Materion Corporation

Good morning, everybody, and welcome to Materion's fourth quarter earnings release call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your phone keypad. Please note this conference is being recorded. I would now turn the conference over to your host, Mr. John Zernak, Chief Accounting Officer. John, over to you.

Good morning, and thank you for joining us on our fourth quarter 2022 earnings conference call. This is John Zaranek, Chief Accounting Officer. 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 Vijay Varghia, President and Chief Executive Officer, and Shelley 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 and the full year, as well as an update on key strategic initiatives. Following Jugal, Shelley will review the detailed financial results for the quarter and the year, in addition to discussing our expectations for 2023. We will then open the call for questions. Let me remind investors that any forward-looking statements made in this 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 gap numbers shown in the attachments four through seven in this morning's press release. The adjustments are made in the prior year period for comparative purposes and remove special items, non-cash charges, and certain discrete income tax adjustments. And now I'll turn over the call to Jugal for his comments.

Thanks, John, and welcome, everyone. It's great to be with you today and share details on another record quarter for Maturion. which closes out a record year. This year, we marked several milestones for our company, crossing $1 billion in value-added sales, delivering over $300 million in quarterly sales, reaching nearly $200 million in EBITDA, and crossing $5 for EPS. Our transformation into a global leader in high-performance advanced materials is delivering, as we're driving a step change in both our sales and earnings. Our strong execution and delivery on strategic growth initiatives are enabling us to consistently outgrow our end markets. An expanding list of customers continue to place their trust in us for the development of next-generation solutions aligned with global megatrends. These strategic partnerships are helping to build a healthy pipeline for future growth and strengthening our position for 2023. We brought this year to a record close with an incredible 11th consecutive quarter of VA sales growth. The new facility for precision clad strip project contributed meaningfully as we fully qualified the facility. In addition, we continue to supply clad strip from our legacy plants. Our acquisition of HCS electronic materials continue to outperform, delivering on robust demand from our customers. In total, The progress we've made on organic and inorganic initiatives grow record top and bottom line growth with EBITDA margins reaching 18% in the quarter, tracking well towards our midterm target of 20%, and contributing to record quarterly earnings of $1.49 per share. For the full year, we delivered year-on-year increases of 30% or more across sales, EBITDA, and EPS. It was an exceptional year in our company's transformation. Organic growth investments and strategic customer partnerships contributed more meaningfully to our results. The integration of HCS electronic materials has gone extremely well as the power of our combined teams generated significant commercial and operational opportunities that are driving growth beyond our already strong synergy expectations. We're investing more than $20 million in the new facility to expand capacity and capabilities to service demand in the semiconductor, industrial, and aerospace and defense markets. Our precision clad strip facility was completed and qualified during the year and is now achieving significant production levels, a noteworthy accomplishment given the size and scale of that project. As we've shared, the customer is investing an additional $40 million with us to increase capacity after their initial investment of $80 million. The construction for Phase 2 capacity remains on track, and we anticipate that capacity coming online in late 2024. The build-out of our new facility in Milwaukee is progressing nicely, as we are installing new equipment over the next few quarters, with production capabilities coming online in the first half of next year. This site will expand our capacity to support production of the most sophisticated semiconductor chips, as well as broaden our advanced chemicals capabilities to produce materials for next-generation batteries for electric vehicles. This year, we also announced a partnership with Kairos Energy to support clean energy development with the establishment of a molten salt purification plant that produces FLI, a reliable, safe, and cost-effective molten salt coolant used in nuclear energy production. Today, I'm happy to announce two additional customer partnerships that further develop our growth pipeline. First, we secured another customer-funded investment of $15 million to expand our capabilities and supply critical materials for clean energy power generation. We expect equipment installation to be completed this year at our facilities and look forward to completing delivery of the materials by end of next year. We also continue to see great interest in our capabilities for critical space applications. We recently signed a three-year agreement to supply materials for space propulsion systems. We have already received an initial $10 million order, which we will start to ship middle of this year. This partnership further establishes Materion as a leading partner for innovative solutions that deliver the level of performance and reliability required for critical space missions. Strategic growth projects are the cornerstone of our strategy, and in 2022, our team demonstrated an ability to execute on our commitments and to continue developing important customer partnerships. There is no better evidence of our global success as an advanced materials leader than the customers who continue to choose Materion and make upfront financial contributions so that we can solve the most pressing challenges. Materian's performance over the past two years has seen sales growth 70 percent, with earnings more than doubled. And as indicated by our growing list of customer partnerships, we are continuing to build for the future, remaining laser focused on outpacing the growth rate of the markets we serve and continuing to align ourselves with megatrends that will open additional growth avenues for years to come. With the success and progress of our outgrowth initiatives, we're heading into 2023 with excellent momentum. We will continue to drive market outgrowth, even as the environment experiences pockets of general softness, particularly in the semiconductor space. Operational excellence, disciplined cost management, combined with our outgrowth, will ensure we continue to advance the earnings power of our company. We will continue to drive our transformation and differentiating material through unparalleled technical expertise innovation and strong performance. As we continue to build our pipeline, we expect to deliver another year of record results at both top and bottom. I'm proud of our global team as they continue to support our customers and help them exceed expectations. Thanks to our team's talent and dedication, we have delivered record results for two consecutive years. Together, we are driving long-term value creation for our customers, our shareholders, and our people. Now, let me turn the call over to Shelley to cover the financials.

