Q4 2024 Materion Corp Earnings Call
Speaker Change: Greetings and welcome to the Materion fourth quarter and full year 2024 earnings conference call.
At this time all participants are on a listen-only mode and a question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Please note, this conference is being recorded.
Speaker Change: I will now turn the conference over to your host, Mr. Kyle Kelleher, Director Investor Relations and Corporate, FP&A. Sir, you may begin.
Speaker Change: Good morning, and thank you for joining us on our fourth quarter 2024 earnings conference call. This is Kyle Kelleher, Director, Investor Relations and Corporate FD&A. 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.
Speaker Change: You can also access the materials through the download feature on the Earnings Call webcast link.
Speaker Change: With me today is Jugal Vijayvargiya, President and Chief Executive Officer, and Shelly Chadwick, Vice President and Chief Financial Officer.
Jugal Vijayvargiya: Our format for today's conference call is as follows. Jugal will provide opening comments on the quarter. Following Jugal, Shelly will review detailed financial results for the quarter and full year in addition to discussing expectations for 2025. We will then open up the call for questions.
Jugal Vijayvargiya: 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.
Jugal Vijayvargiya: 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.
Jugal Vijayvargiya: 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's fourth rate in this morning's press release.
Jugal Vijayvargiya: 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 Jugal for his comments.
Thanks, Kyle, and welcome, everyone.
Jugal Vijayvargiya: It's nice to be with you today to discuss our fourth quarter and 2024 results and provide our initial outlook for 2025.
Let's start with the fourth quarter.
Jugal Vijayvargiya: Sales developed about as we expected in the fourth quarter with strong shipments in aerospace and defense and improved contributions from semiconductor and precision clad strength, muted by the continued softness across other end markets like automotive and industrial.
Jugal Vijayvargiya: We delivered record EBITDA with 240 basis points of margin expansion thanks to the diligent work our teams have been driving to improve our operations and streamline our back office functions. These actions will continue to pay dividends as we move through 2025 and beyond.
Now for the full year.
2024 was a challenging year with notable achievements.
Jugal Vijayvargiya: Sluggish markets and inventory corrections may have dampened our organic growth, but this allowed us to demonstrate the strength of our company, the commitment of our team, and the result of their hard work.
Jugal Vijayvargiya: For the year, we delivered our fourth consecutive year of record EBITDA and EBITDA margins.
Jugal Vijayvargiya: After years of diligent efforts to improve performance and drive profitable growth while streamlining our organization, we delivered on our midterm EBITDA margin target of 20% for the first time for the full year of 2024.
Jugal Vijayvargiya: We have been taking swift and consistent actions to optimize our footprint and address our cost structure while continuing to invest for growth and strengthen our customer partnerships.
Jugal Vijayvargiya: Achieving this level of performance in a sluggish environment gives us confidence to look ahead and set new goals for the company.
Jugal Vijayvargiya: As our end markets strengthen and we deliver on our organic initiatives, we will continue to drive further operational improvements and generate even stronger levels of profitability.
Jugal Vijayvargiya: With this in mind, we're establishing a new midterm EBITDA margin target of 23%, expecting that our business can deliver an additional 300 basis points of improvement over the next several years.
Jugal Vijayvargiya: While our underlying markets struggled to find momentum in 2024, we advanced several strategic initiatives during the year.
Jugal Vijayvargiya: In aerospace and defense, our customers are developing new products and applications that require the highest level of performance reliability in harsh conditions.
Jugal Vijayvargiya: Earlier this year, a leading aerospace and defense customer agreed to invest approximately 10 million dollars in new capacity and capabilities at one of our existing sites in support of their growing demand.
Jugal Vijayvargiya: The growth of commercial space has driven new opportunities for us as well, as Materion is well positioned to serve the needs of this expanding market.
Jugal Vijayvargiya: In the second quarter, we secured a $150 million multi-year agreement to supply critical materials for space propulsion systems, after proving ourselves to be a key critical supplier of these products.
Jugal Vijayvargiya: In addition, IONTEX Alloy, one of our newest high-performance products, was selected for a new telescope mirror that will be tested by NASA in its cryogenic test facility.
Jugal Vijayvargiya: In semiconductor, the expansion of our portfolio to include ALD or atomic layer deposition products is allowing us to support the production of the most sophisticated semiconductor chips.
Jugal Vijayvargiya: We were pleased to receive an overall excellent supplier award after our team collaborated with a leading ALD customer to innovate multiple new materials which will see expansion with the rapid growth of AI and the increasing demand for the most complex chips.
Jugal Vijayvargiya: We also entered into an agreement to serve as a technology partner for a major global supplier of semiconductor processing equipment.
Jugal Vijayvargiya: We are supporting this customer in their development of a new deposition material that will pave the way for a wide range of next-generation consumer and automotive electronic devices.
Jugal Vijayvargiya: Aside from commercial advancements, we took steps to eliminate underperforming non-core businesses and optimize our footprint.
Jugal Vijayvargiya: In the fourth quarter, we completed the sale of an electronic materials facility in Albuquerque, New Mexico that produces coatings for architectural glass mainly used in commercial construction. We are also closing a related nearby facility.
Jugal Vijayvargiya: We're in the process of rightsizing two facilities in Asia, which should be completed in the first half of this year.
