Greeting and welcome to the Materion Corporation First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Steve Shamrock. Vice President, Corporate Controller and Investor Relations for Materion Corporation. Thank you, Mr. Shamrock. You may begin.

Good morning. This is Steve Shamrock, Vice President, Corporate Controller, and Investor Relations. With me today is Dick Hipple, Executive Chairman, Jugal Vijayvargiva, President, and Chief Executive Officer; and Joe Kelley, Chief Financial Officer. Our format for today's conference call is as follows; Dick and Jugal will provide opening remarks and comment on key strategic initiatives. Following Dick and Jugal's remarks, Joe will review the financial results for the quarter and the outlook. Following Joe, we will open up the call for questions. Before we begin, let me remind investors that any forward-looking statements made in this announcement, including those in the Outlook section, and during the question-and-answer portion, are based on current expectations. The company’s actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release we issued this morning. Additionally, comments with regard to operating profit, net income and earnings per share reflect the adjusted numbers shown in attachment four and five in this morning's press release. The adjustments made in the current year for comparative purposes remove non-recurring items such as CEO transition cost, acquisition and integration cost, cost structure realignment actions and legacy environmental matters. And now, I’ll turn the call over to Dick.

This is a special occasion for me as it marks the final time I will join this call as a regular participant after 43 consecutive quarters. As most of you know, Materion completed the planned and orderly leadership succession in March. After nearly 11 years as President and Chief Executive Officer those responsibilities have been handed to my successor Jugal Vijayvargiva. I am staying on as Materion's Executive Chairman to support Jugal and this transition until my retirement from the company within a year. Jugal joined us from Delphi Automotive where he had a successful 26-year international career. Most recently he was President of Delphi's Electronics and Safety Segment, a $3 billion global business headquartered in Germany. Jugal has a terrific combination of integrity, proven strong commercial M&N and operational experience and a passion to grow the business. I believe you will find him to be an outstanding leader and committed steward of this organization. Thank you for your interest and support in Materion and for the encouragement and goodwill you have always shown the executive team and me. I take tremendous pride in personal satisfaction in knowing how well you will be served with Jugal at the helm supported by the great culture of the Materion employees. I will now turn the microphone over to Jugal.

Thank you, Dick for those introductory comments and for your valuable role in acclimating me to Materion. Let me extend a very warm welcome to all of you on the phone. I'm very excited to have joined the Materion team and for the opportunity to follow Dick in leading this great company to its next level of long-term success. During my time at Delphi, I had the privilege to serve in a number of leadership roles in Europe and North America. Those experiences include delivering profitable growth across multiple product lines, global customers and regions, identifying and harnessing market trends. There are numerous areas where my background dovetailed with Materion. Materion is an organization with highly differentiated technologies and products, dispersed across a global manufacturing base. It has evolved and transformed from legacy businesses to an innovative leader in advanced materials. Materion is deeply engaged in multiple global markets be it consumer electronics, industrial, defense or automotive. During my short tenure here, I've been highly impressed with the quality and passion of our people. The vital role that our advance materials play in improving the world, the proud and consequential history of the organization and most importantly, the bright promise for Materion's future. Materion has many compelling strengths to make me very confident in what lies ahead. These include a rich and differentiated product portfolio, diversity across a number of long-term growth markets, an organization that is universally recognized for its innovation and material design, a company well-placed with strong market positions and significant competitive advantages and an unlevered balance sheet to support organic and inorganic growth. There will be more report all subsequent calls, but for today, I would like to provide a glimpse into my priorities for Materion in the months and years to come. Materion is in…

Thank you, Jugal and good morning to everyone joining us on the call. My comment today will cover first quarter 2017 financial highlights, a review of profitability by segment, brief comments on the balance sheet cash flow and modeling assumptions and the earnings outlook for 2017. Starting with the financial highlights, the first quarter 2017 we reported year-over-year growth in both topline value-added sales and adjusted operating profit for the first time in the past seven quarters. First quarter 2017 adjusted earnings exceeded our internal forecast and earnings guidance provided to the street. First quarter 2017 value-added sales of $149 million increased approximately 4% versus the prior-year first quarter value-added sales of $143.9 million. The Heraeus acquisition late in the first quarter of 2017 accounted for $2.9 million of value-added sales growth, while the base historical business value-added sales grew 2% over the prior year period. As a reminder to investors, value-added sales removes the impact of pass-through precious metal cost. The company continued to experience positive momentum with new product value-added sales, which totaled $20.3 million in the quarter and grew 22% over the prior-year first quarter. A modest recovery in end market demand also continued, particularly in our two largest end markets, consumer electronics and industrial components. These favorable trends were largely offset by decreased sales into the medical and defense end markets. As you may remember, it was mentioned on the year-end earnings call that Materion's largest medical customer began the transition from a legacy product to a next-generation product in the fourth quarter of 2016. This product transition continued during the first quarter of 2017, negatively impacting year-over-year value-added sales in the medical end markets. As for sales in the defense end market, although defense sales in the first quarter of 2017 were solid in historical…

Thank you. We'll now be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Edward Marshall with Sidoti & Company. Please proceed with your question.