Thanks, Jubal, and good morning, everyone. During my comments, I will reference the slides posted on our website this morning, starting on slide 13. As Jubal outlined in his opening remarks, we achieved another record quarter of value-added sales, adjusted EBITDA, and earnings per share in the fourth quarter. Value-added sales, which exclude the impact of pass-through precious metal costs, with $309.2 million for the quarter, up 30% for the prior year. This significant increase was driven by strong demand across the industrial, aerospace, and energy markets, along with higher precision-clad strip sales in the fourth quarter. Organic VA sales, excluding the impact of acquisitions and currency, increased approximately 26% compared to the prior year, with significant above-market growth. We delivered adjusted earnings of $1.49 per share in the fourth quarter, up 32% as compared to the prior year, despite substantial interest headwinds. Moving to slide 14, adjusted EBITDA in the quarter was $55.6 million, or 18% of value-added sales, up 40% from the prior year. The increase was largely driven by higher volume, favorable price mix, and positive contribution from our HCS electronic materials acquisition. These strong growth drivers were partially offset by commercial and R&D investments as we continue to support our organic growth initiatives. Now, let me review fourth quarter performance by business segment. Starting with our performance materials business on slide 15, value-added sales were a record $177.6 million, an increase of 53% compared to prior year. The increase was driven by strong performance in the industrial, energy, and aerospace end markets, and higher defense and hydroxide shipments. In addition, the new precision clad strip plant contributed near full run rate with additional shipments from our legacy facility. EBITDA excluding special items was a record at 44.3 million and a record 25% of value added sales, up 96% compared to 22.6 million in the fourth quarter of 21. The increase in EBITDA was primarily due to increased volume, favorable price cost, and a strong mix. Moving to the 2023 outlook, the order book for performance materials remains strong, and we expect another year of above-market growth. The largest markets served, including industrial, aerospace, and energy, should all see growth in 2023. And with our precision-clad strip business exiting 22 near the full run rate, we expect meaningful contribution in 2023. Next, turning to electronic materials on slide 16. Fourth quarter value-added sales were 104 million, up 16% versus the prior year, and up 2% organically. The organic growth rate has been decelerating with slower shipments in semiconductor as customers work through inventory correction. Sequentially, electronic materials VA declined 9% organically. EBITDA excluding special items was 17.1 million, or 16.4% of value-added sales in the quarter, an increase of 8% from the prior year. The increase was driven largely by increased HCF volume and favorable price costs. This business also saw significant margin expansion from the third quarter of 130 basis points due to a richer mix combined with our cost control efforts. As we look forward to the coming year, we expect the electronic materials business to outgrow softening markets and continue to see positive contribution from HCF electronic materials with higher volumes and improved price costs from that portion of the business. Finally, turning to the precision optics segment on slide 17, value-added sales were 27.7 million, down 15% compared to the prior year. This decrease was driven mainly by the discontinued consumer electronics application and another quarter of foreign currency headwinds, negatively impacting the top line by approximately 2 million. EBITDA excluding special items was 4 million or 14.6% of value-added sales down from the prior year due to the lower sales volume. Despite this volume reduction, EBITDA margins have continued to expand each quarter in 2022 as we have successfully managed costs while rebuilding the growth pipeline. For 2023, we expect quarterly sequential improvements supported by new business in defense, automotive, and space exploration. Moving to slide 18, let me quickly review the record results we saw in full year 2022. As we did in 21, we delivered another record year of value-added sales, adjusted EBITDA, and adjusted earnings per share. VA sales reached an all-time high of $1.1 billion, up 33% from the prior year. This year-over-year increase resulted from strong demand across the semiconductor, industrial, energy, and aerospace end markets, as well as the impact of our clad strip project and the addition of HCS electronic materials. Excluding the impact of acquisitions and currency, organic VA increased approximately 18% when compared to the prior year, representing clear market outgrowth. Adjusted EBITDA for the year was $196 million, or 17.1% of value-added sales, up 37% from the prior year. The increase was largely driven by higher volume, favorable price cost, and the impact of the HCS electronic materials acquisition. We delivered $5.27 adjusted earnings per share for the year, up 30% as compared to the prior year. This resulted from the company's strong performance despite an additional 70 cents of interest expense when compared to 21. Moving now to cash, debt, and liquidity on slide 19. We ended the quarter with a net debt position of approximately $419 million and $185 million of available capacity on the company's credit facility. Our leverage at 2.1 times sits at the midpoint of our target range with our expanding EBITDA and $62 million of debt pay down in the fourth quarter funded by our strong free cash flow. Lastly, transitioning to slide 20, let me address our 2023 outlook. While we remain confident in our expanding organic initiatives pipeline, we will continue to see some end-market softening, particularly in the semiconductor space. Despite this, we expect to deliver another record year for VA sales and earnings, with adjusted EPS in the range of $5.50 to $5.90 per share, representing an 8% increase at the midpoint. We have also provided some updated modeling assumptions as we move into 23. We are anticipating another strong year of growth investment, with capital expenditures forecasted at approximately $95 million for both new and in-process projects. We are also forecasting roughly $11 million in mine development costs to occur in the back half of 23, relating to a new pit opening at our beryllium mine. In closing, despite some market headwinds, 2023 is shaping up to be another exciting year of strong market outgrowth and execution for Materion, leading to record results and long-term sustainable value creation for our stakeholders. This concludes our prepared remarks. We will now open the line for questions.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your phone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For anyone using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment whilst we poll for questions. Thank you. Your first question is coming from Daniel Moore of CJS Securities. Daniel, your line is live.

