Materion Corp (MTRN) 2014 Q1 法說會逐字稿

Greetings, and welcome to the Materion Corporation first-quarter 2014 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.

I would now like to turn the conference over to your host, Mr. Mike Hasychak, Vice President, Treasurer, and Secretary for Materion Corporation. Thank you. Sir, 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, Joe Kelley, Vice President of Finance, and Jim Marrotte, Vice President and Corporate Controller.

Our format for today's conference call is as follows - John Grampa and Joe Kelley will comment on the first quarter 2014 results and the outlook, and Dick Hipple will provide additional commentary. Thereafter, we will open up the teleconference call for your questions.

A recorded playback of this call will be available until May 9th, by dialing area code 877, the number is 660-6853, or you can dial area code 201, and the number is 612-7415. Conference ID number is 13579692. 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 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 issued this morning.

And now, I'll turn it over to John Grampa for comments.

Thank you, Mike, and good morning everybody. Thanks for taking the time to join us today.

Today's agenda will be a little different from that of our past calls. Joe Kelley, our Vice President of Finance, will review the financial results for the quarter, then I will return and review the outlook. Following my comments, Dick Hipple will review the states of our key markets and provide his perspective on certain specific key new product initiatives, as well as other developments. Following Dick, we will open the call for your questions. Joe.

Thank you, John. I will cover first quarter sales, margins, and earnings. I will then review the key changes in business levels by key markets, comparing the first quarter of 2014 to the first quarter of the prior year, and sequentially compared to the fourth quarter of 2013. I will also make some brief comments on the balance sheet and cash flow.

Looking at our first quarter 2014 financial performance, sales for the quarter were $258.9 million, down $40.3 million, or 13% from first quarter 2013 levels, driven primarily by changes in precious metal market pricing. Value-added sales for the first quarter were $144.9 million, down only 4% below the prior year first-quarter valued-added sales.

The year-over-year decline in value-added sales is attributable to lower volumes related to severe weather conditions at our facilities and our customers' facilities, inventory de-stocking in the automotive supply chain and lower shipment volumes by a hydroxide. This later factor is due to the fact that hydroxide shipments to our one hydroxide customer are now quarterly versus semiannually in the prior years.

Gross margin in the first quarter was $45.5 million, down 6% from the prior year first-quarter gross margin of $48.3 million. Gross margin expressed as a percentage of value-added sales was 31.4% in the quarter, in line with prior-year margins of 32%.

Improved product mix and manufacturing efficiencies plus reduced costs related to the Company's facility consolidation efforts resulted in comparable profit margins year over year, despite the lower volume in the quarter.

We are clearly starting to see the financial benefit from our facility closure and product line rationalization efforts. Plus, we are seeing improved productivity at the Company's beryllium pebble plant. During the quarter, the pebble plant achieved approximately 75% of its targeted end-of-year 2014 output rate and is on track to meet or exceed 85% of the forecasted end-of-year production efficiency levels in the second quarter.

On the facility closure and product line rationalization front, the vast majority of the work is complete and the Company is well on its way to achieving the identified $0.30 per share targeted annual cost reduction benefit.

In addition to permanently lowering our cost structure, this facility reorganization is enabling us to better serve our customers and markets. One example of this benefit is visible in our microelectronic packaging product line. We relocated the production of this product from the US to Asia during 2013, in an effort to consolidate our operations and to be closer to our customers.

The sales and profit margins generated from this product line in Q1 2014, are exceeding targeted levels, and we are well positioned to leverage our expanded Asian manufacturing footprint to capture additional market share in the region.

Operating profit for the first quarter of 2014, was $11.1 million, or 7.6% of value-added sales. This included a net benefit of $2 million associated with the facility consolidation efforts, as the Company recorded approximately $600,000 of consolidation expenses, offset by a $2.6 million gain on the sale of related assets. Excluding this net benefit, adjusted operating profit was $9.1 million, 4.6%, or $400,000, below prior year Q1 levels.

Adjusted operating profit margin expressed as a percentage of value-added sales was 6.3% in the quarter. In spite of the lower volumes, first-quarter operating profit margin expanded 110 basis points ahead of full-year 2013 levels on the same adjusted basis.

