basically full and at the same time, we were trying to figure out how to put these additional capacities in place. The slowdown has given us the opportunity to allocate the resources in the right way to put the capacities in place in Milwaukee and Newton so that we can have them ready in the back half of 24 and into 25, you know, as the recovery is going to commit. So, in some respects, David, it's interesting.
David Silver: The slowdown, I think, has helped us to make sure we're getting the capacity in in the right way, and the timing of that, I don't think is impacted at all because it actually lines up with the recovery timing of the Thank you for that. That was a great color.
David Silver: One more maybe from a resources or budgeting perspective, but I always think a lot of October is when a lot of companies do the budgeting for the coming year or two. And on this call and the previous ones, you've outlined a number of kind of incremental new initiatives today, was space and defense a little bit earlier. Of course, there's the multi-step expansion and electronic materials, and I did notice a new project in precision optics.
David Silver: So, if I was a betting man, I would say that the $95 million cat-backs for this year would have to rise for next year. And then even beyond just cat-backs, I'm thinking of R&D resources, technical selling, which you cite it as an aspect of your success and performance materials, but just in terms of overall resource thing, what are you thinking about for, let's say, 2024 and 2025? So, dollars, people, I guess R&D technological expertise, what's on tap for the next year or two as you're planning out things now?
David Silver: Yeah, well, first of all, you're right on the timing. We are starting to think about that and starting to put that together. And as you know, we'll be talking about that to you and everybody in mid-February when we come out with our guide and our plan for 2024. So, I'm very much looking forward to that because I think it's going to be another exciting year for us along with 25 and so on.
David Silver: So, all these opportunities that you've indicated, we expect to play out in 24, 25, 26 timeframe. With regard to our investments, I mean, we've never been shy to invest, as you know, this is a fantastic opportunity for us to continue to invest in our business. We've done that over the last couple of years and we're going to continue to do that, whether it's R&D resources, whether it's cat-backs resources or any type of M&A that may come up, that fits exactly the way we would like in our business.
David Silver: So, we're going to continue to look at that, even when you look at, for example, R&D this year, even though the markets are significantly slower. I mean, we're not slowing down on R&D. We are still investing in R&D and it's our expectation that we'll continue to do that and we'll continue to do that on the cat-back side as well. So, I'm very much looking forward to sharing with you guys, you know, our plans as we put them together.
David Silver: Okay, great. I'll get back in the queue. Thank you very much.
Dave Storms: Thank you.
Dave Storms: Our next question is coming from Dave Storms with Stonegate Capital Markets. Your line is life. Good morning. So, just wanted to touch on one of your end markets. I know Telecom is, you know, probably one of your smallest end markets, but it just seems to keep growing. I was wondering. You could just talk to us a little bit about what your customer acquisition environment looks like here and if there's going to be any meaningful impact from that going forward.
Dave Storms: Yeah, well, comment data center, you're right. It is one of the smaller markets, but it is a market that has nine consecutive quarters of growth. And, and we're very much looking forward to, you know, continue growth in this area. You know, as you know, bandwidth requirements continue to increase, you know, data center requirements, cloud services requirements continue to increase. And that's where this and market, you know, for us is very important.
Dave Storms: And then we continue to supply material to this. So we expect these areas to continue to increase over the next three to five to seven years. And I think we're very well positioned with our materials. You know, the undersea cable market is a key area for us, where we provide rolling based materials and, and, and I think it's going to continue to be a strong market for us.
Jugal Vijayvargiya: That's very helpful. And then just one more for me if I could. What do you see in on the labor front? There's been a lot of news about the UAW labor negotiations. It sounds like your shops are running well now, but if you needed to scale up at any point, you know, what is your confidence you could get more labor in the door if you needed it? I think I think our teams are a fantastic job getting labor into our into our factories, you know, the 21 timeframe as the ramp up happened.
Jugal Vijayvargiya: And I would expect that they're going to do, you know, a really good job again, you know, in 24 as the as the semi recovery happens. I think one of the things that we've stayed focused on is making sure we're retaining as much of the labor as possible so that we can support the update in the 24 timeframe. And then of course, if there's additional workforce that's needed, you know, we'll rely on our HR department to bring in the folks just like they did in 21 and 22. So I'm very confident that we're going to be able to support any type of an uptick.
Dave Storms: That's very helpful. Thank you for taking my questions and good luck in the fourth quarter. Thanks. Thank you.
Operator: We have reached the end of our question and answer session.
Kyle Kelleher: So I will now turn the call back over to Kyle Kalahher for his closing remarks. Thank you.
Kyle Kelleher: This concludes our third quarter 2023 earnings call recorded playback of this call will be available on the company's website materion.com. I'd like to thank you for participating on this call and your interest in materion. I will be available for any follow-up questions. My number is 216-383-4931. Thank you again. Thank you.
Operator: This concludes today's conference and you may disconnect your lines at this time. And we thank you for your participation.