Materion Corporation (NYSE:MTRN) Q2 2025 Earnings Call Transcript

Materion Corporation (NYSE:MTRN) Q2 2025 Earnings Call Transcript July 30, 2025

Materion Corporation beats earnings expectations. Reported EPS is $1.2, expectations were $1.18.

Operator: Greetings. Welcome to the Materion Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host. Kyle Kelleher, Director of Investor Relations and Corporate FP&A. You may begin.

Kyle Kelleher: Good morning, and thank you for joining us on our second quarter 2025 earnings conference call. This is Kyle Kelleher, Director, Investor Relations and Corporate FP&A. Before we begin our remarks this morning, I would like to point out that we have posted materials on the company’s website that we will reference as part of today’s review of the quarterly results. You can also access the materials through the download feature on the earnings call webcast link. With me today is Jugal Vijayvargiya, President and Chief Executive Officer; and Shelly Chadwick, Vice President and Chief Financial Officer. Our format for today’s conference call is as follows. Jugal will provide opening comments on the quarter. Following Jugal, Shelly will review the detailed financial results for the quarter in addition to discussing expectations for the remainder of 2025.

We will then open up the call for questions. Let me remind investors that any forward-looking statements made in the presentation, including those in the outlook section and during the question-and-answer portion are based on current expectations. The company’s actual performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings call press release issued this morning. Additionally, comments regarding earnings before interest, taxes, depreciation, depletion and amortization, net income and earnings per share reflect the adjusted GAAP numbers shown in attachments 4 through 9 in this morning’s press release. The adjustments are made in the prior year period for comparative purposes and remove special items, noncash charges and certain discrete income tax adjustments.

And now I’ll turn over the call to Jugal for his comments.

Jugal K. Vijayvargiya: Thank you, Kyle, and welcome, everyone. It’s a pleasure to be with you today to discuss our second quarter results and provide an update on our outlook for the remainder of 2025. Our business performed very well in the quarter, delivering record second quarter margins and strong free cash flow. Although sales were down 2% organically, we experienced solid growth in aerospace and defense and energy as well as in semiconductor outside of China. EBITDA was strong at $56 million, and we continue to deliver margins above 20% despite some pockets of softness still moving through our top line. I am particularly proud of our Electronic Materials team as they delivered an all-time high EBITDA margin of 23.4%, demonstrating the power of the work that has been done to optimize the cost structure and improve operational efficiencies in that segment.

We have reached a new level of performance with EM, and I expect the business to deliver very good margin expansion for the full year. Precision Optics also showed a significant improvement in the second quarter as the transformation continues. Sales improved 14% sequentially, and EBITDA increased more than $2 million, marking the second consecutive quarter of improvement. Beyond the cost structure improvements that have been implemented, the business is making excellent progress on new business initiatives that should begin contributing by the end of the year. As we have discussed over the last few quarters, cash flow generation remains a key focus for us as evidenced by our Q2 results. We generated $36 million in free cash flow, the strongest we’ve seen in any second quarter.

Our disciplined approach to managing working capital and pacing capital investments is driving the performance. Earlier this month, we acquired the manufacturing assets for tantalum solutions from Konasol, a Korean manufacturer serving the semiconductor and adjacent markets. This acquisition expands our semiconductor footprint in Asia, allowing us to better serve the large Tier 1 chip manufacturers in that region and in-source more of the target manufacturing value chain. This move expands our position as a leading global supplier of deposition materials. The integration is progressing well, and we have begun producing samples for customer qualifications. While the results for the quarter were very strong, what is perhaps more encouraging are many positive signs we’re seeing in order rates, signaling promising momentum as we move through the back half of ’25 and into ’26.

As the broader semiconductor market is showing signs of improvement with wafer starts up and customer inventories coming in line, our order rates are improving, especially within data storage, power and communication devices. Sequentially, our order rates improved double digit, excluding China, where the customers are still showing tariff-related hesitancy. Defense is an area that is getting a significant amount of attention globally, and this is leading to many new opportunities for Materion. Our pipeline of new business opportunities is rapidly accelerating with over $100 million of request for quotation received in the second quarter alone. In the first half of ’25, we saw record bookings of $75 million, and our initiative to grow our defense business outside the U.S. has resulted in a 60% year-on-year sales increase.

I expect the pace of defense-related activity will continue picking up for the back half of the year. In space, we continue to win new applications and expand our reach. Our order backlog has more than doubled in the last year, and we recently won a new application for ground station equipment with a leading U.S. space customer. Leveraging our larger space propulsion systems win in the U.S., we also secured an order for the same application for the customer in Europe. I also want to highlight our business activity in the energy end market. Our sales are up 28% year-on-year for the first half of ’25 as we are growing new and existing business to meet the world’s increasing energy demands. We have a particular focus on initiatives in new energy where our first half sales have exceeded the full year sales of 2024.

