Materion Corporation

Greetings and welcome to the Materion fourth quarter and full year 2024 earnings conference call. At this time all participants are on a listen only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host Mr. Kyle Kelleher, Director Investor Relations and Corporate FP&A. Sir, you may begin.

Good morning and thank you for joining us on our fourth quarter 2024 earnings conference call. This is Kyle Kelleher, Director Investor Relations and Corporate 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 also access the materials through the download feature on the earnings call webcast link. With me today is Jugal Vijayvarghia, 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. Following Jugal, Shelley will review detailed financial results for the quarter and full year in addition to discussing expectations for 2025. We will then open up the call for questions. Let me remind investors that any forward-looking statements made in the presentation, including those in the outlook section and during the question and answer portion, are based on current expectations. The company's actual performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release we issued this morning. Additionally, comments regarding earnings before interest, taxes, depreciation, depletion and amortization, net income and earnings per share reflect the adjusted gap numbers shown in attachments fourth rate 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 the call over to Jugal for his comments.

Thanks Kyle and welcome everyone. It's nice to be with you today to discuss our fourth quarter and 2024 results and provide our initial outlook for 2025. Let's start with the fourth quarter. Sales developed about as we expected in the fourth quarter with strong shipments in aerospace and defense and improved contribution from semiconductor and precision cloud strip, muted by the continued softness across other end markets like automotive and industrial. We delivered record EBITDA with 240 basis points of margin expansion thanks to the diligent work our teams have been driving to improve our operations and streamline our back office functions. These actions will continue to pay dividends as we move through 2025 and beyond. Now for the full year. 2024 was a challenging year with notable achievements. Sluggish markets and inventory corrections may have dampened our organic growth but this allowed us to demonstrate the strength of our company, the commitment of our team, and the result of their hard work. For the year we delivered our fourth consecutive year of record EBITDA and EBITDA margins. After years of diligent efforts to improve performance and drive profitable growth while streamlining our organization, we delivered on our midterm EBITDA margin target of 20% for the first time for the full year of 2024. We have been taking swift and consistent actions to optimize our footprint and address our cost structure while continuing to invest for growth and strengthen our customer partnerships. Achieving this level of performance in a sluggish environment gives us confidence to look ahead and set new goals for the company. As our end markets strengthen and we deliver on our organic initiatives, we will continue to drive further operational improvements and generate even stronger levels of profitability. With this in mind, we're establishing a new midterm EBITDA margin target of 23%, expecting that our business can deliver an additional 300 basis points of improvement over the next several years. While our underlying markets struggled to find momentum in 2024, we advanced several strategic initiatives during the year. In aerospace and defense, our customers are developing new products and applications that require the highest level of performance reliability in harsh conditions. Earlier this year, a leading aerospace and defense customer agreed to invest approximately $10 million in new capacity and capabilities at one of our existing sites in support of their growing demand. This project is well underway and we expect to our new capabilities online mid next year. 2024 also saw key new business wins in defense, including the selection of our Supreme X lightweight composite material for use on the prototype for the U.S. Army's future tilt rotor long range aircraft as Materion's products are uniquely suited for next generation applications. The growth of commercial space has driven new opportunities for us as well, as Materion is well positioned to serve the needs of this expanding market. In the second quarter, we secured a $150 million multi-year agreement to supply critical materials for space propulsion systems after proving ourselves to be a key critical supplier of these products. In addition, IonTex alloy, one of our newest high-performance products, was selected for a new telescope mirror that will be tested by NASA in its cryogenic test facility. In semiconductor, the expansion of our portfolio to include ALD or atomic layer deposition products is allowing us to support the production of the most sophisticated semiconductor chips. We were pleased to receive an overall excellent supplier award after our team collaborated with leading ALD customer to innovate multiple new materials which will see expansion with the rapid growth of AI and the increasing demand for the most complex chips. We also entered into an agreement to serve as a technology partner for a major global supplier of semiconductor processing equipment. We are supporting this customer in their development of a new deposition material that will pave the way for a wide range of next generation consumer and automotive electronic devices. Aside from commercial advancements, we took steps to eliminate underperforming non-core businesses and optimize our footprint. In the fourth quarter, we completed the sale of an electronic materials facility in Albuquerque, New Mexico that produces coatings for architectural glass mainly used in commercial construction. We are also closing a related nearby facility. We're in the process of right-sizing two facilities in Asia which should be completed the first half of this year. As a result of some of the changes already made, our electronic materials business delivered roughly 20% EBITDA margins for the year, representing a 390 basis points improvement year over year. Regarding our cost structure, we took a series of decisive actions to streamline our organization and position us for greater efficiency. Over the last year, we reduced over 150 positions through targeted reductions and optimizing back office operations while controlling discretionary spending. At the same time, we remain focused on investing for the future. Our R&D spend in 2024 was at an all-time high as we focus on partnering with our customers to deliver next generation products and solutions. Even through periods of market softness, we have remained focused on investing for the future, further aligning the business to high growth opportunities supported by global mega trends. Across our plants, we're improving yields and profitability through process and technical innovations and continuous improvement initiatives. In Precision Optics, we took meaningful steps to drive the early stages of transformation, starting with appointing a new president, Jason Moore. Despite the challenges the business has faced, we believe the long-term fundamentals remain strong. Jason is quickly working with his team to adjust the cost structure and optimize the footprint to ensure we're maximizing the value of that critical business and prioritizing the growth opportunities the business is developing. The number of careful and deliberate actions we've undertaken allowed us to deliver record performance in 2024 and have set the stage for even stronger performance in the future. As we look ahead to 2025, we're cautiously optimistic about a stronger macro environment as we move through the year. We expect to continue to see solid growth in aerospace and defense, where healthy end market demand will be compounded by outgrowth from our organic winds. We're seeing some gradual recovery in semiconductor, and while our customers are providing mixed outlooks for 2025, we expect to see -single-digit growth -on-year. Industrial, where our largest application is the Berlion Nickel Spring for commercial construction, should see growth in 2025 as the inventory correction is nearly complete and we are seeing orders returning to near-normal levels. We're planning for other end markets to show low single-digit growth, with the exception of automotive, which is poised to remain weak. With regard to precision clad strip, we're expecting meaningful headwinds in 2025. Our customers indicated that the inventory correction that started in the back half of 2024 will carry through in 2025, resulting in lower volumes -on-year. After working diligently to ramp volumes and fill their supply chain over the past couple of years, PMI finds themselves in a position to lean out their inventory levels, despite the continued success of their ICOS products rollout. Our Phase 2 capacity is complete and online, ready to serve their increased demand, which is expected in 2026. As we head into 2025, I'm confident that we will continue to deliver the strong performance you have come to expect from Eterion. I would like to thank our global team for the unwavering commitment to innovating for our customers while managing costs and delivering record performance. Now, let me turn the call over to Shelley to cover more details on the financials.

