Materion Corporation (NYSE:MTRN) Q1 2024 Earnings Call Transcript May 3, 2024
Materion Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Materion First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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, Director, Investor Relations and Corporate FP&A. You may begin.
Kyle Kelleher: Good morning and thank you for joining us on our first quarter 2024 earnings conference call. This is Kyle Kelleher, Director, Investor Relations and Corporate FP&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. You can 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. Following Jugal, Shelly will review the detailed financial results for the quarter in addition to discussing our expectations for the remainder of 2024.
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 yesterday. Additionally, comments regarding earnings before interest, taxes, depreciation, depletion and amortization, net income and earnings per share, reflect the adjusted GAAP numbers shown in attachments four through eight of the press release. The adjustments are made in the prior year period for comparative purposes and remove special items, noncash charges, and certain discrete income tax adjustments.
And now I’ll turn over the call to Jugal for his comments.
Jugal Vijayvargiya: Thanks Kyle and welcome everyone. It’s nice to be with you today to discuss our first quarter performance as well as our current outlook for 2024. Our results for the first quarter fell far short of our expectations. While we were expecting to be roughly in line with Q1 of ’23, some operational challenges, mainly in our performance materials business and some pockets of slowing end market demand, led to lower sales and earnings. I’m proud of our team’s quick actions to mitigate these short term headwinds, delivering roughly flat EBITDA margins year-over-year, despite a nearly $40 million sales decline. We have taken a number of targeted cost actions that are benefiting not only our short term results, but are providing longer term structural improvements that will enhance profitability as key markets recover.
Looking more closely at the sales performance, continued semiconductor weakness represented roughly half of the year-over-year decline. In addition, the expected inventory destocking of our beryllium nickel product used in non-residential construction had a meaningful impact. Our results were further limited by delayed shipments due to the operational challenges, mainly in performance materials. While we had anticipated the softness in some of our end markets, demand in commercial aerospace and automotive was softer than we expected due to reduced aircraft build rates and slowing growth for electric vehicles. Airplane deliveries were down significantly year-over-year in the first quarter and are expected to be depressed for the year. Offsetting these declines, we saw strong growth across space and defense, where we are providing critical materials for space propulsion systems and on a growing number of defense platforms.
Short term operational challenges further impacted sales on a temporary basis in the quarter. Addressing some yield and equipment issues, our operations team responded quickly to address the issues and return our assets to normal output levels. Operational excellence initiatives have been core to our performance as we deal with market headwinds and other short term challenges. We have taken multiple targeted actions to adjust our cost structure while continuing to invest in the areas that drive organic growth for our business. These important moves have helped to deliver strong margin performance in a softer end market environment. Despite the decline in sales, our overall EBITDA margin for Q1 was roughly flat on a year-over-year basis, representing a strong 20% decremental margin.
Our laser focus on driving margin improvement in electronic materials delivered EBITDA expansion of approximately 500 basis points in the quarter, even with a 25% VA [ph] sales decline. This strong performance leaves us extremely well-positioned to drive even higher levels of performance as markets recover. Our focus on managing the business through some short term headwinds is complemented by our relentless efforts to invest for the future, as we continue to seed the pipeline for long term organic growth. We remain confident in our strategy and believe that our robust organic pipeline and portfolio of cost improvement initiatives will help drive earnings growth for the balance of the year. We expect to see continued strength in the space and defense markets as we move through the year.
Many of our advanced materials are engineered to perform in the harshest environments, making them an ideal fit for these demanding applications. New defense business wins in addition to the previously announced R&D partnerships for various government-funded projects, further solidify our position as a key supplier for advanced materials across aerospace, defense and new energy markets. In the semi market, near term growth in memory and logic chips used in high performance computing is expected to drive the rebound in our sales this year with demand for power and industrial chips coming back later in the cycle. We believe Q1 was the bottom of the downturn for us, as we see order rates picking up coming into the second quarter, giving us confidence that our top line will continue to improve as we move through the year.
The industry is continuing to prepare for the global shift toward broader AI adoption and Materion is a vital part of that supply chain. We continue to advance our broad portfolio of semiconductor products and are investing to increase capacity in key production areas to ensure we are ready to support that increased demand. The precision clad strip project continues to be a significant driver of organic growth for us and our partnership with our customer is strong. The expansion of our new facility remains on track to start up late this year. As the customer’s global rollout progresses and our teams have driven higher levels of output and performance at our new facility, we will now begin to ramp down production at our legacy facility. Our customers indicated an adjustment to their inventory levels for the second half of the year, which will impact our shipments.
