Materion Corporation (MTRN) Q4 2017 Earnings Report, Transcript and Summary

Greetings. And welcome to the Materion Corporation Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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. Thank you. You may begin.

Good morning. This is Steve Shamrock, Vice President, Corporate Controller and Investor Relations. With me today is Jugal Vijayvargiya, 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 Vijayvargiya will provide opening comments on the quarter and an update on key initiatives. Following Jugal, Joe Kelley will review detailed financial results for the quarter and full year 2017 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, 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 both the current year and prior year periods for comparative purposes and remove non-recurring CEO transition cost, cost reduction actions, certain legacy legal and environmental matters, merger and acquisition costs and certain income tax adjustments. And now, I’ll turn it over to Jugal for his comments.

Thanks Steve, and good day everyone, I'm pleased to report a very strong finish to 2017. Today, we report a record level value added sales for the fourth quarter at a $181 million and for the full year at $678 million. We reported earnings of $0.51 per share for the quarter, up 82% from prior year. This is the fourth consecutive quarter of value added sales and earnings growth. New product sales reached a record for the quarter at $31 million leveraging our innovation capability and differentiated product portfolio. Our advanced materials are enabling customers to solve their most challenging problems. Our profitable growth strategy focused on commercial and operational excellence, innovation and acquisitions is gaining traction. We made significant investments including organizational changes to further execute on our strategy. We appointed Marc Rands as Head of Global Operations. Marc comes to us from Honeywell, where he had a senior leadership role, managing 14 manufacturing facilities globally. Marc had hit the ground running and is focused on driving peak operating efficiencies, leveraging synergies and best practices across all Materion facility. We appointed Neil Sater as Head of Commercial Excellence. Neil brings extensive background in leading sales and marketing at Intel. In his new role, Neil will lead a unified coordinated commercial approach around the world. With our focus on global profitable growth, we've appointed regional presidents from Europe and Asia. They are locally based and will drive regional growth on the comprehensive One Materion product portfolio. These are just some of the changes we're implementing to deliver sustainable profitable growth. Looking forward, we're confident that the momentum established throughout 2017 will carry into 2018. As such, we're providing 2018 full year earnings guidance of $1.95 to $2.10 per share, which is an 18% increase at the midpoint from 2017. I want to thank all of you for your continued interest in Materion. Now, I'll turn the call over to Joe who'll review financial details.

