Materion Corp

NYSE:MTRN

Earnings Call Analysis

Materion Achieves Record Second Quarter

Materion delivered record Q2 results with value-added sales up 4% year-over-year to $279.8 million, driven by aerospace, defense, and semiconductor recovery. Adjusted earnings per share hit $1.42, up 3%, while adjusted EBITDA reached $57.8 million, or 20.7% of sales. Despite weakness in industrial and automotive segments, strong operational performance and cost management boosted margins. The company lowered its full-year earnings guidance to $5.60-$5.90 per share due to softer market conditions but expects strong performance in aerospace and defense and improved margins in H2 2024.

Solid Performance Amidst Market Challenges

In the second quarter of 2024, Materion Corporation reported a remarkable success, demonstrating resilience despite market challenges. Value-added sales reached a record $279.8 million, marking a 4% increase year-over-year, buoyed by strong performances in aerospace and defense sectors, as well as a gradual recovery in the semiconductor market. This achievement illustrates how the company's strategic focus on operational excellence and cost management is yielding positive results.

Record-Breaking Earnings and EBITDA

Materion achieved record adjusted earnings of $1.42 per share in Q2, a 3% increase from the previous year. Additionally, the adjusted EBITDA reached $57.8 million, or 20.7% of value-added sales, up 4% from the same quarter last year. These metrics exemplify the company's ability to maintain robust margins over their midterm target of 20%, thanks to higher volumes and continued operational improvements.

Segment Performance Insights

The Performance Materials segment reported value-added sales of $173.1 million, also up 4% year-on-year, driven by aerospace and defense strength, while the Electronic Materials segment saw sales of $81.1 million—5% growth from the prior year—indicating a slow recovery in the semiconductor market. Meanwhile, the Precision Optics segment recorded sales of $25.6 million, up 2%, showing growth in aerospace and consumer electronics, albeit affected by defense order timing.

Outlook for the Remainder of 2024

Looking ahead, Materion projects to maintain strength in aerospace and defense markets throughout 2024. However, a more subdued outlook for the industrial and automotive segments has been noted. The company anticipates that the semiconductor recovery will proceed at a slower pace than initially expected, leading to adjustments in their guidance. The adjusted earnings per share guidance for the full year has been revised to a range of $5.60 to $5.90, reflecting a 2% increase from the prior year at the midpoint.

Key Strategic Developments

Materion has made significant strides into strategic partnerships and business wins. A notable $150 million multiyear agreement for critical materials in space propulsion systems was secured, validating the company's capabilities in serving the aerospace sector. Coupled with growth in Precision Clad Strip products due to new collaborations—specifically with Philip Morris International—the company has diversified its portfolio, mitigating impacts from softer markets.

Cost Management and Operational Excellence

Materion's commitment to cost management has been evident, yielding improved margins and operational performance. The company has achieved notable EBITDA margin improvements, consistently surpassing the midterm target of 20% for three out of the last five quarters. Continued focus on operational efficiency is expected to solidify this margin strength as the company moves through the remainder of the year.

Financial Health and Cash Flow Expectations

Materion currently holds a net debt position of approximately $468 million with an anticipated decrease in leverage below 2x by year-end. The company expects to generate robust cash flows in the latter half of 2024, providing sufficient capacity for debt repayment and potential investment in growth opportunities. Their strategy reaffirms a balance between organic growth investments and disciplined financial management.

Earnings Call Transcript 2024-Q2

[Operator]

Greetings. Welcome to the Materion Second Quarter 2024 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] 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. Kyle, you may begin.

[Kyle Kelleher, executive]

Good morning, and thank you for joining us on our second quarter 2024 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 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 our expectations for the second half of 2024. 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 press release we issued yesterday afternoon.



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 428 in yesterday'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 the call over to Jugal for his comments.

[Jugal Vijayvargiya, executive]

Thanks, Kyle, and welcome, everyone. It's nice to be with you today to discuss our record second quarter performance as well as our outlook for the second half of the year.



After a challenging start to the year, I am pleased to share that Materion is back on track, delivering record results again in the second quarter. Top line improvements coming mainly from organic initiatives, combined with our focus on strong operational performance and cost management led to the highest quarterly EBITDA in the history of our company.



I'm especially proud of our team for achieving these strong results while continuing to secure several new business wins and customer partnerships that will seal the pipeline for long-term sustainable growth.



