Greetings, and welcome to Materion Corporation third quarter 2012 earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you your host, Michael Hasychak, Vice President, Treasurer and Secretary for Materion Corporation. Thank you. Mr. Hasychak you may begin.

Good morning. This is Mike Hasychak. With me today is Dick Hipple President, Chairman and CEO; John Grampa, Senior Vice President -- Finance and Chief Financial Officer; and Jim Marrotte, Vice President and Corporate Controller. Our format for today’s conference call is as follows; John Grampa will comment on the third quarter 2012 results in the outlook and Dick Hipple will provide a commentary and a market update. Thereafter we will open up the teleconference call for your questions. A recorded playback of this call will be available until November 9 by dialing area code 877 the number is 660-6853 or you can also dial 201 and the number is 612-7415, conference ID number 401127. The call will also be archived on the company’s website materion.com to access the replay click on Events and Presentations on the Investor Relations page. Any forward-looking statement made in this announcement including those in the outlook section and during the question-and-answer portion are based on current expectations. The company’s actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the Earnings Press Release issue this morning. Now I will turn it over to John Grampa for comments.

Thank you, Mike. Good morning, everyone, and thank you for joining us this morning. Today's agenda is the same as that of our past calls. I will review the results for the quarter and then comment on the near-term outlook. Following my remarks, Dick Hipple will review the state of our markets and some of our key growth initiatives. Following Dick, we will open the call for your questions. I will begin with a brief summary of the key points that are in the release. Then as I normally do, I'll cover the factors affecting the reported sales levels, highlighting the effect of pass-through metal changes, which as many of you are already aware can in our company significantly cloud the level of real business change. We refer to sales net of the influence of changes in pass-through metal as value-added sales. Changes in pass-through metal can be either in the mix of metals gold versus silver versus copper for example, and their pass-through prices or their source. By source I am referring to whether we provide or our customers provides the precious metal to convert to product. When we source the metal its value is recorded as a sale, when our customer provides a metal its value is not recorded as a sale. I will review the change in value-added sales by market comparing the third quarter of the prior year as well as sequentially to the second quarter of this year. I’ll also be reviewing the changes in gross profit and operating profit margin percent of value-added sales. In addition, I will disclose the earnings impact of the cost associated with the initiatives that we had previously been discussing. Those being the startup and wrap-up of the new beryllium plan the integration of the EIS Optics acquisition and…

Thank you, John. So far in 2012 we have had some challenges in gaining the traction needed to achieve results that we initially targeted at the beginning of the year. Although, I am pleased with the quarter-to-quarter earnings and margin improvements we’re certainly not where we expected to be at this time. The slowdown in macroeconomic activity across the globe has impacted our revenue. However, we have used this economic weakness as an opportunity to initiate an investment from operational restructuring that will help us to achieve our longer-term goals. Slower macroeconomic condition in combination with our restructuring activity, happened slower than expected with the startup of the beryllium plant that certainly created the drag on earnings as John has outlined. I’m happy to report that our treble [ph] plant continues to remain on track to be at our targeted production rate by the end of the year. As previously reported relocation of our microelectronics packaging operation to Singapore is also going very smoothly. And deal with the challenging market conditions and operational capabilities from our recent acquisitions, we’re reducing cost through operational efficiencies and further consolidations where appropriate. Our strategic initiative on pricing is contributing to our margin growth and we look forward to further improvement. All these actions will bring us better results as we move forward into 2013. We also recently began an expansion at our Lorain facility to significantly increase our capacity to produce our [indiscernible] alloy which will continue to see ongoing growth in commercial aerospace and oil and gas. During this time we have also been investing in a terrific pipeline of new products that are beginning to hit market or are late in the qualification stage. Now I will give you a few examples. Several of these new products have already seen the…

[Operator Instructions] Our first question is coming from the line of Ed Marshall with the Sidoti & Company.

As I try to parse through the guidance and I look at the discussion about the sequential equality call it and the revenue. I try to look at why we’re seeing a sequential decline in EPS. I’m thinking where on the margin, which segment are we actually beginning to see that, the decrement. Because I’ll assume that with the margin improvement that we’ve been seeing over the prior 3 quarters that would continue into the fourth.

