Transcript of Materion Corporation Third Quarter 2016 Earnings Conference Call October 27, 2016

Transcription

1 Transcript of Participants Michael Hasychak Vice President, Treasurer, Secretary Dick Hipple Chairman, President, CEO Joe Kelley Vice President of Finance, Chief Financial Officer Analysts Edward Marshall - Sidoti & Company Marco Rodriguez - Stonegate Capital Phil Gibbs - KeyBanc Capital Markets Martin Englert - Jefferies Presentation Operator Greeting and welcome to the Third Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mike Hasychak. Please go ahead. Michael Hasychak - VP, Treasurer, Secretary Good morning. This is Mike Hasychak, Vice President, Treasurer, and Secretary. With me today is Dick Hipple, Chairman, President, and CEO, and Joe Kelley, Vice President of Finance and Chief Financial Officer. Our format for today s conference call is as follows; Joe Kelley will review the financial results for the quarter and the outlook. Following Joe, Dick Hipple will provide his comments. Following Dick, we will open up the call for your questions. A recorded playback of this call will be available until November 11 th by dialing area code (877), the number is or area code (201), the number is The conference ID number is The call will also be archived on the company s website, Materion.com. To access the replay, click on Events and Presentations on the Investor Relations page. Any forward-looking statements made in this announcement, including those in the outlook section, and during the question-and-answer portion, are based on current expectations. The company s actual future 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. And now, I ll turn it over to Joe for his comments.

2 Joe Kelley - CFO Thank you, Mike and good morning to everyone joining us on the call today. During my comments, I will cover our third quarter 2016 financial highlights, review the third second quarter profitability by segment, make some brief comments on cash flow, and finally cover the earnings outlook for the remainder of Following my remarks, Dick Hipple, Chairman, President, and CEO will provide comments on the company s key strategic initiatives. Let me start with the third quarter financial highlights. I am pleased to report that our third quarter 2016 financial performance was the second consecutive quarter of sequentially growing value-added sales and profits. Our success in new product sales, improved manufacturing yields, and favorable product mix drove the profit improvement. For the third quarter of 2016, value-added sales, which exclude the impact of pass-through metal costs, totaled at $157 million, growing 5% over the third quarter 2015 value-added sales of $148.8 million. The growth in valueadded sales was due to strong demand in the consumer electronics, telecommunication infrastructure, and science end markets, plus the return of raw material beryllium hydroxide sales after the absence of beryllium hydroxide sales in the first half of the year. Value-added sales from new products, defined as those introduced in the last three years, totaled approximately $24.5 million and represented 16% of our total value-added sales in the third quarter of New product sales were 34% over the prior-year period. Gross margin dollars in the third of 2016 expanded 15% to $50.8 million, from $44 million in the third quarter of Expressed as a percentage of value-added sales, gross margins were 32.4% in the third quarter of 2016, an approximate 200 basis point expansion from the prior-year period. As you will hear in my later comment each of our three business groups delivered improved gross margin profitability both year-over-year and sequentially in the quarter. Selling, general, and administrative expenses were $34.2 million or 22% of value-added sales, $5.1 million higher than the prior-year third quarter. Included in third quarter selling, general, and administrative expense in 2016 is $1.7 million of non-recurring cost associated with acquisition due diligence and cost associated with the settlement of a legacy legal matter, which dates back to the 1980s. In addition to these non-recurring costs incurred in the third quarter of 2016, the prior-year third quarter selling, general, and administrative expense included significant credits for the reversal of accrued incentive compensation as financial performance in 2015 turned downward in the second half related to decreased demand levels from oil and gas customers and the Asia connector market began to slow. Research and development expense continues to represent approximately 2% of value-added sales, as we are investing in advancing our new product pipeline. The R&D efforts are long-term investments and strategic growth platforms; however, the exact timing and magnitude of the end market acceptance is difficult to forecast. Other net was an expense of $3.2 million in the third quarter of 2016, a $1.6 million increase from the third quarter of the prior year. This expense increase is attributable to differences in foreign currency exchange gains and losses. The prior year quarter included a significant $1.4 million FX hedge gain, primarily related to the strengthening of the U.S. dollar against the euro. Operating profit in the quarter totaled $10.2 million compared to $10.9 million of operating profit in the third quarter of Adjusted operating profit, which excludes the nonrecurring acquisition and legacy legal Page 2