Value-added sales were a second quarter record, up 4% year-over-year, largely driven by strength in aerospace and defense and consumer electronics, in addition to a gradual semiconductor rebound now starting to flow through to our order books. The operational challenges we faced in the first quarter have largely been mitigated, and we're seeing the impact of the targeted cost improvement initiatives, enhancing our bottom line as we outperformed our midterm margin target of 20% for the third time in the last 5 quarters.



While we're seeing softer demand across select markets, including industrial and automotive, the momentum we're building across other large markets like aerospace and defense, combined with our operational initiatives and targeted cost management continues to drive strong performance. With new partnerships and business wins in aerospace and defense, we are demonstrating once again the ability of our products and technologies to drive solutions for some of our customers' most demanding technical challenges.



In aerospace and defense, our customers are developing new products and applications that require the highest level of performance reliability in the harshest conditions. The criticality of our materials to these applications is affirmed through rising demand for our products as well as customer investments to secure the supply of these key materials. I am pleased to announce that a leading aerospace and defense customer has agreed to invest approximately $10 million in new capacity and capabilities at one of our existing sites in support of their growing demand.



The growth of commercial space is driving new opportunities for us as Materion remains uniquely suited to serve the needs of this expanding market. Our reputation as an innovative and reliable supplier for highly visible space projects like the James Webb Space Telescope have paved the way for opportunities to support the next generation of applications.



In the second quarter, we secured a $150 million multiyear agreement to supply critical materials for space propulsion systems. This announcement follows four previously announced orders over the past 18 months, further solidifying our position as a long-term key partner for this important customer.



Defense continues to be a growing market for us as advances in technology drive new government initiatives and modernization programs around the world. So far this year, we've received approximately $60 million of new orders in this market with potential for significant upside in future years as these programs gain traction. The pace of incoming orders from defense is at roughly twice the pace we saw last year.



In the second quarter, semiconductor recovery drove single-digit increases in both sequential and year-over-year comparisons for VA sales, mostly driven by growth in logic and memory applications. Although the pace of recovery for semi is looking to be slower than anticipated, we expect to see growth in the second half as we're seeing a pickup in order rates for the remainder of the year.



As the rebound occurs, we're expanding our capabilities to serve customers who are rapidly innovating to power advancements in support of rapid digitization and the shift towards artificial intelligence. The expansion of our portfolio to include ALD or Atomic Layer Deposition products is allowing us to support the production of the most sophisticated semiconductor products. This quarter, we were pleased to receive an overall excellent supplier award from a leading ALD customer. Our team has collaborated with this customer to innovate multiple ALD materials, which will see expansion, the rapid growth of AI and the increasing demand for the most complex chips.



Another source of meaningful growth from Materion has been the important Precision Clad Strip project that we started in 2020. Together with funding from the customer, we built a new state-of-the-art facility to produce higher volumes of product in support of the global rollout of their next-generation products.



Today, we are pleased to be able to share that the customer who invested with us is Philip Morris International. Our Precision Clad Strip is used in PMI's heat-not-burn consumables for the IQOS ILUMA, a smoke-free product that heats tobacco instead of burning it. It is an alternative for adult smokers who would otherwise continue to smoke that is gaining popularity in Europe and Japan.



This business win has created a unique avenue to further diversify our portfolio, enabling us to continue to deliver strong performance even as some large markets have experienced softness in recent months. We are proud of our team's ability to work with the customer in support of this application to successfully ramp up a new production facility to meet the customers' needs.



These many examples demonstrate the power of the Materion strategy, which is grounded in our team's ability to harness our advanced materials expertise to create solutions that enable our customers' breakthrough solutions. Our focus on our customers' needs across our diverse portfolio is helping us to navigate short-term headwinds across some end markets while also building our pipeline to ensure long-term organic outgrowth.



With a laser focus on operational excellence and maintaining the benefits of the structural cost improvements we've put in place, we are positioning ourselves for strong earnings growth throughout the balance of the year. While we are taking down the top end of our guidance range to reflect a softer end market environment, we are well positioned to deliver another record year for Materion.



Now let me turn the call over to Shelly to cover more details on the financials.

[Shelly Chadwick, executive]

Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website yesterday afternoon, starting on Slide 10.



In the second quarter, value-added sales, which exclude the impact of pass-through precious metal costs, were a second quarter record at $279.8 million, up 4% from prior year. This increase was driven by continued strength in aerospace and defense, gradual improvement in semiconductor and growth in Precision Clad Strip, which we have now reclassified from other to consumer electronics given today's announcement. This year-over-year increase was slightly offset by weakness in the industrial, automotive and energy end markets. When looking at earnings per share, we delivered record Q2 adjusted earnings of $1.42, up 3% from prior year.