Jugal Vijayvargiya: As a result of some of the changes already made, our electronic materials business delivered roughly 20% EBITDA margins for the year, representing a 390 basis points improvement year over year.
Jugal Vijayvargiya: Regarding our cost structure, we took a series of decisive actions to streamline our organization and position us for greater efficiency.
Jugal Vijayvargiya: Over the last year, we reduced over 150 positions through targeted reductions and optimizing back office operations while controlling discretionary spending.
Jugal Vijayvargiya: At the same time, we remain focused on investing for the future.
Jugal Vijayvargiya: Our R&D spend in 2024 was at an all-time high as we focus on partnering with our customers to deliver next-generation products and solutions.
Jugal Vijayvargiya: Even through periods of market softness, we have remained focused on investing for the future, further aligning the business to high growth opportunities supported by global megatrends.
Jugal Vijayvargiya: Across our plants, we're improving yields and profitability through process and technical innovations and continuous improvement initiatives.
Jugal Vijayvargiya: In Precision Optics, we took meaningful steps to drive the early stages of transformation, starting with appointing a new president, Jason Moore.
Jugal Vijayvargiya: Despite the challenges the business has faced, we believe the long-term fundamentals remain strong.
Jugal Vijayvargiya: Jason is quickly working with his team to adjust the cost structure and optimize the footprint to ensure we're maximizing the value of that critical business and prioritizing the growth opportunities the business is developing.
Jugal Vijayvargiya: The number of careful and deliberate actions we've undertaken allowed us to deliver record performance in 2024 and have set the stage for even stronger performance in the future.
Jugal Vijayvargiya: As we look ahead to 2025, we're cautiously optimistic about a stronger macro environment as we move through the year.
Jugal Vijayvargiya: We expect to continue to see solid growth in aerospace and defense, where healthy end market demand will be compounded by outgrowth from our organic winds.
Jugal Vijayvargiya: We're seeing some gradual recovery in semiconductor and while our customers are providing mixed outlooks for 2025, we expect to see mid-single-digit growth year-on-year.
Jugal Vijayvargiya: Industrial, where our largest application is the beryllium nickel spring for commercial construction, should see growth in 2025 as the inventory correction is nearly complete and we are seeing orders returning to near normal levels.
Jugal Vijayvargiya: We're planning for other end markets to show low single-digit growth, with the exception of automotive, which is poised to remain weak.
Jugal Vijayvargiya: With regard to precision clad strip, we're expecting meaningful headwinds in 2025. Our customers indicated that the inventory correction that started in the back half of 24 will carry through in 25, resulting in lower volumes year on year.
Speaker Change: After working diligently to ramp volumes and fill their supply chain over the past couple of years, PMI finds themselves in a position to lean out their inventory levels despite the continued success of their ICO's products rollout.
Jugal Vijayvargiya: Our Phase 2 capacity is complete and online, ready to serve their increased demand, which is expected in 2026.
Speaker Change: As we head into 2025, I'm confident that we will continue to deliver the strong performance you have come to expect from Materion.
Jugal Vijayvargiya: I would like to thank our global team for their unwavering commitment to innovating for our customers while managing costs and delivering record performance.
Shelly Chadwick: Now, let me turn the call over to Shelly to cover more details on the financials.
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 13.
Shelly Chadwick: In the fourth quarter, value-added sales, which exclude the impact of pass-through precious metal costs, were $296.1 million, up 2% from prior year and up 12% sequentially.
Shelly Chadwick: This year-over-year increase was driven by continued strength in space and defense and gradual improvement in semiconductor, partially offset by market headwinds across automotive, industrial, and energy.
Shelly Chadwick: When looking at earnings per share, we delivered record quarterly adjusted earnings of $1.55, up 10% from prior year.
Shelly Chadwick: Moving to slide 14, Adjusted EBITDA was a quarterly record at $61.5 million, or 20.8% of value-added sales, up 15%, with 240 basis points of margin expansion from the prior year.
Shelly Chadwick: This marks the third consecutive quarter delivering margins above our midterm target of 20%. The increase was driven primarily by strong cost management and operational performance.
Shelly Chadwick: Moving to slide 15, let me now review fourth quarter performance by business segment.
Shelly Chadwick: Starting with performance materials, value-added sales were $195.8 million, a quarterly record, and up 5% as compared to prior year. This year-over-year increase was largely driven by continued strength across space and defense and the consumer electronics and market.
Shelly Chadwick: EBITDA excluding special items with a record 53.6 million or 27.4 percent of value-added sales, up 17 percent compared to the prior year period with 270 basis points of year-over-year margin expansion.
Shelly Chadwick: This increase was driven by higher volume, strong price mix, and operational performance, including higher production credit benefit year on year.
Shelly Chadwick: Moving now to the 2025 outlook, we expect continued strength across aerospace and defense with improving market conditions in energy and industrials. We expect the automotive market to remain challenged with market contraction for a second straight year.
Shelly Chadwick: Precision clad strip sails to Philip Morris will be down year-on-year given the continued inventory correction that Jugal mentioned earlier.
Shelly Chadwick: We expect to deliver another year of strong bottom-line results driven by operational performance and cost management.
Next, turning to electronic materials on slide 16.
Shelly Chadwick: Value-added sales were $78.6 million, a 1% increase year-on-year driven by improving semiconductor sales, specifically across logic and memory and data storage technology.