Looking at the profitability of the segments, you see a mixed bag. Advanced Material Technologies and Beryllium and Composites profit margins are improving nicely. AMT operating profit margin on an adjusted basis expanded to 8.6% of value-added sales. This is 370 basis points above prior year levels as we realize the benefits for the facility closure and product line rationalization efforts.

Beryllium and Composites operating profit margin expanded to 7.1% of sales, compared to negative margins in the prior year, as the pebble plant production is ramping up to targeted levels and product mix is improving.

Offsetting these meaningful and sustainable improvements in margins, the first-quarter profit margins of Alloy and Technical Materials were well below typical levels. Alloy margins were negatively impacted in the quarter by the change in order pattern of its hydroxide customer and the severe weather issues. Technical Materials' quarterly profitability was heavily impacted by the de-stocking of the automotive electronics supply chain.

We view these factors which negatively impacted margins in the quarter, to be temporary in nature and should not be factors in the second quarter.

Net income for the first quarter was $7.3 million, up 8% from prior-year level. And EPS was $0.35 per share. Adjusted for the net benefit of facility closure cost and related asset disposal gain, net income was $6 million, or $0.29 per share. This is well ahead of the previously provided guidance of $0.20 to $0.25 per share, and ahead of consensus Street estimate.

The better-than-guidance EPS performance was driven by stronger demand levels in the latter part of Q1 and better-than-anticipated product mix.

Turning now to value-added sales by end market. When comparing the prior-year levels, value-added sales were down approximately 4%, and compared sequentially to the fourth quarter of 2013 were down 8%. As previously referenced, abnormally severe weather in the quarter negatively impacted value-added sales, as did the automotive electronics de-stocking, continued defense sequestration, and lower hydroxide shipments.

That said, from an end-market perspective, when comparing the first quarter of the prior year, value-added sales were higher by 5% in our largest end market, consumer electronics. Shipments into energy applications were up 16%. However, value-added sales in defense decreased 25%. Telecom infrastructure decreased 17%, and automotive electronics decreased 15%. Both medical and industrial components decreased 10%.

Comparing value-added sales in the first quarter sequentially to the fourth quarter of 2013, business levels were relatively flat in consumer electronics and automotive electronics, while value-added sales into defense were down 39%, energy was down 18%, and medical was down 13%.

The meaningful decrease in defense value-added sales, which today account for approximately 5% to 10% of our consolidated value-added sales, is primarily related to the ongoing effects of the cutbacks in government programs that began in early 2012.

Finally, let's look at the balance sheet and cash flow. The Company began and ended Q1 2014 with a very strong balance sheet, ending the quarter with $19.3 million in cash and $73.6 million in net debt.

The Company's balance sheet and its cash flow provided the flexibility to return approximately $31 million of cash to shareholders in the form of a regular quarterly dividend and opportunistic share repurchases. During the first quarter, $1.6 million of cash was returned to shareholders in the form of dividends and $1.5 million was returned in the form of share repurchases. A total of approximately 51,000 shares were repurchased during the quarter at an average price of just below $29 per share.

The Company's cash flow from operations in the first quarter was fairly typical due to seasonal and other operating factors. We fully anticipate meaningful positive free cash flow from operations as we go through the remainder of 2014.

This concludes the review of our Q1 financial performance, and I would now like to turn the call back to John, who will review our outlook for the remainder of the year.

Thank you, Joe. The first quarter was an encouraging quarter. While value-added sales volumes were lower when comparing to both the same quarter of the prior year and sequentially to the fourth quarter of 2013, this was anticipated in the guidance that we provided for the first quarter and was due to the factors that Joe just described.

While it's difficult to get a good read on demand levels and how markets in general are developing, we are optimistic, albeit cautiously optimistic, about how 2014 is unfolding at this time.

There were several favorable developments in the first quarter that support our optimism. Order levels were solid and improving. The cost reduction and product line rationalization initiatives taken during 2013, are delivering the anticipated benefit. And the beryllium pebble plant is operating at targeted production levels and efficiency rates.