Moving to Slide 11. Adjusted EBITDA in the quarter was $57.8 million or 20.7% of value-added sales, up 4% from the prior year and a record for any quarter. As Jugal commented, we're very pleased to have once again delivered margins above our midterm target of 20%. This year-over-year increase was driven by higher volumes, improving operational performance and continued cost management. These drivers helped offset some weaker price mix.



Moving to Slide 12. Let me now review second quarter performance by business segment. Starting with Performance Materials. Value-added sales were $173.1 million, up 4% compared to prior year. This year-over-year increase was driven largely by strength in aerospace and defense and consumer electronics, partially offset by weakness in the industrial, automotive and energy end markets.



EBITDA, excluding special items, was $43.1 million or 24.9% of value-added sales, down 6% compared to the prior year period. This decrease was driven largely by unfavorable price mix, the carry forward impact of the Q1 operational challenges and a lower recorded benefit from the manufacturers' production credit, continued strong cost management partially offset the decrease.



Moving to the outlook. We expect aerospace and defense to remain strong throughout the balance of 2024 with a slightly weaker outlook across the industrial and automotive end markets and the impact of the previously discussed second half inventory correction for Precision Clad Strip. We also expect strong operational performance as we move past the impact of the Q1 operational challenges.



Next, turning to Electronic Materials on Slide 13. Value-added sales were $81.1 million, up 5% year-on-year and sequentially, driven by the gradual semiconductor market recovery. The energy market remains suppressed with smart glass sales down due to softness in the non-residential construction market.



EBITDA, excluding special items, was $17.1 million or 21.1% of value-added sales in the quarter, delivering the highest margin profile since the second quarter of 2022. This increase was driven by higher volume and the impact of the cost improvement initiatives, both of which are strong contributors to the 230 basis points of margin expansion year-on-year and 240 basis points sequentially. As we look out to the rest of the year, we expect the semiconductor market recovery to continue, but at a slower pace than previously expected.



Turning to the Precision Optics segment on Slide 14. Value-added sales were $25.6 million, up 2% compared to the prior year. This increase was driven by market strength in aerospace, life sciences and consumer electronics, slightly offset by some defense order timing. EBITDA, excluding special items was $2.1 million or 8.2% of value-added sales. This decrease year-over-year was largely driven by operational challenges combined with an unfavorable mix.



Despite the year-over-year decline, this business saw sequential improvement driven by higher volume and strong cost management. Looking out to the second half of 2024, we expect a step-up in margin performance as we improve operational performance and continue to drive targeted cost improvement initiatives across the business.



Moving now to cash, debt and liquidity on Slide 15. We ended the quarter with a net debt position of approximately $468 million and approximately $106 million of available capacity on the company's existing credit facility. Our leverage at 2.2x remains just slightly below the midpoint of our target range. We expect to generate strong cash flow in the back half of the year, bringing our leverage below 2x by year-end.



Lastly, let me transition to Slide 16 and address the full year outlook. Since the first quarter earnings call, the outlook for semiconductor, automotive and industrial end market has softened. Despite the lower end market demand, we remain confident in our ability to execute and deliver another year of record results by delivering on our organic initiatives and continuing to drive operational and cost improvements throughout the company. With the softer end market demand in mind, we are lowering the top end of our guide, revising our range from $5.60 to $5.90 for the full year adjusted earnings per share, an increase of 2% from prior year at the midpoint.



This concludes our prepared remarks. We will now open the line for questions.

[Operator]

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] And the first question today is coming from Daniel Moore from CJS Securities. Daniel, your line is live.

[Dan Moore, analyst]

I appreciate the color. Maybe just give you the opportunity to kind of elaborate on what you're seeing in the marketplace, looking at the balance of the year, just talk about any more color on the recovery in semi slightly slower than expected, not a surprise given what we've seen there. But any meaningful change in the outlook for kind of memory versus logic and where you're seeing that recovery maybe push out to the right a bit?

[Jugal Vijayvargiya, executive]

Yes. Dan, the markets have certainly been choppy, as you know. And we talked about the semi business in our last call, and we indicated that we expected Q1 to be the low point with some recovery into Q2 and then a little bit more incremental in Q3 and then a little bit more of a step-up in Q4.