Shelley Thanks, Jubil, and good morning, everyone. During my comments, I'll reference the slides posted on our website this morning, starting on slide 13. In the fourth quarter, value-added sales, which exclude the impact of pass-through precious metal costs, were $296.1 million, up 2% from prior year and up 12% sequentially. This -over-year increase was driven by continued strength in space and defense and gradual improvement in semiconductor, partially offset by market headwinds across automotive, industrial, and energy. When looking at earnings per share, we delivered record quarterly adjusted earnings of $1.55, up 10% from prior year. Moving to slide 14, adjusted EBITDA was a quarterly record at $61.5 million, or .8% of value-added sales, up 15%, with 240 basis points of margin expansion from the prior year. This marks the third consecutive quarter delivering margins above our midterm target of 20%. The increase was driven primarily by strong cost management and operational performance. Moving to slide 15, let me now review fourth quarter performance by business segment. Starting with performance materials, value-added sales were $195.8 million, a quarterly record and up 5% as compared to prior year. This -over-year increase was largely driven by continued strength across space and defense and the consumer electronics and market. EBITDA excluding special items was a record $53.6 million, or .4% of value-added sales, up 17% compared to the prior year period, with 270 basis points of -over-year margin expansion. This increase was driven by higher volume, strong price mix, and operational performance, including higher production credit benefit -on-year. Moving now to the 2025 outlook, we expect continued strength across aerospace and defense, with improving market conditions in energy and industrial. We expect the automotive market to remain challenged with market contraction for a second straight year. Precision-clad strip sales to Philip Morris will be down -on-year, given continued inventory correction that you mentioned earlier. We expect to deliver another year of strong bottom line results, driven by operational performance and cost management. Next, turning to electronic materials on slide 16. Value-added sales were $78.6 million, a 1% increase -on-year, driven by improving semiconductor sales, specifically across logic and memory and storage technology. When adjusting for the divested Albuquerque large area target sales, the growth was 4% per quarter. EBITDA excluding special items was $14.7 million, or .7% of value-added sales in the quarter, up 460 basis points versus the prior year. This increase was driven by improved mix, strong operational performance, and cost management. As we look to 2025, we expect the semiconductor market to improve as the year progresses, particularly in logic and memory and data storage devices. This improvement is expected to be greater in the second half. On the flip side, we expect our power semi-business to remain challenged with high level of inventories remaining at our customers and weak end-use demand in markets like automotive and industrial. We expect improved bottom line results, driven by the stronger demand, strong cost management, and operational performance. Turning to precision optics on slide 17, value-added sales were $21.7 million, down 17% compared to the prior year. This decrease was driven by market weakness in several end markets offset by strength in the space and semiconductor market. EBITDA excluding special items was a loss of $1.1 million, or minus 5% of value-added sales. This decrease was largely driven by reduced volume, unsavorable product mix, and some operational challenges. As part of the initiatives underway to transform this business, our new business president continues to review and adjust the portfolio, footprint, and cost structure, setting the stage for dramatically improved results that will start this year. While we are optimistic about the future of precision optics, we did take a non-cash, goodwill, and intangible impairment charge that impacted our gap results in the fourth quarter. This write-down is expected to be a one-time accounting adjustment and does not reflect our commitment to this business as a key part of the Materion portfolio. Moving to slide 18, let me comment on the full year. Value-added sales were approximately $1.1 billion, a 3% decrease from prior year due to market weakness in key end markets including industrial, energy, and automotive. This decrease was partially offset by strength in space and defense and precision cloud strips. Despite the slight decline in VA sales, we delivered our fourth consecutive year of record adjusted EBITDA and EBITDA margins, with adjusted EBITDA of $221.2 million for the year, or .2% of value-added sales, up 2% from the prior year with margin expansion of 90 basis points. We are very pleased to have delivered our targeted EBITDA margins of 20% for the year for the first time in our company's history. This significant margin performance was driven by strong price mix and improved operational performance despite the softer top line. Adjusted earnings per share was $5.34 for the year, down 5% as compared to the previous year. Moving now to cash, debt, and liquidity on slide 19, we ended the quarter with a net debt position of approximately $425 million and approximately $169 million of available capacity on the company's existing credit facility. We generated strong free cash flow of $57 million in the quarter and ended the year with leverage at 1.9 times, down from 2.2 times at the end of Q3. Free cash flow remains an important focus and we expect to generate stronger cash flows in 2025. Lastly, let me transition to slide 20 and address the full year outlook for the company. After a challenged macro environment in 2024, we remain cautiously optimistic about the market dynamics as we enter 2025, expecting -single-digit top line growth from our businesses, excluding precision cloud strips. The cloud strip inventory correction is expected to continue 2025, returning to growth in 2026. Despite the cloud strip inventory correction, we expect earnings growth in 2025 from market outperformance, continued operational excellence, cost management, and portfolio optimization actions despite very modest top line growth. With this, we are guiding to the range of $5.30 to $5.70 for the full year 2025 adjusted earnings per share, an increase of 3% from prior year at the midpoint. This concludes our prepared remarks. We will now open the line for questions.

