Materion Corp (MTRN) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Materion Corporation Fourth Quarter 2017 Earnings Conference Call. (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 5 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 costs, 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 reported record-level value-added sales for the fourth quarter at $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 capabilities 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 and driven organizational changes to further execute on our strategy.

We appointed Mark Rands as Head of Global Operations. Mark comes to us from Honeywell, where he had a senior leadership role managing 14 manufacturing facilities globally. Mark has hit the ground running and is focused on driving peak operating efficiencies, leveraging synergies and best practices across all Materion facilities.

We've appointed Neil Sater as Head of Commercial Excellence. Neil brings extensive background in leading sales and marketing at Intel. In this 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 for Europe and Asia. They are locally based and will drive regional growth of 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 earning guidance of a $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 will 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'll open the line for questions.

I am pleased to report strong fourth quarter 2017 financial results, which exceeded the earnings guidance provided and represented the 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 acquisition, 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 continue to experience strong demand in our 2 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 a 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% (sic) [32%] 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 totaled $38.1 million, up $5.5 million over the prior year fourth quarter of $32.6 million, due primarily to increased costs 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 on cost reductions led to the year-over-year increase.

Special items, excluding income tax in the fourth quarter 2017, totaled a net benefit of $300,000, comprised of a gain on sale of property related to exiting the Fukaya, Japan service center, offset by CEO transition cost.

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 noncash 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 on repatriation of foreign earnings and is forecasted to be paid over the next 8 years. These amounts in total are reflected as special items in the quarter.

As a result of tax reform, we reported a net loss in the fourth quarter 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 a 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 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 operating 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 profit. 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 Composites 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 represents 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 Coatings 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 5 quarters, and reflects strong sales of optical filter products and a more comparable run rate for Medical end-market sales. Operating profit for the Precision Coatings 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 Coatings 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 Medical customer's 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 investments should be $5 million to $10 million. Annual depreciation and amortization should run approximately $40 million. Assume a 16% to 18% effective 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-entry 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 3 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. For our 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 Englert of Jeffries.

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

Yes. Martin, let me start and then certainly Joe can add to that. We're expecting as we indicated a very strong 2018, continuing the momentum that we built with 2017. 18% at a company level increase on EPS, as we indicated. On a segment basis, we've got 3 really good segments. I would say, our Advanced Materials business will continue to operate strong in the mid-teens operating margin levels, that has 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 3, 4 more quarters to go there. And then the Precision Coatings business, our objective is really to just to get that business to the double-digit levels as it was before, and we think that north of 10% is what we've 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. So we would expect that the momentum from '17 to again continue into '18 as the markets evolve. There are certainly some markets that we're monitoring more closely than others, but in general, we expect that growth, 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, what, a 13% sales growth year-on-year?

Yes, it was. And -- but keep in mind, '16 was a relatively low year for us. So the comps certainly are favorable to us in -- from '16 to '17. We had a very good set of 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 '14 with that business. And so don't forget normal seasonality and the impact that has on the profitability at any given quarter. So we continue to make progress in 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.

Got it. And when I think about overall value-added sales reasonable to expect something in the mid-single digits growth for '18?

Yes. 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 -- we need to monitor for the markets very, very closely here. Lots of ups and downs here. So we'll see how those -- we'll see how that turns out.

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

Yes. So as we enter into 2018, we are well hedged and 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.

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

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

Okay, got it. And one last one, if I could. If you can discuss from a high level there maybe 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, how those margins compare to the overall product margins.

Yes. So let me talk about maybe the start sort of 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 objectives to grow our profitably consistently year-over-year. And so the only way we can do that is if our new products are better than in profitability than the prior products. So I would say that's our focus there. I think in terms of -- sorry, 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.

Yes. 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. And 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 a year-on-year, more of a general-based 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.

Our next question is coming from Edward Marshall of Sidoti & Company.

Listen, I wanted to ask about just a follow-on what was just asked about pricing. When you think about copper, and I know you have value-added revenue. But I'm curious, is there any margin benefits due to timing? And how that flows through the business on a quarterly basis?

Yes. So we have eliminated any of the timing benefits or detriments, any of this this pure pass-through based on our pricing agreements with our customers. As that's on a precious metal, it is very, very precise, and on the copper, it is also a pure pass-through. The lag time between quote and invoice is made up by the inventory turns themselves. So we've 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.

Of course, of course. When I look at -- there's the other question I wanted to ask on was the Precision Coatings. Jugal, I think you said double-digit margin goal for that business next quarter. Was that a goal for 2018? Or is it further up?

No. I think our goal for 2018 for Precision Coatings is to be at double-digit margins. So we'd like that business to reach those levels. As you know, we've had some challenges on that business on the top line with the product transition that was done on the Medical side. I think that's stabilized now. But we're driving growth in other parts of that business. So precision -- the rest of the Precision Coatings business had, I believe, an 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 had with the -- we've 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?

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

Got it. 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 the BE shipments?

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

Got it. And at its height, I thought Energy was a much larger business than what it's showing up today. Have you seen that recovery? I know you're in complicated drilling activity. But have you seen that pick-up maybe in the ToughMet material as related to Energy in that business right now?