3 settlement cost, totaled $12.2 million in the third quarter of 2016, slightly below the $12.7 million of adjusted operating profit in the prior-year third quarter. Sequentially, the third quarter of 2016 adjusted operating profit reflects a 51% improvement over the $8.1 million in adjusted operating profit recorded in the second quarter of Increased sales, improved product mix, and favorable manufacturing yields contributed to the sequential profit growth. Net income in the third quarter of 2016 totaled $8.1 million, up 9% over the prior-year third quarter amount of $7.4 million. The year-to-date effective tax rate is approximately 14%, which includes a $900,000 tax benefit associated with some international tax planning. Excluding this discrete item, the year-to-date effective tax rate is approximately 18%. The improved forecasted effective tax rate is being driven by both the amount and the mix of earnings and the mining depletion benefit. Diluted earnings per share were $0.40 in the third quarter of Adjusted earnings per share were $0.46 for the third quarter of 2016, a 7% increase compared to the $0.43 per share of adjusted earnings in the third quarter of 2015 and a 48% increase from the $0.31 per share of adjusted earnings in the second quarter of Now let me review our performance by business. Our Performance Alloys and Composites segment value-added sales totaled $87.2 million in the third quarter of 2016, an increase of 10% from the $79.6 million of value added sales recorded in the prior-year third quarter. The increase in value-added sales compared to the prior-year period can be attributed to increased raw material beryllium hydroxide sales and success with new product connector material being sold into the consumer electronics market. And 70% of the segment's quarterly value-added sales growth in this end market can be attributed to this newly-developed connector material. Gross margins in the third quarter expanded both sequentially and year-over-year to 23.6% of value-added sales in the quarter. High sales volume of the raw material beryllium hydroxide, plus several of the high-margin highpurity beryllium shipments forecasted for the fourth quarter, were shipped in the third quarter. Operating profit in the Performance Alloy Composite segment totaled $4.4 million or 5% of value-added sales in the third quarter of 2016, a slight decrease from the $4.5 million recorded in the prior-year third quarter. However, looking sequentially, you see significant improvement in segment profitability above what is forecasted to be prof [ph] levels of profitability recorded in the second quarter of This is more than simple sales volume leverage. We are taking action to improve product mix, pricing, and cost actions, which are starting to reflect themselves in financial results. That said, there is significant work yet to do to get profit levels and margins for this segment back to its historical range and beyond. Dick will comment further on some of the strategic initiatives to accelerate this recovery. Moving now to our Advanced Materials segment, value-added sales for the segment totaled $46 million in the third quarter of 2016, up 3% over the prior-year third quarter. Growth in the precious metal targets and advanced chemicals sold into the wireless, LED, and broader semiconductor space, more than offset some of the softness in the Asia telecommunication infrastructure market. Gross margins increased both year-over-year and sequentially in the quarter to 43.5% of value-added sales. These levels of profitability were driven by improved manufacturing yields and a favorable product mix. With growing sales and a near record-level gross margin percentage, operating profit for the segment totaled $8.3 million in the third quarter of 2016 or 18% of value-added sales. Page 3

4 This represents a 19% improvement over the prior-year third quarter and a 14% sequential improvement in profitability over the second quarter of Our Advanced Materials segment continues to be our most profitable business and should deliver the third consecutive year of annual operating profit margins as a percentage of value-added sales around 15%. Before I leave the review of our Advanced Materials business, let me make a few comments on the segment's pending acquisition. We frequently receive questions to provide more color on this transaction. We announced our intention to acquire the Heraeus target business back in May of this year. The announcement was made early in the process because proactive communication with the Heraeus employees, particularly the Germanbased employees, was critical for the success of any potential acquisition. Here we are five months later and we are very close to signing a definitive agreement, which will be quickly followed by the necessary regulatory filings. Dick will cover the strategic rationale and why we are excited about this transaction in his comments, but I would like to provide some limited color on the financial. This acquisition, in financial terms, is best thought of as two separate acquisitions. Acquisition A is the target business with operations in the U.S., Europe, and Asia. The operations will be carved out and consolidated with our existing operations in the regions. This business is approximately $60 million in annual value-added sales and delivering operating profit in the mid-single digits and EBITDA margins of approximately 8% to 10% of valueadded sales, prior to any synergies. Acquisition B is a standalone operation, which generates approximately $20 million in annual value-added sales. This business is currently operating near breakeven, however the path to future profitability is clear. As for the purchase price, the only thing we can disclose at this time is that we are paying appropriate market multiples for these two businesses, inclusive of the purchase price, deal cost, and integration cost. The purchase price for acquisition B is based primarily on an earn-out provision tied to future profit levels. We remain disciplined in our financial evaluation of acquisition targets and will walk if the financial returns post due diligence are less than anticipated. Evidence of this discipline can be seen in the acquisition we were pursuing earlier this year in our PAC business. Following due diligence, the economics changed and we were unsuccessful in agreeing on revised financial terms with the seller and terminated the project. Given where we are with the active negotiations, this is the extent of estimated financial information that we can share at this time, but I felt it important that investors were able to better calibrate the financial implications of this pending transaction, which we are very excited about. Moving now to the Precision Coatings Group. This group includes the Precision Optics and Large Area Coatings businesses, which are included in the other segment along with unallocated corporate costs. Value-added sales for the Precision Coatings Group were $25.8 million in the third quarter of 2016 compared to $25.7 million in the prior-year third quarter. This segment continues to experience a high level of sales churn, while transitioning in new product sales and expanding gross profit margins to 41.5% of value-added sales in the third quarter of The Precision Coatings business has the highest percentage of new product sales totaling 26% of total group third quarter value-added sales. Sales of the ceramic Phosphor Wheel in the projector display market continue to grow nicely, replacing sales of the ColorWheel. Value-added sales of our new Paveway [ph] Optical Filters into defense missile applications are growing nicely for the third consecutive quarter. Page 4