I would say the general trend is still there, and that's what we are seeing with our order rates. Clearly, it's led by the logic and memory devices, and we're hearing about it from all the semi customers, as well as, I think, just in the marketplace. But I would say the pace of recovery is probably a bit muted from the time that we spoke one quarter. So, we still expect the recovery just a bit less, I think, and going into Q3 and Q4. And that's how we've sort of revised our thinking and the guide change from the top end that we made.



When you look at the other markets, industrial continues to be challenged, housing starts, non-res construction continues to be challenged. So the recovery on industrial, I would say, is a bit slower than what we had anticipated. Automotive production has been revised. In fact, if you look at the latest IHS data, it indicates about a 2% down from the beginning of the year.



Europe is expected to be-- and we have a lot of business with European automakers expected to be down 6% now year-over-year versus the 2% that I think it was at the beginning of the year. The rig count continues to be challenged. In fact, less than 800 is the number for the rig count. It continues to be challenged there.



What's exciting for us is, I think, the number of new initiatives our team has been able to drive to help offset many of these choppy conditions, and I would say, really tough conditions in some of the markets. When you look at the work our team has done on space, the number of initiatives that they've been able to do, we announced it today, as you know, a large order for that. The number of initiatives on the defense side with the opportunities and organic opportunities there.



And then even in the other markets, the number of organic initiatives that I think our teams have continued to drive to help offset, I mean, delivering a 4% year-over-year growth here in Q2. And then I would expect that we will continue to have growth going into Q3 and Q4 on a combined company basis. So certainly, a choppy situation right now, I think, in the market, but very pleased with the level of effort and results our team is doing on a number of fronts organically to help offset.

[Dan Moore, analyst]

Helpful. I missed the first couple of minutes prepared remarks, so I apologize, but I wonder if you could give a little bit more detail on the new Precision Clad Strip project could that lead to more additional customer opportunities, may be size, the scale of sort of the opportunity set and what, if any, CapEx might be needed to set up a facility. It sounds like you'd be setting up a dedicated facility, if I'm not mistaken. So any color on that opportunity would be really interesting and helpful.

[Jugal Vijayvargiya, executive]

Yes. So on Precision Clad, I mean, as we have spoken over many quarters now, we've been in the Precision Clad business for a number of years. We've supported various markets. I go back to the 2020-time frame when we announced that we had a customer that wanted to work with us to buy a lot more of the Precision Clad than what we were capacities to do. We worked with a customer to put a facility in place and that facility today, we're mentioning is in Reading, Pennsylvania area, Leesport, Pennsylvania, we put that facility in place in combination with the customer as they invested roughly about $120 million to help fund that facility.



We're very pleased to work with them. And I think it's been a fantastic relationship. And today, we announced that, that customer is Philip Morris International, who is using our product and their IQOS ILUMA product. So I would ask you, and of course, others to look at that information. It's a product that's gaining popularity in Europe and Japan, and they continue to do a global rollout.



Now with that said, we are always working on this particular product segment and trying to gain more customers in automotive segment and consumer electronics and clean energy and others. So we have a number of new initiatives that we continue to work on. On Precision Clad. I mean we're one of very few, I would say, a really capable Precision Clad Strip suppliers in the world. So we continue to do that, and we will. We will continue to pursue other customers. And if additional capacity is needed, we'll put additional capacity in either in the Leesport facility, which is the new facility or our existing facility, where we have been doing Precision Clad for many years prior to this new project that's come on board.

[Dan Moore, analyst]

Excellent. Look forward to hearing more. And lastly, maybe just Shelly, with two quarters remaining, I appreciate the update on guide. Any sense of the cadence of revised profitability guidance. Q4 historically is your strongest quarter? Is that how you see this year shaping up as well?

[Shelly Chadwick, executive]

Yes. That is how we see it. We expect that Q3, from a profitability perspective, is probably going to look a lot like Q3 of last year. We do expect some of the markets where we've seen some inventory correction to start to come back. Jugal mentioned the non-res construction. We think that sprinkler business will start to see some orders there in Q3. Automotive, we've seen maybe an overcorrection there. We expect that business to start to come back in the back half.



So we'll move past the impact of the operational challenges we saw in Q1, starting in Q3. And we do expect the volumes to be up even higher in Q4. So you will see the strongest quarter of the year being Q4 and really by a meaningful step with the combination of kind of the higher volume, the better operational performance and then that normal sort of seasonality we sometimes see with markets like defense.

[Operator]

The next question is coming from Mike Harrison from Seaport Research Partners.