Good morning, Jule. Good morning, Shelley. Thanks for taking the questions.

Good morning.

Good morning, Dan. Start with the two new partnerships that you announced this morning. Maybe just a little bit more detail on specific products applications for each and what the revenue opportunity and ramp could look like over the next, you know, one to two years?

Yeah. So, you know, great partnerships. You know, the first one we announced is a funded one with about a $15 million investment that we indicated. That investment will be spent this year, really putting capacity in place. We expect to have the sales completed, I would say, this year and really primarily next year. in this project. Really, as I said, exciting partnership. I'm not able to go too much into detail, Dan, on what the product is or specific materials that we're going to supply just based on the confidential nature of the contract that we have. But it is quite exciting. It actually impacts a couple of our facilities. We will put capacity increases in and then be able to supply, as I said, between this year and next year with the majority of it, I would say, next year. With the second partnership, this is one that we actually have capacity today. So there's not really any funding required for the second item, which is the critical space application. We're going to utilize our existing capacity that we have. It is a three-year agreement that we have reached with the customer. As you know, space is an important megatrend for us. We've talked about it about a year ago in one of our calls. And this is just a really exciting application in proposal systems. So our material is being utilized for that. We're going to start delivering yet, I would say, this year, in the second half of this year, of that initial $10 million order and then into – you know, into next year. And our expectation is that we'll continue to do that, you know, over that three-year timeframe. And then, of course, you know, beyond that as well. Both of these opportunities are part of our performance materials segment. So, quite excited about, you know, continued organic growth opportunities, you know, in our company.

very helpful overall sounds like you're looking for kind of a a positive maybe low to mid single digit uh growth year for value-added sales um is that uh hearing that's correctly putting all the pieces together number one number two what does the cadence look like are we likely to start off in that clip or maybe a little slower given you know some of the near-term headwinds in semi