Shelly Chadwick: When adjusting for the divested Albuquerque large area target sales, the growth was 4% per quarter.
Shelly Chadwick: This increase is driven by improved mix, strong operational performance, and cost management.
Shelly Chadwick: As we look out to 2025, we expect the semiconductor market to improve as the year progresses, particularly in logic and memory and data storage devices.
Shelly Chadwick: This improvement is expected to be greater in the second half.
Shelly Chadwick: On the flip side, we expect our power semi-business to remain challenged with high level of inventories remaining at our customers and weak end-use demand in markets like automotive and industrial.
Shelly Chadwick: We expect improved bottom-line results driven by the stronger demand, strong cost management, and operational performance.
Shelly Chadwick: Turning to precision optics on slide 17, value-added sales were $21.7 million, down 17% compared to the prior year.
Shelly Chadwick: This decrease was driven by market weakness in several end markets, offset by strength in the space and semiconductor markets.
Shelly Chadwick: Evita excluding special items with a loss of 1.1 million or minus 5% of value added sales.
Shelly Chadwick: This decrease was largely driven by reduced volume, unfavorable product mix, and some operational challenges.
Speaker Change: As part of the initiatives underway to transform this business, our new business president continues to review and adjust the portfolio, footprint, and cost structure, setting the stage for dramatically improved results that will start this year.
Speaker Change: While we are optimistic about the future of precision optics, we did take a non-cash goodwill and intangible impairment charge that impacted our gap results in the fourth quarter.
Speaker Change: This write-down is expected to be a one-time accounting adjustment and does not reflect our commitment to this business as a key part of the Materion portfolio.
Speaker Change: Moving to slide 18, let me comment on the full year.
Speaker Change: Value-added sales were approximately $1.1 billion, a 3% decrease from prior year, due to market weakness in key end markets, including industrial, energy, and automotive.
Speaker Change: This decrease was partially offset by strength in space and defense, and precision cloud strip.
Speaker Change: Despite the slight decline in VA sales, we delivered our fourth consecutive year of record-adjusted EBITDA and EBITDA margins.
Speaker Change: with adjusted EBITDA of $221.2M for the year or 20.2% of value added sales, up 2% from the prior year with margin expansion of 90 basis points.
Speaker Change: We are very pleased to have delivered our targeted EBITDA margins of 20% for the year for the first time in our company's history.
Speaker Change: This significant margin performance was driven by strong price mix and improved operational performance despite the softer top line.
Speaker Change: Adjusted earnings per share was $5.34 for the year, down 5% as compared to the prior year, with a $0.16 headwind due to higher interest expense.
Speaker Change: Moving now to cash debt and liquidity on slide 19, we ended the quarter with a net debt position of approximately $425 million and approximately $169 million of available capacity on the company's existing credit facility.
Speaker Change: We generated strong free cash flow of $57 million in the quarter and ended the year with leverage at 1.9 times, down from 2.2 times at the end of Q3.
Speaker Change: Free cash flow remains an important focus and we expect to generate stronger cash flows in 2025.
Speaker Change: After a challenged macro environment in 2024, we remain cautiously optimistic about the market dynamics as we enter 2025, expecting mid-single-digit top-line growth from our businesses, excluding precision cloud strips.
Speaker Change: The CLABS strip inventory correction is expected to continue through 2025, returning to growth in 2026.
Speaker Change: Despite the clad strip inventory correction, we expect earnings growth in 2025 from market outperformance, continued operational excellence, cost management, and portfolio optimization actions, despite very modest top-line growth.
Speaker Change: With this, we are guiding to the range of $5.30 to $5.70 for the full year 2025 adjusted earnings per share, an increase of 3% from prior year at the midpoint.
Speaker Change: This concludes our prepared remarks. We will now open the line for questions.
Speaker Change: Thank you. At this time we will be conducting our question and answer session. If you would like to ask a question please press star 1 on your telephone keypad.
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one moment please while we pull for questions
Thank you.
Speaker Change: Our first question is coming from Mike Harrison with Seaport Research Partners. Your line is live.
Hi, good morning.
Morning, Mike.
Speaker Change: I was just looking for a little bit more clarification on the precision clad strip business and the inventory actions that your customer is taking there. How should we think about the magnitude of that volume decline?
Speaker Change: that you're expecting in 2025. And I guess we should assume that that decline is probably most pronounced in Q1 and Q2 and then maybe levels out in the second half.
and then
You know, you have that consumer electronics
Speaker Change: business listed as a market that should grow low single digits in 2025 on the Outlook slide.
Speaker Change: that should offset the decline that you're expecting in precision clad strip.
Yeah
Speaker Change: Mike, let me address that part of it first. That is excluding our Precision Cloud Script business. This is just general consumer electronics, you know, market.
Speaker Change: I would say small turnaround, small growth on a year-over-year basis on the remaining consumer electronics business.
Speaker Change: They have launched this. We've supported them really in every country that they have gone and launched.
Speaker Change: I think the situation is, you know, in line with kind of what we talked about
at the end of last year, which is...
Speaker Change: You know, the ramp up that we had was significantly more as they were filling the channel than I would say the rollout that they have had.
Speaker Change: sales and actual demands. And as a result of that, we would see 25 to be that down. So, you know, probably looking at roughly about maybe around a 20-ish, you know, type of percent year-over-year decline on that business.
