Materion Corporation
Q4 2016 Earnings Call Transcript

Published: 17 Feb 2017

[Operator:]

Greeting and welcome to the Materion Corporation Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host today, Mr. Stephen Shamrock. Please begin sir.

[Stephen Shamrock:]

Good morning. This is Stephen Shamrock, Vice President, Corporate Controller, and Investor Relations. With me today is Dick Hipple, Chairman, President, and CEO; and Joe Kelley, Vice President of Finance, and Chief Financial Officer. Our format for today’s conference call is as follows; Joe Kelley will review the financial results for the quarter and the outlook. Following Joe, Dick Hipple will provide his comments on end markets and key strategic initiatives. Following Dick, 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 margin, net income and earnings per share reflect the adjusted numbers shown in attachment number five in this morning's press release. The adjustments are made in both the current year and prior year periods for comparative purposes and remove non-recurring 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 Joe for his comments.

[Joe Kelley:]

Thank you, Steve and good morning to everyone joining us on the call today. During my comments, I will cover our fourth quarter 2016 financial highlights, review profitability by segment, including fourth quarter and full year 2016 results, make some brief comments on the balance sheet, cash flow, and modeling assumptions, and finally cover the earnings outlook for 2017. Following my remarks, Dick Hipple, Chairman and CEO will provide comments on the company’s key strategic initiatives. I am pleased to report that our adjusted fourth-quarter 2016 financial results were inline with our forecasted earnings and guidance provided to the Street. Fourth quarter 2016 value-added sales, which excludes the impact of pass-through precious metals, increased 1% versus the prior year fourth quarter value-added sales to $145.1 million. We continued to see positive momentum with our new product value-added sales, which totaled $25.7 million or 18% of total value-added sales in the quarter. This level of new product value-added sales represents an impressive 47% growth rate over the prior year fourth quarter. In addition, we also experienced year-over-year demand increases in our two largest end markets, consumer electronics and industrial components. Offsetting this positive momentum, we recorded no raw material beryllium hydroxide sales during the quarter, and late in the fourth quarter a significant medical customer began transitioning from a legacy product to a next-generation product. The combination of these two factors negatively impacted 2016 fourth quarter value-added sales by approximately $6 million when compared to the prior year fourth quarter. Gross margins were $44 million in the fourth quarter of 2016, an increase of 2% from $43.1 million in the prior year fourth quarter. Expressed as a percentage of value-added sales, gross margins expanded 20 basis points from 30.1% in the fourth quarter of 2015 to 30.3% in the fourth quarter of 2016. The higher profit margins were driven primarily by favorable pricing and product mix. Selling, general and administrative expense increased $4.2 million over the prior year fourth quarter to $32.6 million. The increase was due primarily to increased stock-based compensation expense associated with the significant appreciation in the Materion stock price during the fourth quarter of 2016, and higher acquisition and integration preparation costs. Adjusted operating cost in the fourth quarter of 2016 was $7.2 million, 19% below 2015 fourth quarter adjusted operating profit of $8.9 million. Adjusted fourth quarter 2016 operating profit excludes the $2.6 million non-cash expense associated with the planned closure of the Fukaya, Japan service center and a $1 million in nonrecurring acquisition related costs. Adjusted operating profit expressed as a percent of value-added sales was 5%, a 120 basis points reduction from prior year fourth quarter adjusted operating profit margins. The decrease in year-over-year adjusted operating profit was primarily attributable to the absence of any foreign exchange hedge gains in the fourth quarter of 2016 compared to $1.2 million of hedge gains realized in the prior year fourth quarter associated with the strengthening of the US dollar. Net income for the fourth quarter of 2016 was $6.8 million, or $0.33 per share, diluted, comparable to the prior year fourth quarter results. On an adjusted basis, fourth quarter 2016 earnings were $0.28 per share down from $0.36 per share of adjusted earnings recorded in the fourth quarter of 2015. Please note that the adjusted fourth quarter 2016 earnings excludes a favorable $3.3 million special tax item related to the repatriation benefit associated with dividends paid from our Japanese subsidiary. Let me now briefly comment on our full year 2016 consolidated financial performance. Value-added sales totaled $600 million for the full year 2016, a 3% decrease from the prior year. The primary drivers of the decrease in value-added sales were a $12.4 million decrease in raw material beryllium hydroxide sales and continued weakness in the oil and gas market. We experienced a $4 million or 25% decrease in value-added sales