5 Operating profit in the third quarter of 2016 for the Precision Coatings business totaled $3.4 million or 13.2% of value-added sales compared to $3.6 million of adjusted operating profit or 14% of value-added sales recorded in the third quarter of the prior year. The prior-year amount excludes non-recurring costs associated with cost-reduction initiatives, which are clearly working. in conjunction with improved yields and product mix. Since the cost-reduction initiatives were undertaken in July of 2015, the Precision Coatings business has reported double-digit operating profit margins in four of the last five quarters. This business remains on track to deliver our fourth consecutive year of adjusted operating profit and margin improvement. Turning now to cash flows. The company's balance sheet remained strong in the third quarter as net debt was only $800,000. The company continues to have significant available liquidity to support meaningful organic growth opportunities, pursue strategic inorganic growth alternatives, and return capital to shareholders. Cash flow provided from operating activities totaled $26.4 million for the first nine months of 2016, which includes $12 million of pension funding contributions. For the full year, we are forecasting cash flow from operations to be in the range of $50 million to $60 million as the fourth quarter has seasonally stronger cash flows. Cash used in investing activities totaled $27.6 million in the first nine months of 2016, $13 million below the prior year amount. Capital spending, excluding mine development, is forecasted to total approximately $25 million to $30 million for the full-year 2016 while mine development investments are forecasted to be approximately $9 million, less than half of what it was in the full-year of During the third quarter of 2016, we repurchased approximately 41,000 shares for $1.1 million, bringing the yearto-date total spend on share repurchases to $3.8 million for approximately 147,000 shares for an average repurchase price of $25.78 per share. Additionally year-to-date, we have returned $5.6 million to shareholders in the form of a dividend. Turning now to the outlook, the company is confirming the previously-issued annual adjusted earnings guidance range of $1.30 to $1.40 per share. This earnings guidance range suggests the second half 2016 earnings level, which is approximately 28% to 45% above the first half of 2016 earnings level. The reason for the wide quarterly range is that the timing of high purity beryllium and raw material beryllium hydroxide shipments and volumes can be uncertain. As we experienced in the third quarter of 2016, the beryllium-based business was stronger than anticipated as we were able to ship products previously forecasted for the fourth quarter. This concludes my prepared remarks and I will now turn the call over to Dick Hipple who will review the company's strategic initiatives. Thank you, Joe. I thought I would depart from my customary practice of commenting on major markets and new product introductions and instead summarize some of the strategic moves Materion is making to reposition itself for the future. First of these is our M&A pipeline. As we announced earlier, Materion has been in negotiations to acquire the high performance target materials business of the Heraeus Group of Hanau Germany. We are very close to reaching a definitive agreement that will allow us to proceed with regulatory approvals and other pre-closing steps toward an anticipated close in early Page 5