And however, you know, we would see that then.
Speaker Change: coming back to growth in the 26th timeframe. I think at this time, I probably would say that, you know, that year over year decline is spread across the full year. You know, so not necessarily, you know, heavily, more heavily weighted in the first half than in the second half. But of course, we will continue to monitor this. We'll continue to work with the customer. I mean, if we see that they're starting to have
and their development partners. So that's how I see it.
Speaker Change: All right. Thank you for that. And then on the electronics business, I was hoping you could just give us a little more color on your expectations for the semiconductor business. It sounds like you're expecting maybe some acceleration in the pace of recovery as we get further into the year. But are you seeing some green shoots?
Speaker Change: in any of the more mainstream portions of the market, or is this mostly an advanced application-driven recovery I guess that you're baking into your 25 guidance for now?
Yeah
Speaker Change: As you know, the semiconductor business, you know, the market, of course, our business has been extremely challenged, you know, over the last six, eight quarters as the market has gone through a significant downturn.
Speaker Change: The expectations certainly were that the market recovery was going to start last year in 24. In fact, some expectations were that it would even start at the end, back up of 23, but that has continued to get pushed out.
Speaker Change: We have seen, you know, in the in the in the back half of 24 that the logic and memory segment was starting to recover primarily driven by the advanced nodes, the 3 nanometer, 5 nanometer, 7 nanometer type of advanced nodes that are used in in AI applications or other high performance computing applications associated memory applications, so high bandwidth memory applications associated with that have also contributed to a little bit of a turnaround.
Speaker Change: data storage side, considering the increased use of data and data processing. So we are starting to see maybe a little bit of recovery on that.
Speaker Change: At the same time, Mike, I mean, I'm sure you know, and we've all seen the reports, the power semiconductor is extremely challenged, right? All the...
Speaker Change: All the key players of the power semiconductor business have had tough quarters, you know, tough guide for Q1 and I think they're projecting, you know, challenging years, challenging year in 2025.
Speaker Change: We have a fairly balanced portfolio, so when you kind of balance out the challenges on the power semiconductor side with the expected increases on the advanced nodes, especially with our contribution on the ALD or atomic layer deposition growth that we're trying to push,
Speaker Change: High-end memory applications. We believe that, you know, especially in the second half of the year, you know, this market could be, you know, a mid-single digit type of a growth market.
Speaker Change: Q1 will be a very, very challenging quarter in this market.
Speaker Change: in the back half of the year, leading to about a mid-single-digit type of growth. And that's what we have included in our model.
Speaker Change: All right, very helpful. And then last question for me is on the $73 million of impairments in the precision optics.
Speaker Change: business. I'm curious, was that the Balzers Optics business that you acquired?
Speaker Change: about four years ago, and if so, can you give us a sense of maybe how that has progressed differently than you expected when you acquired it? And if it's not, maybe just help us understand what it is that was written down and how that helps to establish you going forward for better performance.
Speaker Change: Mike, why don't I start on that one and then we'll see if Jugal has comments to add. You know, every year we need to do an assessment of the intangibles. It's an accounting exercise. Precision Optics itself is a whole reporting unit, so it gets measured at the segment level, which does have goodwill beyond optics sponsors.
Speaker Change: But if you think about, you know, what has happened in that business over the last several years, certainly that was a large acquisition in 2020 with very strong prospects.
Speaker Change: We did see, you know, a major setback with the loss of a very large customer, which the business has struggled to recover from completely. We still see that business fulfilling, you know, our vision, but in the meantime, the forecast had gotten as such that we couldn't support the value that was on our books. It's not a...
Speaker Change: It's not something we choose or don't choose. It's really model driven from the accounting side. So we took the adjustment, it goes into our gap results. It's a one-time item and we move forward from here to build back that business. Yeah. And Mike, what we're excited about going forward is I think one, leadership change. We've made a leadership change in the back half of last year. We're really, really excited to have Jason Moore on.
Speaker Change: He has traveled to the various sites, met with the people, understood the technology, the footprint that we have. I would say significant number of changes that we drove already in Q4 and it's our expectation to continue to drive both cost optimization, footprint optimization, and of course, top-line growth and deliver a meaningful year-over-year improvement from 24 to 25. That's included in our plan and we want this business to be an equal contributor.
Speaker Change: to our 23% margin objective you know that we have for a midterm. So our goal is to have a meaningful improvement from 24 to 25 and then continue that going forward beyond that.
Sounds good. Thank you very much
Thanks Mike. Thanks.
Speaker Change: Thank you. Our next question is coming from Daniel Moore with CJS Securities. Your line is live.
Speaker Change: Morning, Jugal. Morning, Shelly. Thanks for taking the questions. Morning, Ben.
maybe start with
Ben: With the new long-term target of 23% adjusted EBITDA margin, obviously really strong performance to get to your prior target in a difficult environment. How do you think about kind of reasonable time frame and maybe more importantly what type of organic top-line growth we would need to achieve it?
Ben: Yeah, well, first of all, Dan, it has been a it has been a heavy lift But I think a lift that our team, you know took on and has delivered I'm really really proud of I think what our team has accomplished over the last five years in this regard
Ben: We've gone from roughly about a 15% EBITDA margin, you know, in the in the 20 time frame to delivering a full year.
20% EBITDA margin. I think, you know, ahead of our...
