Materion Corp (MTRN) 2003 Q2 法說會逐字稿

You good day everyone and welcome to the Brush engineers materials second quarter 2003 earnings release conference call. Just as a reminder today's program is recorded. With us today for opening remarks and introductions we have Michael Hasychak. Mr. Hasychak go ahead, sir.

With me today is Gordon Harnett Chairman President and Chief Executive Officer, John Grampa Vice-President of finance and CFO, Jim Marrotte VP and corporate controller. John Grampa will comement on second quarter results and the outlook. Thereafter we will open up the tele conference call for the questions. Play back will be available 30 days bydialing area code (719)457-0820, access code No. 132494. The call will also be available on the Company's website BEMINC .com for 30 days.

To access the replay click on quarterly earnings conference call under the investment page. It requires real player software which is available from the icon as indicated. Any forward-looking statements made in this announcement including those in the outlook section in the question and answer portion are based on current expectations.

The company’s actual future performance may differ from that compensated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the second quarter 2003 earnings press release issued this morning. We now turn it over to John Grampa for comments.

Thank you Mike. Good afternoon everyone and thank you for joining us today. As Mike indicated I will review the second quarter and comment on the outlook. I will be brief and then open the call for questions.

Once again I would like to reinforce several of the comments made in today's press release because they have implications for the outlook by doing that perhaps I will preanswer some of your key questions. As you all know, the second quarter of 2003 is the first quarter of where we have been bump break-even since the downturn that occurred in mid-2001 just two years ago.

That downturn which as you all well-know was computer and telecom equipment and market driven and affected our quarterly revenues by 30 to 40% all of which occurred in late spring or early summer of 2001. Since then we have maintained 5 keys to our returning to profitability. I would like to review those and comment on our progress against each of them.

First was reducing debt. This was through better working capital management and capital spending control. We are in our eighth straight quarter of continued debt reduction.

Second was significantly reducing overhead. We had targeted a reduction of $10 million per quarter from the first quarter of 2001 levels. With that reduction coming from headcount and spending per services. We exceeded that target now in each of the last two quarters.

Third was improving margins. This was through operating improvements, especially in our alloy business using sick Sigma and manufacturing techniques. You note in the press release that gross margin is up 350 basis point in the quarter and 460 basis point in the first half. Largely due to those improvements.

Fourth was broadening our base to 11 depends on computer and telecom market recovery. This is a longet term goal and while are revenue are modest for the first term. we are progressing. We are progressing with the qualifications and the field trials with most of our programs.

Finally we were seeking improvement in the general economic environment. This meant that our quarter demand in our core market as well as some improvement in computer and telecom as well. This is one area that is not completely in our control and we are dispointed with the State of the U.S. economy and the softness that was evident especially in the second quarter.

Over all the year 2003 is progressing well. Almost all of the key goals we set continue to be even met or exceeded. Sales grew an additional 2.5% in the second quarter from first quarter levels. Slightly less than what we had expected but within the range that we provided in April.

The growth was due to mixed and currency as well as strong markets in Asia and share gained in some of our domestic markets. International sales grew 21% in the quarter while domestic sales fell 6%. Results before tax improved by $3.6 million compared to second quarter of last year.

Year-to-date pretax results improved right over $7 million. This is the fourth straight quarter of very significant quarter-over-quarter improvements in operating performance. The improvement shows extraordinary leverage from the actions taken over the past seven quarters. The gross margin grew by 350 basis points and it's due to a combination of factors including currency lower overhead, improvement in yields and improvement in operating costs.

On a $1.1 million sales for the second quarter gross margin dollars increased $3.8 million or 25%. That again is outstanding leverage. The results of our on going efforts to reduce costs and improve manufacturing efficiency is very visible in those numbers.

We continue to to have internal lead times inventory turns and customer service levels as well during the quarter. Total overhead, including overhead captured in both cost of sales and SG&A was flat compared to the first quarter and down over $11 million over the second quarter 2001 levels. That is $1 million better than our targets. We broke even at sales levels that were below our previously suggested break-even point.

In the past we had indicated that our break-even point was around $105 million per quarter in sales. Braking even below that is due to currency, better mix and improved factory costs. As for the balance sheet debt is down $6.5 million below prior year. In total obligations both on and off the balance sheet are approximately $26 million below prior year's levels. In the quarter the total on and off balance sheet obligations is actually down $13 million from year end in spite of increasing receivables of around $10 million.

As for the outlook, while we have many good reasons to be encouraged by our progress we are cautious about the near term outlook. As we reinforced in the past, there continues to be a lack of visibility in our markets and during the second quarter domestic quarter entry weakened as the quarter progressed.

While we are able to respond to the shorter lead times, we still get a significant amount of our orders in a month for delivery in that same month. This makes forecasting difficult. As you all know our business is somewhat seasonal, customer shut downs, especially in Europe and our own shut downs always effect the third quarter.