Thank you. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we poll for questions. Thank you. Our first question is coming from Mike Harrison with Seaport Research Partners. Your line is live.

Hi, good morning. Morning Mike.

Was just looking for a little bit more clarification on the Precision Cloud Strip business and the inventory actions that your customer is taking there. How should we think about the magnitude of that volume decline that you are expecting in 2025? And I guess we should assume that that volume is probably most pronounced in Q1 and Q2 and then maybe levels out in the second half. And then you have that consumer electronics business listed as a market that should grow low single digits in 2025 on the outlook slide. Is that excluding the PCS business or are there any pieces within consumer electronics that should offset the decline that you are expecting in Precision Cloud Strip?

Yeah, let me address that part of it first. That is excluding our Precision Cloud Strip business. This is just general consumer electronics market. I would say small turnaround, small growth on a euro-bidder basis on the remaining consumer electronics business. With regard to the Precision Cloud Strip, as you know, we have supported the customer from day one. We are their development partner. We have been on a number of different things that we have developed with them and we have an extremely good relationship with them as they have launched this. We have supported them really in every country that they have gone and launched. I think the situation is in line with what we talked about at the end of last year, which is the ramp up that we had was significantly more as they were filling the channel than I would say the rollout that they have had. So they have access inventory. They have a significant initiative in their company to de-lever. As part of that, they have made many initiatives, one of them being inventory and getting their supply chain aligned to the actual sales and actual demands. As a result of that, we would see 25 to be that down. So probably looking at roughly about maybe around a 20-ish type of percent -over-year decline on that business. However, we would see that then coming back to growth in the 26 timeframe. I think at this time, probably would say that -over-year decline is spread across the full year. So not necessarily more heavily weighted in the first half than in the second half. But of course, we will continue to monitor this. We will continue to work with the customer. If we see that they are starting to have alignment to their inventory goals, then we may see perhaps higher volumes in the second half of year. But our plan is not necessarily based on that. We expect this product to continue to be a very strong product for us. Even with the -over-year headwind, it is still a great contributing product for us for this year. We would expect it to continue that way over the next several years as we continue to be their development partner. So that is how I

see it.