into the oil and gas market in 2016 compared to 2015. Full year 2016 adjusted operating profit totaled $35 million compared to adjusted operating profit of $45.8 million in 2015. The decrease in adjusted operating profit is due primarily to $6.2 million of foreign currency hedge gains recognized in 2015, which did not repeat in 2016 plus lower year-over-year sales volumes experienced primarily during the first half of 2016 compared to the first half of 2015. In summary, at the consolidated Materion level, we managed to deliver the low-end of our annual earnings guidance range provided at the beginning of last year. This result reflects our continued focus on new product introductions and productivity improvements in a period of slow economic growth and overall softness in some of our key end markets. Let me now review our 2016 performance by segment starting with our Advanced Materials segment. Value added sales in the fourth quarter of 2016 were $41.2 million, a 4% increase versus fourth quarter 2015 value-added sales of $39.8 million. In the fourth quarter of 2016, we experienced a strong Christmas build with higher demand from our customers serving the consumer electronics end market, and overall market demand growth in the industrial components end market. Segment operating profit for the fourth quarter of 2016 was $5.5 million, or 13% of value-added sales compared to $4.5 million or 11% of value-added sales in the prior year quarter. The 22% growth in segment operating profit was due to a combination of higher sales volumes and improved product mix. For the full year of 2016, the Advanced Materials segment value-added sales declined 4% to $176.3 million from $182.8 million in 2015. Due to softer demand for alternative energy applications, weaker consumer electronics end markets sales in the first half of 2016 versus the first half of 2015, and lower demand for microelectronics packaging driven by a slowdown in the 4G build out in China. Full year operating profit was down slightly coming in at $26.3 million in 2016 compared to $27.8 million in 2015. However, operating profit as a percentage of value-added sales was 15% in both periods. This segment continues to be our most profitable business and we look forward to our pending acquisition of the Heraeus high performance target business, which will expand the geographic reach and the product portfolio of this segment. Looking now at our Performance Alloys and Composites segment. Segment sales were $95.5 million in the fourth quarter of 2016, an increase of $5.2 million from the same period last year. Value-added sales for this segment were $83.2 million, a 6% increase from $78.4 million in the fourth quarter of 2015. This segment grew despite the fact that there were no sales of raw material beryllium hydroxide in the fourth quarter of 2016 versus $4.4 million in the prior year [Indiscernible]. The increase in fourth quarter profitability was driven primarily by improved pricing and product mix, which more than offset the lack of a $1.2 million FX hedge gain recognized in the fourth quarter of 2015. Looking at the full year results for Performance Alloys and Composites. Value-added sales declined less than 1% from 2015 levels to $332 million. Excluding the impact of raw material beryllium hydroxide sales, finished product value added sales grew 3% over the prior year level. Full year 2016 adjusted operating profit for this segment totaled $9.2 million or 3% of value-added sales compared to $23.6 million or 7% of value-added sales in 2015. The $14.4 million decrease in year-over-year profitability was due to $6.2 million of foreign exchange hedge gains realized in 2015, which did not repeat in 2016; unfavorable product mix related to stronger low-margin strip product sales in Asia combined with reduced demand in the oil and gas market, and unfavorable manufacturing yields. As we discussed on previous calls, we are not satisfied with the financial performance of this segment, and continue to take actions to improve pricing and product mix and reduce costs to return this business to historical levels of profitability. One action we are taking to reduce our costs footprint is the planned closure of our service center in Fukaya, Japan, which is expected to be completed in the second quarter of 2017. Our plan is to service our large Japanese customers through our local sales office while shipping directly out of the US. Smaller customers will be transitioned to our network of local distributors. Under this plan, we forecast no significant impact on value-added sales. Associated with this pending facility closure, we recorded a non-cash asset impairment charge of $2.6 million in the fourth quarter of 2016 for the write-down of land and building value. In addition to the Japan realignment, we have taken other actions related to eliminating positions and outsource services to lower the overall cost footprint of this segment. This segment’s profit improvement plan extends beyond cost reduction action. We have continued to explore pricing and productivity opportunities along with new product and application developments to drive improved profitability within this segment. Turning now to the Precision Coatings segment. This segment delivered value-added sales of $22.2 million in the fourth quarter of 2016. This