Let me talk about ToughMet in general. ToughMet in general, as we've talked before, is a very strong growth product for us. We did experience in '17 about a 60% year-over-year increase in ToughMet sales in total. Of course, Energy is a subsegment 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 accounting on the -- I'll say that several years back, '14, '13 time frame rig levels had to build to return that business to historical profitability levels. We want to make sure that we can do that with the 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.

Got it. There is one more point in clarification. I'd just like some points on. You mentioned government approvals within PAC. And you saw the foreign governments, is that the government approvals you're waiting for? And was there a logjam there that got pushed through in the quarters? Just trying to want to understand that.

Yes. So we were referring to the domestic market and what we were talking about is, as the transition happened with the administration, there is 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. And 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 and backlog are still awaiting approvals today?

No. I think that comment was simply as we look at our forecast, and you referenced it, 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 released and then delivered into Q4.

Do you expect it to normalize 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 market are not smooth on a quarterly basis. So to the extent it will smooth out, it's all relative, I guess.

Our next question is coming from Marco Rodriguez of Stonegate Capital Partners (sic) [Stonegate Capital Markets].

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 much of a benefit that had for the EPS guidance into '18?

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

Got you. Okay. Then shifting gears here, some high-level questions here just from a strategic standpoint. I know, Jugal, you've laid out in your first quarterly call in '17, some main points that you were 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 that drive that forward. And is there any sort of set goal that you're trying to strive to have? Your VA sales, a certain percentage of them being new product sales?

Yes. 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, closer to 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 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 a really important aspect I think, Marco, of what we've 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 scattered 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 channeling our innovation work towards key items, leveraging really our commercial excellence activities that we can combine that with. And then the other thing that we've really done is, we really put a very strong focus on regional growth. So we recently appointed a 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. I said there was 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 then long-term growth, both top and bottom line.

Got it. It's very helpful. And then if maybe if you could talk a little bit about the new hire you have here that's going to 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?

Yes. So what we've had, and I think it's been a good effort by us is we really worked towards sales and marketing in our 3 business segments and approaching customers within those 3 business segments. And what we really focused on is leveraging, of course, those 3 business segments, but then pushing much more aggressively on a one Materion basis. And again, going back to my original 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 a one-off type of customer base. So the commercial excellence umbrella and Neil Sater who we've hired. I mean, Neil brings 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.

Got you. And when you mean by also a coordinated approach, was this the sales team in the different areas have a, I don't know, a similar approach or a certain strategy at which they go to their end markets? Any sort of color there?

Yes, absolutely. 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 then 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 top line. And again, going back to my innovation comment, and then really working in conjunction with the innovation work that we've got going on.

Got it. Then last quick question here just on the balance sheet. The prior 3 quarters, it seems like you've had some really healthy benefits to your cash flow from increases in payables and expenses. Can you maybe talk a little bit about that? Has -- have some of the payment terms changed? Or this is just management of working capital, any color there?

Yes. So we have been pushing a little bit on the payment terms, but I can't take -- 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 flowed through working capital. The other thing I will tell you on the APAR side is on the annual incentive comp and stock-based comp accruals 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 on any given quarter will cause a little bit of fluctuations specifically in that accrual.

Sure. Understand that. I mean, obviously acquisitions can mess up comparables year-over-year. So just trying to understand those 2 areas of working capital going forward. Would you say that the turns you've seen at least in the last 3 quarters in those areas, would those be cut a normalized position that we should think through going forward into '18 and beyond?

Yes. So as you look at our working capital as a percentage of sales, we were successful in the year in 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. This is what I would model.

Our next question is coming from Phil Gibbs of KeyBanc Capital Markets.

I 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 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 first quarter, because I know the fourth quarter was pretty strong.

Yes. 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 a 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 to consumer electronics. I think that probably what I would say you are noticing for Q1. And then we would expect that we would get back to our normal order rates as the year progresses.

Okay. That's helpful. And Joe, any color you could provide in some of 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 contract and the minimum order quantities. At a minimum, it will be flat year-over-year with the potential upside if more volume is required.

Okay. And then can you explain a little 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?

Yes, so the $5 million to $10 million spend on mine development is to complete opening a 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 that we are completing the ore removal from the other pits and then 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 that by the end of the year.

Okay. 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 in the next couple of years from a project standpoint in terms of what got funded?

So first of all, I think on defense is one of the markets that we believe, as the work in the administration continues to happen. We think that 2018 would 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 can imagine, they will take some time and we'll have to further understand exactly where the money is going? And how that impact the various programs on the defense side? And what the trickle down 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 will see that we own 2018 and as we get more color and better understanding of what that may mean, we'll be sharing that with you guys. So do we have any other questions?

No, we do not.

So let me maybe close out with just some quick comments and then I'll turn it over to Steve. So team, I just want to wrap up and say that we are able to close out the year very strong in Q4. That's 4 consecutive quarters of top line and bottom line growth. We have good momentum going into '18 and of course, we are positioned to take that momentum there and execute on it and deliver, what we expect will be a good year for 2018 with 18% year-over-year APS improvement in the midpoint number that we've communicated. So with that, I'm going to turn it over to Steve.

Thank you, Jugal. This is Steve Shamrock, and this concludes over fourth quarter 2017 earnings call. Our recorded playback of this call will be available on the company's website, 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 your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.