All right. Thank you for that.

Then on the electronics business, I was hoping you could just give us a little more color on your expectations for the semiconductor business. It sounds like you are expecting maybe some acceleration in the pace of recovery as we get further into the year. But are you seeing some green shoots in any of the more mainstream portions of the market, or is this mostly an advanced application driven recovery that you are baking into your 25 guidance for now?

Yeah. As you know, the semiconductor business, the market, of course, our business has been extremely challenging over the last six, eight quarters. The market has gone through a significant downturn. The expectations certainly that the market recovery was going to start last year in 2024. In fact, some expectations were that it would even start at the end, back up of 23, but that has continued to get pushed out. We have seen in the back up of 24 that the logic and memory segment was starting to recover, primarily driven by the advanced nodes, the three nanometer, five nanometer, seven nanometer type of advanced nodes that are used in AI applications or other high-performance computing applications, associated memory applications, so high bandwidth memory applications associated with that, have also contributed to a little bit of a turnaround. We are starting to see a little bit of a turnaround on the data storage side, considering the increased use of data and data processing. So we are starting to see maybe a little bit of recovery on that. At the same time, Mike, I am sure you know, and we have all seen the reports, the power semiconductor is extremely challenged. All the key players of the power semiconductor business have had tough quarters, tough guide for Q1, and I think they are projecting a challenging year in 2025. But we have a fairly balanced portfolio, so when you kind of balance out the challenges on the advanced nodes, especially with our contribution on the ALD or atomic layer deposition growth that we are trying to push with the high-end memory applications, we believe that especially in the second half of the year, this market could be a -single-digit type of a growth market. Q1 will be a very, very challenging quarter in this market. Every earnings call that I have heard from the chip manufacturers is a sequential down. In many cases, it is a year over year down. There is normal seasonality that happens in the chip industry, but I think they have perhaps a little bit more than a normal seasonality, as I said, particularly in the power segment. But we do see that during the year, particularly in the areas that I highlighted, maybe a little bit of an uptick and then more of an uptick in the back half of the year leading to about a single-digit type of growth. That is what we have included in our model.

All right. Very helpful. Then the last question for me is on the $73 million of impairments in the precision optics business. I am curious, was that the Balzer's optics business that you acquired about four years ago? If so, can you give us a sense of maybe how that has progressed differently than you expected when you acquired it? If it is not, maybe just help us understand what it is that was written down and how that helps to establish you going forward for better performance.

Mike, why don't I start on that one and then we will see if Jubal has comments to add. Every year we need to do an assessment of the intangibles. It is an accounting exercise. Precision optics itself is a whole reporting unit, so it gets measured at the segment level, which does have goodwill beyond optics Balzers. If you think about what has happened in that business over the last several years, certainly that was a large acquisition in 2020 with very strong prospects. We did see a major setback with the loss of a very large customer, which the business has struggled to recover from completely. We still see that business fulfilling our vision, but in the meantime, the forecast had gotten as such that we could not support the value that was on our books. It is not something we choose or do not choose. It is really model driven from the accounting side. We took the adjustment. It goes into our gap results. It is a one-time item and we move forward from here to build back that business.

Mike, what we are excited about going forward is, I think, one, leadership change. We have made a leadership change in the back half of last year. We are really excited to have Jason Moore on. He has traveled to the various sites, met with the people, understood the technology, the footprint that we have. I would say significant number of changes that we drove already in Q4. It is our expectation to continue to drive both cost optimization, footprint optimization, and of course, top-line growth and deliver a meaningful -over-year improvement from 2024 to 2025. That is included in our plan. We want this business to be an equal contributor to our 23% margin objective that we have for a midterm. Our goal is to have a meaningful improvement from 2024 to 2025 and then continue that going forward

beyond that. Sounds good. Thank you very much. Thanks, Mike. Thanks.

Thank you. Our next question is coming from Daniel Moore with CJS Securities. Your line is live.

Morning, Google. Morgan Shelley. Thanks for taking the questions. Morning, Dan. Maybe start with the new long-term target of 23% adjusted EBITDA margin. Obviously, really strong performance to get to your prior target in a difficult environment. How do you think about reasonable time frame and maybe more importantly, what type of organic top-line growth we would need to achieve it?