In addition, as we entered the second quarter, order levels continue to improve. Over the past 10 weeks, order entry is up by over 10% when comparing to the same 10 weeks of the prior year. Business levels in consumer electronics continue to improve, and areas that were weaker in the first quarter are also appearing to gain momentum. Specifically, automotive electronics and telecommunications infrastructure now appear to be gaining some traction as well.

In addition, the items that Joe described, the tempered margins in the first quarter, should not be factors in the second quarter, thus, both value-added sales and margins should improve nicely beginning with the second quarter.

In addition to the progress in these areas, subsequent to the end of the first quarter, the Company reached a settlement with its insurance carrier related to the claim for the silver theft that occurred at our Albuquerque, New Mexico facility during 2012. We received a cash settlement of approximately $6.8 million. This settlement will favorably affect second quarter and full year by approximately $0.20 per share.

As we noted in the press release, our guidance for 2014 is intact. Results on a GAAP basis, including the insurance settlement and the first quarter costs-related to the facility closing, net of the benefits of the related asset sale, are, at this time, expected to be in the range of $2.02 to $2.22 per share.

Earnings for the full year 2014, excluding these two factors, are expected to be in the range of $1.75 to $1.95 per share, consistent with our previous guidance.

Finally, for your modeling purposes, we expect free cash flow for the year to be in the range of $60 million. We expect a tax rate of approximately 30%. We're looking for capital spending to be in the area $35 million, and depreciation and amortization of approximately $45 million.

That concludes my remarks. I'll now turn the call over to Dick Hipple.

Thank you, John. During the last year, I've often commented on the heavy lifting we had to do to improve performance and reposition the Company for profitable growth. There was a lot of smoke on the battlefield that I indicated would begin to clear as we moved into 2014. And our first-quarter results were an important first step of the smoke clearing, and I expect further earnings improvement as we move through the balance of 2014.

We are now capturing our restructuring savings, and our pebble plant continues to meet our ongoing higher production targets. And, we have seen a nice lift in our order rate as compared to last year's level.

The lift in business is general in nature, including in the markets that were the weakest coming into 2014, such as in the automotive inventory adjustment we saw in the first quarter. Some of this lift may be a rebound from the negative supply chain effects of the weather-related shipment delays and factory outages that we did incur in the first quarter.

All-in-all, three of our eight key markets were stronger in the first quarter than last year, and we expect seven of the eight to be stronger in the second quarter, only defense will be weaker.

Our global macro conditions do not seem to be particularly robust as scene in the fairly soft PMI trends across the globe. We are seeing an improving demand environment bolstered by our new product pipeline.

We've positioned ourselves well with applications in markets that we expect will support our greater-than-GDP forecast.

During the quarter, we continue to ramp several products that we invested in during 2013, and I'll comment further on a few examples. We were qualified last year and are now entrenched in the supply chain in our Optics Division in Shanghai for gesture-control for gaming devices. This technology is expected to provide a multi-year growth platform.

Another example, also in Optics, is that at the end of last year we completed an investment in our facility in western Massachusetts focused on wafer-level processing. This provides a new lower-cost platform for our customers to expand the application of IR technology in non-defense applications. The technology has been well received and we are now ramping sales.

We also continue to invest in new capability at our Milwaukee facility to support increasing demands for our unique phosphor precursor materials four high-intensity LED. Our investment in additional ToughMet alloy capacity last year at Elmore, Ohio, was also well timed, as we had another record year of production and need the additional capacity to support our new product introductions in numerous markets like oil and gas, commercial aerospace, and consumer electronics.

Two new products are well underway in our Beryllium and Composites Division, which includes our new Investment Castings Product, which is undergoing qualification with Lockheed Martin for the F35, and liquid metal and amorphous metal, which is under qualification in several markets and applications.

We have also begun our expansion of production capability at our hydroxide processing plant in Utah, to prepare for the expected change in supply/demand dynamics over the next several years.

Our proprietary-advanced battery connector technology for electric and hybrid batteries from our Technical Materials Operation in Lincoln, Rhode Island, is finding its way into a broad range of customers, and we expect good growth in the second half of 2014, and beyond.