6 Teams from both companies are in the finals steps on an agreement on a number of factors including the relocation of Heraeus' target manufacturing operation in Hanau Germany to a new Materion site nearby, as well as overall integration planning into Advanced Materials business. As we have completed the diligence and become very familiar with our Heraeus partners and their target business, we are even more excited about the potential of this transaction. There are both the complementary and unique aspects inherent to Materion's and Heraeus' target materials offering and capabilities. Combining them will enable us to enhance our position in our traditional markets and drive additional growth in new markets. Specifically, we will gain target manufacturing capability in both Europe and Asia as well as design centers Europe and Asia and a highly-experienced, talented workforce. Looking at this from a market perspective, we expect to be able to accelerate and solidify our global materials offering with enhanced technology and capacity in semiconductor, while expanding capability in several new markets. Outside of semiconductor the acquisition immediately provides us with diversification and critical mass in a number of attractive target-related businesses segments and technologies where Materion has not historically enjoyed a strong position. These include architectural and automotive glass, solar and display, growth businesses offering synergies with our existing platform. Finally, the acquisition will bring together two discrete, but complementary areas under the umbrella of memory materials. Heraeus has a very good position in the media side of the magnetic data storage market while our wheelhouse has been in the film materials for the head side of storage. When grouped together we'll gain scale to enhance operational and product development, along with an ability to serve customers singularly with a more complete offering. Materion and Heraeus make for a winning combination. It is a compelling fit with our global growth strategy and our criteria for investment. We're looking forward to the final turn in the agreement process and then on to closing. Beyond Heraeus we have other targets in the acquisition pipeline that show promise for integration with our core businesses in alignment with our corporate culture and values. Now I would like to turn to two other major initiatives we're taking to accelerate the performance improvement of our PAC business and enable our long-term success. The first of these involves a fundamental rethinking and rebalancing of our strategy of being a raw material beryllium hydroxide supplier. You will recall that for the past 20 plus years, Materion has sold beryllium hydroxide directly from our mine and mill in western Utah under long-term cost plus supply agreements, primarily to an Asian-based competitor in the copper beryllium business. This company has purchased our hydroxide to produce copper beryllium master alloy, which it further refines and processes into copper beryllium for its own customers. As has been the case this year, we experienced periods of limited hydroxide order volumes during negotiations for a new supply agreement, which in turn distorts our sales and margins. While this is typically short-term, it is also disruptive to our ability to plan and forecast results and partially obscures the performance of the base PAC business. Given that we are the world s only fully-integrated supplier to the beryllium consuming industry, we have an opportunity to maintain our role as a supplier, but under a different structure. We plan, over time, to shift our focus from being a provider of raw material beryllium hydroxide to other suppliers, to a provider of semi-finished cast products to that same supply base. Page 6

7 This move allows us to realize both unique value we provide as the industry's mine-to-mill producer as well as better leveraging the capital-intensive front end of our copper beryllium business, which is otherwise unaffected by the external sale of hydroxide. We are well equipped and motivated to accept this additional front-end business at our Elmore, Ohio facility, backed up by the assurance of approximately 70 years improvement ore reserves. We are in discussions now with our primary customer to reach a new approach and structure to our relationship that assures benefits to both and satisfies the markets overall demand for copper beryllium. Our incentive and determination is clear, change the strategy to level volatility, add predictability, and capture a greater return on an investment no other producer has made. The second set of actions underway to restore the profitability of our PAC business focuses on the alloy strip product line. The sustained foreign currency impact on the profitability of this product line, predominately sold internationally, makes it imperative we explore alternatives. We have reorganized the management structure within the alloy business and begun detailed profitability improvement initiatives. These two strategic shifts, aided by a modest recovery in the oil and gas market, is targeted to return the PAC business, not only to historic levels of profitability, but in fact to exceed them. So then to summarize, despite the challenges we have faced this year, I am confident that our focus on growing niches of growth markets is on target. It is especially gratifying to see our value-added sales from finished product growing year-over-year and profit margins improving sequentially across all of our businesses. With the new products, acquisitions, and strategic realignment initiatives, we are poised for a continued solid growth improvement in our results. We do appreciate your interest in Materion and for taking the time to join us for this morning. Operator you may open the line for questions. Question-and-Answer Session Operator Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Edward Marshall with Sidoti & Company. Please proceed. Q: Hi, guys, good morning. Good morning, Ed. Q: So I wanted to ask about, I guess, the change in strategy with the hydroxide shipments. I know you've been working on an agreement for some time. I think price was the big negotiator there. Why the change now after several quarters of trying to get that price negotiation? I know we've talked about the potential for this to go this route before, but just curious what the thought process is or maybe what the pushback from the customer was regarding a potential contract? Page 7

