Greeting and welcome to the Materion Corporation Second 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] It is now my pleasure to introduce Steve Shamrock. Thank you, you may begin.

Good morning. This is Steve Shamrock, Vice President, Corporate Controller, and Investor Relations. With me today is Jugal Vijayvargiva, President, and Chief Executive Officer; and Joe Kelley, Vice President of Finance and Chief Financial Officer. Our format for today's conference call is as follows; Jugal Vijayvargiva will provide opening comments on the quarter and update on key strategic initiatives and the outlook for the remainder of the year. Following Jugal, Joe Kelley will review detailed financial results for the quarter and then we will open up the call for questions. Before we begin, let me remind investors that any forward-looking statements made in this announcement, or contained in today's press release, 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 GAAP numbers shown in attachment number five in this morning's press release. The adjustments are made in the current quarter for comparative purposes and remove CEO transition cost, merger and acquisition costs, and non-recurring cost reduction actions. And now, I'll turn it over to Jugal for his comments.

Thank you, Steve, and a very warm welcome to everyone on the call. I am pleased to report second quarter results of $0.42 per share, up 35% year-over-year and up 45% from first quarter this year. Looking at the topline, value-added sales in the quarter set a record at $176 million that's a 14% increase year-over-year. This marks the fourth consecutive quarter of year-over-year sales growth. New product sales growth set a benchmark, accounting for nearly $27 million or 15% of value-added sales for the quarter. This is an increase of 52% over the same period last year. ToughMet sales reached record levels, providing technical solutions for customers in the aerospace, energy, and consumer electronics markets. Overall growth for the quarter was broad-based with year-over-year and sequential increases in seven of our 10 largest markets. In addition, we delivered double-digit year-over-year growth in the consumer electronics and industrial components markets. Higher customer demand for existing products and the addition of new revenues from the Heraeus' target materials acquisition also contributed to increase sales. Record sales for the quarter combined with product mix improvement led to significant increase in profitability. Operating profit for the quarter came in at $11.7 million, an increase of 44% year-over-year and 52% sequentially. Now let me take a few minutes to provide status of two important initiatives underway. These initiatives contributed to strong results for the quarter and key to maintaining the momentum for the rest of the year. Performance Alloys and Composites profitability improvement plan continues to gain traction, delivering $6 million improvement in adjusted operating profit year-over-year. Value-added sales from this business improved 11% year-over-year. Key action is underway as part of the turnaround plan are, implementation of value-based pricing, optimization of the cost structure including exiting of the Japan service center and executing…

Thank you, Jugal and good morning to everyone joining us on the call today. During my comments, I will cover a review of our second quarter 2017 financial highlights, profitability by segment, make some brief comments on the balance sheet, cash flow, and modeling assumptions, and finally, cover the earnings outlook for 2017. Following my remarks, the line will open for questions. We are pleased to report strong second quarter results, which exceeded the earnings guidance provided and represented the second consecutive quarter with year-over-year growth in both topline value-added sales and adjusted operating profit. Also it's important to note that second quarter 2017 value-added sales was the highest levels since we began reporting this metric in 2012. Second quarter 2017 value-added sales of $176.1 million increased 18% sequentially versus the first quarter of 2017 and 14% versus the second quarter of 2016. Now if you recall, the Heraeus acquisition closed late in the first quarter of 2017. The Heraeus acquisition accounted for $10.6 million of value-added sales in the second quarter of 2017, while the base business grew value-added sales 8% year-over-year. We experienced strong demand in most key end markets including our two largest end markets of consumer electronics and industrial components. New product sales in the second quarter of 2017 increased to $26.6 million and represented 15% of second quarter 2017 value-added sales. This also is a record high since we began tracking the metric. During the quarter, we recorded $5.3 million of value-added sales for shipments of raw material beryllium hydroxide. It is good to see this portion of our business resume after being absent for four of the last five quarters. The value-added sales growth and profitability mix combined with productivity enhancements improve gross profit margins as a percent of value-added sales to 31% and…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Edward Marshall with Sidoti & Company. Please proceed, your line of live.

Hi, Jugal, Joe, Steve, how are you?

Doing well, Ed.

Doing well, Ed.

All right. So I wanted to ask about the beryllium shipments. It looks like first time we kind of got some data on division. It looks like sales were typically between $10 million and $15 million a year. Now they step back and I just look at the quarter for itself, we annualized that puts you well over $20 million for the year. Was there something specific in the quarter, catch-up et cetera that might have driven that number slightly higher, and what's you anticipation for the full-year?