We are also in the midst of numerous new product qualifications in our medical roll-to-roll business in Windsor, Connecticut that focuses on diabetes or blood glucose test strips. The product, currently primarily uses gold, so many initiatives are underway in platinum and palladium to provide lower-cost products.

In summary, at Materion, we are focused on growth opportunities driven by unique technologies and materials positioned in good growth markets. I am confident that you will be seeing the results of the initiatives this year and over the next several years.

Operator, we will now take questions.

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) One moment, please, while we poll for questions. Edward Marshall, Sidoti and Company.

So I'd like to start at the revenue line, if I could. I'm wondering, you mentioned several different things that impacted the quarter, de-stocking, weather, hydroxide shipments. I assume the hydroxide shipments will be an ongoing kind of, call it headwind, if you will, but just not on an annual basis, but on a quarterly basis.

I'm just curious, can you list in the order of priority or maybe the largest impact by, what was the largest impact and what was the smallest impact? And if you could quantify the different buckets there, that'd be great?

Sure, Ed. This is John Grampa. First, the hydroxide shipment situation, that is not a headwind. That is the demand level being shipped in 4 quarters as opposed to semiannually as it was in prior years. This is something that the customer wanted, and it works best for us for supply chain dynamics and production dynamics as well.

So that had an impact on the first quarter because in the prior year we had a full shipment in the first and fourth quarters, I believe, as opposed to now, we're going to have about equal shipments in each quarter of the year. So the demand level there is still approximately $15 million to $20 million a year, but now spread between quarters.

The dynamics of the automotive electronics de-stocking and the weather-related factors, they both affected value-added sales by about $2.5 million each in the quarter. So for those two items, it's about a $5 million decrease versus prior year.

And then defense sequestration and the change in hydroxide shipment pattern are each worth about $3 million in value-added sales in terms of how it affected the first quarter.

So, therefore, while we were down $6.5 million year over year in value-added sales, those factors actually hurt us by about $11 million. So the across out other businesses in general, across the other markets, we're, therefore, up about 3% year over year.

I see.

Hopefully that helps you.

Yes, it does. Now, you said defense sequestration. What was the second item of that that was also a $3 million impact?

The hydroxide shipment impact.

Hydroxide shipment. Now, does that imply that you'll be -- I'm just annualizing that number - it's going to be $12 million. Did you say the number was $15 million to $20 million last year?

No, no. No, no. Last year -- it will be about -- last year it was $15 million to $20 million, I believe, unless I have a bad number. No, I'm being --

It's a little high.

-- corrected here.

It's a little high. It was about $12 million.

You're correct, it is $12 million.

$12 million, okay. And so, and for 2Q -- and basically [with] 2Q, 3Q, we should see that impact reverse, so we should see about $3 million in each of the two quarters, is that about roughly --

That's correct.

-- the way I should be thinking about it?

That's correct. Yes.

Okay. Now, if I wanted to --

Yes, that's correct.

Okay. If I want to get to the Advanced Materials segment, if I could, and obviously the margin was eye-opening, I assume that the -- was it a $3 million asset gain that was in there that's on the cash flow statement that ran through that segment? And what results --

The --

Go ahead.

The gain on sale of the asset was $2.6 million. And then offsetting that, we incurred in the quarter $600,000 of consolidation expense that fell over from our Q4 efforts.

Okay. And so, the question I have is, the -- that still looks like a pretty decent margin. What was the rest of -- you had a restructuring benefit anticipated at $0.30 for 2014. You said you recognized --

Yes. Let me give you --

Yes.

Yes, let me give you a little GAAP analysis on that for you, because I think that that's really important. It's a great question.

The gain on the sale of the assets net of the restructuring costs that we incurred in the first quarter, was approximately $2 million dollars of OP improvement. The restructuring savings was just over $3 million in the quarter.

And the impact of the lower value-added sales, therefore, if you add those two numbers together, your above the OP reported for the quarter. So the impact of the lower value-added sales in that quarter and other business factors, approximately $1 million.

Okay. And then if we could just hop on down to the pebble plant. And I appreciate the kind of -- the analysis on the percent shipped in the quarter. And I'm just kind of curious if we can kind of talk about maybe the goal that you have, the projected goal this year. And I don't know if you want to quantify it or even add some material for me to understand.