Yeah. Well, first of all, Dan, it has been a heavy lift, but I think a lift that our team took on and has delivered. I'm really, really proud of what I think our team has accomplished over the last five years in this regard. We've gone from roughly about a 15% EBITDA margin in the 20 time frame to delivering a full year 20% EBITDA margin. I think ahead of our plan, ahead of our expectations and taking our EBITDA from roughly about $100 million of EBITDA to well over $200 million of EBITDA in this time frame. So more than doubling the EBITDA. Really proud of, I think, what the team has accomplished. That gives us the confidence frankly that we believe we can continue this trajectory and reach a 23% midterm EBITDA margin. It involves, of course, organic growth, but we believe and we've indicated this, I think, all along that we always want to be growing ahead of our underlying markets. So perhaps maybe a 200 to 300 basis point type of growth beyond the underlying markets. It could involve some bolt on M&A's. We've done those over the last few years. And so perhaps maybe that could happen over the next several years. And then the continued disciplined execution that we have delivered, I think, in the company with the commercial excellence, with cost management, operational excellence, and I think continuing to drive leaner, more efficient organization. And then with the changes that we've driven in 2024, especially during this little bit of a downturn, I think those changes will certainly carry through into the next few years as well. We talked about precision clad and how that can be a turnaround factor in the 26 and beyond years. And that would be a contributing factor. So I think all of those things that we have done to get from the 15% to 20% today and then building on that, I think, gives us the confidence that over the next several years, we believe we can continue to march towards that 23% EBITDA margin. So we're quite excited about this new initiative and sort of new benchmark that we've got for ourselves. And of course, we're happy to share the progress

with you as we go along. Very helpful. And then in the prepared remarks you

teased, we're in the discussion of new products and new opportunities. You teased new deposition material. What, if anything, can you say about that relative to your current tantalum and or precious metals and what type of applications and anything in terms of market opportunity? Thanks.

Yeah. So we're actually quite involved with a leading equipment manufacturer on that. As you know, the type of deposition technologies that we're involved in today are PVD. So physical vapor deposition is a core part of what we do and that involves precious metals targets, tantalum targets, other non-precious metals targets. We have the emerging ALD or atomic layer deposition technology that we're involved in. And we now have a relationship or a partnership with a leading equipment manufacturer who is investigating a sort of next generation deposition technology that can be used in certain applications. We're fortunate enough to have that relationship with them and we're supporting them. So provided that this is something that could become successful over the next couple of years, we would expect to have good meaningful growth after that. So we're very much looking forward to continue to do the development with them and see where this takes us.

All right. I appreciate the color. I'll jump back when you follow up next. Thanks, Dan.

Thanks, Dan. Thank you. Our next question is coming from Phil Gibbs with KeyBank. Your line is live.

Hey, good morning. Morning, Phil. As you all have thought about the tariff environment and what could be or will be or won't be, where are some spots that may be of concern or where are some spots that may be of an opportunity as you look across your supply chain and customers?

Well, as we know, Phil, this is a very evolving situation, right? Just this morning, for example, there's some report about possible tariffs on pharma, semi, autos. There's been talk of, of course, Canada, Mexico, reversal, China. I mean, so it's a very, very evolving situation. So we're, of course, keeping a sort of a daily track on it to understand the ins and outs and how we can be properly positioned to operate in this environment. First of all, when we look at buy side, so we do certainly have buy from Canada, from Mexico, from China. We've looked at what those buys are, the dollar values, the customers, the suppliers that we're buying from. We've evaluated where we have second source opportunities and where we could potentially shift our buy to those countries. You know, if there was, you know, action that was taken, we've also made sure that and we have this because we've used it during COVID time. We've used it in general situations and that we have a very disciplined, robust process on any cost increases that we would get, whether it's tariffs or any other type of things that we work with our customers to process those increases. I mean, you've heard us say this all along, you know, that we don't want to be the sponge, right? And so if there are any cost impacts from the buy side, we're going to work very openly and transparently with our customers and be able to share that with them and process that. So I think that's the, I'll call it the buy side. You're right on the sell side. I mean, we have roughly a third of our business that goes into Europe. You know, China is a relatively small sales arm for us, probably mid single digits, I think, you know, in terms of our share there. But really, I would say it's the European side. So if there are any tariffs that are imposed for material going into Europe, certainly we'll have to work through that and understand what the implications are and how we work with our customers on that. We're also looking at initiatives where we can take advantage of what can we do from the very large footprint that we have in the US. As you know, we have a very important and meaningful footprint in the US. So, you know, where can we take advantage of perhaps competitor situations where we can do local, you know, manufacturing here in the US. We're also looking at China. As you know, there's a lot of talk about what gets produced in China. Can we produce outside? We have footprint in Asia that's not in China. And so we're also working towards those initiatives. At the same time, we're working on a number of different materials that, you know, perhaps could be exempted from, you know, tariffs just based on the national security importance of those materials. And so we're working with the right people in Washington to highlight those. So they understand that there are certain materials that are important to the national security of the country and therefore, you know, they may perhaps should be exempt from tariffs. So I can tell you that this is a topic that certainly is getting a lot of attention, you know, on our side and we'll continue to monitor it and continue to manage it in a very effective way.