Hey guys. Good morning.

Good morning, Ed. So just to clarify the 25% to 35% sequential improvement 2Q to 1Q EPS, were you referring to the GAAP or the pro forma number.

It's an adjusted earnings number Ed.

Okay. Anything to report, I know you're forecasting that the hydroxide shipments will improve throughout the year, is there anything to report from a customer level that gives you that confidence that just the continued discussions or do you think that they're running low on the particular stockpile and therefore will need to repurchase?

Yeah Ed, you're familiar with the situation. We had about 30 plus years of our long-term consistent supply agreement in place that ended in 2015. Since then, we've been negotiating to renew our long-term contract. Last year we had one spot shipment in Q3. We had nothing in Q4, nothing in Q1 of this year. But I can tell you that we have continued to make good progress in our negotiations and our forecast as it was last quarter and our forecast now, includes the assumption that hydroxide sales resume later here in 2015. So, there has been I would call it positive development and momentum in negotiations in the first quarter here and we feel good about our forecast in the future.

Okay. As I look at the coatings division itself and I look at -- and I see revenue down about 9% and I thought about the medical test strip was a larger portion of that business, but I see that the decline in an operating income is as much stronger than the decline in revenue and I am trying to get this -- I'm trying to get a sense as to the kind of the mix there and what might be occurring in the division? If you can kind of get a little granular percentage and give us some idea.

You bet, so first of all, I'll remind you in Q1 of 2016 this business delivered operating profit at 17% of value-added sales, which was a record and in fact that quarter, I said it was the perfect mix in volume with mainly like our after ceramic foster wheel had very high volumes our blood glucose test strip and the particular products that we serve there were very favorable mix and so it was kind of an ideal situation in Q1. That being said, in 2016 margins of this business improved to 12%, return on value-added sales, which is the fourth consecutive quarter of improving. So when you look at the year-over-year decrease, it's 9% operating profit compared to 17% or $4.1 million as you referenced a number is a pretty tough comparison, but to answer your specific question, yes it was the customer transition in blood glucose test strip, but also on the optical coating side, it was unfavorable mix that we had this month, sorry this quarter compared to last quarter when you look at the phosphor wheel and the after phosphor wheel and the mix shift in overall projector display I would say.

Got it. And is there a price compression too on the test strip you as you shift to maybe a more competitive situation and sharing volume?

The price pressure I would tell you and the topline revenue as they go from a gold to a less gold containing product from a revenue standpoint, there will be some benefits to the customer and some decrease in our results, but from a value-added standpoint, there should not be a significant pressure. So, the main headwind is volume as you go from 100% share to 50% or approximately 50% share and so what's going to offset that volume is the growth and expansion with other customers and the blood glucose test strip market.

Got it. Okay. Thanks very much.

Thank you, Ed.

Thank you. Our next question comes from the line of Marco Rodriguez with Stonegate Capital Markets. Please proceed with your question.

Good morning, guys. Thank you for taking my questions.

Good morning, Marco. Good morning.

Good morning, Dick. Congratulations on your coming retirement and Jugal also congratulations for coming on in.

Thank you.

I was wondering Jugal, if maybe you could talk a little bit more about your priorities. You outlined four steps or four focus points that seem to make sense here, but you also talked about a performance-based culture that I guess I'm kind of curious about it if you can maybe talk a little bit more about that in detail and if this is kind of changing some mentalities if you will across Materion?

Yes, first of all thanks for your question Marco and I would say that I don't think it's something that's changing across Materion. I think Materion has done an excellent job of making sure that the right things are being done in the business over the last several years But as we come on Board and as we look at these priorities, what we need to make sure is that everyone within the company understands what our priorities are and is able to relate to what their role in those priorities is and then they can then take those items that they have to deliver on and actually deliver on those items and I think that's what a good performance-based mindset and good performance-based culture does is that you understand what is expected of you. You understand is that expectation is something that can be delivered on and then you develop the right plans to do it. So, I think it's more I would say associated with making sure that the four priorities that I've outlined are priorities that we can roll out effectively across Materion and then have the right mindset and culture to deliver on those and I'm confident that we'll be able to do that. I've had the pleasure so far to visit four plants on the East Coast. I am going to be doing more plant visits here in fact after this call here in the Midwest area and then we've got a trip lined up on the West Coast in Asia and so far, all my visits have been extremely positive in terms of what the people are looking for and I think what they want to be able to accomplish. So, I expect -- I expect that we're going to be really focused on these four priorities with a really strong performance-based mindset and culture and you've seen the results from this quarter, which are very positive results. The team has done an outstanding job of making sure that the earnings come through and the growth has come through and we're very focused on making sure that the same happens for the upcoming quarters and that's why we're confirming the guidance. We're making sure that you understand what we're going to deliver and then we deliver on it.