But can you maybe talk about the year-over-year growth that you anticipate in what was shipped last year versus the target goal that shipped this year, and see if I can kind of work back into the profitability ranges for that?

I think the best way to think about it is not so much in terms of the volume itself because you have significant movement that will occur in individual products inside that business.

We're on target for the 3 to -- I think we said $4 million to $5 million year-over-year improvement in profit in that business. It's probably on the high end of that range at this point in time. We had losses last year. We'll have profits this year.

Okay. But, can I -- can we talk about maybe, though, the production shipments out of that? I mean, I guess some of that could also be mixed. But if I can kind of look at that from -- I understand you have, what? I don't want to say unlimited capacity. But you don't anticipate that you filled the capacity in that facility, if I'm correct.

How much more upside, as we look into 2015, could you see out of the pebble plant? And I'm just kind of curious about maybe 2014 over 2013. I mean, are you doubling the amount of shipments that are coming out? Just kind of a growth estimate for that.

I guess, we talk a lot about the pebbles plant in terms of production volume. But there are other supplies for the shipment side. So from a production standpoint, we are anticipating a meaningful 20 percent-plus increase in production at the pebbles plant itself.

And so do you assume that the Beryllium and Composite segment itself could be up 20%? Is there pricing involved in that? Is there something offsetting maybe that's also running through the beryllium mill itself that could slow that number down? Just kind of help me figure that out.

The pebble plant produces the raw material, the beryllium in the form that we need to manufacture our products. What it is doing for us is allowing us a more continuous and stable and cost-effective supply of material and it avoids us having to go out to the outside world to buy materials to fill our needs. It also allows us to schedule our plants and our operations more efficiently.

So what's we are going to get on top of this continuous supply to meet the expanded need, is a more stable and consistent cost basis. As we also improve the output of the plant and get more comfortable with the equipment, we will improve efficiencies and the cost per pound.

So it is difficult to relate the output of the plant to the end sales, because we do have [the] sales that's driven by our demand in the marketplace, but it allows us to meet that demand internally as opposed to going to external [forces].

Okay.

And we've also had some supply chain interruption. So the way I look at it is, it's probably interrupted our capacity to ship by 5% to 10%. In other words, [that] maybe shipments that we've missed that we should have had because we just didn't have a stable supply chain through the system.

And with the pebble plant up and running, that gives us, we're not going to make any missed shipments here. So there's kind of a latent ability for us to ship faster and provide shipments to customers that need things right away that maybe otherwise we weren't able to do before.

So it's -- Jim's right. It's basically a stable supply chain situation that we have that drives for lower costs, lower inventories, and improved profitability, and somewhat higher shipments that we'll be able to make.

Now, to your other point, our actual capacity, we'll still have latent capacity that's much higher, that should certain markets develop, that we can certainly ship another 30%, 40% of material.

Okay. And then if I look just maybe on the sequential margin of that business, and assuming that you're going to be producing more and more to target on an ongoing basis, it sounds like. Is this the base case for -- base run rate number for 2014? You would assume that you'd build on this number from a sequential basis? Or is there something else that was in there as a positive or and negative that I should be aware of?

I think that the first-quarter numbers I would not build on sequentially. Demand levels in this particular segment will find lower shipments in the second quarter than in the first, again because of the chunky nature of the business that it is.

From a aggressive perspective looking at margins year over year, we certainly should see -- well, obviously we had negative margins last year. But we should see ourselves well ahead of, for the year in total, well ahead of where we're at presently. We probably should see operating profits as a percent of [VA] there, begin to climb toward the double digits as the year progresses. But for the year on average, we're still going to be probably in that 6% to 7% range?

Okay. Thank you very much -- and one last question. I'm sorry. You said, didn't you say $3 million to $5 million of improvement year over -- or $4 million to $5 million of improvement [in] operating profit year over year?

Yes.

That would imply roughly $1.5 million at the high end of profit in the year. And did you say that you were expecting 7% margins on the blended rate for the year?

Yes.

I don't know does the math work? Am I missing something? Because that gets you $1.5 million in profit for the --

No, you've got.