Thank you. And then as you look at your 300 basis

point margin improvement expectations, just counts as I guess over the next three to five years, how much of that is getting some meat or profit back in precision optics versus, you know, anything else you could be doing over the portfolio? Because I would imagine obviously moving from a negative EBITDA to a positive EBITDA situation there is obviously going to do a lot to get you a decent way of the amount there. But maybe some thoughts around what are the big moving pieces?

Yeah, well, precision optics clearly, you know, has to be an important contributor, right? You know, we've said this all along that all three of our businesses need to contribute equally to our top line profile as well as our bottom line profile. Precision optics has not done that. And so we're making, you know, the changes, the necessary changes so that it can. You know, I would remind all of us that if we just go back, you know, four or five years, I mean, this business was a 20% plus EBITDA contributor to the company. It's a smaller base than the other two businesses, clearly, but it's still an important contributor. And it was a 20% plus EBITDA business. And of course, you know, our objective to the new leadership is that, you know, the roadmap. How do we get that business back to that level? So we are looking forward to that business contributing, but at the same time, you know, we want to make sure we can keep pushing our electronic materials business to move and deliver, you know, north of the 20% EBITDA margins and continue to drive, you know, both the top line and bottom line in

the rest of our company. Thank you for that. And

I guess staying with the precision optics you mentioned earlier on the call that your R&D budget was very strong last year. Is there a decent bid in the R&D budget to rejuvenate that business in particular?

Yeah, first of all, you know, at the company level, I mean, we spent nearly $30 million, you know, on R&D. I mean, I remember the time when we were spending, you know, less than $20 million in R&D in this company. So I think, you know, we've continued to make the right investments for R&D spending at the company level. And we've made sure that as we have looked at the precision optics business and we have made cost improvements and cost changes in that business, we've actually taken the R&D organization and, frankly, almost kind of isolated it to create a single R&D organization that can be working to support that business globally. So it is, I think, targeted at making sure that the right projects are being funded and then the markets that we're focused on in that business, you know, are going to be focused on. So I think we're well positioned to ensure that we've got the resources to fund that business as it kind of, you know, goes on this turnaround over the next several years.

Then I've got a couple of small ones. I appreciate the giving me the time to ask these. I know Tantalite prices have been moving up. There's been some supply disruptions in Africa. Now, how much does that impact you guys one way or the other? And how are you managing through some potential cost inflation there?

Yeah. So first of all, I think, you know, we've got a very good diverse supply base for Tantalum. So, you know, if there's disruptions in one part of the world, you know, I think we have good supply base and good balance across the world. So to be able to make sure that overall, you know, we're not being disrupted on the supply side. On the pricing side, you may recall, Phil, there was a time a couple years ago where prices did go up. And unfortunately, you know, we had to eat some of those prices just because of the way our contracts were structured, you know, when we had taken over the business. We worked very diligently to restructure the contracts so that we could make sure that there were some clauses in there to have a price recovery for cost changes on the Tantalum side. I think we've got a fairly good feel for that. And so we have a good relationship, kind of a cost price relationship with our customers on that. So, you know, would there still be some impact? It could be, but it would be more from a timing standpoint to make sure that we've got the supply side and the sell side aligned. But overall, I think we've got a fairly good feel for how to handle the supply and the price side for Tantalum.

Thanks. And then lastly, for me, just the working capital side did a good job in the fourth quarter there, particularly on the inventory reduction as you got some of the higher value shipments out the door in defense and space, I'm sure. But looking ahead, how should we think about how you're thinking about working capital management in 2025 in terms of use or source and then any internal metrics that you all have over the next three to five years in terms of where you want your efficiency measures to be? Thanks.