Okay. I appreciate that. Then moving into some of the segment reporting here, following up on the precision coating questions earlier, can you talk a little bit more here -- you're talking about the profitability maintaining that double-digit profitability, you're at 12% operating margin on VA sales last year. Obviously just shy of 10% this quarter. You've got some volume headwinds presumably I am assuming as well maybe some margin headwind as well on the gross margin side, can you just talk a bit more, are you really going to be just be picking up volume to kind of get that or are you going to be stripping out more costs?

Let me be clear. So, in Q1 we did 9% and I don't know that from a Q1 forward, there are significant volume headwinds. Q1 is reflective of a transitionary period with this particular blood glucose test strip product line specifically and so we don't forecast or anticipate what I call a volume headwinds going forward. We have shipped the next generation product and in so I really think going forward from here it's not a volume headwind, maybe even a little bit of a volume tailwind as we get later in the year. If you look at some of the seasonality of our optical coating business in particular and some mix improvement going forward.

And so, you're forecasting with your gross margin on VA sales. Obviously the Q1 compare year-over-year, you highlighted the fact that it was a tough compare, but looking at the last three quarters in fiscal '16 still fairly solid gross margins on VA sales. Are you forecasting similar type rates or are they going to change somewhat?

Yeah, we'll be similar. So, last year we did 39%. On the full year this year was soft at 36%. If you go back in Q4 it's 34%. So, this transition has impacted the margins Q4, Q1 and we anticipate to be recovered by the second half of 2017, back to historical margins of the 38% to 40% type range.

Got you and then switching here to the performance alloys, I'm not sure I caught all of it but I think that there were some mix issues that arose in the quarter. Can you just talk a little bit about that and expectations of mix going forward?

Yes. So, I'll make some brief comments. The mix issue here was the high purity beryllium into the defense and we had a very strong quarter in Q4. So, if you're looking sequentially or even if you look year-over-year that was down. That is again not systematic of lost market share. It is simply timing of delivery of some of these larger defense orders. You can see that in our defense end market sales, which were down both sequentially and year-over-year for the segment. So that mix negatively impacted this particular business. Also, that telecom infrastructure for this business, which is mainly undersea repeater housing, that was down, that's also a high margin. All of that was offset because you saw the value-added sales grow with expansion of our lower margin copper beryllium strip product line and that was primarily in the Asia market for electronic connectors. Big picture the profit improvement plan in PAC, it is working and it's a little bit discouraging, it's hard to see in these Q1 results because that mix shift in beryllium, but if you go specifically to the copper beryllium business, that business itself had sequential $2 million improvement in profitability Q4 to Q1 as we have been initiating pricing improvement initiatives, mix improvement initiatives within copper beryllium and also some of our cost savings initiatives, although the Japan action we made a lot of progress in restructuring the Japan service center, that won't be complete until the end of Q2. But that will deliver going forward $2 million of annualized benefit and then there's a volume pickup. We commented on the order entry rate. The order entry rate in our performance alloy business has been strong the first half of the year and that's partially as the oil and gas market starts to come back a little bit, but as we commented, industrial consumer electronics also have some positive momentum in our current order entry rate. So, we are making progress in the profitability improvement plan within the PAC business. It's just a little bit disguised because our high margin beryllium business was down in the quarter, although it's not forecasted to be down for the full year. It will have a heavy back half of the year similar to what it had in '14 and in '16.

Got it. And then a last quick question just circling back around here on the beryllium hydroxide and I believe you guys are -- you talked about earlier as far as forecasting some revenue or some shipments there. I heard your response to the prior question there, but just wondering if maybe I can ask somewhat differently here, do you have actual orders or orders are coming or is it more of kind of just like a feeling indications of interest if you will?

Yes. Marco, let me let me take that on. I think the discussions that Joe mentioned earlier, we've been having discussions with our customer base and those discussions are progressing very well and as he indicated, we have in our plans to resume shipments here in the second half of the year, but I think that's something that we'll be able to hopefully communicate to you more down the road.

Got it. Thanks a lot guys. I appreciate your time.

Thank you.

There are no further questions at this time.

Okay. So, let me make a couple of summary comments here. So first I like to thank Dick for his outstanding leadership that he's provided to the company for 43 consecutive quarters. That's just phenomenal. So, Dick thank you very much for that and I like to thank of course the folks that have dialed in and participated on the call. I look forward to joining you for the quarters to come ahead and I can assure you that we are focused and committed on the business as you've seen here in the first quarter with the result that we've delivered and the confirming the outlook that we've provided to here for the rest of the rest. So, thank you again.

And think you as well. This is Stephen Shamrock and this concludes our first quarter 2017 earnings call. A recorded playback of this call will be available on the company's website materion.com. We would like to thank you for participating on the call this morning and your interest in Materion. I will be available to answer any follow-up questions. My direct dial number is 216-383-4010. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.