Yeah, I mean, let's just start with semi because, you know, that is, as you know, sort of a question mark, I think, that many companies have right now, including us. I would say that in general, it's probably a slower first half as inventory correction works and then, you know, better second half as the pickup is expected. Semi is about a third of our business, so that certainly has an impact on our overall company, and so I would expect the first half to be a little bit slower than the second half in terms of sales, and I guess you could kind of extrapolate that to the earnings part of the company as well. We think when you look at our market chart, which we have included in our deck, I think it's slide 10, You know, majority of the markets that we participate in are, we believe, are going to be positive. So a little north of the zero to three or a little bit more than three for a couple of them, which is aerospace and energy. Semi is the big one, as we indicated, which... you know, is going to be perhaps a little bit more negative. So I think your assessment is probably reasonable in terms of the type of growth maybe that, you know, the company may experience overall. But I certainly would say that, you know, it is going to be a first half, you know, start a bit on the software side, but then really, you know, deliver much more in the second half. But overall, we're excited, I mean, because you're looking at You know, an 8% growth on the EPS side. I mean, the operational performance, we think, of the company is going to be somewhere in the 14, 15, maybe, you know, type of a range. You know, we have a little bit more interest, of course, that we have to deal with, so the EPS is around 8. But I think overall it's going to be a good year for us.

Well, and, Dan, maybe since, you know, you've talked about timing, I would just talk about, you know, the sequential Q4 to Q1. You know, we had a really strong Q4. You know, as Dougal talked about, we'll see the semi-softening in Q1. So we certainly expect to be up year on year, maybe 10% earnings from Q4 to Q1, but be a little bit potentially softer than Q4.

Very helpful, Shelly. Last for me, and I'll jump out. Cash flow picked up nicely in the quarter, obviously, and you gave the outlook for CapEx. Just talk about kind of what your expectations are for working capital and cash generation in fiscal 23, and with the balance sheet now leveraged down to that kind of midpoint of the range and declining, any shifts in order of priority for capital allocation? Thanks.

Yeah, no, great question. And we were pleased with our cash flow generation in Q4. You know, certainly we're keeping debt in view to make sure that our leverage is you know, in the low to mid part of that range, I think is what we're targeting at this point, given where we are kind of in the cycle of things. You know, our CapEx was a bit lower as we had some CapEx in accounts payable at year end. So that means in Q1, we're going to have a bigger payment for CapEx than maybe normal. So I don't think we're going to see, you know, a real strong free cash flow number out of Q1, but expect a good number for the whole year. And we'll bring that debt down, you know, a bit more. You know, I don't think we're going to put that as number one priority. As you saw, the CapEx number's still healthy. We've got a lot of growth opportunities, but you'll see that debt number come down. Right now, we're at 2.1. We'll certainly be in the high ones next time this year. This time next year, sorry.

Perfect. Jump back with any follow-ups. Thank you.

Thank you very much. Your next question is coming from Phil Gibbs. Phil, your line is live. Phil, are you on mute?

Maybe we'll go to the next and come back to Phil.

Yep. Okay. Just one second. So there's no issue with the, okay. Just bear with me. I think there might be a technical issue with the panel. Hang on a second. I'm really sorry.

Hey, Jenny. I'm helping out. Phil Gibbs will be our next question. Phil, your line is live. Please go ahead.

Can you hear me now? Yeah, we can hear you. All right. Perfect. Good morning. Morning. Always something, right? Yeah. First question is just on the defense and hydroxide piece that you mentioned. I know it's typically a good kicker to your mix. And we saw a lot of our, our other companies in the, uh, the specialty metals arena have good quarters in defense, you know, partially maybe because of the, the war and international demand. So what was the, the pickup quarter on quarter for, for PAC meeting? How, how outsized was it? And then what should we expect to persist as some of these, you know, geopolitical and macro things persist?