Ben: ahead of our plan, ahead of our expectations, and you know, taking our EBITDA from roughly about $100 million of EBITDA to well over $200 million of EBITDA in this time frame. So more than doubling the EBITDA. Really proud of, I think, what the team has accomplished and you know, that gives us the confidence that, frankly, that we believe we can continue this trajectory and and reach a 23%, you know, midterm EBITDA margin.
Ben: It involves, of course, organic growth, but we believe, and we've indicated this, I think, all along, that we always want to be growing ahead of our underlying markets, so perhaps maybe a 200 to 300 basis point type of growth beyond the underlying markets. It could involve, you know, some bolt-on M&As. We've done those over the last few years, and so perhaps maybe there is, you know, that could happen over the next several years. And then, you know, the continued disciplined execution that we have delivered, I think, in the company,
Ben: commercial excellence, with cost management, operational excellence, and I think continuing to drive, you know, leaner, more efficient organization. And then with the changes that we've driven in 24, especially during this little bit of a downturn, I think those changes, you know, will certainly
Ben: Ibida Margin. So we're quite excited about this and now, you know, new initiative and sort of new benchmark that we've set for ourselves. And of course, we're happy to share the progress with you, you know, as we as we go along.
Speaker Change: Very helpful. And then in the prepared remarks you teased, or in the discussion of new products and new opportunities, you teased new deposition material. What, if anything, can you say about that relative to
Your current, you know tantalum and or precious metals and
Thank you. Thank you.
Thanks.
Thank you.
Yeah.
Speaker Change: So, you know, we're actually quite involved with, you know, a leading equipment manufacturer on that. As you know, the type of deposition technologies that we're involved in today are PVD, so physical vapor deposition, is a core part of what we do, and that involves precious metals, targets.
tantalum targets, other non-precious metals targets.
Speaker Change: We have the emerging ALD, or Atomic Layer Deposition Technology, that we're involved in. And, you know, we now have a relationship or a partnership with a leading equipment manufacturer who is investigating a sort of next-generation deposition technology that can be used in certain applications. We're fortunate enough to have that relationship with them, and we're supporting them. So, you know, provided that this is something that...
Speaker Change: could become successful over the next couple of years we would expect to have a good meaningful growth after that. So we're very much looking forward to continue to do the development with them and see where this takes us.
Speaker Change: All right, appreciate the color. I'll jump back when you follow up, thanks.
Thanks Dan. Thanks Dan.
Phil Gibbs: Thank you. Our next question is coming from Phil Gibbs with KeyBank. Your line is live.
Hey, good morning.
Morning, Phil.
As you you all have
Phil Gibbs: thought about the tariff environment and what could be or will be or won't won't be.
where
Phil Gibbs: Where are some spots that may be of concern or where are some spots that may be of an opportunity as you look across your supply chain and customers?
Phil Gibbs: Well, as we know, Phil, I mean, this is a very evolving situation, right? Just, you know, this morning, for example, there was some report about possible tariffs on pharma, semi, autos. There's been talk of, of course, Canada, Mexico reversal.
Phil Gibbs: China, I mean, so it's a very, very evolving situation. So we're, of course, keeping a sort of a daily track on it to understand the ins and outs and how we can be properly positioned to operate in this in this environment.
First of all, when we look at the buy side
Phil Gibbs: So, we do certainly have buy from Canada, from Mexico, from China. We've looked at what those buys are, the dollar values, the suppliers that we're buying from. We've evaluated where we have second source opportunities and where we could potentially shift our buy to those countries, you know, if there was, you know, action that was taken. We've also made sure that, and we have this because we...
Phil Gibbs: You've used it during COVID time. You've used it in general situations.
Phil Gibbs: and that we have a very disciplined, robust process on any cost.
Phil Gibbs: that we would get, whether it's tariffs or any other type of thing, that we work with
Phil Gibbs: You've heard us say this all along, you know, that we don't want to be the sponge, right? And so if there are any cost impacts from the buy side, we're going to work very openly and transparently with our customers and be able to share that with them and process that.
Phil Gibbs: So I think that's the I'll call it the buy side you're right on the sell side I mean we have roughly a third of our business that goes into Europe
Phil Gibbs: You know, China is a relatively small sales arm for us, probably mid-single digits, I think, you know, in terms of our share there. But really, I would say it's the European side. So if there are any tariffs that are imposed for material going into Europe, certainly we'll have to work through that and understand what the implications are and how we work with our customers on that.
Phil Gibbs: We're also looking at initiatives where we can take advantage of What can we do from the very large footprint that we have in the US as you know, we we have a very Important and and meaningful footprint in the US. So, you know, where can we take advantage of perhaps? Competitor situations where we can do local, you know manufacturing here in the US we're also looking at China the as you know, there's a lot of talk about what gets produced in China
Phil Gibbs: Can we produce outside? We have footprint in Asia that's not in China. And so we're also working towards those initiatives. At the same time, we're working on a number of different materials that perhaps could be exempted from tariffs just based on the national security importance of those materials. And so we're working with the right people in Washington to highlight those. So they understand that there are certain materials that are important to the national security of the country
Phil Gibbs: And therefore, you know, they may perhaps should be exempt from the tariff. So I can tell you that this is a topic that certainly is getting a lot of attention, you know, on our side and we'll continue to monitor it and continue to manage it in a very effective way.