compares to $26.4 million of value-added sales in the same period last year. The decrease in value-added sales is due primarily to lower sales volumes into the medical end market. As previously referenced, we had a significant customer who manufactures blood glucose test strips begin a product transition to a next-generation product late in the fourth quarter of 2016. Materion was in a primarily sole-source position on the legacy product with the next generation product being dual-sourced between Materion and another supplier. This product transition was not forecasted to occur in the fourth quarter and had a negative impact on value-added sales and operating profit for the quarter. However, we are confident that we will identify other growth opportunities to offset a portion of this headwind as we move throughout 2017. Operating profit for the Precision Coatings segment totaled $1.8 million in the fourth quarter of 2016 compared to $3 million in the fourth quarter of 2015. The decrease in segment operating profit was due primarily to the lower sales volume. The Precision Coatings segment in the full year of 2016 recorded $97.7 million in value-added sales, which was 4% below prior year levels due primarily to the drop-off in Q4 in medical end market sales volumes. However, we are still excited about the long-term growth prospects of this business as this segment contains innovative and differentiated products as evidenced by the high percentage of value-added sales coming from new products in 2016, which totaled 30% of total segment value-added sales. For the full year of 2016, adjusted operating profit in this segment expanded to $11.6 million or 12% of value added sales compared to adjusted operating profit of $8.9 million or 9% of value-added sales in 2015. Favorable product mix driven by new product sales and improved manufacturing yields drove the 30% increase in year-over-year profitability. This marks the fourth consecutive year of increased profitability for this business segment. Turning now to the balance sheet and cash flow. The company continued to maintain a very strong balance sheet ending the year in a net cash position. We have significant available liquidity to support meaningful organic growth opportunities as well as pursue further strategic growth alternatives. The company’s cash flow from operations for the year totaled $67.2 million in 2016, and we have now averaged approximately $75 million in annual operating cash flow over the last four years. For financial modeling purposes in 2017, capital spending should run approximately $30 million. Mine development investments should be less than $3 million. Annual depreciation and amortization should run approximately $43 million to $45 million. Assume approximately a 20% to 24% effective tax rate. Note that 2016 earnings, excluding special items is reflective of an effective tax rate of approximately 20%. And finally now the earnings outlook for 2017. We are cautiously optimistic about 2017 based on the order entry we are seeing in recent weeks and the fourth quarter growth in select and markets particularly consumer electronics and industrial components. Also as I mentioned earlier we believe the oil and gas market has dropped and is poised for modest recovery in 2017. However, there continues to be uncertainty regarding geo-political events and the U.S. policy with the new presidential administration. The ultimate impact of these events and/ or policy changes on the US and global economy is difficult to predict. And more companies specific levels we also need to manage the timing and impact of our customer’s transitions to a next generation product in our precision coding business. Additionally the amount and timing of raw material beryllium hydroxide sales during 2017 remain uncertain. However, we are excited about our new product pipeline and the opportunities associated with our acquisition of the high performance target business. We did receive European regulatory approval for the acquisition and still expect to close this deal in the first quarter of 2017. We are currently completing our preparation to operate this business on a standalone basis post acquisition. As a reminder, the acquired business generates approximately $50 million to $60 million in value added sales on an annual basis and generate operating margins in the mid single digit range prior to any synergies. Based on the combination of these factors we are guiding full year 2017 earnings to range from $1.45 to $1.60 per share. The midpoint of this range represents the 15% increase over 2016 adjusted earnings. From a quarterly guidance perspective we expect the first quarter of 2017 earnings to be similar to or modestly below our Q4 2016 performance. This is based on my earlier comments related to our medical customers product transition, normal seasonality and timing of raw material beryllium hydroxide sales. The increased profitability moving into the second quarter and later in the year is again normal seasonality plus the addition of a lower cost structure from cost reduction action plus increased beryllium hydroxide sales volume. This concludes the review of our financial performance. And I would like to now turn the call over to Dick who will provide updates on several of our strategic initiatives.