This adds to forecasting difficulty. We believe that revenue will continue to improve and that we will continue to see good leverage in the second half of the year. Third quarter revenue should be flat to up 5% versus prior year's third quarter revenue of $93.5 million.

Fourth quarter revenue should be up as much as 10% versus prior years fourth quarter revenue of $89 million. Over all second half revenue is currently expected to be up five to 10% versus prior year. Now operator, I would like to open the conference to questions.

Thank you, sir. At this time if you would like to ask a question you may do so by pressing the star key followed by the digit one on the touch-tone telephone. We take the questions in order that you signal us and take as many questions as time permits. If you are on a speaker phone press the mute button sue the signal can reach our equipment. Up first we hear from Mark Park from Donald investments.

Hey John.

Good afternoon.

Hey congratulations. That was a nice quarter.

Thank you. Thank you.

Is that Gordon?

Yup

Hey Gordon. The third quarter revenues, okay, did you say they would be up from the second quarter or up year-over-year?

Up year-over-year.

So down sequentially then, right

That would be possible but given that range, yes

So, if you are up 5% on 93,that is what, 97, 98, somewhere in that range? Okay. Is that --

That is the pattern for the third quarter, Mark.

I am not complaining. I am just trying to figure out what the number is. Also I was curious about the second quarter. Looked like tax accrual was fairly high. And I just wondered if you might talk about that a little bit.

Mark this is Jim Marrotte, you may recall that we had to take a 109 provision for the deferred taxes at the be end of last year. So the income taxes that we record this year are purely state and local taxes and some foreign taxes associated with our Singapore and Japanese operations.

So, you can't take that income tax number and compare it to total pretax gain or loss and come up with a normalized rate. We will have, you know, given our be current results in those countries and the State and local, will have several hundred thousand dollars of taxes regardless of our overall pretax situation.

Okay. At this point I am looking at the gross profit margin, second quarter, and it really accelerated quite a bit. And you did that concurrent with the sequential reduction in inventories. And typically when I see inventories coming down, there is a margin penalty associated with that.

That's correct

Could you talk a little bit about this, this apparent inconsistency and what the gross margin outlook for the third quarter might look like, you know, given the maintenance shut downs that you normally have in July

This is Jim. I talk about the second quarter. There were a number of factors that combined to help the margins. And by the way, that margin percentage is the highest percentage we have seen since the second quarter of 2001. The first was we had a very good product mix, amongst our goods within the business. For example, within Alloy Products our gold strip products increased the pounds sold there over last year.

And as you know both of those carry better margins in general. Brilliant products had a strong product mix and contribution margin on those products was high. TMI had a strong product mix as well. So it was pretty much across the board just what we were able to sell and get a good mix.

Secondly is we made numerous operational improvements on the shots on he will more, PMI, CTP, our circuit business out in California. Also better yields, better efficiencies, better machine operation that type of thing. That ttranslates into improved margins.

Third issue was currency. With the weaker dollar we saw in the second quarter versus last year. As you know we saw in Euros, we saw in yen, those sales get translated it gets translated back into dollars. It's higher dollars there. The cost incurred in dollars, that spread there is going to flow through against the margin.

And the fourth thing was overhead cost as John was eluding to in his be comment. We start pulling cost out and we see the benefit of those being out of the system.

Did you put those in the order with which they were important, over all importance?

I have to stop and think here. They were all -- currency might go a little bit higher up there but they all contributed similar amounts.

Okay. Anything you want to show about the third quarter?

Mark clearly Q3 and Q4 should improve significantly compared to prior year and that is of course the sales grow as we forecasted holds and also assumes the cost reductions hold. What is unclear about the outlook and I attempt to do reinforce this in my dialaog, is mix, currency and other market conditions, especially in the domestic markets.

You are willing to forecast you will do better than a loss of 41 cents in the second half?

We won't comment.

I'm sorry. I'm sorry.

The effect of that is also the effect of seasonality. The results should generally be about the same.

I had one other question and I don't want to take anything away from what you guys are doing because I think you are making tremendous progress and I want to congratulate you on that but I was wondering, Gordon, if you could give a brief update on the marketing front and what you are seeing there in general, you know either to talk about in demand patterns or new product initiatives or any highlights that you would want to share that we might be able to use.

Sure as was quoted in the press release, I think I am a little disappointed that the markets have not improved as much as we might have hoped for. That clearly remains an issue for us, particularly here in North America. Great news is we are able to serve the market in Asia well and as reported, our revenues there grew considerably in the quarter.

Domestically things remained fairly soft and in the quarter, automotive, in particular, you know, slowness hurt both TMI and outlook. I think we believe automotive will start to improve in the third quarter as shut downs abate and they start to build and already we are seeing some improvement at TMI.

As indicated again, I am in the press release, I remained very upbeat about the market development activities that are taking place literally across the Company but particularly in alloy.

There are 390 strip which is a high strength high conductivity alloy is now being introduced into the marketplace and getting a good reception. We have, this now being sampled in a number of applications and it is expected that we could start to see some sales in this alloy before the end of the year.