Generally, the fourth quarter is weaker in all of our segments than the third quarter with the possible exception of Defense which has a tendency to move around counter to the holiday period. Generally, the fourth quarter is weaker in all 3 of the remaining segments. Relative to the previous guidance, the fall off versus again, previous guidance is principally in our thin-film coatings operation and largely due to a falloff in China. In particular the acquisition in China, the projection display business there failed -- it’s really down by over 25%. It began to fall in mid-third quarter and it’s off dramatically. But more importantly a key optics customer lost his business to his largest competitor during the third quarter. And while we are in the process of qualifying products to ship to that competitor, that process as they normally do, they do move slowly and it is moving slowly. The thin film coating operation which is part of the Advanced Materials segment is the area that will see the fall-off again, versus our previous forecast in the fourth quarter.

That’s means, you’re saying the lower volumes cause the lower margins, I’m assuming is what you’re saying. Do you see that rebound again in 2013? At that 4.8% that you’re putting up in the Advance Materials Technology’s business, certainly sustainable as we move forward. Is that a step for the next leg up?

Yes, I’m not sure I understand your question. The 4.8% is what?

The operating margin of 4.8% in the Advance Materials, is that sustainable going forward into 2013?

Frankly, we think it will grow.

You do think it will grow? Okay, so this is a, I won’t call it a base case, because obviously we’ve it weaker, but certainly a stepping stone for the future. Oh, yes, okay. Now let’s go to the beryllium segment I mean it looks like you are nearing a breakeven you had some good comments on the Pebbles [ph] plant. Do we potentially see that’s going to an operating income? Again I think the original guide was first quarter 2013 but you are darn close right now.

Right, you are absolutely correct. We expect that to be certainly profitable next year.

Okay, and when you say the tax -- just last question related to the tax question. You mentioned you weren’t able to capitalize. Are you referring to a deferred tax assets that just wasn’t able to be capitalized in the quarter and assuming that you ran at a loss in a foreign nation somehow?

Well, let me express it a little differently to let you know exactly what it was. I guess you’d almost look at it as a perfect storm in the sense that a combination of 2 factors; one I’ve already referenced and that is the Optics business in China in a subsidiary in China falling off dramatically our projections of profits being lower significantly there. Due to both display business falling off by the 25% that I referenced a minute ago and the key Optics customer are being lost to a large competitor. That in itself is probably 2/3 of this issue and it is losses that were there from the integration of the acquisition that cannot be absorbed or offset per se. They’ll be offset in the future as business responds. The second piece of that is in Europe and it’s linked to the European solar markets falling dramatically and in particular the operation shield cleaning operation in the Czech Republic. That operation has historic losses that we cannot offset as well. It’s a combination of those 2 factors that caused us to reassess the tax rate and it hurt our quarter earnings by about $0.05 per share and the year.

So it’s a 1 quarter true up? I mean it’s essentially what it is right?

That’s right.

Okay, what was the total amount there?

$1 million impact on the bottom line is the nickel share.

Our next question is coming from the line of Martin Englert with Jefferies.

I wanted to see -- you talked a little bit about price increasing and we are seeing margin improvement in some of your segments there. Have you initiated or do you intend to initiate any price increases that would impact 2013?

Well, that’s a constant effort on our part to strategically increase pricing everywhere we can and with our new efforts on pricing it’s a very strategic methodology that we go through on examining the volume order sizes and more of a value sale that we are after these days. So we are pushing margins and pricing throughout the company at this point. So I do expect pricing in general to be higher next year than this year.

Okay. Any other I guess its qualitative commentary on what your expectations may be for 2013. I understand that it’s still fairly early and you noted visibility is low. But any kind of answer that you can provide on sales, earnings expectations or whether you are more or less optimistic today than you were say 6 months about prospects for 2013.

Right, you hit the nail on the head. It’s way too premature to be talking about what we would expect in 2013 in this company. I think a lot depends on not only the elections, but what kind of economy we have, what kind of macro-economy we have because we are a global company that we have going in to 2013 and then throughout the full year. Volume has a significant impact on our bottom-line and you can see that in our margins and if volume starts to come back we see profits beginning to get closer to the historic levels. You will recall the early part of last year we were earning far more than what we are earning today. Volume is important. With volume will also, will come improved margins and significant flow through. So beyond that it’s way premature to predict what 2013 would look like.