[Dick Hipple:]

Thank you, Joe. I would like to provide an update on some strategic initiatives underway within Materion that are expected to create new momentum on our path to stronger results in 2017 and beyond. Our focus on a number of structural actions we are taking to lower our cost and reshape Materion for the future provide an update regarding our pending acquisition as well as new products and technologies and share some insights around a few of our key markets. The Materion team has moved aggressively on factors within our control this includes reducing our overhead expenses without compromising our ability to serve customers and to grow as conditions improve. In recent weeks we have scale backed and consolidated some of our corporate services to better align our corporate cost with the current profit levels of the business. Some staff and vacant positions have been eliminated and responsibilities have been combined. In addition to these actions our overall budget have been trimmed. In the performance, composite segment there is follow through with the profitability improvement plan that began last year with a reorganized management structure in the allied product business. Our manufacturing base and supply chain have been evaluated and continue to be scrutinized for new opportunities to reduce cost and strengthen margins. As part of that review the Fukaya, Japan alloy service center which has seen lower volumes for several years will be permanently closed. Other options are being explored including how to best re-balance the model for being a supplier of highly differentiated beryllium hydroxide material into a provider of higher value semi-finished cash beryllium containing products to the same supply base. Additionally, the company continues to re-position through smart acquisitions. During the past two investor calls an update has been provided for the planned acquisition of Heraeus target material business. This exciting acquisition is progressing on schedule with closing anticipated before the end of this quarter. Through this transaction Materion advanced material segment gains target manufacturing capacity in Europe, Asia and U.S. as well as new technologies and a highly specialized workforce. The accelerating and solidifying our global material offering in semiconductor the acquisition provides diversification critical mass and new opportunities and other growing target related areas where Materion has not enjoyed a stronger position. These include architectural and automotive glass, solar and display. I would like to take this opportunity to extend an early welcome to the 140 employees who will soon be joining in Materion family and look forward to their significant contribution to our advanced material growth strategy. Well, structural and acquisition initiatives are important to our future so to, is the fundamental strategy of driving growth through differentiated products in long term growth markets. In 2016 our new product pipeline was as robust as it ever has been contributing 14% of the value added sales up from 12% in 2015 and it’s repeating that new products in the fourth climb nearly 50% above the level achieved a year earlier. In our largest end use market consumer electronics Materion made additional headway in the hand-held device sector with new generation materials across our organization. Advanced materials has introduced a new line of shielding materials for smartphones and tablets to manage electromagnetic interference generated by the higher number of semiconductor chips now designed into devices. The performance alloy business has developed higher performing tough -- products for camera mounting systems. These materials are now included in a number of expected 2017 smartphone launches. Following extensive qualifications Materion's technical material business is now seeing commercialization of two new material platforms. One being composite metal systems which are helping to enable the electrical and thermal performance required by today's smartphones. Elsewhere in consumer electronics innovative color wheel materials continue to support the transition from lamps to laser based projections display technology. Our low cost high volume Shanghai facility is in good position to move beyond traditional projection display markets specially as more consumer mobile and automotive application demand superior light management and display features. During the past year additional investments have been made in semiconductor capacity installing new clean rooms and processes in Buffalo to support our successful expansion into the 300 millimeter sector. This expanded capacity enables us to meet more controls and significantly broadens our reach beyond the 200 millimeter space which itself remains a very active growth platform. These investments plus the addition of Heraeus target manufacturing and Materion's existing shield cleaning services provide an integrated power house offering to the semiconductor customers worldwide. An alternative