Phil Gibbs: Thank you. And then as you look at your 300 basis point margin improvement expectations, just couch this I guess over the next three to five years.
How much of that is getting...
Getting some meat or profit back in precision optics versus
Phil Gibbs: you know anything else you could be doing over the portfolio because I would imagine obviously moving from a negative EBITDA to a positive EBITDA situation there is obviously going to do a lot to get you
Phil Gibbs: Well I mean precision optics, clearly has to be an important contributor right.
Phil Gibbs: <unk> said this all along that all three of our businesses need to contribute equally to our topline profile as well as our bottomline profile precision optics has not done that and so we're making the changes necessary changes so that it can.
Phil Gibbs: I would remind all of us that if we just go back four or five years I mean, this business was a 20% plus EBITDA contributor for the company.
Phil Gibbs: It's a smaller base than the other two businesses clearly, but it's still an important contributor and it was a 20% plus EBITDA business and of course, our objective to the new leadership is is that the roadmap.
Phil Gibbs: Do we get that business back back to that level. So we are looking forward to that business contributing but at the same time.
Phil Gibbs: We want to make sure that we can keep pushing our our electronic materials business to.
Phil Gibbs: To move on and and and and deliver you know north of North of 20% EBITDA margins and continue to drive.
Phil Gibbs: Both the topline and Bottomline and the and the rest of our rest of our company.
Speaker Change: Thank you for that I guess staying with the precision optics, you mentioned earlier on the call that your R&D budget was very strong last year is there a decent bid in the R&D budget too.
Phil Gibbs: Due to rejuvenate that business.
Phil Gibbs: And in particular.
Yeah, well first of all the company level I mean, we're we spent nearly $30 million on R&D I mean, I remember the time, when we were spending less than $20 million in R&D. In this company. So I think we've continued to make the right investments for our.
Phil Gibbs: R&D spending at the company level and we've made sure that as we have looked at the precision optics business and we have made cost improvements and cost changes in that business, we've actually taken the R&D organization and frankly, almost kind of isolated it to create a single R&D organization that can be working to support that business.
Phil Gibbs: Globally. So it is it is I think targeted at making sure that the right projects are being funded and and then in the markets that we're focused on in that business.
Phil Gibbs: Gonna be are going to be focused on so I think I think we're well positioned to ensure that we've got the resources to fund that business as it as it kind of goes on this turnaround over the next several years.
Phil Gibbs: And then I've got a couple of small ones I appreciate that.
Phil Gibbs: Giving me the time to ask this.
Phil Gibbs: I know, it's the ancillary prices have been moving up theres been some supply disruptions in Africa.
Phil Gibbs: How much does the <unk>.
Phil Gibbs: Impact you guys, one way or the other and how are you managing through some some potential cost inflation there.
Phil Gibbs: So first of all I think we've got a very good diverse supply base for channel the tantalum so.
Phil Gibbs: If there is disruptions in one part of the World I think we have good supply base in good balance across the world.
Phil Gibbs: To make sure that overall were not being disrupted on the supply side on.
Phil Gibbs: On the pricing side, you may recall, so there was a time a couple of years ago, where prices did go up and Unfortunately, you know we have to eat some of those prices just because of the way our contracts were structured when we had taken over the business.
Phil Gibbs: We worked very diligently to restructure the contracts. So that we can make sure that there were some clauses in there to have a price recovery for.
Phil Gibbs: Cost changes on the tantalum side I think we've got a fairly good feel for that and so we have a good relationship kind of a cost price relationship with our customers on that so would there still be some impact it could be but it would be more from a timing standpoint to make sure that <unk> got the supply side and the sell side aligned but.
Phil Gibbs: Overall, I think we've got a fairly good feel for how to handle the the supply and the price side for example.
Phil Gibbs: Yeah.
Phil Gibbs: And then lastly for me.
Phil Gibbs: Just the working capital side did a good job in the fourth quarter there.
Phil Gibbs: Particularly on the on the inventory reduction as you got some of the higher value shipments out the door and defenses.
Phil Gibbs: Defense and space I'm sure but.
Looking ahead.
Phil Gibbs: Should we think about.
Phil Gibbs: How you're thinking about working capital management in 2020.
Phil Gibbs: Five in terms of a user source in them any internal metrics that you all have over the next three to five years in terms of where you want your efficiency measures to be thanks.
Phil Gibbs: Yes, sure Phil I'll take that one so working capital is a very important initiative to us.
Phil Gibbs: I think had some really good success in bringing inventory down in some places and then we've had places where we needed to add inventory, whether it's for new space business, whether it's for clad strip. So we had a base that was kind of increasing and decreasing at the same time you know.
Phil Gibbs: Hitting a more steady state we're now working on bringing that down getting to levels that we think are more appropriate for where we're at in time and space and you saw that come through in Q4, typically we don't have the best working capital performance in Q1, So I don't expect to see a sequential improvement quarter on quarter, but I do.
Phil Gibbs: Back to very strong year for cash flow for 25, So I think youre going to see the best cash flow performance that we've put up in a couple of years. As we you know we are still have good organic spend still a relatively high level of capex, but you know.
Phil Gibbs: Not adding that working capital really controlling that area and with good cash earnings I think I think we're going to have the performance there.
Phil Gibbs: Thank you.