When you look across the different end markets, where do you think the largest volume has been lost? Has it been consumer electronics?

Defense and science. Consumer electronics I think are the 2 largest year-over-year volume wise.

When you look at consumer electronics, is there any indication that you have lost any kind of market share to a competitor or are you seeing substitutes replacing any of your offerings in those products?

No, I don’t think so. There have been a couple of shifts in customers but at the same time we’ve gained some customers. As we look at it in general we believe actually our market share has increased. Some of this has to do with specific applications going on. But I will say we think on a longer term basis that particularly on product substitution for example when we talk about one of our -we have a couple of major applications in consumer electronics. One is gold based and there’s always a question about people trying very, very hard to design out gold in their electronic applications and there has been some of that that’s occurred. But at the same time as we move forward there’s design changes going on that will increase the demand for gold. So for example as the market moves from a 4G to a 5G which actually you can actually buy routers in the stores today that have 5G capability which is actually ability to watch video movies not online, but actually streaming videos is the 5G capability. And that’s called 80211AC and that particular technology will demand a lot higher use of gold for the power amplifiers and some of the compound semiconductors. There has been a little bit of a trend going down in the use, but that’s going to start to turn up back again. So that’s generally how these things kind of work out there that there’s a little bit of ebb and flow and I think we probably had a little bit of ebb going on maybe in the last year and now it’s started to pick up again as far as how I see the technology shifts. Let me interject something. I had referred to your question I said defense and science and consumer electronic. Intended to say telecom infrastructure not consumer electronics. Consumer electronics is down a bit, but not significantly versus prior years. Telecom infrastructure, that is of significance.

That is strictly an inventory situation because in the telecom infrastructure we had all time high record sales in 2011 and the nature of that particular market for us is it swings quite a bit and they get -- we knew this was coming this year at least there was a high chance of a lower sale for telecom infrastructure just because we just thought that the supplier changes bought too much. They have worked down their inventory at this point in time and we’re starting to see the order entry pick back up in the telecom infrastructure. That was down significantly this year but it really wasn’t a market situation. It was an inventory situation.

If I could one last question. You noted in the release some of the customers shifting to supplying their metals rather than having you supplying them. So that pulled some out of that raw material path through there. What was the reason behind the shift?

That’s a pattern that does occur from time to time. When a customer has metal he can choose to supply it or look to us to buy metals. I think it was unusual to see that volume of it occur in a given quarter. I don’t know that there is any significant factor that we can cite that would tell anyone why and I really don’t expect that to occur at that level in future quarters.

Our next question is coming from the line of Avinash Kant with D.A. Davidson.

A few questions. First did you have a chance to talk about Q4 revenues? I know you gave us some idea about the EPS.

No, we did not and again as you know we do not forecast revenues because of the nature of metal price movement and again as you just heard customer metal swings and also customer uses versus our own metal swings as well as shifts between gold, silver, platinum, plating and copper can affect revenue dramatically without really affecting value of end sales. What we did say is that we expected business levels to be similar.

Okay. Now your commercial aerospace seems to be one of the better segments and one of the high growth segments at this point as you have good sales. Are you in a position to give us some idea how big it is with respect to overall business?

How big what is?

Commercial aero?

As a percentage?

Yes. Any order will do.

Well, order of magnitude it’s a $30 million or so business.

Then the other quarterly then they’ll be the same. Hello.

I’m sorry, we are having trouble hearing you, Avinash. I don’t know whether it’s your phone or ours.

Yes, I got cut off a little bit. So is this on a quarterly run rate basis right now, $30 million?

No.

No, that’s annual.

Annual? Okay, Could you give us some idea about when the beryllium plant comes up most likely early next year, what kind of contribution should we expect? Of course, it will ramp over time, but for 2013 what’s the level of contribution in revenue or EPS terms that we could expect from there?