energy for automotive we are well positioned to benefit from the growing electrification trend for passenger cars and light trucks. Our unique duct tape copper and aluminum bonded strip is being specified into additional large application specially the supporting lithium ion batteries for start/ stop up and plug in hybrid vehicles. In 2016 General Motors Malibu joined two European volume build automotive brands designed with duct tape equipped start/stop battery system. In 2017 we expect to add a major Japanese based auto makers plug in hybrid model to our list of on the road applications. Turning now to oil and gas, Materion high strength engineer tough metal alloys provided some welcome relief to this highly cost sensitive industry. The alloy and composites introduced to tough tempers and large diameter bar products during the year which are improving the reach, reliability and accuracy of direction drilling tools. In oil field production and completion the sucker rod couplings completed their first full year in service and are providing terrific reviews for helping maximize output and reducing oil operating cost. The success of these products both in terms of order volumes and customer interest are very encouraging. In commercial aerospace growth is seen and bearing materials for landing gear and instructional application on Boeing and air bus platforms. The use on the new and retro fitted planes continues to climb due to the performance advantages it provides versus the traditional steel and bronze materials. I also want to mention a niche technology acquisition that gives us even more differentiation in the sensor market. In the fourth quarter our unique package of thin film capabilities and related IP gaiter technology which is used to improve the long term reliability for medically sealed sensor packages was purchased. Acquiring this technology augments and completes the vertical integration of precision optics wafer level process flow for thermal imaging applications. Finally, I will provide an outlook for several of our major markets. In consumer electronic where Materion enjoyed 16% increase in value added sales quarter-on-quarter and nearly 5% year-on-year we remain encouraged. Coming off subdued 2016 for the market overall there is some positive indicators for the year ahead. Forecast of global smartphone shipments to grow by more than 4% on a compound basis through 2020 after a flat 2016. The overall semiconductor market which was generally flat for 2016 is expected to pick up during next two years. Part of this new growth is expected from the industrial and automotive sectors where more vehicles are equipped for the advanced dash board electronics. Within our second largest market industrial components value added sales declined a modest 4% for the year but in the fourth quarter posted double digit value added sales increases on a sequential basis. Strength occurred across the performance alloys and composite segment with gains and alloy strips construction market and industrial electrical systems as well as from the beryllium side for master alloy, metal maker to materials and to glass. Rounding out this market both advanced materials and optics also experienced higher demand with optics wining new business in flame and gas filtering systems. For the year sales reflected largely by an overall sluggishness in the heavy equipment in industrial area. Offset to some degree by a modest increase in construction spending. There are gradual signs of renewed demand in industrial as witnessed by the recent U.S. CMI and industrial production figures. In defense value added sales grew greater than 13.5% in 2016 over a strong 2015. Each of our businesses operating in this market including alloy, beryllium advanced material recorded increased defense sales for the year driven by growth in satellites and missile systems and a new contract for bearing materials and exciting vehicle. As per the outlook, demand from the U.S. defense is likely to increase given the November election results, higher budget request by the military branches as well as growing hostilities in various parts of the globe that could have allied countries spending more to counter threats. To bring this to close, Materion has gained some nice momentum and achieved a number of milestones in the fourth quarter and throughout 2016, all the while toughing it out through a number of marketplace challenges. What hasn't changed is a long term model for sustained growth. There has been success at diversifying our revenue base while increasing new product introductions. The Company remains highly disciplined on cost and margins, and is making progress in improved capital utilization. Our goal to be a top tier advanced material producer is definitely in reach, given our rich innovation heritage. The exciting potential of new products, technologies and market opportunities and the passion of the Materion team around the globe. Well thank you, and operator, we will now open the line to questions.