Thank you, Jugal and good morning to everyone joining us on the call today. During my comments, I will cover fourth quarter 2017 financial highlights, review profitability by segment for both fourth quarter and full year 2017 results, provide some brief comments on the balance sheet, cash flow and modeling assumptions and finally, cover the earnings outlook for 2018. Following my remarks, we will open the line for questions. I am pleased to report strong fourth quarter 2017 financial results, which exceeded the earnings guidance provided, and represented fourth consecutive quarter with year-over-year growth in both value added sales and operating profit. Fourth quarter 2017 value added sales, which excludes the impact of pass through precious metal costs, were a record $181.2 million, representing an improvement of 25% versus the prior year fourth quarter. As a reminder, the Heraeus, which closed late in the first quarter of 2017, contributed $11.6 million of value added sales in the fourth quarter of 2017. Excluding the impact of the acquisition, the base business grew 17% year-over-year, driven by new product sales, improved product mix and improving end market demand. New product sales in the fourth quarter of 2017 were at a record level of $31 million or 17% of total value added sales in the quarter. We continued to experience strong demand in our two largest end markets of consumer electronics and industrial components. Additionally, defense end market sales increased over 30% compared to the prior year period, as we saw meaningful progress in working through the backlog of orders awaiting government approval, particularly around the high purity beryllium product line. Gross profit was $58.7 million in the fourth quarter, an increase of 33% from $44 million in the prior year fourth quarter. Expressed as a percentage of value added sales, gross margin expanded year-over-year 200 basis points from 30.4% to 32.4%, driven by performance improvements, value based pricing and improved product mix. Selling, general and administrative expense total $38.1 million, up $5.5 million over the prior year fourth quarter of $32.6 million due primarily to increased cost associated with the Heraeus’ target business and variable expense directly related to value added sales growth and improved financial performance. As a percentage of value added sales, SG&A expense decreased to 21% in the fourth quarter of 2017, down from 22% in the prior year period. Operating profit totaled $13.9 million in the fourth quarter of 2017. Adjusted operating profit, excluding special items, was $13.6 million, up almost 90% compared to the prior year fourth quarter adjusted operating profit of $7.2 million. Performance improvements related to commercial and operational initiatives and a continued focus of cost reductions led to the year-over-year increase. Special items, excluding income tax in the fourth quarter of 2017 totaled a net benefit of $300,000 comprised of a gain on sales of property related to exiting the Fukaya Japan service center, offset by CEO transition costs. Looking at income taxes. We recorded a one-time tax expense in the fourth quarter of 2017 of $18.9 million, primarily related to the new U.S. tax reform. The majority of the expense is non-cash associated with the revaluation of deferred tax assets and write-off of foreign tax credits. Approximately $6 million is cash tax expense associated with the transition tax and repatriation of foreign earnings, and is forecasted to be paid over the next eight years. These amounts in total are reflected as special items in the quarter. As a result of cash reform, we reported a net loss in the fourth of 2017 of $8.2 million or $0.41 per share. On an adjusted basis, fourth quarter 2017 earnings were $0.51 per share, up 82% from $0.28 per share of adjusted earnings recorded in the fourth quarter of 2016. Let me now briefly comment on full year 2017 consolidated financial performance. Value added sales totaled a record $677.7 million for full year 2017, up 13% compared to 2016. Excluding the Heraeus' target business acquisition, the base business grew 7% year-over-year due to new product sales growth and strength from customers serving the consumer electronics, industrial components and commercial aerospace end markets. Full year 2017 adjusted operating profit totaled $46 million in 2017, which represents 31% increase compared to adjusted operating profit of $35 million in 2016. Expressed as a percentage of value added sales, operating profit margins expanded 100 basis points over the prior year to 6.8%. Full year 2017 adjusted earnings totaled $1.72 per share, up 30% versus 2016 earnings of $1.32 per share. In summary, we exceeded the high end of our full year earnings guidance provided at the beginning of last year by 7.5%. We delivered these strong results by executing on commercial and operational improvements across the business. Now, let me review 2017 fourth quarter and full year performance by business segment. Starting with advanced materials, value added sales in fourth quarter 2017 were $58.3 million, up 40% versus fourth quarter of 2016 value added sales of $41.2 million. Excluding sales related to the acquisition, value added sales grew a robust 13% year-over-year. New product sales and strong end market demand, particularly in the consumer electronics end market, drove the increase. Operating profit for fourth quarter 2017 totaled $7.9 million or 14% of value added sales compared to $5.5 million in the prior year quarter. The 44% growth in segment operated profit was due to a combination of higher sales volume and improved performance in commercial execution and product mix. For the full year 2017, advanced materials delivered record value added sales and operating profits. Value added sales and operating profit both improved approximately 30% year-over-year due to the factors mentioned previously. We continue to be pleased with the financial performance of this business and remain excited about the future. Looking now at our performance alloys and composite business. Value added sales exceeded $100 million in the fourth quarter of 2017, a record level for the segment and an increase of 21% versus the fourth quarter of 2016. Excluding hydroxide sales, value added sales improved 15% versus the prior year with success in new product introductions and commercial execution related to value based pricing and improved product mix. End market demand also favorably contributed to results, particularly in defense, which experienced 23% growth year-over-year due to strong customer orders and an acceleration of government program approvals. Adjusted operating profit in the fourth quarter of 2017 totaled $8.2 million or 8% of value added sales, the highest level since the second quarter of 2015. Fourth quarter 2017 adjusted operating profit is more than double prior year fourth quarter. For full year 2017, PAC reported a record $363.5 million of value added sales, up 9.5% versus 2016. Adjusted operating profit of $22.1 million in 2017 improved $12.9 million versus the prior year, and represent 6.1% of value added sales. This business continues to make meaningful progress on the recovery plan introduced in 2016, and we expect to deliver on our commitment to return this business to historical levels of profitability by the end of 2018. Turning finally now to the precision coating segment. Fourth quarter value added sales were $22.9 million compared to $22.2 million in the fourth quarter of 2016. This marks the first year-over-year increase in value added sales in five quarters, and reflect strong sales of optical filter products and a more comparable run rate for medical end market sales. Operating profit for the precision coating segment totaled $2.3 million in the fourth quarter of 2017 or 10% of value added sales compared to $1.8 million in the fourth quarter of 2016. The increase in segment operating profit was due primarily to improved sales volume and improved manufacturing performance. For the full year 2017, the precision coating segment reported $90.7 million in value added sales, which is 7% below prior year levels due primarily to the drop-off of medical end market sales. Adjusted operating profit was $8.8 million in 2017 or 10% of value added sales compared to adjusted operating profit of $11.6 million in 2016. Although, operating profits were down in 2017 due to a significant metal customers’ product transition early in 2017, this business reported double digit operating margins for a second consecutive year. Moving now to the balance sheet and cash flow. The Company ended the fourth quarter of 2017 with a net cash position of $38 million compared to $26.8 million at the end of 2016. We had another strong year of cash flow performance as we generated $67.8 million of operating cash flow in 2017 consistent with 2016 levels. We continue to maintain a very strong balance sheet and have significant available liquidity to support capital allocation priorities mentioned previously, including organic growth opportunities, further inorganic growth opportunities, and to consistently return capital to shareholders. For financial modeling purposes, in 2018; capital spending should run approximately $30 million to $35 million; mine development and investments should be $5 million to $10 million; annual depreciation and amortization should run approximately $40 million; assume a 16% to 18% effective of tax rate, which is lower than the adjusted 20% rate realized in 2017. And finally, now the earnings outlook for 2018. Based on our current order and trade activity and end market outlook, we expect growth to continue in 2018 across most of the major end markets we serve. At a more company specific level, we remain focused on maintaining a robust new product pipeline and the execution of identified commercial and operational performance improvements. The PAC recovery plan has consistently delivered both year-over-year and sequential quarterly improvements for the past three quarters. We expect to return this business segment to historical levels of profitability by the end of 2018. Based on these factors, we are guiding full year 2018 earnings to range from $1.95 to $2.10 per share. The midpoint of this range represents an 18% improvement over 2017 adjusted earnings. From a quarterly guidance perspective, we expect the first quarter of 2018 earnings to be much improved from the prior year first quarter but below our Q4 2017 performance given normal seasonality. This concludes our prepared remarks. We will now open the line for questions.