[Michael Harrison, analyst]

I was hoping that we could talk a little bit more about the operational issues that impacted Q1, and it sounds like maybe there was still some lingering impact in both Performance Materials and Precision Optics in the second quarter. Any help you can provide on quantifying the impact of those two segments in Q2 would be appreciated. And then I guess I just want to understand do you guys feel like those operational issues are completely resolved in both segments at this point? Or could there be some further headwinds as we look into the second half?

[Shelly Chadwick, executive]

Yes, I'll start with that one, Mike. So in Performance Materials is where we saw the main operational issues. And as you know, a big part of that business is vertically integrated. And so, to see operational challenges work through that system takes a little bit of time. We are seeing marked improvement there. So I don't think we have concerns over the operations in Performance Materials. Where you see some of that impact still coming through in Q2 is really normal amortization of variances.



On the optics side, we did see some continued operational challenge in Q2. But the team thinks they really got that figured out and expect better performance in Q3 and for the back half of the year.

[Michael Harrison, analyst]

All right. And then just in terms of the Philip Morris application, any further update on their rollout plans and how their inventory management is going to impact volumes and also the Phase II start-up in the second half? Just trying to get a better sense of how we should think about the volume and the earnings headwind from PMI in the Performance Materials segment as we're comparing the second half to what you guys did last year?

[Jugal Vijayvargiya, executive]

Yes. So Mike, as we indicated, I think, in the last call that second half of the year, we expected inventory correction based on the inventory management things that the customer is going through. And I would say it's in line with what we reviewed last time. So really no change from our assumptions on that inventory correction and management in the back half of the year. Yes, same as our commentary, I think from a quarter ago.



As we look at our Phase II, of course, we've been working on Phase II and our team has done a tremendous job of getting -- continuing to make progress on getting the equipment qualified. We've indicated that, that equipment would be ready really at the beginning of the year, and we would expect to start using it and start to ramp that into the '25 time frame.



Of course, we will work with the customer on the level of volumes that they expect. So it's one thing to, of course, have the capacity for Phase 1 and Phase 2, and it's important that we can do that. And then in terms of the actual orders and deliveries, those we will just continue to work with the customer on what level of inventory correction do they want to continue to work through or new orders that they want to place, what level of new orders that they want to place, and I would expect that to continue to then get ramped over time.



So I think we're very well positioned to be able to support the customer as they continue to move forward on the global rollout. And just like we have, I mean, we'll follow the lead on the order patterns and requirements that they have as we get closer to the end of this year and have a better understanding of the requirements for next year.

[Michael Harrison, analyst]

All right. And then on Electronic Materials, the gross margin number has moved around a little bit in the past several quarters, kind of anywhere from the mid-20s to the mid-30s Q2 was 33.5%. And as you noted, kind of a higher watermark for overall EBITDA margin for that segment.



Do you see that 33% or 34% gross margin level at a sustainable level that maybe you can build on as volumes recover? Or should we think about maybe some mix factors or any other factors that could maybe lead gross margin to be a little bit softer in Electronic Materials over time.

[Shelly Chadwick, executive]

Yes. No, great question. And we're really proud of the work that the team has done in Electronic Materials to kind of rightsize their cost structure, while they've had some softer volumes, it's given them a chance to really focus on operations and make sure that we've got the right organizational setup there.



That really has helped prop up gross margins as we kind of move through the downturn, and now we're starting to see things pick back up slightly. There is a mix impact within EM based on their product mix and whatnot. But we do think that the progress we've seen should be sustainable as the volumes start to come back and that, that will be great for our bottom-line margins going forward.

[Operator]

[Operator Instructions] The next question is coming from David Silver from CL King.

[David Silver, analyst]

I'm going to preface my remarks by stipulating. I've been jumping around amongst three calls. So my apologies if I'm making you repeat yourself.



The first place I'd like to start would be with the new $150 million contract for Critical Materials for space propulsion. I've been following your company for a few years, and I really don't recall a new piece of business of that scale. So correct me if I'm wrong or whatnot. But how long has it been since there was an order of that size that you've disclosed?

[Jugal Vijayvargiya, executive]

Yes. I think, David, first of all, I'm very pleased with the work that the team has done. This is our fifth order actually with this customer. We've announced 4 orders with this customer more of, I would say, smaller chunks of orders. This order here is a multiyear contract now. What we had been announcing is almost in a way, you could say almost kind of like spot orders where we get an order for one or two quarters, and we supply. This gives us, I think, a multiyear long-term sustainable revenue stream with the customer, and we're very, very pleased with that.