Yeah. So, Phil, you know, we had mentioned when you look at defense, I think when we in our Q3 call, we'd mentioned that, you know, there may be some defense orders on timing that we have been waiting on and we've been trying to get them in that, you know, may benefit in Q4. And that's exactly, you know, what happened. And they benefited here in Q4. you know, we expect defense to be a good market just in terms of going into 23. We've noted in our slide 10 that it's probably somewhere in the zero to three type of a range. So, you know, for a mid-growth type of a market for us. But that certainly was a positive for us in Q4. And then hydroxide, I mean, as you know, you know, that one, we typically have, you know, one or two shipments per quarter, depending on depending on the needs the customer may have. And we happen to have a shipment, extra shipment in Q4 that benefited us. We would expect the shipment timing for 23 to be relatively in line with, let's say, the historical rate that we've had. So I wouldn't expect anything unusually positive or negative from the hydroxide shipments.

And maybe just to add some color on Q4, you know, as you know, Phil, the defense shipments can be kind of lumpy. You know, they come in chunks versus a consistent throughout the year. So year on year in Q4, you saw pretty significant growth, you know, in the 20s, if you would, percentage wise, which certainly helped with our mix.

Okay, that's helpful. And then as a second question, I know the tantalum misalignment impacted Q3, I think, to the tune of $4 or $5 million. Not really sure what it was in the fourth quarter, but I remember you expected some of those things to gradually get better. I don't think the first quarter was inclusive of that, but some better contracts and some things timing up a little bit better by the second quarter. Can you give some color in terms of where those things stand?

Yeah, maybe I'll start on that one. So, you know, we talked about the $4 million in Q4. That looked better in Q3, you know, closer to $3 million. We will see that still work out in Q1 as we're working through some higher-cost inventory. You know, the negotiations with the customers are largely behind us, so we're seeing some of that pricing start to feather in as we enter the year, but some contracts renegotiate in the year as well. So that's why we'll still see a little bit of that hangover as we start out 23.

Is that still reasonable to suspect that that's done by the second quarter for the most part?

Yeah, I think what we had indicated is for the most part, it would start to phase out in the second quarter. And then the second half, we expected it to be a little bit on the clean side. So that's the expectation.

Thanks so much.

Thank you. Your next question is coming from Dave Storms from Stonegate Capital Markets. Dave, your line is live. Please proceed.

Good morning, and thank you for taking my questions. I just want to start. Good morning. There is strong year-over-year EBITDA margin expansion in performance metals on a value-add level. Can we expect any of that to be sticky, or is that more just a product of maybe inflation monitoring or more macro trends?

Well, our performance materials business certainly did really well in Q4. There's a number of factors. The business is continuing to drive organic growth as we move forward. Some of the operational challenges that we had in Q3, we got those challenges behind us. We just mentioned, for example, the positive mix with the defense and hydroxide. Both of those tend to go a little bit more in the performance materials business. We also had the precision clad business ramp much more in Q4, so that certainly was a favorable item. So I would expect that, you know, as we move forward, some of these things are going to continue to benefit, and then some certainly, you know, the one-time type of things like with defense and hydroxide. are going to taper off. So we expect performance materials to continue to do well into 23, but I'm not sure the rate that was delivered in Q4 is something that we can replicate, you know, four times this year.

Yeah, it's not the new floor, right? So if EBIT was at around 20% or 18%, sorry, for the year and 20%, 21% in the quarter, you know, I think we'll do better than the year, but 21 is certainly not the floor.

That's perfect. And just touching on the precision clap real quick, Shirley, I know you mentioned in your comments that that was near full run rate. Just curious, is there any color as to what, you know, full run rate would look like?

So, yeah, I would say we exited the year near full run rate, so probably not from the new facility at full run rate for the whole quarter. But we did have the benefit of also shipping from our legacy facility. So, in total, it was really favorable volume. You know, we do expect to have all the volume coming out

of the of the new facility in 23 and we're getting very close to full ramp uh in in that facility that's perfect thank you one more if i could um just wondering shelly you also mentioned the order book looks really good uh i was wondering if there was anything specific to you know china and the reopening over there and if there's any effects we can expect from the supply chain or anything of that nature

Yeah, no, our order book continues to look strong. I mean, the mix of our order book certainly is changing a little bit just based on the market conditions. So, for example, we've talked about semiconductor and what that market is doing. So, our order book on that one is a little bit stressed, but we have a really positive order book on some of the other markets. So, I think in Overall, our order book continues to be favorable and one that supports our guide that we've provided for 23, which is a substantial, you know, growth from 22 levels. You know, China opening up certainly has a, I want to say, positive impact. But, you know, our business in China is relatively small in comparison to our total company. So it has a, you know, small positive impact, but nothing of a meaningful impact.