Yes. Our anticipation continues to be the $10 million to $15 million type range. And so to your point, yes at the $5 million number in Q2 that may have been a little catch up. As you recall for the last five quarters, we've been negotiating with them and there has been no shipments. So I expect we speculate that Q2 shipment may then a little heavy when you look at an annual run rate of $10 million to $15 million.

As we noted in the prior communication, we've got this agreement and it's a five-year agreement. And as Joe indicated, we expect to have sales in that range. We're very pleased with the agreement that was reached. I think it's good for both parties and going forward.

Okay. And when I look at the process and the driven of that slightly higher than normal sales run rate, what do you think the excess profit, it was then important cut from just the extra sales?

Yes. I mean we don't - as you know, we don't disclose specific profit for customers or specific products. But I would say of the $6 million that we've picked up in the PAC business, majority of the profit was not related to the shipments for that. So that's probably what I think we can share with you.

Okay. Fair enough. The intangibles I was looking at and I was thinking - I was expecting to see a much higher [indiscernible] was the value of that acquisition purchase price to you pay that attractive that it didn't add additional intangible assets to the balance sheet?

Yes. So we likewise - when you look at that in the intangible assets that we acquired was that the intangibles and the goodwill was very small portion of the roughly $30 million total purchase price.

And you mentioned this $10.6 million in revenue that you got from Heraeus', did you talk about the profit? Was it profitable?

Yes. It contributed favorably to our Q2 growth. So we're very pleased to see coming out of the blocks here in Q2. The Heraeus acquisition did contribute favorably to our Q2 profits.

What was the operating profit for the business?

We have not disclosed that and we're not going to disclose that going forward.

Okay. Finally, you talked about cash flow and you noted or all know that it was - seems to be got $12 million to $15 million weaker than normal. Was there something that was timing related in the first half that you'll catch up within the second half or was this something else unusual?

The unusual - just to go back to the Heraeus acquisition, the one unusual, the way the actual purchase price was paid they did not deliver the accounts receivable and so you'll see down in the cash flow from investing activities only $16 million to $17 million spent on the Heraeus acquisition. That's because we had to fund basically the working capital up above. So I would tell you the way that purchase price, the cash ended up flowing, it negatively impacted our operating cash flows by about $10 million, and so that's the one difference in the two.

Yes. Thanks very much. I appreciate it.

You bet. Thank you, Ed.

Thanks Ed.

Our next question comes from Phil Gibbs with KeyBanc.

Hey, good morning.

Good morning, Phil.

Good morning, Phil.

Did I hear you right that you had - did you say you had record sales of TouchMet in the quarter?

You did. You heard us right.

Okay. I was just curious on that because I don't think we've talked about TouchMet now for maybe three or four quarters since the oil crisis. Was the business a lot better from oil or you coming up with some new applications? What's the explanation?

Yes. I think we have a couple of things. One, as you know, the oil and gas market is recovering although from a low point, but it is recovering and so that's helping. Also there are sales into the aerospace market, so good sales in both markets. And new applications, multiple new applications of the product into those markets also application in the consumer electronics business as well. So we're having good success and of course this is a key product segment for us that we want to grow.

Yes, Phil I would just add to that. When you look at our new product sales growth, which is also a record to $27 million in the quarter, 15% of total value-added sales, ToughMet - new ToughMet products was the main driver of that growth, and it was not the majority of those not a recovery in oil and gas in our traditional products, but more it was new products as Jugal mentioned for those markets.

That's helpful. Is this common vis-à-vis new form as well, meaning new forms of the metal?

So there is some new tempers that we're serving in the consumer electronics space that are helping, and then I would tell you its bushings and bearings in the aerospace, and then the coupling for the oil and gas, beyond the traditional oil and gas products, the coupling also was contributing.

Okay. Any color you could provide on the defense market in terms of sentiment or order book, what you're seeing there in the project side of things?

Yes, so the defense market that, Phil, it's been a little bit weak. But I think it's all due to some of the changes in administration and changes that are going on right now. We expect the market to recover, as some of the things stabilize with the administration. So I'd say interim temporary weakening, but recovery as we get into the year.

What's the temporary weakening and I'm sorry or in terms of the volatility?

Getting it's large projects approved and so as you recall, I mean a portion of our defense business is a large one-off shipments primarily around the high beryllium - high-purity beryllium product line. And so getting those final approvals through requires some political appointees to take place and things of that nature. Relatively typical stall at the change of administration, where is our normal steady state defense business, particularly on the optics coding side continues and continues to be strong.