-- for the year, which I assumed is --

Ed, I don't know how to reconcile that while we're here on the phone. But you've got to assume, based on what Dick said, you're also going to have some improved VA.

Okay. All right.

You have a shipment impact as well.

Okay. We can circle back to that later. Okay. Thanks, guys.

Avinash Kant, D.A. Davidson.

A few questions. The first one was that you were talking about operating margin and relative to the last year what was the decline or increase in various segments. I don't think we got the numbers on the Performance Alloy and Technical Materials. Do he have those numbers?

Yes. Performance Alloy operating profit as a percentage of VA in the quarter, was 6.5% and Technical Materials was 2.0%. So as I referenced in my comments, those were down from the typical levels in those business associated specifically with the hydroxide issue and weather, as you look at performance alloy and then associate it with the automotive de-stocking, that impacted Technical Materials.

Perfect. And also, talking about pebble plant a little bit, are you in a position to give us some idea in terms of what percentage of production at the pebble plant is right now being used for internal sales and how much is going to external sources?

It's 100% self-consumed.

100% self-consumed, right. So what we're trying to understand, and, Dick and John, maybe you can help, is that as the production at the pebble plant continues to ramp, what kind of margin improvement should be expected? And any metric on the utilization goes from like 50% to 75%? This is the kind of improvement in margin that particular segment can expect. Any reference to that will be helpful.

Again, I don't think we could give you a reference to that, because, as Joe indicated, you have, from period to period, you have chunky volumes in this business. As you know, we have a -- we have lumpy, lumpy sizable orders that can move from period to period.

So production levels, while they may be smooth throughout the period, margins, from period to period, can move around significantly. So I don't think you can bridge the two.

I think it's best to reflect the overall macro, which is given that in the prior year demand levels were not met because of the inability to produce enough material, have some increase in demand levels year over year, order of magnitude, I would say minimum of, let's say $5 million, and then you have the benefit of the increasing production levels getting to our targeted levels by the end of the year, and that should give us a $4 million to $5 million year-over-year segment OP improvement. I think that's the best way to think about it.

$4 million to $5 million, right. So basically, another way I was thinking of that, if you were to -- or going (inaudible), if you were not supplying from the pebble plant, started to be the way you were trying to procure it from outside sources versus now you producing this at the pebble plant, assuming the revenue levels are exactly the same, what kind of margin improvement are you seeing? You can put that in [quantity].

That is kind of difficult to assess because of the -- not only the what goes on in the marketplace or the cost of the beryllium, but it's also the availability of the beryllium from external sources which is not always there. It's not always a consistent supply.

So are you hinting at the fact that your procurement prices were failing quite a bit because of the market conditions when you [are] acquiring it from outside sources?

Yes. Yes, that's correct.

Exactly.

What was the order variation, 20%, 25%? Any idea? I'm talking with range of fluctuation, over the past 5 years you can assume.

Over the past 5 years, it was actually over 50%, probably 50% to 75% variation in the purchase price, easily.

That gives us some idea, 50% to 75%. Okay. Perfect. Now, one other question, most likely for John. In terms of the R&D and SG&A, like the cost, how should we think of the rest of the year? We kind of have some idea of earnings. But should it really much? Or, at least the linearity through the rest of the 3 quarters, how should we think of it?

When you think about our SG&A and our R&D, I think we'll take them piece by piece. On the SG&A, we are seeing a lot of our cost savings associated with some of the restructuring initiatives here in the first quarter. And so that should be flat to up, with inflation.

And then on the R&D side, I think we have some strategic initiatives to continue and invest in this area. So that should grow as you go forward.

But basically, as we said in our comments, a lot of the savings associated with the restructuring actions, you are seeing impacting SG&A, once you adjust for the restructuring costs incurred in the quarter already in Q1.

Already in Q1, right?

Yes.

So from the cost savings perspective, we are already at the baseline. Is that what -- and then from here on, depending upon the revenue growth, things will vary. Is that what you're saying?

Yes. But I would caution you that as we go throughout the year, some of these savings associated with these facility consolidation and product like rationalization, some of the cost savings we started to realize a little bit Q2, Q3, and more in Q4 last year. So the year-over-year benefit will start to diminish to get them to the 30% share that we've referenced.