8 Well I guess I'm not feel free to discuss confidential conversations with the customer. However, as we look forward, there is a lot of common sense on our part to change the whole dynamics of that supply situation where we would go back actually go down in the supply chain supply to supply semi-finished over time versus just the raw material and obviously that would drive more value to us through our primary end and hopefully bring other efficiencies throughout the supply chain of the industry. So I think it will ultimately create a win-win and it's a totally different way of thinking about the business and I think we'll get there over time. Q: Do you have the full capabilities that your customer currently has and how much capital do you have to sink into the business in order to meet the demand that you see? None. We have the capacity to supply. Q: Okay. So I want to also ask about make sure I understand the discussion on the new products appropriately. You talked about 16% of value-added sales this quarter, 11% last year, how do you define new products? Is that over 3 years or 12 months? I forgot how you correctly define? Ed, that's new products, those introduced are commercialized in the past three years. Q: Okay. So it's not appropriate to ex the numbers out to look at the base business. No. Q: No. Okay. Because you constantly have things coming out of the new product category. Q: Right so you can't get to a clean number I'm assuming. Right, but we track this internally reported for every one of our businesses to continue to drive the focus on a new product introductions and then also ensure that new products are generating appropriate margin profile. Q: Got it. And when you talked about the acquisition of Heraeus and you talked about some of the financial characteristics, you mentioned, and I think you said 8% to 10% on profitability, was that operating as a percent of the AR or was that EBITDA of a percent of the AR? Yes so what I said was OP margins or EBIT margins were in the mid-single digits and EBITDA margins were in the 8% to 10% range. Q: Got it. Okay. Thank you guys very much. Yeah that's all and just a reminder, that's all the current base business prior to any synergies. Page 8

9 Q: Right. Operator Thank you. Our next question comes from Marco Rodriguez with Stonegate Capital. Please proceed. Q: Good morning, guys. Thank you for taking my questions. I wanted to talk a little bit more about the Performance Alloys segment there and the beryllium sales you had in the quarter. It also sounds like you pulled some revenue from what you were expecting in Q4 into Q3. Can you help us think about that, quantify how much got pulled from Q4 into Q3 and what you might be expecting the margin impact going into Q4? Yes, so basically when you think about our second half-year guidance has remained unchanged, yet the third quarter financial performance was better than what we had internally estimated. And the primary reason there was the volume of beryllium hydroxide sales. We did forecast that significant of a volume in the third quarter, we had it more evenly throughout the second half. And so the sales on that in the quarter were $7.6 million, just value-added sales on the beryllium hydroxide. And then we had two actually large shipments of high purity beryllium that were going into the science end market and, again, the customer simply was able to accept those earlier, required those earlier. So those were shipped in the Q3 as opposed to Q4. So big picture, our second-half guidance remains unchanged. It's just that those two particular product lines came in, timing was different than what we had forecasted. Q: Got you. And then in terms of the strategic shifts you're making here and obviously the drive to get the operating profit margins on VA sales back up to a normalized level. First, I m assuming normalized level, you're talking maybe back to your fiscal '13 fiscal '14 operating margins where you were in like the 9% range, first if you can help me think through that. And then second, on these two strategic shifts that you talked about with the beryllium and then on the alloy strip line, can you give us a sense of timing and if those two specific items are going to get you back up to that normalized operating margin or is there something else that also has to happen? Joe Kelley - CFO Yeah, so go ahead Dick. I would say that the timing we're looking at is over the next couple years to get all that executed on. And I talked about two different strategic levers in the business and also I think it makes a lot of common sense that we will see some we re not assuming a big boom here, but to assume some recovery in the oil and gas market. Joe Kelley - CFO And just to calibrate, Joe, specifically when we say historical terms, we're talking '13 and '14 as you referenced when the OP was about 9% of value-added sales. And these plans, combined with a recovery in the oil and gas market, will take us, as I said in my comments, back to those levels and beyond. Our target is to have that business at double-digit margins. Page 9