When you put the other 4 orders that we have announced along with this one, it's in the neighborhood of around $220 million of business between the last 18 months and then, of course, the go-forward $150 million contract that we announced today. Very pleased with that with I think the work our team has done.



With regard to the size of the orders, obviously, you know about the Precision Clad program, which today, we announced as the PMI International program. And that, of course, has been a very large, meaningful business for us, and we're very, very pleased with how that turned out. But in addition to that, certainly, the space contract is one that is a very meaningful program for us. So these types of businesses, for us, I think we're doing everything we can to make sure that we're getting larger, more sustainable type of contracts. So we can have a little more surety in our revenue stream, and I hope that we can continue to do that.

[David Silver, analyst]

Okay. And then maybe just a quick follow-up on that. But should I assume that this large order compared to, I think you said the 4 other smaller ones, is it essentially the same? In other words, they're asking for maybe more material or they're willing to commit for a longer period. But your role or the company's role hasn't really changed much? Or is this -- does this represent maybe, I don't know, an evolution where the current contract encompasses some additional, I don't know, either cross-selling or bundling or technology included.



So first order to the fifth order. Is there kind of a development or an evolution in your role there? Or is it -- should I think of it as just a larger version of the previous 4 orders?

[Jugal Vijayvargiya, executive]

Yes. Well, first of all, I mean, we've been a great, I think, partner, I hope with this customer and the customer, I think, has confidence in us, and that's why they are reaching out and wanting to work with us and now on a multiyear program.



It is essentially, like you said, the same product that we've been supplying in the prior 4 orders. It's a matter of just really cementing our relationship with them on a more longer-term basis so that we're not looking at on a more spot order, order-by-order type of situation. It allows us to do, of course, much better planning, make sure we have the right capacity, capability, workforce and then continue to drive improvements, operational improvements, efficiency improvements so that we're able to provide them with a better product and better value, frankly, over time. So I think this is just, again, a great testament to the relationship that our teams have developed with the customer.

[David Silver, analyst]

Got it. I'd like to switch over to Electronic Materials for one or two. But I was happy to see that despite the -- as you put it, a slower than anticipated pace of recovery in that area. The revenues grew both year-over-year and sequentially as did the operating income, and there's been a lot of margin improvement over that time as well.



I'm thinking about your expansion projects that are underway at Newton and Milwaukee. Has the timing of when those projects would be completed and enter start-up. Has the timing of that changed with the change in your thinking about the pace of end market recovery in that area? Or is it the case where the customers that you had envisioned to be the major off takers for that new capacity? Are they lined up? Or should we push back maybe the start-up or the contribution from those investments a little bit further in to the right, I guess, as someone else said.

[Jugal Vijayvargiya, executive]

No, I think in general, as we've talked about in earlier quarters, I mean, those projects, I think, are on track. And in fact, as we have indicated in earlier discussions, the bit of a slowdown in the semiconductor market actually give us an opportunity to put those projects in place in a more efficient and more meaningful way.



As you know, when the market was at its peak, I mean, we hardly had a time to get other things done. So I think it's allowed us to put those projects in place. I would say, by and large, I mean, the projects are on track. I think as the market recovers, which we've kind of indicated perhaps a little bit more of a recovery in Q4 and then into '25, I think we'll be well positioned to take advantage of those projects.



In Milwaukee, as you highlighted, I mean, we mentioned it in the call earlier today, but I'm very pleased with the supplier award, the recognition from a leading ALD customer, which is exactly the type of capacity that, that new facility is having. So I think as ALD continues to grow we are well positioned to be able to do that. And the fact that our team has developed a great relationship to receive this award, I think, is again a testament of the work.



And when you look at our Newton facility and the additional projects that we have going on there, that really serves the logic and memory market is the main market that area serves for the semiconductor side. And that area is the one that has started the recovery. So we would expect that the recovery will continue and then into '25 so that the projects we have would be adding value to that ramp-up.

[David Silver, analyst]

Okay. Great. Maybe just a question for Shelly, I guess, on capital expenditures. But when I looked at the relevant slide in the deck here, and I'm sorry, I'm fiddling with it here. I think it might be 16, sorry. But I was just wondering, has the total CapEx spend moved down a little bit in the last 90 days or so? And if so, or if there's been a shift in the emphasis there, I mean, what has changed, I guess, in your CapEx projections for the current year? And I guess that feeds in a little bit to what I was asking Jugal, about maybe the timing of the Electronic Materials programs.