Well, there is no change in revenue because we’re just shifting the supply source. Today the supply source or where it’s been coming from is the Government’s strategic stockpile. So instead of getting the raw material from the Government, the raw material now will shift to our mine in Utah. So there won’t be an increase in revenue. What will improve is the cost and the profitability of that segment. So for example this year that division will lose money primarily driven by the startup cost of the new facility. That will shift now to profit making because we’re going to be, again the plant won’t be starting up through next year. It’s starting up now and making very good progress. So we expect to have a minimal impact of the negative side of the beryllium plant we saw this year. It will be far less impact much, much less impact next year and we’re going to make significant profits in that division next year.

Okay, so it’s more the profitability that will be impacted?

Yes.

So it starts now? Any kind of guideline intensive, if we had similar revenues compared to what we had this year, what kind of impact should we expect on the margin?

We’re looking at and I’ve said this many times, we’re probably looking at somewhere, $0.20 at least $0.20 to $0.25 per share shift in the company with the change in that business.

And that will start to show up from the first year itself on a full year basis, right?

Yes.

Our next question is coming from the line of Rob Young with William Smith.

I have a question on the capital expenditures. It looks like you increased the guidance for that a little bit. I was wondering if that solely pertained or largely pertained to the Tuffmed [ph] expansion project.

That’s part of it.

Okay. And is that being driven by the commercial aerospace side of the world?

And oil and gas.

And oil and gas?

Yes.

Is there something else that’s contributing to that increase or is it?

No, I think it’s largely that. There may be some tie-in with other projects but it’s largely that.

Okay. And from a CapEx perspective going forward next year, I know that you said that it’s ways off, but what level of capital expenditures should we be looking for next year. Is it going to be higher or lower and you are not going to have the beryllium implant next year but…

Well, the beryllium plant hasn’t been showing up on our capital because that was funded elsewhere.

Right.

It’s likely to be higher, but maybe $3 million to $5 million higher.

Okay, last quarter you talked a little bit about lead times being shorter than typically seen. Can you comment a little bit on that in terms of an uptake?

Sure. That’s much the same. Week to week things are very, very choppy as I indicated in my preamble. Business from week-to-week is extremely choppy.

Okay. Do you have the amounts of contribution from acquisitions in the quarter in terms of, well I guess what I’m looking for is the organic portion of revenue contribution.

I don’t have it handy.

Of the side 2 most recent acquisitions?

Yes.

It’s very small.

Our next question is coming from the line of Hendi Susanto with Gabelli & Company.

My first question, when you look at the higher tax rate of 33% to 34%, should we think that the rate will stay in the near to midterm or should we think it’s a temporary one that may, where you may see it as a different area tax rate?

The 33% to 34% rate for 2012 which you are referring to and in particular prior year to the fourth quarter as well, we don’t have our arms around 2013 yet, but I think your assumption is probably a fair one in that it might return to the historic level which is a little bit lower.

Okay and then, could you indicate what the target in production rates of the new beryllium plant in terms of say a greater output?

It’ll be running at probably around a 60% level. The plant is designed for more than what the normal market is so that you have to be a little helpful and that was done jointly with the Government because they wanted the plant designed with peak capacity in case there were a situation where there was a much higher demand for beryllium from a defense standpoint. So we designed the plant with what I would call from an engineering perspective a high turndown ratio which means that you can operate it at lower levels efficiently and that’s how we’ve designed it. So that we have a lot of upside capacity in this facility that was done intentionally in case there was a spike in demand by the Government.

Okay. And then when do you report to that…

By the way it’s actually something to keep in mind because that business itself, we have a strategy behind that business that although today it certainly it’s highly dependent on the defense industry, we might have about 60% of our business dependent on defense and science, maybe 65% when you throw in the science side of it. We are aggressively pursuing them, growing the commercial side of that business. Today it’s already 30% commercial products and we’ll be growing that. So we have no limitation on that plant and we can use it for unlimited commercial upside. So our job as a good management team is to grow that business outside of defense and science so we can tap the capacity that we have in that plant.

Okay. When you refer to that 60% level, would you share like some idea about the timing or the gradual ramp up? Like whether we will see that, let’s say like in the first half of 2013 or later toward the year.

Well, we’re planning to be certainly at high level in the first quarter.