10 Q: Got you. Okay. And then I'm not sure if I caught this, on the Heraeus acquisition you provided some detail there. Just trying to get a sense here, is that revenue that you're going to potentially be taking into your financials? Is that going to be all put into the Advanced Materials, will it be spread throughout your segments or how is that going to happen? Yes, so both of those businesses are exact fits with our Advanced Materials businesses. Many of them share the same product line, customer base, technologies, and so it will be 100% absorbed into the Advanced Materials business. Q: Got you. Perfect and the expectation, if I heard you correctly, is a Q1 close date of fiscal '17. Correct. So we're hoping to sign here in the next couple weeks and then begin the regulatory approval process with a close in Q1 of '17. Q: Got you. Okay. And last quick question, on the Precision Coatings business, pretty good expansion here year-to-date in terms of the margin profile, especially on the gross margin on VA sales and revenues are relatively flat sequentially and not huge increase year-over-year. Can you talk a little bit more about what are the issues there that are basically allowing you guys to show a substantially higher VA gross margins on VA sales? Yeah. So I'll comment on that. First of all, if you recall back in July of last year, we took an initiative to do some restructuring of our Shanghai operation to significantly reduce the cost structure there and centralize R&D efforts in our Westford, Massachusetts facility and that was to lower the cost structure. But I'll tell you the other thing is we had some advancements in yields, manufacturing yields of our optical coating systems in Westford and then improved product mix and we took some also very specific pricing actions. So it was the combination of those factors and at the same time there was the fall-off, if you go back to the back half of last year, the sharp fall-off in the ColorWheel, it was a product where margins had deteriorated, price points had commoditized it and as that fell off, we replaced it with a much higher margin, Phosphor Wheel and that has started to ramp up nicely, so that helps. And then I would also tell you, our Large Area Coatings business, which is the blood glucose test strips. So in the back half of '15 we were successful in developing a new product and one business with a new customer, LifeScan. And so as they ramp up, that helps and so it's the new product introductions there and improved yields on that operation. But I would tell you, as you see, you don't have to look any further than this past year. Margins are as high as 17% at one quarter and as low as 9%. There is still a significant degree of product mix and profitability that could impact any given quarter within the Precision Coatings group as you've seen year-to-date. That being said, in my comments we have it s not just this year, over the last four years we've taken actions, mix, yield, cost, to really restructure this business and for four years have grown profits and the margin profile. And so we're forecasting to end here with double-digit operating profit margins, which is a nice story considering back in 2012 it was around 2%. Q: Got you. That's very helpful. Thanks a lot. Appreciate your time. Page 10

11 Operator [Operator Instructions] Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please proceed. Q: Good morning, gents. Good morning, Phil. Q: How are you? Doing well. Q: Good, the two parts you mentioned, acquisition A, acquisition B. Those both are within this Heraeus acquisition was that, did I hear that correctly? That is correct, that is correct, those are what have been categorized as the Heraeus acquisition and what we've been working on. Internally, in financial terms, we carve them into two buckets when we talked about the financial returns and profile internally. Q: Okay. That 8% to10% EBITDA margin on the bigger piece of the revenue base, none of that would include purchase price accounting if there's any of that? Phil, that's reflective of their current forecasted trailing-12-months profitability. Q: Got it. And then in the fourth quarter I think you point to some general macro malaise in the outlook commentary you provided in the release. Is that just year-end inventory adjustments, customers feeling some hesitation in front of the election or is that another destock in consumer electronics? Can you help us there? Well I just think that's just an overall comment regarding the whole global world is fairly flat on a growth basis. So that's pretty much it. Automotive appears to be on the softer side and I would expect that to be some destocking going on there. I think you see the forecasts going up by the big automotive companies. I do expect, on the other hand, to see a little bit of a pickup going on in the oil and gas market. We're starting to see some early signs of that bottoming out and possibly picking up in some spots. That makes common sense with some of their higher oil prices that you see and the rig count is starting to come up very modestly, but it is coming up. So that's bottomed out. The consumer electronics is always difficult to forecast because of how is the consumer going to come in at Christmas time, we're not sure and we have all kinds of changing dynamics. When you got Apple whose last quarter sales were down 15%, this quarter sales were down 5%. You got Samsung who s in a mess with their new phone launch. Where all this is going to play, but then Apple comes out with a very, very strong forecast in the fourth quarter. So I guess I would say that we're not banking because of all the turbulence in the cell phone market. We're not counting on a big robust fourth quarter because of all the turbulence that s there. So just a lot of the markets are Page 11