That's perfect. Thank you both very much.

Thank you. And as a reminder, ladies and gentlemen, if you would like to join the queue to ask a question, you may press star 1 on your telephone keypad to join the queue. Once again, that will be star 1 on your keypad if you would like to ask a question. And our next question is coming from David Silver from CL King. David, your line is live. Please go ahead.

Yeah, hi. Good morning. Thank you. Good morning. Morning, David. Yeah. So a couple of questions. I apologize. There'll probably be a little hopscotching around here. First thing I wanted to ask you about was the effect of currency on your operations this year. And also, what are your assumptions for currency impacting? Well, what was the currency impact assumed in the fiscal year 2023 EPS guidance range. If you could, I mean, is there a revenue, you know, a delta on the revenues, delta on the adjusted EPS, if you had that, that would be great. Thank you.

So one good thing about our business, you know, where we have currency exposure, we've got pretty good matching on costs. So, you know, what we see on the revenue line is usually much bigger than what we would see, you know, on the EBITDA line. So we're well protected from that perspective. You know, when we go into a new year, we're often looking at keeping it stable with where we end of the year so we don't make big calls on what we think is going to happen with currency. You know, what we saw this year was, you know, not overly meaningful, you know, talking maybe $10 million or so for the top line, but nothing near that for the bottom line.

Okay. And then just maybe kind of more of a theoretical question or philosophical question, but a number of my industrial and electronic materials companies, you know, have talked about the significant impact of inventory destocking during the fourth quarter, both direct for their sales, but also indirect, maybe affecting their customers downstream. I may have missed it. I did not hear too much reference to that. And I'm just wondering, was destocking an issue? Do you think it'll be an issue in the first half of 2023? Or is it the case that maybe the more advanced materials nature of your portfolio doesn't lend itself as readily to the kind of buffer stock build up and draw down that maybe has been characteristic of some of your end markets more broadly. Thank you.

Yeah. Well, I think the inventory correction issue or destocking that you mentioned is definitely an issue in the semiconductor space. Not only are we seeing it, but I think the entire market in the semispace is seeing that. We expect that to work its way out, I would say, in the first half and then pick back up in the second half. That's one of the reasons why we've got semiconductor as a market, perhaps a little bit less than zero from a year-over-year perspective. I think that is an issue, David, and it is something that I think we're experiencing, and certainly I'd say pretty much the entire semi-industry is experiencing. When I look at our other markets, I don't see destocking as an important one. I think other markets... you know, are continuing to move forward. I mean, as we've highlighted in our chart, chart 10 of kind of how we see 23 coming along. We do see, in general, I would say a little bit softer first half versus the second half, but a lot of that is due to the semiconductor side, just because that business is about a third of our business. So, it is an issue for part of our business, but I would say not an issue for, you know, some other parts of our business.

Okay, next couple of questions I think are going to be on the, would be on the electronic materials business. And I'm going to quote just a sentence from the press release this morning. So, you know, you said the successful, I'm going to paraphrase, but the successful integration of HCS and the power of our combined teams is, quote unquote, generating value beyond our expectations, unquote. So the generating value beyond our expectations is what I was wondering about. And in particular, when I think about that in the context of some of the goals or some of the opportunities with combining HCS, I'm thinking more along the lines of maybe revenue synergies. In other words, cost synergies were probably expected and could be, you know, could be identified ahead of time to a certain extent. Whereas revenue synergies, you know, there's potential, but the timing is always, the timing and execution are always highly uncertain. But, um, maybe if you could comment on what the, the beyond our expectations element of the, uh, HCS acquisition integration, you know, combination has, uh, you know, how that has played out?