Yeah, sure, Phil. I'll take that one. So, you know, working capital is a very important initiative to us. You know, we've, I think, had some really good success in bringing inventory down in some places. And then we've had places where we've needed to add inventory, whether it's for new space business, whether it's for cloud strip. So, we had a base that was kind of increasing and decreasing at the same time. You know, hitting a more steady state, we're now working on bringing that down, getting to levels that we think are more appropriate for where we're in time and space. And you saw that come through in Q4. Typically, you know, we don't have the best working capital performance in Q1. So, I don't expect to see a sequential improvement quarter on quarter. But I do expect a very strong year for cash flow for 25. So, I think you're going to see the best cash flow performance that we've put up in a couple of years. As we, you know, we still have good organic spend, still, you know, a relatively high level of capex, but, you know, not adding that working capital, really, you know, controlling that area. And with good cash earnings, I think we're going to have good performance there.

Thank you. You're welcome. Thanks, Phil.

Thank you. Our next question is coming from David Silver with CL King. Your line is live.

Yeah, hi. Good morning. Thank you. Hi. I have a couple of kind of smaller questions or smaller topics and then maybe a bigger topic. Firstly, I'm just looking on this, I guess it's slide 20 from your deck, full year guidance. And I wanted to hone in on the $25 million that you called out from your capex budget for HCS. I was just wondering, is that the outlays required to complete the previously announced capacity expansion or is there something else, something newer going on there?

Yeah, I mean, as you know, that's been an important part of our growth as we acquired that business. And we have made sure that we are investing in that business to capture the full growth, not only in the semiconductor space, but in the industrial space and the aerospace and defense space. And as you remember that business, you know, it was about a 70 to 75% semiconductor business, but we've made significant strides, you know, in the industrial space and the aerospace and defense side to grow that business. We have had a number of investments that we've highlighted over the 24 timeframe that we made. And so I would say majority of that spend is related to investments that we have announced and that we're putting in not only additional capacity, but more cost effective capacity in many cases that we're doing. So that's what that is, and it'll continue into 25 as we finish that out. But that's a business that I think we're going to take full advantage of the opportunities that are there in an aero defense, industrial and semi.

Interesting. Thank you very much for that color. Next question relates to your non-recurring items this period. So you were asked earlier about the large, you know, $73 million or so, you know, for repairment and write down a goodwill. But there was also a $7.4 million charge here, I guess, under the term or listed as M&A related. And I'm just wondering, is that, were those some costs that were capitalized maybe from the Balsers transaction or is that related to kind of ongoing M&A spend that maybe the project that was targeted for has been, you know, dropped off the list. But maybe just some comment on the M&A related charge this quarter, please.

Sure. So I'll take that one, David. You know, as you probably know, in the M&A line, we also have divestitures. And so a lot of that cost was related to finalizing the divestiture of the Albuquerque large area targets business that we've talked about, as well as related to the facility closure, the nearby facility closure that we've been working on. So that's really, you know, kind of divestiture related versus acquisition related.

Yeah. And as we've talked, you know, with the number of changes that we have driven in the company over the last 12 to 18 months, you know, making sure that our portfolio is stronger going forward, you know, right, has been an important, important initiative. And I think, you know, this move that we announced at the end of last year, and then we've executed, you know, gives us a stronger, more profitable portfolio

as for 25 and beyond.

Okay, great. And this next question, I'll stipulate in advance, okay, I'm going to just take a little time to introduce it. But, you know, I'm going to ask a question about your performance materials group and try to relate it to an element, you know, of your strategy within electronic materials. So within electronic materials, Jugal, you've highlighted a number of times that your company works with each of the top 15 chipmakers. And I always thought that was, you know, an important kind of, you know, positioning to have particularly, I mean, if you think about how the list of the top 15 maybe has changed over time. I was wondering, you know, I was trying to draw an analogy there to your performance materials and in particular, you know, A&D portion of that, which seems to be driving a tremendous amount of growth in the past year or two, and likely going forward. So, you know, maybe this is a marketing strategy or marketing approach question, but, you know, within the space, aerospace and defense, you know, there are, you know, just like in many industries, there's a couple of bigger, more dominant players, but then there's a lot of new business, new investment, new approaches, you know, both in this country and outside. I was wondering if you might be able to talk about your approach to kind of exploiting your very strong positioning on the A&D side. Is this the case where, you know, your beryllium products are kind of a must-have and you're brought into the discussions by, you know, some of the emerging players in space or related areas, or is this the case where, you know, you're trying to lock up, you know, a big business with a handful of leading companies? So, you know, as you think about your multi-year approach to, you know, taking full advantage of your strong positioning there, I mean, what is the goal? Do you want to be a top 15 supplier or do you want to be, you know, the exclusive supplier to, you know, number one or number two in the industry? Thank you.