[Operator Instructions] Our first question is coming from Martin Engler of Jefferies. Please go ahead.

So on the 2018 EPS guidance, can you provide a little bit more detail regarding expectations broadly across the segment on value added sales trends and profitability. You touched on PAC a little bit and maybe if you could provide some goal post there as far as what you’re thinking on there profitability exiting the year?

Martin, let me start and then certainly Joe can add to that. We’re expecting as we indicated a very strong 2018 continued momentum that we’ve built with 2017, 18% at a company level increase on EPS as we indicated. On a segment basis, we’ve got three really good segments. I would say our advanced materials business will continue to operate strong in the mid-teens operating margin levels that is continued to be that way. And as we integrate the Heraeus business, we believe that we’ll continue that type of strong performance in this business. PAC business, the recovery plan that we’ve highlighted we’re going to keep pushing that recovery plan. And it’s our objective that we get that to historical levels by the end of 2018. So another three-four more quarters to go there and then the precision coatings business, our objective is really to just get that business to be a double-digit level as it was before. And we think that north of 10% is what we got to deliver on that. In terms of VA and overall sales growth, in general, we’re seeing positive trends in the marketplace. I think our new product pipeline is strong. We expect to continue to push forward on our new businesses that we have with various customers, expanding the application rate. We would expect that the momentum from ’17 to again continue into 2018 as the markets evolve. There are certainly some market that we’re monitoring more closely than others. But in general, we expect that growth that VA growth to continue. So overall, I think a good strong trend we believe from ’17 going into ’18.