Perfect. Thank you so much.

Luke Folta, Jefferies.

First question looks like, seems like you've raised your free cash flow guidance. Any thoughts on what you might be expecting to do with that cash this year?

Sure. Obviously, if you look at the balance sheet, you'll see that we have some debt yet to pay down. So the cash will be first supplied to debt. And then, consistent with our past discussions regarding our overall capital allocation strategy, we'll fund the internal growth. And we have about $35 million of capital that will be invested. And should we have unique augmentation opportunities, small businesses to acquire to append to our technologies, and products or geographic regions that we service, we'll look at that as the next priority.

And then, of course, we have the dividend and the share buyback announcements that we have made previously. And the dividend is, in the first quarter, as Joe had indicated, we put about $3.1 million into both of those.

Looking at the balance sheet, it seems like your leverage is very reasonable and that the (inaudible) came out of (inaudible). I guess I'm wondering why debt pay down is the first priority versus your additional growth or stock buyback?

Well, I think that we're not going to get into the specifics of what level share buyback you might see us incur this year. But our largest priority is always our organic growth. And the initial use of any cash would be to offset that debt with the right opportunities. And you may see us invest further in growth.

Okay. And then, it's pretty encouraging what you've reported on the consumer electronics market. I know we've been waiting for a turn or a restock in that market for some time.

Can you dig in deeper and just talk about, to the extent you can, more specifically, is this -- are you seeing a broad-based turn? Are these some specific projects that are -- excuse me -- programs that are starting to improve? What's your overall thoughts there in terms of how we should think about that the rest of the and into next year?

Well, that's -- we see it from two perspectives. The market itself has been rather squishy here over the last 18 months or so, and we're seeing growth now. We're seeing growth, and the best part of the growth is more application-driven, so that we've had some pretty good runners in both the smart phones and tablet areas for some application base in there. And so that's what has actually started to kick us off.

I think maybe a little bit stronger basis, we have applications on all the cameras and also in all -- in the tablet area. So that's really, the smart phones and the tablets are your best area to be in right now. And so that's what we're seeing. And certainly, we see that both in our alloy business and also in AMTS business.

And the AMTS business is more driven by companies such as the Avagos and the Skyworks and their compound semiconductors in the gallium arsenide power sector.

Okay. And then just on telecom, it's seeming like the 4G build out appears to be kind of in its last innings.

Now, you're absolutely -- I don't mean to be negative here. But, no, it's just beginning.

[I mean, it's just that] talking with some of the folks internally in telecom, it just seems like the spending on it from the major companies seems to be kind of winding down and shifting into kind of a new area.

Well, are you talking about the US or you talking -- what part of the world you talking about?

I guess I'd be talking mainly US.

I'm not talking U -- it's exploding right now in China and India.

Okay. Okay. So looking forward, what sort of growth rate do you think we should think about in telecom then over the next -- remainder of this year?

Well, we'll see. I mean, telecom's always a, it's a crazy market. It's probably one of the highest fluctuating markets that we run into, because it's really driven by just capital spend that goes on. As you point out, US is probably softer today, but then we see a pretty dog gone big pickup in China and India.

So my guess is we're going to see much higher level in telecom growth this year than last year, probably, I would say probably we'll see 10% to 15% in our particular segment, growth in 2014. And then once you go beyond that, it's always a tough call. And so I would say we're seeing a lot of growth right now, and the growth is driven by Asia.

And how much of your business in that area is, I guess US versus non-US? Or however you want to break it out.

It probably would be -- our business really is very much global, so that today -- I just -- I don't really have the breakdown on that, because a lot of that product goes through distributors. So it's a little bit more difficult for us to determine exactly where all the product's going, except that we see a very, very strong pull from our Asian distributors right now. So we're probably seeing 65% of our market to 70% of our market being driven by Asia at this point.

All right. Thank you, gentleman. I'll turn it over.

Marco Rodriguez; Stonegate Securities.

Thank you for taking my questions. I apologize I jumped on late. So if you've already covered my questions, please let me know and I'll follow up offline.