First quarter, okay. Then last question, could you refresh our memory about your capital allocations strategy with regards to the hidden cash on the balance sheet cash for making strategic acquisition and capital structure? I’m wondering whether that has changed…

Yes, I’ll comment on that and let me begin by saying it is not changed. Our view related to use of our cash and our credit lines has always been and continues to be first growth, second, strategic acquisitions or augmentations of the business and then finally to maintain the flexibility that we do have. In other words maintain that strong balance sheet so that we can take advantage of opportunities as they occur. Related to returning cash to shareholders, our current view is also the same and that is that our priority would be the dividend and growing the dividend. Secondarily should we see significant excess cash build and significant liquidity build in the company, then we begin to look at alternatives relative to a share buybacks and that kind of thing.

[Operator Instructions] Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

John, why has there been so much variability in the DNA component?

The largest factor in the variability there is the mine amortization. The amortization of the fundamentally brilliant spot pump and that moves around based on the use of the material.

If I can amplify on that. This is Kevin Brennan. If I can amplify that the amortization occurs when we extract the ores into our facility. We campaign the facility based on the fitness of the plant. So we don’t use the same quantity of ore at any given period, from period-to-period. So you’ll see the choppiness in the DNA accordingly.

Okay. In the oil and gas business, that business is down, sequentially down year-over-year. I think it’s we've seen similar things with other companies with exposure there. What do you think aside from just the rate count drop that it may be due to? Are you seeing a lot of inventory in the supply chain and when are you forecasting that business, may potentially, it can turn around.

Yes, I think it’s just that you have to split the business up in different categories. You’ve got DC is certainly continuing on and you have, on the directional drilling particularly natural gas and they’ve pulled the rigs up. They’re trying control, suddenly you’ve got a shift going on. So what happens is you get this timing and we still pick up the businesses. As they shift over to oil, we pick up that business. So it’s not like business going on forever but there’s always a shift in timing. So what happens if you’ve got tools? They have an oversupply of tools on the natural gas side and what they do is they use the tools that they have to continue to support their current drilling activities. So you have this kind of lack of an order book for a while as they use their inventory of tools for the active rigs. Once they get through that, then the business starts to pick back up again. So I just see this as a transitory issue because at the same time as they’re increasing their drilling for the oil side, on the liquid side. Net-net on a longer term basis, they’re still drilling for carbon units, let me tell you. We’ve seen it kind of, what I call a hole in the bucket here for maybe a 6 month period of time because of the shifting. They’re shifting in the oil and they’ve got an oversupply in the natural gas side, so you can’t expect when that shift is going on to have a stable market situation. But long terms, I have no concerns at all.

You have any sense of the division between your products as far as the oil side and the gas side?

I would be guessing. That’s a good question, I don’t have the answer to, but if I were asked for an educated guess, I would probably say it’s 65% to 70% oil and the balance gas.

Okay. And then lastly, looking for a little bit more color on EIS. I think John or Dick, you said something to the effect of business on the display side is down drastically and sounds like you lost a big customer. How do we think about that going forward as far as your ability to potentially ride the ship there?

Well, I think the big objective there, in fact, let me just talk a little bit about the strategic platform. When we bought EIS, they're a major product, and they have a very large market share, global market share for the digital light processing market. But that’s not why we bought them. We bought them because they have, that was kind of a nice stable core market. Turns out it wasn't as stable as we thought, but we bought them to grow that business in other areas. And so in my commentary I had mentioned about a new platform of business there which is gesture control which they were not in and it’s a sizeable market, and we hope to have a significant order book for that market starting in 2013, as we finish our second stage qualifications for that. So we’re looking to grow that business and other commercial applications beside their core business. So that’s the job we have in front of us is to make that happen and we believe we have those opportunities. And it's just not a belief, we've got things in qualification and products that we've already developed. And the nice part of that is that we have been able to bring technology to that operation that they didn't have here before our other optic operation here in the United States. So we brought a more really a stronger technical capability to get into some of these new areas that they weren’t able to do otherwise. But they had the equipment to do it which is a nice thing.

Gentleman, there are no further questions at this time. I’ll now turn the floor back over to management for closing remarks.

This is Michael Hasychak. We’d like to thank all of you for participating on the call this morning. I’ll be around for the remainder of the day to answer any questions. My direct dial number is (216) 383-6823. Thank you.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.