And I believe the value added in’17 was 13% sales growth year-on-year?

Yes, it was. But keep in mind, ’16 was a relatively low year for us. So comps certainly are favorable to us from ’16 to ’17. We had a very good set of a new product growth. And as I said, we’re going to continue to try to push growth into 2018 and of course long-term as well.

Martin, the only thing I’d add from a modeling standpoint is on the PAC business. We had very favorable mix with our high purity BE here in Q4 similar to what we experienced back in 2014 with that business. So don’t forget normal seasonality and the impact that has on the profitability in any given quarter. So we continue to make progress on the PAC recovery plan. We’re committed to hit the targets we’ve disclosed, but don’t forget about the favorable mix here in Q4 in PAC.

And when I think about overall value added sales reasonable to expect something in the mid single-digits growth for 2018?

As you know, we don’t spell out value added sales growth. We provide the EPS. But I think when you look at the general market trends, I would say mid single-digits could be a reasonable assumption. But I probably would -- I think I'd say we need to monitor the markets very, very closely here, lot's of ups and downs here. So we'll see how those -- we'll see how that turns out.

And if you could provide maybe a little bit of detail on your euro hedges and how recent strengths could impact the cost structure throughout 2018?

So as we enter into 2018, we are well hedged in accordance with our policy. So I would not anticipate any windfall benefit in '18 from our hedge because as you know, Martin, we layer those in 18 months prior. And so if the exchange rates stay where they are that benefit would only start to be realized in '19.

And any idea of ballpark on what type of benefit that is without the hedges?

That is just the -- so the hedges are online for just a couple of million dollars, after day's exchange rate. So your guess is good as mine were, it's going to be in '19 but that's where we are right now.

And one last one if I could. If you can discuss from a high level there may be what you're seeing regarding the base price trends for your products into 2018 versus 2017. And maybe qualitatively discuss your new product value added sales of those margins compared to the overall product margins?

So let me talk about maybe to start backward with your question. Our objective, as we introduce new products, is to of course improve on our profitability. And so I think in general what I would tell you is that we're focused on making sure that our new products are being introduced at equivalent or better margins than the products that they are replacing. We have an objective that to grow our profitability consistently year-over-year. And so the only way we can do that is if our new products are better than -- and probably than the prior products. So I would say that's our focus there. I think in terms of -- remind me your first question again.

So when you think about base prices across your products, I would imagine that you have some window to renegotiate those, as you move through the course of the year and annually, probably see some resets. Just curious if you're seeing any increases there?

What I can tell you is that I think on a pricing basis, I mean we are really focused quite a bit on pricing in general. I mean what we want to make sure is that we're getting the right value for the products and services that we're providing. So I wouldn't necessarily say that it's year-on-year more of a general base pricing increase. I think we're being very focused on each of our products that we're providing, and really looking at what is the pricing, what should the pricing be and then are there steps that we can take. But it is a very important part of our long term strategic growth.

Thank you. Our next question is coming from Edward Marshall of Sidoti and Company. Please go ahead.

I wanted to ask about just follow-on what just asked about pricing, I think about copper. And I know you've value added revenue. But I am curious, is there any margin benefit due to timing -- how that flows through this on a quarterly basis?

So we have eliminated any of the timing benefits or detriments, and it is a pure pass through based on our pricing agreements with our customers. As on the precious metals, very, very precise and on the copper, it is also a pure pass through, the lag time between coat and invoice is made up by the inventory turns themselves. So we have really mitigated the swings in profit margins from movements in copper, as well as precious metal. And that’s the main reason we disclosed the value added sales.