[Operator:]

[Operator Instruction] Our first question comes from Edward Marshall with Sidoti & Company. Please proceed with your question.

[Edward Marshall:]

Hey guys, how are you? Good morning.

[Dick Hipple:]

Morning.

[Edward Marshall:]

So I wanted to ask about the guidance and I wanted to understand if you included any benefit from the acquisition of Heraeus in those numbers?

[Dick Hipple:]

Yes, Ed. Heraeus is included in those numbers. I would tell you it's a range of probably $0.05 to $0.10 per share.

[Edward Marshall:]

$0.05 to $0.10, okay. The mine development cost has gone down. And I understand, I think, in prior calls you mentioned that you’ve been able to get higher yield out of existing open mine. I am curious as we move forward and we talk about or you guys talk about the shortages of supply around the globe. I am curious as to why the dollar value at the mine is for development is continuing to decrease just from cash projections.

[Dick Hipple:]

If you go back in time again we started to open larger pits and so if you go back, we spent $10 million this year and the year or in 2016 and back in 2015 we spent over $20 million to open larger pits that expose large ore streams and therefore it's available to process at our mill. And so, the actual investment on mine development is not smooth on an annual basis. I don't think it reflects our view to look at that and imply that, that reflects our view on demand for beryllium would be a false conclusion. It was simply, we opened much larger pits due to the ore stream itself that was being exposed. And so when you think about that going forward, I think again while it will be light in 2017, it will probably pick back up to the call it $10 million to $20 million range in 2018.

[Edward Marshall:]

Got it. And finally you talked about the dual sourcing and it kind of picked up on you here, unexpectedly in 4Q. When did you expect that conversion to actually take place?

[Dick Hipple:]

Well we expected that, it's been a tough call for us because the customer himself is going through a transition and actually they themselves didn't know because of some of the qualification issues that they had. So I think, we really expected that to occur this year or 2017 versus late last year.

[Edward Marshall:]

Got it. And so I am just trying to get understanding of what's causing the weakness in 4Q from that as well as what you expect to see in 1Q. Is it that you have to rationalize your own internal workings and manufacturing to kind of get to a point and so maybe you are carrying a little bit extra labor cost, or is it inventory I am just trying to get a sense as to what's causing the little bit of overhang there.

[Dick Hipple:]

Yes, we crept up on Materion [ph] actually in the month of December was the pullback in order volume. And we have a large fixed cost component cost structure. So it had slightly greater than negative, slightly greater than $1 million negative impact. I would tell you if you look at Q4 results compared to Q3 or Q4 of the prior year and that negative impact it will continue into Q1 and then it will start to subside going out to Q2 and beyond, within the large area coding business as both the next-generation product will ramp up and some other new product wins that we have in the forecast. So if you think about the segment, the profitability of the precision coding segment will decline year-over-year 2016 to 2017, and probably produce profit margin similar to that they did in 2015, but we fully anticipate to exit the year in Q4 at a profitability level similar to what we delivered in full-year 2016.

[Edward Marshall:]

Got it, and so just to be clear there is not going to be any changes to the footprint. You have actually filled the production gap with…

[Dick Hipple:]

The footprint is just one -- yes the footprint of the larger coding business is one facility.

[Edward Marshall:]

Right but while the price is different while the utilization rate of that facility is you are going to fill that gap with you said new product, new product wins and so…

[Dick Hipple:]

Yes. And the ramp-up of the next generation volumes.

[Edward Marshall:]

Right, but I guess when I think about dual source versus single source, how do I -- I mean is it 50/50 split, I mean how the split work? I am just trying to get a sense as to what has come down there?

[Dick Hipple:]

Big picture yes, they go to the transition. The volume is going to come down artificially low for December and parts of Q1 and then it will start to ramp back up. It will not ramp back up. It's not forecasted to ramp back up to the historical levels for this customer given the dual source versus the single source, however, this is not the only customer of this segment. And as I had mentioned before, within our precious coding business group, this is the most what I would say innovative product offering that we have. Their value added sales new products represent about 30% of value added sales. So there are other customers and product initiatives within the precision coding groups, which will help fill some of that void.

[Edward Marshall:]

Okay. Thanks guys.

[Dick Hipple:]

Thank you.

[Operator:]

Our next question comes from Marco Rodriguez with Stonegate Capital Market. Please proceed with your question.

[Marco Rodriguez:]

Good morning guys. Thank you for taking the question. Wondering if – coming back to one of the earlier questions on the Heraeus acquisition is included in your guidance for fiscal 2017, just curious do their financials change any of your historical seasonality, or is it kind of flow through?