Yeah. Great question. And let me just talk a little bit about that aerospace and defense market, because really, I think I can break it up into actually three sub-segments of market. And in this market, there doesn't tend to be, you know, sort of the top 15, because I think there's a little bit, you know, lesser number of players in each of these key areas that I'm going to talk about. So when you think about aerospace, there's obviously the, you know, the two big players, right? One in North America, one in Europe, and then an emerging player in China. We have, you know, a very strong position and I would say almost kind of an equal base with both North America and the European customer. We have an extremely good relationship with both our copper-brilliant business, but also our tough met business, which is a material that's used across both the narrow body and the wide body planes. We have established, and credit to our team in China, as well as our team here in North America, a solid relationship with the emerging customer in China, with equal, I would say, amount of weighting in terms of the content that we have, you know, as they're starting to build the narrow body planes and then down the road, you know, the wide body planes. So I think on the commercial aerospace side, we're well positioned, you know, with those three major customers. When I think about the commercial space side, I mean, there's obviously one very large customer company around the world and then there's a number of different smaller companies on both the government as well as the global side. Without getting into specifics, because I can't talk about customer names, I can tell you that we are well positioned with the customers in this space, whether it's on the commercial space side as well as the government side. So, you know, we have a history of working with the U.S. government. We also have the European Space Agency that we work with. We work with the Indian Space Agency and I would say other agencies around the world. So I think we're well diversified on the space side of it. When you look at defense, certainly our materials, whether it's both beryllium-based materials, -beryllium-based materials are extensively used in the defense market. We have a strong relationship with all the top defense contractors without going into, again, names. I mean, supply our optics materials to the defense industry. We've had a strong focus over the last couple of years to go global on our defense side. So we've established relationships with Korea, with Japan, with the European customers. We've actually leveraged our commercial excellence and some external partners to help us identify defense opportunities outside the U.S. that, of course, are approved and allowed by the U.S. side. And so I think we have a good, diversified defense business in North America, but I would say an emerging growing business outside of North America with the number of things that are going on in the world. So I think when you look at the three areas of sort of commercial aerospace, the space side, both the commercial space as well as the government space, as well as the defense, both North America as well as global, this has been a very focused, targeted activity for us, particularly in the last two to three years, to make sure that we are taking advantage of all the growth opportunities that are there. We're looking forward to actually the commercial aerospace business turning around in 25. As you know, airplane deliveries were down roughly 10% in 24 due to the number of issues that some customers had, but we're looking forward to a turnaround in 25 that's built into our plan when we talk about some of the growth activities. So great question. I think it's an area that we're very focused on and we're going to

continue to stay focused

on.

That's great. I really appreciate all the detail there. Thank you.

Thank you. Once again, ladies and gentlemen, if you have any final questions or comments, please indicate so now by pressing star one on your telephone keypad. Our next question is coming from Dave Storms with Stongate. Your line is live.

Morning. Morning. Morning, Dave. Just two quick questions from me here. Any estimates on the remaining Borlian Nickel inventory correction timeline? And I guess how are you thinking about industrial post-correction? Is it fair to say that growth in industrial may be a little more half-weighted this year?

Yeah, so I think on the Borlian Nickel side, I would say the inventory correction is nearly complete. Feedback from our key customers is that they look to start to place orders. They started to place some orders in the back half of last year and we would see more orders in the first half. And so I think we're getting through that and we would see a normalcy that by midyear as we continue to make improvement on those orders. With regard to industrial, as you know, the PMI index has been below 50 for a number of quarters, but it hit 50% in the last report that came out. So maybe there's a little bit of a positive sign that industrial as a market may perhaps be turning around. But I would see slow growth throughout the year for industrial is how I would put it. Yes, certainly more growth in the back half of the year, but we hope industrial is something that where the inventory levels have worked through in general and we can have slight growth in the first half with a little bit more growth in the second half.

Understood. That's very helpful. Thank you. And then I just wanted to ask one follow-up question around the divestiture-related costs. With the mentioned right-sizing of the facilities in Asia, should we expect divestiture-related costs per facility to be similar to the New Mexico charge or are there other variables here that we should be aware of?

Good question. So nothing to that magnitude, right? At any time we make facility changes, you're going to see a little bit of costs related to that, but really nothing to the magnitude of the $7 million that we took on the Albuquerque and the related facility closure.

That's very helpful. Thank you for taking my questions. Okay, thank you.

Thank you. We have reached the end of our question and answer session, so I will turn the call back over to Mr. Kelleher for closing remarks.

Thank you. This concludes our fourth quarter 2024 earnings call. Recorded playback of this call will be available on the company's website, materion.com. I'd like to thank you for participating on this call and your material. I'll be available for any follow-up questions. My number is -383-4931. Thank you again.

Thank you. This concludes today's conference and you may disconnect your lines at this time and we thank you for your participation.