Phil Gibbs: You're welcome Thanks, Phil.
Speaker Change: Thank you. Our next question is coming from David Silver with C. L. King Your line is live.
David Silver: Yeah, Hi, good morning, Thank you so much.
Speaker Change: Hi.
Speaker Change: Hi.
Speaker Change: I have a couple of kind of smaller questions or smaller topics and then maybe a bigger bigger topic.
Speaker Change: Firstly I'm just looking on the I guess, it's slide 20 from your deck full year guidance.
Speaker Change: I was wanted to hone in on the $25 million that you called out from your Capex budget for HCS.
Speaker Change: Just wondering is that.
Speaker Change: The outlays required to complete the previously announced capacity expansion or is there something else.
Speaker Change: Something newer going on there.
Speaker Change: Yeah, I mean as you know that's been a.
Speaker Change: An important part of our growth initiative right as we as we acquired that business and we have made sure that we are investing in that business to capture the full growth not only in the semiconductor space, but in the industrial space and the aerospace and defense space and as you remember that that business is.
Speaker Change: It.
Speaker Change: It was about a 70% to 75% semiconductor business, but we've made significant strides in the industrial space and the aerospace and defense side to grow that business.
Speaker Change: We have had a number of investments that we've highlighted over the 24 timeframe that we made and so I would say majority of that spend is related to investments that we have announced and that where we're putting in and not only additional capacity, but more cost effective capacity in many cases.
Speaker Change: That we're that we're doing so that's what that that's what that is and it will continue into 'twenty five as we as we finish that out.
Speaker Change: But that's a business that I think we're going to continue to look to figure out how we can how we can keep funding and take full advantage of the opportunities that are there and Aero defense industrial and semi.
Speaker Change: Interesting. Thank you very much for that color.
Speaker Change: Next question relates to your nonrecurring items. This period. So you were asked earlier about the large you know $73 million or so impairment and write down of goodwill.
Speaker Change: But there was also a 7.4 million dollar charge here I guess under the term or listed as M&A related.
Speaker Change: And I'm just wondering is that where were those some costs that were capitalized maybe from the bolsters our transaction or is that related to kind of ongoing M&A spend that may be the project that was targeted for us.
Speaker Change: No.
Speaker Change: Dropped off the list, but maybe just some comment on the the M&A related charge this quarter. Please.
David Silver: Sure So I'll take that one David.
David Silver: As you probably know in the M&A line. We also have divestitures and so a lot of that cost was related to finalizing the divestiture of the Albuquerque large area targets business that we've talked about as well as related to that facility closure in the nearby facility closure that we've been working on so that's really you know kind of divestiture related versus.
David Silver: Related yes, and yes.
David Silver: We've talked with a number of changes that we've driven in the company over the last 12 to 18 months.
David Silver: Making sure that our portfolio is stronger going forward right has been an important an important initiative and I think this move that we announced at the end of last year and that we've executed.
David Silver: It gives us a stronger more profitable portfolio.
David Silver: As for 25 and beyond.
Speaker Change: Okay, Great and this next question stipulate in advance Okay, I'm going to just take a little time to introduce it but.
Speaker Change: I'm going to ask a question about your performance materials group and try to relate it to an element of.
Speaker Change: Of your strategy within electronic materials.
Speaker Change: So within electronic materials jugal, you've highlighted a number of times that.
Speaker Change: Your company works with each of the top 15, Chipmakers and I always thought that was you know an important kind of positioning.
Speaker Change: Positioning to have particularly I mean, if you think about how.
The list of the top 15, maybe has changed over over time.
Speaker Change: I was wondering you know I was trying to draw an analogy there to your performance materials and in particular.
Speaker Change: D portion of that which seems to be driving a tremendous amount of growth.
Speaker Change: In the past year or two.
Speaker Change: And likely going forward.
Speaker Change: So you know maybe this is a marketing strategy or marketing approach question, but.
Speaker Change: Within the space Aerospace and defense you know there are you know.
Speaker Change: Just like in many industries, there's a couple of bigger more dominant players, but then there's a lot of <unk>.
Speaker Change: New business, new investment new approaches both in this country and outside.
Speaker Change: I was wondering if you might be able to talk about your approach to kind of exploiting your very strong positioning on the A&D side.
Speaker Change: Is this the case, where you know you're beryllium products are kind of a must have and youre brought into the discussions by some of the emerging players in space or related areas.
Speaker Change: Or is this the case, where you're trying to lock up.
Speaker Change: A big business with a handful of leading companies. So you know as you think about your multi year approach to taking full advantage of your strong positioning there I mean, what what what is the goal do you want to be a top 15 supplier or do you Wanna be.
Speaker Change: The exclusive supplier to.
Speaker Change: Number one or number two in the industry. Thank you.
Speaker Change: Great question.
Speaker Change: And let me just talk a little bit about that aerospace and defense market, because really I think I can break it up into actually three sub segments of that market.
Speaker Change: And in this market doesn't tend to be you know sort of the top 15, because I think theres a little bit lesser number of players in each of these key areas I don't want to talk about so when you think about aerospace.
Speaker Change: There is obviously the two big players one in North America, one in Europe, and then an emerging player in China.
Speaker Change: We have a very strong position and I would say almost kind of equal base with both the North America and the European.
Speaker Change: Customer.