When I look at, just the other question I wanted to ask, no was the precision coatings. Jugal, I think you said double digit margin goal for that business and that’s great. Was that a goal for 2018 or is it further up?

No, I think our goal for 2018 for precision coatings just could be a double digit margins. So we like that business to reach those levels. As you know, we’ve had some challenges in that business on the top line with the product transition that was done on the metal side. I think that stabilized now. And we’re driving growth in other parts of that business. So the rest of the precision coatings business had I believe 8% growth in Q4 excluding the medical business. Overall in that business, we expect I would say modest growth despite some of the headwinds that we have had with the medical customer and transition. And our focus is to get that business healthy quickly.

Did you say modest growth in 2018 excluding or including the…

Including the product transition, we would expect modest growth in that business.

The PAC business was the largest variance for me. I know there is a few things going on, specifically what stands out is the other market line. Is that to be shipments?

Included in the other line is the hydroxide shipments as well as other end markets such as appliance and science.

And that is why I thought energy was a much larger business than what's showing up today. Have you seen that recovery? I know you’re in complicated drilling activity, but have you seen the pickup maybe in the ToughMet service related energy in that business right now?

Let me talk about ToughMet, in general. ToughMet in general is as we’ve talked before is a very strong growth product for us. We’re experiencing and we did experienced in '17 about 60% year-over-year increase in ToughMet sales in total. Of course, energy is a sub-segment of that. And then with regard to energy in particular, we did see improvement in '17 on energy. We’re cautiously optimistic that the improvement will continue coming into '18. But as we have indicated before, we are not expecting and counting on the -- I'll say the several years back '14, '13 timeframe levels like we build with the return that business to historical profitability levels. We want to make sure that we can do that, it would be cost improvements and overall general improvements to the business at the current type of levels. And certainly, as I said some modest recovery would help into '18.

There is one more point about classification I just like a final point point on. You mentioned government approvals within PAC. And do you sell to foreign governments, is that the government approvals you're waiting for and was there a large end there that got pushed through in the quarter just want to understand that?

So we were referring to the domestic market. And what we were talking about is as the transition happenned with the administration, there was a lot of appointments and lot of let's say things that needed to happen. So that orders could be freed up and issued to us. Aand as some of those things have happened during the year, some of those things came through into Q4 and we would expect that some of those will continue into '18, so that's what we’re really referring to is the change in the administration and the general transition that happens with new appointments and approvals.

Could you quantify maybe what orders in backlog are still awaiting approvals today?

No, I think that comment simply is as we look at our forecast and you referenced the miss to your forecast and we referenced the stronger performance in terms of mix in PAC. We were just more successful than we had forecasted I would say in getting some of those orders delivered -- released and then delivered into Q4.

Do you expect it to normailize now?

Yes, it will continue I would say to normalize. But as you're aware, because you've been following us for a while the high purity BE sales into the defense end market and science end markets are not smooth on a quarterly basis. So to the extent, it will smooth out it's all relative, I guess.

Thank you. Our next question is coming from Marco Rodriguez of Stonegate Capital Partners. Please go ahead.

Real quick, I was wondering on the EPS guidance for fiscal '18. Can you maybe quantify or help us understand the change in the tax laws? I mean how of a benefit that had for the EPS guidance into '18?

So our guidance in '18 has a range of 16% to 18% effective tax rate. If you compare to that to 2017, we were at approximately 20% effective tax rate on an adjusted basis. So when you think about it in EPS terms, there's probably about $0.05 benefit going '17 to '18 from the new tax laws.

Then shifting gears here, some high level questions here just from strategic standpoint. I know Jugal you’ve laid out in your first quarterly call in '17 some main points that you're trying to focus on from a strategic standpoint as far as operational commercial excellence and innovative products. And it sounds like especially the new product innovation has gone very well this fiscal year. I was wondering if maybe you could perhaps add a little more color to what sort of strategic initiatives you might be doing with the product people, the R&D people to drive that forward. And is there any set goal that you're trying to strive to have your VA sales, a certain percentage of them being new product sales?