[Shelly Chadwick, executive]

Yes. Good question. So it is down a little bit, but I would say it's probably two different factors. I mean, one, of course, as the CFO, I'm very focused on cash generation and making sure that we're being prudent with our debt paydown while we're investing for growth. So we have not delayed any growth-related projects. The other side of that is a specific piece that we're working on in Performance Materials, which you used to see on this page, extrusion press. That's just been pushed out a quarter or two while we're doing more engineering to get ready for that. So that's another piece of kind of the tick down.

[David Silver, analyst]

Okay. Very good. And I guess the last question would be one about, I guess, the Q1 to Q2 margin progression. I mean, to me, that was one of the more eye-catching developments, I guess, in your quarterly release. And I'm just wondering if in addressing the issues that led to the inefficiencies in the first quarter.



First of all, congratulations for kind of addressing that so quickly. But I'm just wondering, I mean, to have your thoughts about the target level, 20%, I guess, was your intermediate level, you've exceeded that a few times now. I mean, should we be thinking that there's going to be some upside to that midterm target that you seem to have reached ahead of schedule?

[Jugal Vijayvargiya, executive]

Well, first of all, thanks for recognizing that, and we'll definitely pass that on to the team for, I think, the great work that they did in the first quarter to kind of help recover and then get us back on track here in the second quarter with record results, the highest EBITDA level of any quarter that we've had. So we'll definitely pass that on.



This is the third quarter in the last 5 where we have been north of 20% EBITDA margins. We've also highlighted in our remarks that we expect the back half of this year to be north of 20% EBITDA margins. And yes, then I think where we go, David, in '25, we'll obviously be talking about that later this year and early into next year. But our goal is the same. We want to make sure that we can, on a sustainable basis, deliver north of 20% EBITDA margins. And certainly, we can do more, then we'll definitely be talking about that.

[David Silver, analyst]

Okay. Great. And I forgot to add that you're accomplishing this in a less than robust demand environment as you've articulated. And that's it for me.

[Operator]

The next question will be from Phil Gibbs from KeyBanc Capital Markets.

[Philip Gibbs, analyst]

I noticed in your slide deck, you had some nice incremental business wins within propulsion and then also just generally defense. Are those orders expected to ship over the next 6 to 18 months? And how should we think about that? I wouldn't think you'd be able to cater to all of those in the back half?

[Jugal Vijayvargiya, executive]

Yes. No, they are clearly not all in the back half, right? So let me start with roughly $60 million of orders that we have had on defense. First of all, by the way, I just want to highlight what a wonderful job our team has done in terms of securing these orders. A couple of things that I think that are important.



One is we're starting to have more and more of our defense orders from outside the U.S. or global. I think that's been a very important part of the work that our team has been doing. So a sizable portion of that $60 million is actually outside.



The second is, that this is $60 million for the first 2 quarters of the year. All of last year, we had $60 million of new defense orders. So we're roughly on pace to be about 2x the value of defense orders this year than what we secured last year. So the team has done certainly a very nice job with that. We would expect those to ship a bit of it here in the back half of this year, but then really into '25. And typically, as you know, Phil, defense orders do tend to be in the 1 to 2-year time frame. So we would expect that to happen.



With regard to the space and the propulsion orders, we also indicated that this is a fifth order from this customer. So the first 4 were the spot orders, but now this is a multiyear contract that we have. So this is a 2, 3, 4-year type of a multiyear type of a contract. And so we would expect -- right now I'm going to say, still finishing up, delivering to the orders that we had already. We're finishing those up. And this new award will go into effect once we finish delivering the last -- the 4 contracts that we had once we finished delivering that, this will go into effect and then will last on a multiyear basis.

[Philip Gibbs, analyst]

Thank you. And then generically, on your backlog, can you give us an idea about how your overall backlog looks right now relative to the end of '23 or end of first quarter, just so we've got an idea of the visibility that you may have?

[Jugal Vijayvargiya, executive]

Yes. So look, I mean, the backlog it's kind of a mixed bag, as you can imagine, right? I mean there are certain markets where the backlog is improving. I mean we indicated, for example, on semi, our backlog is improving because we are starting to see a bit more of an order pattern on semi, as you can imagine, on space and defense. Our backlog is improving. But there are certain areas like automotive and industrial and couple a very challenged area, our backlog is certainly a bit more challenged.