12 just stirring, but if you put everything in a bucket, I would say, when you come out the other side, I don't forecast a lot of growth. We're really focused on what can we control and which is why we spent so much time on the new products and the focus there. Q: Great. I appreciate that on market color. And on the $7 million that you pointed out, Joe, in the hydroxide sales in the third quarter, you d also mentioned two specific orders that maybe had gotten pulled in. Should we anticipate all else equal, that the revenues associated with that will effectively represent the drop-off in valueadded sales and performance alloys in the fourth quarter because you essentially received all that in 3Q? Yeah I think, as I would say, the profitability of the PAC business exceeded our internal expectations in Q3 because of the larger volume of beryllium raw material hydroxide and those two orders. So when you think about that segment sequentially going into Q3, it will be softer I m sorry, going into Q4 will be softer than Q3. Q: Is that the biggest variant in the bridge in the fourth quarter for you guys right now? Well the biggest--between our internal forecast of Q3 and the actuals, that that is the biggest variant. Q: I just mean in terms of the expected modest drop off in earnings quarter-on-quarter is the biggest variable in that drop off this absence? Yes, I would say that that is the largest. I think when you look at some of the other end markets, there is some natural seasonal softness in Q4, but that's normal and was included in the forecast. Q: Okay. Terrific and I have just one more on the defense market, can you help us, in terms of what you're seeing there across your defense buckets, meaning maybe what your outlook is moving forward and if you've felt any lagging impacts from sequestration just given the fact that we're in this election cycle and whether or not you expect some kind of demand to unfold afterwards, thanks. I think overall we've seen very nice growth in that market. I think year-to-year, Joe, you have the numbers in front, 14% 15% up year-to-year. Joe Kelley - CFO Defense year-to-date is up 20%. Okay, 20% and obviously we see that in our optics business. What we see, it s really in our optics business, we see it certainly in our high BE business, and to a much smaller extent into our alloy business. But right now we expect that to remain robust. We're not forecasting that to go backwards at all and to me that would only occur if there was some kind of a significant change on the political front, say post-election, that we would change those dynamics right now. But the sequestration, I think that whole dampening effect on the defense budget was based on some of the actions and Congress was relieved a bit. And we're certainly seeing that in our order book as a result, plus I think we're also in different platforms and maybe the way you think about Materion is we're really not supporting, not to say I shouldn't make a black-and-white, but we're not really supporting the soldier on the ground. We're Page 12

13 supporting the satellites, planes, missiles, targeting systems and that's what we supply and right now that's where they're spending money on. We don't have a lot of troops out in the field. Q: Makes sense. Thanks so much. Appreciate it. Thank you, Phil. Operator Thank you. Our next question comes from Martin Englert with Jefferies. Please proceed. Q: Hi. Good morning. Good morning. Q: So for the pull-forward of the hydroxide sales and then there was two large sales into the science end market. Was all of that within your prior guidance? Yes it's simply a movement from Q4 to Q3. Q: Okay. What's your sense that this was, I guess, being purchased maybe moreso on the hydroxide side to replenish diminished inventories and is there any possibility that you would see some other unexpected orders in the fourth quarter here? Yeah and the answer to the second question is there is some uncertainty as it relates to Q4 in terms of the volume and that's why the range that we left out there has the $0.10, call it a wide range, for Q4. And so that's what I would say regarding that. And then as it relates to the we do not have clear visibility into inventory levels of a particular customer and so I can't comment as to whether we view the volume to be a replenishment or a stockpiling. At this point we don't have that visibility. Q: Okay. But I would say on the science ones when you're selling a high-purity beryllium business has large one-off orders very frequently, either into nuclear medical, some science, some space and science, some defense and so you will see volatility on any given quarter in between those different end markets and it was just--it wasn't driven by our actions as much it was the customer's desire for the material that accelerated that shipment into Q3. Q: Within you're implied forecast for the fourth quarter, do you have incremental hydroxide sales or do you have hydroxide sales in that and do you have anything. We have only one primary customer so we don't disclose that level of granularity. Page 13

14 Q: Okay. And if I could, one quick question. I guess thinking about the pension, what do you expect the full-year contribution to be and then also the expense add-back. So what would that overall net impact be for 2016 and do you have any expectations for 2017? Yes for 2016, we anticipate contributing $16 million to our pension and the expense will be approximately $9 million. And then the '17 pension expense, as you're aware, is all going to depend on where the discount rate ends at the end of the year. If you look at where the discount rate is today and this were December 31, our pension expense next year on a GAAP basis would increase approximately $3 million. Q: And a similar cash contribution. No, not necessarily a similar cash contribution, we are, as you see, we are contributing cash in excess of the expense and we have been doing that for several years. We maintain above the PBGC premium limit to keep a minimal expense and so I don't anticipate a change in cash contributions. Q: You don't anticipate any change or do you mean that imply that. I do not anticipate any change in cash contributions next year. Q: Okay, and then for that way you have it flowing through your cash flow, these two are netted out. So this year would be about, I guess it's about a $7 million net impact right. Full year cash flow of $7 million unfavorable net outflow included in the operating activities. Q: Okay. And when I think about CapEx for the next year, should I think of the mine development what's been allocated for that largely gone at this point or do you anticipate ramping that back up at all? Yeah it will depend but right now I would tell you I anticipate that to be zero next year. Q: Okay. And possibly a similar range or budget of the $25 million to $30 million for the base. We've been running around $25 million to $30 million last year. $25 million to $30 million this year. I think we'll probably be closer to the $25 million than the $30 million next year. Q: Okay. Excellent, thank you very much. Thank you. Operator We have a follow-up question from Edward Marshall with Sidoti. Please proceed. Page 14