[Dick Hipple:]

Well their seasonality actually probably is a little bit more smooth than ours, because a big piece of their business is in the construction area building products, which we typically don't have a big participation in. So piece of the business is in the semiconductor area which would reflect ours, but there is a new piece that wouldn't have necessarily the same kind of cyclicality.

[Marco Rodriguez:]

Got you. So it's I guess from back of the envelop where we should maybe think about it as kind of a flat line through the year in terms of their performance. I think last quarter you talked about two different divisions or two different groups as far as thinking about it. One was $60 million; one was $20 million in terms of the VA sales?

[Dick Hipple:]

Correct. And we acquired just one group. At this point in time we won't be -- we will not be acquiring the second piece, because we got into the due diligence it didn't have the synergies that we expected.

[Marco Rodriguez:]

Got you. So I am assuming you are taking the bigger piece then? The $60 million?

[Dick Hipple:]

That's correct. What's what will be closing on?

[Marco Rodriguez:]

Got you. Okay and if you can maybe talk a little bit more here in terms of the medical supply client here. I understand that some of the prepared remarks and obviously the response to the prior question, I am just kind of wondering here as you progress through the year, how realistic do you think it is, that you are able to replace all of that business that is going to the source of the other supplier.

[Dick Hipple:]

I think -- yes we are going to be structuring a little bit lower in that business because of the fundamentally splitting the business going 50/50. In the legacy product, we basically had a 100% as a transition so we will be sharing the business going forward. And then we will be growing with another large customer along the way. So, we do expect some additional uplift, but from the one key customer it will be structurally lower.

[Marco Rodriguez:]

Got you. And any update you can provide on the beryllium negotiations with that the major client there?

[Dick Hipple:]

Yes. We anticipate and included in our guidance is a modest volume increase 2017 over 2016, refraining from disclosing specifics of the individual customers in the forecast sales, but basically we continue to be confident our long term strategic position in the beryllium market. It is clear that our customer has been working through some excess inventory in 2016 and continues to have some of that issue to work through in 2017 as you will recall they bought significant portion back in 2015 actually 2014 and 2015 in anticipation of the end of that 20 year cost plus contract coming to an end. So we continue to be in active negotiations with them, and I would say have this confidence that our long-term strategic position is still valid and this is just a timing issue.

[Marco Rodriguez:]

Got you. And then, kind taking doing a little bit of deeper dive here on the industrial segment for you guys. Can you maybe if possible talk a little bit more about the specific sort of end markets that you might be most exposed to or you are seeing some strength? I am assuming you are lumping in oil and gas in the industrial side.

[Dick Hipple:]

The oil and gas is separate. That's in our energy group. So we split that out. But the industrial side is for us quite a bucket of different things that you would classically if you take a look at our other markets, it's kind of like the all other, but the things that would be included in there with we were a big participant in what’s known as the plastics market in automotive and plastic tooling market would be in there. We have products to go into building products, such as the product we have that goes into sprinkler systems and all buildings we have components that go into that. We have that's where we split our heavy equipment in there, sales and the Caterpillar and -- and basically the caterpillar, the [Indiscernible] mining, the mining activities construction activities so those would be examples, they are quite diverse.

[Marco Rodriguez:]

Got you. I appreciate your time guys. Thanks.

[Dick Hipple:]

Thank you.

[Operator:]

[Operator Instruction] Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question.

[Phil Gibbs:]

Good morning.

[Dick Hipple:]

Morning Phil.

[Phil Gibbs:]

I had a question on the oil and gas market, value added sales expectations for 2017 versus 2016, what type of magnitude or momentum are you expecting this year versus last?

[Dick Hipple:]

We have as I said in my prepared remarks a modest recovery. We are not history would suggest a V shaped recovery in the oil and gas market if you go back in time. We’re not forecasting that. We saw a very modest uptick Q3 to Q4, and we feel that it profited in Q3, and so we are forecasting a modest recovery in 2017 numbers. So as it relates to upside and the guidance and the range and the guidance we could be pleasantly surprised if that is better than what is forecasted. But single digits to 10% improvement is what it looks like.