As our business is well aligned to this global megatrend, we expect this area to be a growth driver for the company for the foreseeable future. When we released our first quarter earnings in late April, there was considerable uncertainty surrounding the tariff environment, which we noted as a qualifier to our guidance. While much remains to be finalized, we are more confident affirming our initial full year earnings guide despite the risk that remains. Thanks to our strong year-to-date performance, new business wins and the increased order activity we are seeing. I would like to thank our global team for their unwavering commitment to driving our business forward while navigating the current environment. Now let me turn the call over to Shelly to cover more details on the financials.

Shelly M. Chadwick: Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website this morning, starting on Slide 10. In the second quarter, value-added sales, which exclude the impact of pass-through precious metal costs, were $269 million, down 2% organically from prior year and up 4% sequentially. This year-over-year slight decrease was largely driven by lower precision clad strip shipments and semiconductor demand from China. Excluding the impact of these items, value-added sales would have been up 2% versus the prior year. Strength in aerospace and defense, energy and semiconductor sales outside of China are driving the year- over-year sales increase. When looking at earnings per share, we delivered quarterly adjusted earnings of $1.37, down 4% from prior year, but up 21% sequentially.

Moving to Slide 11. Adjusted EBITDA was $55.8 million or a second quarter record of 20.8% of value-added sales, down 3% year- over-year with 10 basis points of margin expansion despite the lower volume. This decrease was driven by lower volume, partially offset by strong operational performance and structural cost improvements. Favorable pricing was realized in the quarter, offsetting unfavorable mix from hydroxide shipment timing. Moving to Slide 12. Let me review second quarter performance by business segment. Starting with Performance Materials, value- added sales were $168.5 million, down 3% year-over-year, but up 5% sequentially. The year-over-year decrease was driven primarily by lower precision clad strip shipments as the expected inventory correction continues.

Excluding precision clad strip, sales were up 3%, driven by strength in energy and aerospace and defense. Adjusted EBITDA was $41.5 million or 24.6% of value-added sales, down 4% compared to the prior year period. This decrease was driven by lower volume and unfavorable mix, partially offset by strong operational performance. Looking out to the second half of 2025, we expect to see continued strength across the aerospace and defense and energy end markets. In addition to higher volume, we expect to see continued strong operational performance and cost management. Now turning to Electronic Materials on Slide 13. Value-added sales were $76.1 million, down 6% from the prior year, driven by lower semiconductor sales to China. Excluding this impact, the remainder of the semiconductor market was up 6% from prior year, signaling market strength with improving demand across many subsectors.

EBITDA, excluding special items, was $17.8 million or a record 23.4% of value-added sales in the quarter, up 4% from the prior year with 230 basis points of margin expansion. This record margin and year-over-year increase was driven by continued operational performance, including the impact of our cost improvement initiatives and strong price mix despite lower volume. As we look out to the remainder of the year, we expect the semiconductor market to improve in the second half and continue the momentum seen during the quarter. While some uncertainty remains around our semiconductor sales to customers in China, we are confident that our balanced and global semi portfolio will help offset some softness there. And as demonstrated so far this year, we expect to deliver considerable margin expansion as demand increases and the impact of our improved cost structure takes hold.

Turning to the Precision Optics segment on Slide 14. Value-added sales were $24.4 million, down 5% compared to the prior year and up 14% sequentially. The year-over-year decrease was driven largely by order timing in the defense market. EBITDA, excluding special items, was $2.2 million or 9% of value-added sales in the quarter, approaching double-digit margins with 950 basis points of sequential improvement. The increase was driven by improving performance and the impact of the structural cost changes. This quarter brings the second consecutive quarter of improved results, and we expect to continue this trend as new business initiatives advance and we continue to improve our business performance. Moving now to cash, debt and liquidity on Slide 15.

We ended the quarter with a net debt position of approximately $413 million and approximately $257 million of available capacity on the company’s existing credit facility. Our leverage remains below 2x as cash flow generation is an important focus. We delivered approximately $36 million of free cash flow during the quarter, bringing our year- to-date conversion to more than 70% of adjusted net income. While continuing to invest organically, we also repaid $26 million of debt and repurchased 100,000 shares at an average of $78 per share, further demonstrating our balanced and disciplined approach to capital allocation. As we look out to the remainder of the year, we are well on our way to deliver free cash flow that exceeds 70% of adjusted net income with strong first half cash generation and second half cash initiatives on track.

Lastly, let me transition to Slide 16 and address the full year 2025. We are pleased with our business performance in the first half of the year, having delivered strong results despite a volatile macro environment, and we are encouraged by improving market dynamics and new business opportunities won as we look to the second half of the year. With that, we expect Q3 will be similar to slightly better than Q2 and we are on track to deliver a strong Q4 with improving demand and the timing of defense shipments. As a result, we are affirming our initial guide of $5.30 to $5.70 adjusted earnings per share for the full year. This concludes our prepared remarks. We will now open the line for questions.

Operator: [Operator Instructions] And the first question today is coming from Phil Gibbs from KeyBanc Capital.

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