Okay. And the euro now starting to move in your favor, is that helping the competitiveness of the business now or is it just been too sharp and too early to suggest and let's say, it stays between 150 and 120. Does that help you this year? Does it more or less start to help you next year some of the hedges come on down a little bit?

Yes, I think about it correct. I don't know that that has a benefit this year in this short quick movement, but it perhaps will next year. What hurt us, if you go back to 2015, it was when - it went from 132 down to 107 and stayed there relative - in relatively short order. That's what we suffer from in 2015 and 2016. So this short movement, I don't think that that's helping us in the near-term and if it continues that way, you are correct it will help us in future years as hedges unwind.

All right, thanks very much. I appreciate it.

Thanks Phil.

Thank you, Phil.

Our next question comes from Marco Rodriguez with Stonegate Capital.

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

Yes. Hi, Marco, good morning.

Good morning. I was wondering maybe you could talk a little bit more on some of the drivers that you saw on sales, just kind of more from a high level. Just trying to kind of understand a little bit more as far as what is driving your new product sales higher and then the product mix? Is the product mix a function of new sales becoming a bigger percentage of your revenues or there are some other types of items that are driving that higher?

Yes, so there are several questions in there. I would tell you if we take it segment by segment, our PAC business and their revenue growth was largely driven by new sales and improved product mix because as we take these new sales on, we end up also pruning some of the lower margin business. And so that's why you see the very high incremental margins in the PAC business accompanied with that growth rate. That has had one of the highest increases of the $9 million increase in new product sales, came in our PAC business. And as - those are going back to the new applications, I touched on primarily around TouchMet drop. So it was the new beryllium ceramic product lines that contributed as well. So I would tell you there is a combination of new products and therefore offer some mix improvement. When you look at our Precision Coatings business, that's a medical pullback that is negative impact on product mix, but we had some success in our Optics business with improved productivity and some new products there on the foster wheel that helped offset a portion of that drop off. And then when you go to the AM business it wasn't as much new products there as it is industrial and consumer electronics uptick in demand that growth incremental to the Heraeus' acquisition.

Gotcha. And then maybe if you could talk a little bit about the end market drivers you've kind of seen here it seems like it was fairly broad-based where some of your biggest end markets saw pretty good demand. Maybe you can talk a little bit about what you're hearing from your customers and the specific industries where you're seeing the most pick up from some end markets?

Yes, so couple of areas Marco that we see really good flow from the end markets you know consumer side and industrial side. And as we talked about in fact a couple of things right we talked about some of the ToughMet applications into those we have a number of applications in to some of the new launches that our customers are doing on the consumer side. So I think the new and the new growth I think in those areas is really helping us. So both I would say strength is from the consumer side and from the industrial side.

Gotcha. And do you think you're picking up share there or is it just an overall increase in overall demand?

I think there's a combination. Clearly the demand is there, but I believe the new products that were introducing are getting in there and we're becoming an incumbents and the opportunity to then of course to pick up share.

Gotcha. And based on your conversation with end customers, can you give us a sense as far as how much you know where is there a level of comfort as this year progresses in terms of end market demand are they feeling much more confident now or are they still hedging their bets any sort of color there?

Yes when we look at well in talking with our customers as well as when we look at our order intake for the rest of the year. I would say that there's a reasonable optimism although always cautious of course. But good feedback especially in these markets our order rate continues to be positive.

Gotcha. And then last quick question here just on the medical business. I know you guys have discussed that here for some time now in terms of the volume declines there. I was just a little bit surprised I suppose in terms of the year-over-year decline again in that revenue line for that business that is are you losing additional share there on the medical side or there some other sort of drivers there that caused the increased in a year-over-year decline on revenues VA sales.

Yes, I just think you're still seeing on a year-over-year basis the result of the product transition that we referenced because if you look sequentially sales are relatively flat. And so that product transition started hard in Q4 it completed here in Q2 we did begin shipping the next generation product. So associate with that specific customers product transition it was a loss of share, but what you're seeing now is the new run rate and just a year-over-year basis it still is reflective of the 10% down, but sequentially it's relatively flat. And the Precision Coatings business should remain that way I would say through the next quarter before it starts to pick back up with some new products and new applications and some market share gains hopefully in Q4 as what's expected.

Gotcha. Thanks guys. As appreciate your time.

Thank you.

Thank you, Marco.

We have now reached the end of our Q&A session. I would like to turn the floor back over to Steve Shamrock for closing comments.

Thank you. This is Steve Shamrock and this concludes our second 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 all 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.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.