The other one I might comment on is the tough net product, the alloys that we make in Lorraine facility which are a high strength and low friction alloy that is being tested in a number of wear applications such as sleeve bearings and here again all of the testing that we now have underway continue to the demonstrate this product's capabilities. We currently have under test the tough net with caterpillar, [attaché], joy, Volvo, plus some people in the pump industry.

So I again remain very enthused. No knock out. Everybody continues to talk positively about the products. The challenge is just trying to get a good handle on when the orders really start to kick in some level of volume. The customer base that I am talking about here are also somewhat depressed. So trying to get significant volume, particularly at the OE level is still a challenge. But nonetheless I think bottom line the efforts that are going on in alloy, people are encouraged about.

Okay. Thanks, Gordon and congratulations on early great progress.

Next question from Anthony Sorentino from Sorentino metals

Good afternoon everyone. In the press release you stated that you are currently examining several refinancing alternatives. Might those include going to capital markets to raise financing?

Anthony this is John Grampa. I think it would be premature and too speculative to comment on what we said in the press release. At this point we pass on the dialogue about that. It is too premature and speculative to comment.

On the subject of the gross margin which I saw is at 18.5%, and as you pointed out very impressive 350 basis point improvement on only a 1% improvement in sales, would you have any rough idea or rough range of what the gross margin could possibly go to in a more normalized sales environment?

We have -- we anticipate continued gross margin, growth obviously, as the sales growth returns. You may recall from your history with the Company that prior to the 1998, ‘99 time frame, gross margins were in the high 20's. We don't anticipate seeing high 20's in the near term but we certainly believe the sequential improvement in revenue that we will see gross margins in the 20% plus range again.

Okay. Very good. Thank you very much and congratulations on the turn around.

Thank you.

Up next we hear from Ryan McCormick Williams Smith and Company.

Good afternoon guys.

Good afternoon.

How are you doing?

Good.

Can you offer anymore clarity on the impact of the foreign change of your sales?

On the sales volume over all were $2 million in the second quarter versus second quarter last year and for the first half it was a little over $4 million.

First half was $4 million?

Right.

Okay great. Thank you.

As a reminder if you would like to ask a question today press the star key followed by the bilge one on your telephone. Hear from John walls Housen from Paradyme capital.

Over all question is, am I understand I understanding correctly that we did better ass at hitting a small profit at 102 versus the 105 break-even that we talk about but we shouldn't adjust our models to assume a different break-even point

I would say that is correct, John. About a third of it is currency. The balance is cost and mix. I think it would be premature to adjust the models at this point.

That is helpful. In the release you talk about WAM clearly did well but you are expecting it to moderate. Can you talk about why we expect a slow down there.

WAM has seen some mix shift in the DVD area that they supplied vapor deposition targets into. And they are expecting slowing there and margin condition this that product line. So they kind of warned us that that could happen. It's a little tough for them to be accurate in predicting but after a very good first half we felt we weren't sure we could rely on the same growth in the second half.

Is that a shift away from precious metals?

There is some of that. There is also our -- there is competition as well as they are concerned about. Some of this continues to move to, you know, lower priced materials as well and as you suggest, away from precious metals.

Right, right. They have been warning us of this for awhile. I guess it's premature but I guess it will happen.

PMI, that was a pretty steep drop we had. They have always been good entrepreneurs there. Do they have new products or new business that they can be bringing on in the next few quarters.

I am encouraged by TMI. As you said the best thing they have been able to do is despite precipitous drop in volume they have managed to remain profitable. I think if they were on the call today they would say one of the areas that they are most excited about is selective precious metal plating. They have gained a share there. They see that market starting to recover.

They are actually shipping, you know plated product into Asia from our island successfully. So I would say they would be encouraged about that. Automotive as we believe as we indicated should pick up in the back half of the year from where it was in the second quarter. So that is giving them a bit of a list lift. They also continue to focus on new business opportunities with some technology that they developed. So all in all I think what we expect to see is TMI show improvement in the back half of the year.

Good. Good. Then sort of a an inkling question. I was scratching my head trying to think what does the minority interest relate to?

That is a WAM joint venture, shows up for the first time. WAM as part of its reach into the Asian marketplace established a 60/40JB. They have 60 the partner has 40. It's head quartered in Taiwan. Started with a bonding debonding center for vapor deposition targets there but also will provide an opportunity to access the Asian markets especially China with our partner there in Taiwan. What you see in the quarter there is obviously a small loss but you see a minority interest reported there

It's in the start up phase now and costing us a little bit. Okay. Thanks.

As a final reminder if you have a question today press the star key followed by digit one. And gentlemen there are no further questions at this point. So I turn things back over to Mr. Hasychak for remarks.

We would like to thank all of you for participating this afternoon. I will be around this afternoon for remaining questions. Direct dial number (216)383-6823 thank you very much.

That will conclude today's conference today. Thank you very much for your participation