So we would love to see our new product sales in the 15% to 20% range. I personally would love to see them of course go through the '20 and perhaps even beyond '20 as we march towards a higher growth business than what the business has traditionally been. With regard to I think goals and objectives and how we're working with the team, I think there's a couple of things I would highlight. One is our company has a good innovation culture, I would say. But what we’ve really added in with the innovation culture is the combination of the commercial culture. We want to make sure that the products and technologies that we’re developing, we’re really taking full advantage of getting out in the marketplace, not just with one customer but with many customers and not just with one market with many markets. So that’s really important aspect I think Marco of what we have focused on. We’re also focused on making sure that we’ve got a very laser like focus on some innovation applications, rather than maybe a bit of a scatter approach where we may have a lot of different things going on. And then not having the full focus and effort on the few key strategic ones. So I think channelling our innovation work towards key items, leveraging really our commercial excellence activity that we can combine that with. And then the other thing that we’ve really done is we’ve really put a very strong focus on regional growth. So we’ve recently appointed Head of Europe and Head of Asia and that we’ve tasked them with taking our innovation and really getting out to customers and markets in those regions, so we can push those. So I’d say there is a number of things that we’re pushing on the innovation front but then we’re doing that in the other fronts as well, whether it’s operational or other areas to set the business up for continued success in 2018 and the long-term growth both top and bottom line.

And then maybe if you could talk a little bit about the new hire that you have here that’s going to be driving this, I believe you called it a worldwide coordinated approach for sales and marketing. Can you maybe talk a little bit about that approach compare and contrast?

So what we’ve had, and I think it’s been a good effort by us is we really work towards sales and marketing in our three business segments, and approaching customers within those three business segments. And what we really focused on is leveraging of course those three business segments, but then pushing much more aggressively on a one Materion basis. And again, going back to my regional comment, particularly in Europe and Asia. We want to make sure that we can take some of our core key large customers and broaden our product portfolio with those customers rather than just being one-off type of customer base. So the commercial excellence umbrella and Neil Sater who we have hired, I mean Neil just bring just tremendous background in sales and marketing and business growth and we’re really pleased I think with the initial work that Neil has done and looking forward to pushing that ahead into 2018.

And when you mean also an coordinated approach with the sales team in the different areas have a similar approach or a certain strategy which they go their end markets any sort of color there?

So as we basically design our plan to win aspect for each of our customers, we want to make sure that we can leverage things that are going on within each of the businesses and that we can have a common consistent approach to those customer growth ,whether it’d be in Korea or China or Germany or here in the U.S. So a coordinated approach I think is for our company and for where we’re at. We believe will be much more a value add than maybe some of the approaches that we’ve had, I mean driving our topline. And again, going back from my innovation comment and then really working in conjunction with the innovation work that we’ve got going on.

Then last quick question here just on the balance sheet, the prior three quarters, it seems like you had some really healthy benefits to your cash flow from increases in payables and expenses. Can you maybe talk a little about that? Have some of the payment terms changed or is this just management of working capital any sort of color there?

So we have been pushing a little bit on the payment terms, but we can't take credit for all that. What causes the working capital movements to be inflated on the year is the acquisition of Heraeus. And so that increased both on the AR inventory side, because the purchase price was reduced as the cash flow flowed through working capital. The other thing I will tell you on the AP/AR side is on the annual incentive comps and stock based comp approvals that are all paid out at the end of the year. And so as our performance has improved that accrual has also increased. And then finally it’s just the timing of payroll payments in any given year or any given quarter will cause a little bit of fluctuations specifically in that accrual.

I mean obviously acquisitions mess up comparables year-over-year. So just trying to understand those two areas of working capital, going forward. Would you say that the turns you've seen at least from the last three quarters in those areas, would those be a normalized position that we should think through going forward into '18 and beyond?