Speaker Change: We have extremely good relationship with both our copper beryllium business, but also our <unk> business, which is a material that is used across <unk>.
Speaker Change: Both the narrow body and wide body planes.
Speaker Change: We have established and credit to our team in China as well as our team here in North America, a solid relationship with the emerging customer in China.
Speaker Change: With the with.
Speaker Change: Equal I would say our amount of weighting in terms of the content that we have as they're starting to build the narrow body planes and then and then down the road into the wide body planes. So I think on the on the on the commercial aerospace side, we're well positioned with those with those three <unk>.
Speaker Change: <unk> customers.
Speaker Change: When I think about the commercial space side I mean, there is obviously one very large customer.
Speaker Change: Our company around the World and then there is a number of different smaller companies on both the government as well.
Speaker Change: Right.
Without getting into specifics because I can't talk about customer names I can tell you that we are well positioned with.
Speaker Change: The customers in this space, whether it's on the commercial space side as well as the government side. So we have a history of working with a U S. Government. We also have the European space Agency that we work with we worked with the Indian Space Agency.
Speaker Change: And I would say.
Speaker Change: Other agencies around the around the world. So I think we're well diversified on the on the space side of it when you look at defense.
Speaker Change: Certainly our materials, whether it's a both beryllium based materials non balloon based materials are extensively used in the defense market, we have a strong relationship with all the top.
Speaker Change: Defense contractors, but without going into again names are you mean every one of them I think we supply our materials are too. We also supply our optics materials to the defense industry. We've had a strong focus over the last couple of years too.
Speaker Change: Our go global on our defense side, So we've established relationships with.
Speaker Change: Korea, with Japan, with a European customers, we've actually leveraged our commercial excellence and some external partners to help us identify defense opportunities outside the U S and that of course are approved.
Speaker Change: Approved and allowed by by by the U S side, and so I think we have a good diversified.
Speaker Change: <unk> business in North America, but I would say in emerging growing business.
Speaker Change: Out of North America with a number of things that are going on in the in the world. So I think when you look at the three areas of it.
Speaker Change: Commercial aerospace.
Speaker Change: Space side, both commercial to commercial space as well as the government space as well as the the defense, both North America as well as as well as global this has been a very.
Speaker Change: Focused targeted activity for us, particularly in the last two to three years to make sure that we are taking advantage of all the growth opportunities.
Speaker Change: But are there.
Speaker Change: We're looking forward to actually the commercial aerospace business turning over 125 as you know you know airplane delivery.
Speaker Change: Deliveries were down roughly 10% and 24 due to the number of issues that.
Speaker Change: That some customers had but we're looking forward to our turnaround and 25 thats built into our plan. When we talk about some of the growth growth activities. So great question I think it is an area that we're very focused on and we're going to continue to stay focused on.
Speaker Change: That's great I really appreciate all the all the detail there. Thank you.
Speaker Change: Thank you once again, ladies and gentlemen, if you have any final questions or comments. Please indicate so now by pressing star one on your telephone keypad.
Unidentified Operator: Our next question is coming from Dave storms with Stonegate. Your line is light.
Morning.
Speaker Change: Good morning, Dave.
Unidentified Operator: Just two quick questions from me here.
Any estimates on the remaining beryllium nickel inventory correction.
Unidentified Operator: My mind and I guess, how are you thinking about industrial post correction.
Unidentified Operator: Fair to say that growth in industrial maybe a little more back half weighted this year.
Unidentified Operator: Yeah. So I think on the beryllium nickel side I would say the inventory correction is nearly complete feedback from our key customers is that.
Unidentified Operator: They look to start to place orders they started to place some orders in the back half of last year, and we would see more orders in the first half and so I think we're getting through that and we would see.
Unidentified Operator: Normalcy and that you know by mid by mid year as we continue to make improvement on those on those orders with regard to industrial as you know the PMI index has been below 50 for a number of quarters, but.
Unidentified Operator: It hit 50% and in the last report that came out so maybe there's a little bit of a positive sign that our you know industrial is a market may perhaps be turning around but I would see slow.
Unidentified Operator: Throughout the year for industrial is how I would put it yes, certainly more growth in the back half of the year, but but we hope industrial is something that where the inventory levels have worked through in general and we can have a slight growth in the first half with a little bit more growth in the in the second half.
Speaker Change: Understood that's very helpful. Thank you.
Speaker Change: I just wanted to ask one follow up question around the divestiture related costs with dimension right sizing of the facilities in Asia should we expect dress divestiture related cost per facility to be similar to the new Mexico charge are there other variables here that we should be aware of.
Speaker Change: Yeah. Good question, so nothing to that magnitude right at anytime we make facility changes youre going to see a little bit of costs related to that but really nothing to the magnitude is of the $7 million that we took on the Albuquerque, and the related facility closure.
Speaker Change: That's very helpful. Thank you for taking my questions.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you we have reached the end of our question and answer session. So I will turn the call back over to Mr kind of her for closing remarks.
Speaker Change: Thank you. This concludes our fourth quarter of 2024 earnings call recorded playback of this call will be available on the company's website materially dot com I'd like to thank you for participating on this call and your interest in material and I'll be available for any follow up questions. My number is 21633 490 <unk>. Thank you again.
Speaker Change: Okay.
Speaker Change: Thank you. This concludes today's conference and you may disconnect. Your lines at this time and we thank you for your participation.