[Phil Gibbs:]

That's helpful. I appreciate that and are you seeing any green shoots in mining? You just talked about that a little bit, are you seeing any improvement there in terms of more of the MRO side starting to come back?

[Dick Hipple:]

I would say no.

[Phil Gibbs:]

Okay.

[Dick Hipple:]

Wait. We have seen in the recent weeks as I mentioned in my comments some recent uptake in our order entry, in line with some other economic statistics around industrial manufacturing. And so, the past three, four weeks has been an uptake in our order entry. Some of that comes through distribution as you know Phil, so it’s a little bit difficult up front to understand the end market that's driving in.

[Phil Gibbs:]

No I understand. I appreciate it, and I also just for your information I did miss the prepared remarks. I was on another call. So I apologize from repeating making you repeat yourself. Any color on the pension expansion 2017 versus 2016 and any color on cash contributions this year?

[Dick Hipple:]

Yes. Cash contribution this year will be similar to last year and approximately $16 million and pension expense should be slightly down from the prior year less than but they are very close to last year's.

[Phil Gibbs:]

Okay and did you provide a cash from operation outlook for 2017 at all?

[Dick Hipple:]

Cash from operation will be about 50 -- is forecasted about $50 million to $60 million. I did not provide that. I just did.

[Phil Gibbs:]

And then anything you could add in terms of automotive. I think your automotive sales were actually fairly resilient from sequential perspective in Q4, should we expect that to be the case or any seasonality, any changes that you are seeing there?

[Dick Hipple:]

At this point in time, we are seeing a nice steady order book coming in from automotive.

[Phil Gibbs:]

Okay. Thanks very much guys.

[Dick Hipple:]

Thank you

[Operator:]

Our next question is follow-up from Edward Marshall with Sidoti & Company. Please proceed with your question.

[Edward Marshall:]

Yes just a couple of quick follow-ups. The Euro assumptions that are embedded into your guidance for the year.

[Dick Hipple:]

107

[Edward Marshall:]

107. Okay and the blood test stripe, blood glucose test stripe what is that as a percentage of codings or is that the entire medical piece of your coding business?

[Dick Hipple:]

It's not the entire. It's the vast majority of the medical component of our precision coding business segment.

[Edward Marshall:]

Okay. And so the $6 million, $5 million or $6 million gap down on the quarter, does that reflect the entire shift lower in that particular business for the time being, or do we expect that to be another step down on Q1? Just to get a sense.

[Dick Hipple:]

We don't provide that specific guidance, but like I said before, I mean it will be Q1 will have negative impact from this transition similar to the fact that Q4 had a negative impact. And the Q1 impact might be a little bit more severe than the Q4 just given the timing, it happened so late in the fourth quarter.

[Edward Marshall:]

Got it. And the timing of the recovery on the new, are you shipping that new product now or when do you anticipate that the new product will be shipped?

[Dick Hipple:]

It starts to ramp up going into Q2 and Q3.

[Edward Marshall:]

Okay. So the initial 2Q and then I guess full run rate 3Q?

[Dick Hipple:]

It's hard to tell in the medical end market and when the customer is adopting a new product. It's not contingent on our ability to produce it as much as it is their transition.

[Edward Marshall:]

Got it. And there was a change in technology, is there any R&D that you have to spend in order to kind of adapt or you have already done that R&D.

[Dick Hipple:]

That's been done over the last; I would say, two years working. Again, this is the medical end markets. It's a long, long sale cycle and so that has already been spent.

[Edward Marshall:]

And based on the utilization rates that we talked about is there any additional capital that's necessary in order to meet the demand that you anticipate?

[Dick Hipple:]

No.

[Edward Marshall:]

Okay. Great guys, thanks.

[Dick Hipple:]

Thank you, Ed.

[Operator:]

Thank you. At this time I would like to turn the call back over to Mr. Stephen Shamrock for closing comments.

[Stephen Shamrock:]

Thank you. This is Stephen Shamrock, and this concludes our fourth quarter 2016 earnings call. A 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 on Materion. I will be available to answer any follow-up questions. My direct dial is 216-383-4010. Thank you very much.