So as you look at our working capital as a percentage of sales, we were successful in the year and actually improving the efficiency, and that's reflective in the AR/AP and inventory levels. And we would anticipate again incremental improvement as we head into '18. So again, the normal working capital investments to support the growth going forward offset by some efficiency improvements, is what I'd model.

Thank you. Our next question is coming from Phil Gibbs of KeyBanc Capital Markets. Please go ahead.

Had a couple of questions. I don't follow the Apple supply chain all that closely, but I was just noticing that there's been some volatility I guess in the iPhone X orders. And so I'm wondering if that at all is impeding the book to bill in the consumer electronics business right now as we move into the end of the first quarter, because I know the fourth quarter was pretty strong.

So Phil, first of all, I got to say that as you know we don't talk about specific customers and then their orders, we tend to work on an overall market level. So I'm not going to be able to comment specifically on what's going on with Apple or for that matter with other customers. But what I can tell you is that consumer electronics is a very seasonal activity, particularly for Q1, it's typically a very strong Q3, Q4 type of business and then Q1 tends to be a softer quarter, in general for consumer electronics. So I think that's probably what I would say you're noticing for Q1. And then we would expect that we would get back to our normal order rates as the year progresses.

And Joe, any color you could provide us on the hydroxide sales in the fourth quarter and what the expectations are for '18. I think I was coming up with something around $5 million?

Yes, so they're approximately $5 million in the fourth quarter. And again, as we look '17 to '18 based on the contracts and the minimum order quantities, at a minimum it'll be flat year-over-year with the potential upside if more volume is required.

And then can you explain a bit about the mine level CapEx, I think you had said that was $5 million to $10 million. I know it was a big slug a couple of years ago and we put that on hold. And so what is that $5 million to $10 million give you in terms of what the spend is on?

So the $5 million to $10 million spend on mining development is the complete opening of portion of the pit that was started as you referenced several years ago. And so as we remove the overburden that is then capitalized as mine development and when the ore is removed, we have the offsetting amortization. So that $5 million to $10 million is because we are completing the ore removal from the other pits, and we are moving on to removing overburden to open -- to finish opening that pit that we started several years ago. I would anticipate that that amount of capital would complete this section of the pit and then allow us to begin mining it by the end of the year.

And then on the outlook for defense, I know the budget was increased. I would assume that would be good for you at some point in time. So one, what was the outlook for you maybe prior to this, and then what could this increase in budget provide you as the year goes on as we move into call it the next couple of years from a project standpoint in terms of what got funded? Thanks.

So first of all, I think defense is one of the markets that we believe that as the work in the administration continues to happen, we think that 2018 will be a favorable year for us and overall in the defense market. With regard to the budget, changes that have happened, those changes as you could imagine they'll take some time and we'll have to further understand exactly where the monies are going and how that impacts the various programs on the defense side and then what the trickledown effect of that ends up being to us. But we would expect that -- I don't really expect much of that to impact 2018. I would see that beyond 2018. And as we get more color and better understanding of what that may mean, I am sure we'll be sharing that with you guys.

Thanks Jugal and team, apprecite it.

Okay, thanks Phil. Edard, do we have any other questions?

No we do not.

Okay great. So let me maybe close out with just some quick comments and then I'll turn it over to Steve. So team, I just wanted to wrap up and say we’re able to close out the year very strong in Q4, that's four consecutive quarters of top line and bottom line growth. We have good momentum going into '18 and of course we're positioned to take that momentum there, and execute on it and deliver what we expect would be a good year for '18 with 18% year-over-year EPS improvement at the midpoint number that we've communicated. So with that, I’m going to turn it over to Steve.

Thank you, Jugal. This is Steven Shamrock and this concludes our fourth quarter 2017 earnings call. A recorded playback of this call will be available on the Company’s Web site, materion.com. We would like to thank all of 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 number is 216-383-4010. Thank you very much.

Ladies and gentlemen, thank you for participation. This concludes today’s conference. You may disconnect your lines at this time. And have a wonderful day.