Materion Corporation (NYSE:MTRN) Q3 2023 Earnings Call Transcript
Materion Corporation (NYSE:MTRN) Q3 2023 Earnings Call Transcript November 2, 2023
Operator: Greetings, and welcome to the Materion Third Quarter 2023 Earnings Call. At this time, all participants are on a listen-only mode, and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Kyle Kelleher, Manager, Investor Relations. Sir, you may begin.
Kyle Kelleher: 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. You can also access the materials through the download feature on the earnings call webcast link. With me today is Jugal Vijayvargiya, 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. 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 amortization, net income and earnings per share, reflect the adjusted GAAP 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 removed special items, non-cash charges and certain discrete income tax adjustments. And now I'll turn the call over to Jugal for his comments.
Jugal Vijayvargiya: Thanks, Kyle, and welcome, everyone. It's great to be with you today. 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 outgrowth initiatives, while pursuing targeted cost improvements and driving improved performance across our plants. These trends are offsetting the impact of softer demand conditions in the semiconductor and industrial end markets and enabling Materion to deliver in a challenging environment.
The third quarter represented our 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 continued softness in the semiconductor market, our value-added sales were up 8%, which speaks to the substantial diversity of our portfolio and the significance of the contributions from our organic pipeline. Strength in aerospace, including the emerging space market, defense, telecom and data center and meaningful contributions from precision clad strip, drove the differentiator performance. We continue to benefit from improved aerospace build rates, and more importantly, are increasing content per plane.
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. We believe the third quarter was a 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 per chip. 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 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, valued at $13 million.
That brings the total amount awarded 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 our ToughMet product sales into the space market will double to approximately $10 million next year. 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. Growth in this market is also benefiting our Precision Optics business, which has secured approximately $8 million in new contracts 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. We continue to be an important supplier of the critical defense programs, bringing our unique expertise and technically demanding materials. We've 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 additive manufacturing capabilities, also known as 3D printing, for beryllium and aluminum beryllium alloys. Additive manufacturing capabilities will enable significant advantages in the production and performance of optic 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. 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, are uniquely relevant technical capabilities and our teams unrelenting focus on operational excellence, we are continuing to build on the earnings power of Materion. 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 will 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 pass-through precious metal costs, were $270.5 million for the quarter, down 5% from prior year but up sequentially. Excluding the semiconductor market softness, the remainder of the business was up approximately 8% year-on-year. This growth was driven by strong demand in the aerospace and defense and telecom and data center end markets, along with meaningful contribution from the precision clad 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 in the quarter was $55.4 million or 20.5% of value-added sales, up 14% from the prior year, with margin expansion of 330 basis points. This significant increase was driven by favorable pricing and mix, as well as strong operational performance, partially offset by the slight decrease in volume. Our targeted cost improvement initiatives also contributed to the step up in earnings, outperforming our midterm EBITDA margin target of 20% for the second straight quarter. 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 clad strip drove this increase.
EBITDA, excluding special items, was $46.5 million, or 27.5% of value-added sales, up 41%, when compared to $33 million in the third quarter of 2022, with an impressive 530 basis points of margin expansion. This growth was primarily due to higher volume from our outgrowth initiatives, favorable pricing and a strong mix, 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 with continued contributions from precision clad strip. Next, turning to Electronic Materials on Slide 13. Value-added 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 correction.
EBITDA, excluding special items, was $13 million or 17.2% of value-added sales in the quarter. Despite this year-over-year decline, we saw a 110 basis points of margin improvement compared to prior year. This was driven by a favorable mix plus the benefit of our targeted cost reduction initiatives, which do include some short-term actions. As we look forward to the fourth quarter, we expect incremental improvement in semiconductor sales, as well as the continued benefit from the cost improvement initiatives we've implemented. Finally, turning to the Precision Optics segment on Slide 14. Value-added sales were $26.1 million, down 7% compared to the prior year. This decrease was mainly driven by the reduced PCR filter demand, the discontinued product application and general softening in the consumer electronics market, slightly offset by strength in defense.
EBITDA, excluding special items, was $3.4 million or 13% of value added sales. The decrease in volume was a meaningful driver of this year-over-year decline offset by positive mix and the benefit of our targeted cost improvement initiatives. From a sequential standpoint, we saw EBITDA 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. 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 2 times remains slightly below the midpoint of our targeted range.
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 guidance 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 and long-term sustainable value creation for our stakeholders. This concludes our prepared remarks. We will now open the line for questions.
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