But I wanted to talk a little bit about the Performance Alloy segment still having some issues with the manufacturing yields. Can you provide a little update on where you stand on resolving those issues? I think you guys said that you'd have that all done by Q2 of this year.

Yes, that is true, as they say, knock on wood. But we pretty much nailed the issues we were having in alloy early in the first quarter. So that pretty much says that because of the lead times through the factory and everything else, you start to see the real impact in the second quarter.

So still holding to that, I think we're going to see a nice bounce in their performance. One of the factors in the second quarter, we'll alloy's performance better in the second quarter from the return to better performance, in what's particularly in the strip area of our production. That'll be back to a good solid performance in the second quarter. And also the order book is stronger in the second quarter.

And alloy is also the division where we had most of the impact on the weather occurred in our alloy operations. Someone uniquely, I'd say, in the company, probably 75% to 80% of the negative weather impact occurred in the Alloy Division.

Can you sort of break down then, I mean, you were previously, before the yield issues, running somewhere in the low double digits 11%, 12% operating margin. Is the expectation then that Q3, Q4 you're back up to that level?

I'd say Q2.

Got it. Okay. And then shifting here to the balance right real quick. Inventory showed a pretty strong increase year over year and sequentially. Can you talk a little bit more about what's driving that? And what are sort of your expectations for the inventory levels the next three quarters.

Yes. Typically in Q1, we do have an investment in our inventories. And it's not so much to build in Q1 as it is the low levels that we end the year in December.

So as you look at our cash flow forecast going throughout for the remainder of 2014, we do anticipate to reduce that investment, and you won't see a significant investment in inventory on the full-year basis.

And do you expect a kind of a gradual decrease there or does it revert to a more normalized level?

Yes, the typical business pattern is that it will maintain at these levels or slight decrease Q2, Q3, and then you'll see a meaningful decrease in Q4.

Got it. Thanks a lot, guys.

[Brian Rouchelle], private investor.

I'm a private investor in Cleveland. And two of the directors of Materion, including Mr. Hipple, are also directors of Ferro Corporation, symbol FOE. And there was a proxy fight last year related to Ferro, and there were two new directors elected there.

And as a result, there was a company contracted with Ferro called Procurian, which is a specialist in procurement. And Ferro stock has, since then, gone up dramatically. And I was wondering if Materion has also considered hiring Procurian or some other considerations to reduce overhead. And it seems that Materion has a bloated overhead as far as financial-type factors.

Well, I'm not sure where you're getting all your information from, but I don't think that's the case. It's also not appropriate for me to -- I happen to be on the Board of Ferro, and it's not appropriate for me to talk about Ferro issues and things that they're doing.

I will say that in the case of Materion, we have made incredible improvements to our procurement area over the last several years. In fact, I've talked about that in the calls before, not recently because of the changes that we made. But say probably 5 years ago, this Company did not have a good procurement practice. We had 20-some plants across the globe that they were all buying their same things. We had no leverage as a company.

And over the last several years, we have put in systems in place. We've taken a lot of headcount out in procurement, and we've driven [by] common systems now, and we've taken an incredible amount of cost out of this company through procurement systems.

So different approaches. We certainly have benchmarked with different companies. In fact, the company that you mentioned that had worked with Ferro, we've we certainly benchmarked with them. So we're very familiar, certainly, I'm, obviously, familiar with what goes on in Ferro. And I think both companies have made some tremendous progress in this area. And so I'm proud of what we've accomplished, and we've ripped a lot of cost out of this company.

Well, what about financial overhead-type costs? Like, for example, when you do stock repurchases, do you use a discount broker or do you use like a full-service broker?

Well, we use a, I guess you'd call it a full-service broker, because they're --

Well, why? Why don't you use a discount broker?

Well, frankly, I don't think that's appropriate for the things on the regulatory area that we have to meet as a public company when you're entering upon those situations.

All right. Those are all my questions.

Thank you. Ladies and gentlemen, we've come to the end of our time for questions. I'd like to turn the floor back to Mr. Hasychak for closing comments.

This is Mike 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 further questions. My direct dial number is 216-383-6823. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines and have a wonderful day. We thank you for your participation.