15 Q: You mentioned signs of oil and gas pickup and I am curious, is that anecdotal like customer inquiries or did you have any meaningful orders at this point? No, it s actually orders. Q: Okay. And they're meaningful? Anything in the oil and gas market is meaningful at this point, but it's just that our sales pretty much bottomed out in the second quarter and we're starting to see a little bit higher level of order rate coming in. So it's good to see that. So is it meaningful, I would say it's certainly meaningful in that particular market. So anyway I guess that's really the message I would say that it has bottomed out and we're starting to see it tick up, but it's not anywhere near where we were in 2014 obviously. Joe Kelley - CFO And, Edward, all comments are relative, we're coming off of losing about $30 million in annual sales into the oil and gas. So when you see a quarter where it's actually up over the prior year, even if it's only a couple $100,000 that's assigned a life that we're coming off of the bottom. Q: Got it, so it's meaningful to you. It's not going to be meaningful to you guys, but it sure feels better. Q: I am curious your target business, what is the profitability either on a EBIT or EBITDA for your existing target business? Well our Advanced Materials business has been running for the last three years at a 15% EBIT to value-added sales. Q: Right, but that's not all the targets right, there is other in there, can we get a little granular. Maybe we can put it different way, is it higher then what your target than, no pun intended, the target that you're looking at in Heraeus? I've disclosed their EBITDA margins or EBIT margins are in the mid-single digits, ours is running at 15% our AM business runs at 15% and so when we take advantage of some of the synergies, we anticipate that that business will that acquired business margins will improve significantly. I don't know it will be better than our consolidated corporate margins, but I don't know that it will be, given the product mix, to that of the 15%. Q: Got it and the timeframe that you assume that you can make that happen? Yeah. Our model goes out to 2018 to achieve these targeted levels. So run rate at the end of '18. Q: And I think you said appropriate market multiples Page 15

16 Correct. Q: But what's appropriate? Well this business is very much in our space, in our sector, and you can see what we and our competitors trade at that when we think of market that's what we look for as an indicator of what is market. Our peer group, ourselves. Q: Got it. Thanks very much. Operator We have a follow-up question from Martin Englert with Jefferies. Please proceed. Q: Just a couple quick follow-ups, any color that you can speak to regarding the holiday build and also what you would anticipate the impact would be from the Samsung there? Well I touched on that in my prior comments, I would expect to see a shift that goes on. I think people aren t going to not buy something because of Samsung. I think they'll I would think you would see maybe something bouncing over more towards the Apple side. So the only negative impact for us could be in a certain application or two that we ship into the Samsung supply chain that would be adjusted based on their builds, but the total market, I don't think that's going to drive the total market in the consumer buy. I just think the consumer is going to shift to somebody else in totality. So I don't think Samsung is going to drive the market. They're just going to cause customers to go somewhere else for their product. And I guess I would just go back to the Apple s earnings call, if you want, you should go back and review that. I think they had I think their revenue in the quarter that we just completed, it was around $50 billion and I think their forecast for the fourth quarter was like you $75 billion or so. So they're forecasting quite a strong surge in their iphone 7 sales. So hopefully we would see a bit of that, of course this is late in the season already. The supply chain is already reacting to whatever the builds are, coming into the Christmas season at this time. And we have that within the forecast that we just provided you that's embedded in there. Q: Excellent. Thank you. Operator Thank you. I would like to turn the floor back over to Mike Hasychak for closing comments. Michael Hasychak - VP, Treasurer, Secretary All right. It's Mike Hasychak. We would like to thank all of you for participating on the call this morning. I'll be around for the remainder of the day to answer any questions. My direct dial number is area code Thank you very much. Page 16