Yeah. Well, first of all, I think the HCS acquisition, just like our quote indicated, I mean, it has delivered really well for us. Our teams combined with the HCS team have worked on so many different fronts to deliver. You know, during the year, we were able to add over 20% headcount to the facility and increase our output from the facility. We announced over $20 million worth of capital investments that we're putting in place to be able to put new capacity for them for the business. you know, the number of initiatives that our teams have been working on where they have worked together to go and offer our complete portfolio of electronic materials to the top 15 semiconductor manufacturers, you know, has been very powerful. So I think there's a number of things that have happened. Certainly all of those things, by the way, have led to, you know, great financial results as well, you know, for that business. I would say much better than what the synergies levels that we had indicated. I think the other thing that's been very interesting, and we've talked about this, is when you look at tantalum and the application of tantalum continues to increase in general. The smaller the nodes are getting, the more application for tantalum. And so even though there's this short-term softness on the memory side, the logic side is continuing very strong, and we would expect the memory side to be recovering. So the long-term trend of this business is extremely good and extremely healthy. So I think it's a combination of things when we say beyond expectations, combination of how things have turned out on our top line with the synergies, combination of of the investments that we've made, the people that we've actually put in place as, you know, as well as I think the future opportunities that we have for our combined portfolio. So all of that put together, I think just is very, very favorable for us and we're excited about this business.

Okay. I'd like to kind of follow up on the electronic materials outlook and the You know, I apologize in advance. This question will be a little more disjointed than normal. But, you know, in the United States, there's a number of very large wafer fabs and related units coming on stream or under development now due to come on stream between, let's say, early 2024 through... And it's my opinion that, you know, the wafer fab development is moving maybe a little bit faster than what I would call the ecosystem, you know, the suppliers and support and logistics and whatnot. And along those lines, you know, two things. I was wondering if you could comment generally on how you see the opportunities for your products and services developing as those big new wafer fabs are completed and get commissioned and ramp up. And then secondly, how does the CHIPS Act or the new level of aid that's available for semiconductor manufacture in this country, how does that play into your growth strategies or your ability to tap into that source of financial support, et cetera. So just, you know, the growth that had already been announced and now the financial support at the federal level. Thank you.

Yeah. Yeah. Well, first of all, as we've already indicated, I think, on the call and we continue to indicate, you know, this is a space that we're very excited about. The acquisition that we did, of course, is in the semiconductor space. We see this as a long-term growth flight for us. It's producing good short-term results, and we expect it to produce good long-term results. Our footprint, our R&D footprint and our manufacturing footprint is primarily in North America. And the acquisition that we made here about a year ago is also in North America. So I think we are very well-positioned. to continue to work with all the semiconductor manufacturers. As we indicated, we have access to all the top 15 semiconductor manufacturers. And then we are able to have both R&D as well as manufacturing in region to support them. So we see that as a very positive for us on a go-forward basis. When you look at then what additional things we can do, I mean, we certainly are involved in the CHIPS Act discussions. We're studying it very carefully. We're looking at what options there could be. We're looking at which of these capabilities and skill sets that we have that we could further strengthen. And so we're involved in a number of discussions on how we can take advantage of and support the chip manufacturers as they grow their capacity. As we have more on that to communicate, we certainly will. But yeah, that is definitely one of the initiatives that we're engaged in.

Okay. And then just last question. And I apologize when Shelly was going through this part of her discussion. I was a tiny bit distracted. But Just to touch base on your third segment, the optics, I think you were saying that you were indicating that maybe the restructuring, reshaping had kind of reached a point where the unit there has been stabilized and could be positioned for growth. And I believe you mentioned a healthy backlog, but Would it be fair to say that we should look for kind of an inflection point or a turnaround to growth overall in that segment, full year 23 versus full year 22? Thank you.

Yeah, I think that's fair to say that. As we look at our 23 and kind of look at the new business initiatives that the business is involved in, we would expect that those things to kick in during the year. Certainly the back half of the year then would have more of a benefit than the front half of the year, but on a full year basis, we would expect that business to have uh growth um on a year-over-year basis on you know both the top and uh and bottom line so we're excited about that i mean it's a great uh it's it's been a great business for us it's gone some gone through some headwinds here over the last 12 months or so just based on uh customer decisions and uh you know some of the the life life sciences uh product uh discontinuation that happened but but in general uh this is a great business for us and and we're looking forward to um be able to share the turnaround here during the year.

Very helpful. Thank you very much. Thanks, David.

Thank you. And there are no further questions in queue. I would now like to turn the floor over to John Zarnik for any closing remarks.

Thank you. This concludes our fourth quarter 2022 earnings call. A recorded playback of this call will be available on the company's website, materion.com. I'd like to thank you for participating on the call this morning and your interest in Materion. I will be available for any follow-up questions. My number is 216-383-4010. Thanks again.

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.