This adjustment does not correlate to weaker end product sales as the customer’s global rollout remains on track and their projections support a robust long term outlook for our business. Our team has done an exceptional job of steering the company through some short term challenges, while maintaining a longer term focus that will further position Materion for sustainable growth and value creation. With the start of the recovery in semi and improved operational performance, we expect to deliver a much stronger Q2, with additional step ups in the third and fourth quarter, resulting in another record year for Materion in 2024. 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 last night, starting on Slide nine. In the first quarter, value added sales, which exclude the impact of pass through precious metal costs, were $257.8 million, down 14% from prior year. Despite strength in aerospace and defense and consumer electronics, our sales were negatively impacted by declines in semiconductor and automotive, plus the expected inventory correction for our non-residential construction material. Additionally, as Jugal commented, some temporary operational challenges limited our shipments, particularly in performance materials. Our teams have made meaningful progress in mitigating these challenges and expect more normal levels of output in the second quarter.
When looking at earnings per share, we delivered adjusted earnings of $0.96 in the first quarter, down 28% from prior year. Moving to Slide 10, adjusted EBITDA in the quarter was $45.2 million, 17.5% of value added sales, down 15% from the prior year with roughly flat margins. Despite the significant sales decline, the strong margin performance was driven by positive price and the benefit of our cost improvement initiatives, partially offsetting the volume decline. Moving to Slide 11, let me now review first quarter performance by business segment, starting with performance materials, value added sales were $155.6 million, down 7% from prior year. This year-over-year sales drop was driven by lower demand in automotive, commercial aerospace and the non-residential construction application within industrial.
Space and defense remains a bright spot with significant contribution from the emerging space market and strong defense demand more than offsetting declines in commercial aerospace. EBITDA excluding special items was $35.7 million or 22.9% of value added sales, down 17% from the prior year period. This decrease was driven by the lower volume, partially offset by targeted cost improvement initiatives. Moving to the outlook, we expect space and defense to remain strong throughout the balance of 2024 and again expect the operational challenges to improve as we move into the second quarter. Next, turning to electronic materials on Slide 12, value added sales were $77.6 million, down 25% compared to the prior year as a result of continued weakness in the semiconductor market.
EBITDA excluding special items was $14.5 million or 18.7% of value added sales in the quarter. Despite significantly lower volume, operational performance and cost improvement initiatives helped mitigate the semiconductor slowdown, which drove approximately 500 basis points of margin expansion year-on-year. As we look out to the rest of the year, we expect a gradual semiconductor recovery from Q1 with sequential improvement as we move through the balance of the year. Finally, turning to precision optics segment, on Slide 13, value added sales were $24.6 million, down 8% compared to the prior year. This year-on-year decrease was mainly driven by reduced demand in industrial and automotive, partially offset by strength in space and defense. Precision optics also saw some operational challenges which delayed some shipments out of Q1.
EBITDA excluding special items was $0.4 million or 1.8% of value added sales. The decrease in volume was a significant driver of this year-over-year decline in addition to unfavorable product mix. Looking out over the next few quarters, we expect a meaningful step up in margin performance in Q2 with stronger demand and continued focus on cost improvement initiatives. Moving now to cash debt and liquidity on Slide 14, we ended the quarter with a net debt position of approximately $462 million and approximately $130 million of available capacity on the company’s existing credit facility. Our leverage at 2.2 times remains just slightly below the midpoint of our target range. Lastly, let me transition to Slide 15 and address the full year outlook.
Despite the slow start to the year, we expect to deliver another year of record results with our organic and operational initiatives more than offsetting some market softness. Since our initial guide for 2024, the outlook for commercial aerospace and electric vehicles has softened and as Jugal mentioned, we are expecting some inventory correction from our precision clad strip customer in the back half of the year. We also expect slightly higher interest expense based on the current rate outlook. While we will work to mitigate much of these headwinds, we are adjusting our full year guide to a wider range of $5.60 to $6.20 adjusted earnings per share, a 5% increase from the midpoint versus the prior year. Despite the mixed market environment, Materion remains poised to deliver another year of strong execution and record results in 2024.
This concludes our prepared remarks. We will now open the line for questions.
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