So it's a mixed bag for -- we've got some areas where the backlog is improving quite a bit, and then fortunately, other areas where it's now. I would say, on an overall basis, the backlog at a material level is moving in the right direction. So incremental moves from quarter to quarter, and I hope we can continue that into Q3 and then more of a larger step move in Q4 as that is particularly in the semi market and the beryllium-nickel for industrial market, et cetera, that we would expect a much more of a pickup on the backlog in the fourth quarter.

[Philip Gibbs, analyst]

And then lastly for me, I think the slide deck also talked about a focus on cash generation in the back half of the year. The first half carried a bit more cash than we thought 3-6 months ago, let's just say, for net working capital. And I know you've got a focus to let some inventory bleed down or normalize a bit as you ship on some of these projects. Is that still the case as of right now? And how should we be thinking about cash generation and net working capital in the back half? And what kind of -- whatever you're going to say next, what gets you there?

[Shelly Chadwick, executive]

Sure. So we didn't end Q2 with the cash generation that we were looking for. And a lot of it was timing. We do have some plans to reduce inventory that are well underway, but they're being a little bit offset by some build that we have both for the space business and also clad. So we're managing that from a timing perspective.



Same with accounts payable. If you think about controlling costs and bringing costs in and trying to manage inventory that way, it's bringing down our AP a little bit as well, which, as you know, is a good guy. So as we look out at the back half of the year, stronger earnings is certainly a help, but we expect those working capital numbers to get in line as well. So to be able to bring down the debt to under 2x, where we think it should be at this point.

[Operator]

The next question will be from Dave Storms from Stonegate.

[David Joseph Storms, analyst]

On the call in the slides, you mentioned or highlighted how cost management has been a driver of the margin growth. Just curious as to how much more headroom you see here, how many more levers you have to continue having cost management be beneficial to margin expansion?

[Shelly Chadwick, executive]

Yes, I'll start, and if Jugal has anything to add, you can pipe in. But I think that if we think about where we've been, we started out with some very targeted cost actions sort of waiting to see what the markets would do in semiconductors in EM, electronic internal specifically, I think we got a little bit more holistic saying, really, where do we have opportunities to improve the cost structure in this business. And so, I would say those were a bit more fulsome actions.



And now I would say we're kind of back to that targeted level. There's work going on in optics, I think we mentioned that as well. But they certainly will become more selective as we don't -- we're focused on growing the business, right? That takes investment. So I would say we've done the lion's share of what there is to do. It would be selective from here, but there'll also be investments as we look towards what's coming in the future.

[David Joseph Storms, analyst]

Very helpful. And Apologies if I missed this. Has there been any more clarity on the production tax credit?

[Shelly Chadwick, executive]

No, great question. Not really. We expect that there will be final guidance still this year, and there are whispers here and there what might or might not be included. As we've said before, we think we've taken a very middle-of-the-road approach in what we are accruing for a benefit. It's a little bit less than what we were recruiting in the first half of last year. But I would say there's equal amounts upside, downside based on where that final guide lands. So we look forward to hearing that sometime in the back half.

[David Joseph Storms, analyst]

Also, very helpful. And then just one more for me. I know you mentioned debt paydown as part of one of your uses for the expected increase in cash flows. I'm just curious, are you seeing anything in the M&A market that peaks your interest? Where do you think values are just put them flow of cash expected just anything along that line?

[Jugal Vijayvargiya, executive]

Yes. Clearly, as we've indicated before, I mean, we're always looking at opportunities, right? I mean our door is sort of always open. But we're very, very critical in the way we look at things. We want to make sure that it's the right fit. We don't want to do M&A just for the sake of doing M&A. We want to make sure that it's got the right culture fit. It aligns with our mega trends, our portfolio that we have and that we can really drive significant value as we were doing that.



So we are continuously looking at that and evaluating opportunities. And certainly, if there's an opportunity for us to move forward, then we would. We have even at today's levels, I mean we have the capacity to be able to do it. But certainly, we're going to continue to improve our cash position, not only for M&A, but as we've highlighted, we want to continue to make sure that we're driving organic investments. So we'll keep doing that.

[Operator]

Thank you. There are no other questions at this time. I would now like to hand the call back to Kyle Kelleher for closing remarks.

[Kyle Kelleher, executive]

Thank you. This concludes our second quarter 2024 earnings call. A recorded playback of this call will be available on the company's website, materion.com. I'd like to thank you for participating on this call and your interest in Materion. I will be available for any follow-up questions, my number is [phone]. Thank you again.

[Operator]

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.