Materion Corp (MTRN) 2004 Q1 法說會逐字稿

Good day, everyone, welcome to the Brush Engineered Materials first quarter earnings release conference call. Today's call is being recorded. With us today for opening remarks and introductions we have Michael Hasychak. Mr. Hasychak, please go ahead, sir.

Good afternoon, this is Mike Hasychak, Vice President, Secretary and Treasurer.

With me today is Gordon Harnett, Chairman, President and Chief Executive Officer, John Grampa, Vice President of Finance and Chief Financial Officer and Jim Merritt, Vice President and Corporate Controller. Our format for today's conference call is as follows: John Grampa will comment on the first quarter 2004 results and outlook. Thereafter, we'll open up the teleconference call for questions.

A recorded playback of this call will be available for 15 days by dialing area code 719-457-0820, access code number 338413. The call will also be available on the company's Web site, BEMINC.com for 30 days. To access the replay, click on "Quarterly Earnings Conference Call" under the Investors page. The broadcast requires Real Player software which is available as a free download from the icon as indicated.

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 first quarter 2004 earnings press release issued this morning.

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

Thank you, Mike. Good afternoon, everyone. And thank you for joining us today.

As Mike suggested, I'll review the first quarter as well as the year, and then comment on the outlook. Then we'll open the call for questions.

It's important to note that we are in the process of registration and that may affect our comments as well as our responses to some of your questions. As I have in past conference calls, I'd like to reinforce several of the comments made in today's press release in part to add clarity but as importantly because they have implications for the outlook.

I'd also like to review as I have in the past the progress in the five key areas that are in important to our turn-around and our progress. By doing both, I hope to be able to pre-answer some of your questions as well.

To begin, I'd like to step back one quarter. You'll recall that we entered the fourth quarter of 2003 with a weaker backlog than we had hoped, due to a weaker order entry pattern during the summer of 2003.

Late in the third quarter of 2003, our order entries started to improve, and our book to bill ratios started to climb due principally to a long-awaited for improvement in the electronic equipment market. The improvement gained momentum as the fourth quarter progressed especially late in the fourth quarter, and that momentum continued into the first quarter of this year.

In the fourth quarter of 2003, sales grew 19%. During the first quarter, we saw growth start to gain momentum in some of our other markets as well, and as a result, the first quarter's revenue was stronger than expected. That improvement translated to solid gains in operating results as well.

And as indicated in the press release, after considering the mark-to-market valuations, results improved $8 million on a 26% revenue increase.

Since the mid-2001 downturn in the computer and telecom equipment markets which affected our quarterly revenue by 40%, we've maintained that there are five keys to our turn-around. And during the first quarter, we continued to advance in each of the five areas as well. I'd like to review those for a moment.

The first area was reducing debt.

This was to be through better working capital management, and control of capital spending. By the end of 2003, total balance sheet debt, plus key off-balance sheet building and equipment leases and precious metal consignment obligations had been reduced by 39% or over $81 million since the end of the year 2000.

In the first quarter of this year, due to the sales growth, inventory and receivables climbed by approximately $21 million, which drove our balance sheet debt plus leases up about $14 million. This increase is expected to be temporary. We currently expect that the Q1 increase will be eliminated through cash from operations, in Q2 and Q3.

The second area was reducing overhead.

We targeted a reduction of around $10 million per quarter from the second, excuse me, from the first quarter 2001 levels. That reduction was targeted to come from headcount and spending for services. We were close to that target in the first quarter of this year, and we exceeded that target in each of the previous four quarters. We expect to do so in Q2 as well.

The third area of concentration was improving margins. This was through operating improvements in all of our businesses, most notably in our alloy business using Six Sigma and lean manufacturing techniques.

You'll note that gross margin percent is up approximately 6.3 points for the quarter, compared to the first quarter of 2003. Gross margin percent is also up two points compared to the fourth quarter of 2003.

The fourth area of concentration was broadening and adding to our revenue base. Our goal here is to lessen our dependency on the computer and telecom market. This is a longer term goal, focused on new products as well as new markets and new geographies.

And while our revenue targets are modest to date, we are progressing with qualifications and field trials with most of the programs. One very important accomplishment last year was the previously announced James Webb Telescope contract which will add $15 million of revenue, much of it in late 2004 and 2005.

Another is the success we are having with our geographic reach into Asia where our sales growth has been helping to offset a sluggish domestic economy. Our international businesses led by growth in Asia were up 39% in the first quarter.

The third area is our new ToughMet bearing material which is starting to find its way into varying applications as well. Roughly a third of our first quarter growth in our alloy business was from new products and geographic initiatives.

The fifth area of concentration and important to our improvement is the state of the general economic environment and the markets we serve. While this is not entirely within our control, we certainly work to ensure that we participate as markets turn.

We've improved internal process, response times and service levels. We, like many, have been disappointed with the state of the U.S. economy and the softness that was evident during most of 2000 and 2003.

However, manufacturing started to expand late last year, and it seems that this expansion accelerated in the fourth of last year, and into the first quarter of this year as well, becoming broader-based and that's very encouraging.

Almost all of the goals that we've set in each of the five key areas have either been met or exceeded and we continue to make good progress in each. As indicated in the press release, after considering the negative impact of the noncash mark-to-market valuations, results improved by $8 million year-over-year on sales growth of just a little more than $26 million.

The flow-through to the bottom line is 47% when you consider that approximately $6.4 million of the $26.4 million sales growth was metal price and currency. The improvement confirms the extraordinary leverage from the actions we've taken, and that leverage was visible in all four quarters of the prior year as well.

The first quarter of 2004 was the fifth consecutive quarter which sales were higher than the comparable quarter of the prior year. It was the seventh straight quarter of very meaningful quarter-over-quarter improvement in our earnings and the second quarter in a row with top-line growth near 20% or above.

The gross margin growth of 6.3 points is due to a combination of factors that include flat factory overhead versus last year, plus important improvement in yields and operating costs. This improvement occurred in the first quarter in spite of a negative impact of higher copper prices that we were not able to completely pass on to our customers.

On the $26 million increase in sales for the year-to-date, compared to prior year, gross margin dollars increased $12.5 million or roughly 48%. The results of the ongoing efforts to reduce costs and improve manufacturing efficiency are very visible in those figures.

As for the outlook, we continue to be encouraged by our progress and the strengthening in the end use markets. The benefit of the strengthening that is appearing in our key markets is now in our order book. Orders received in the first quarter exceeded orders billed in the first quarter by approximately $12 million.

Lead times, though, remain short. Meaning that changes in order rates can quickly translate to higher or lower sales making sales forecasting difficult.

Assuming the stronger markets continue to favorably affect the company's order entry rate throughout the entire second quarter, we would expect sales to be in the range of 15 to 25% above the prior year's second quarter level. The second quarter may also be favorably affected by higher factory operating rates.

One potentially sizable benefit is that we are operating Utah at significantly higher rates in the second quarter. This, plus other operating factors, has the potential to improve earnings in the second quarter over the first quarter, by $1.5 million, or I should say by up to $1.5 million.

The second quarter may also be favorably or unfavorably affected by the mark-to-market valuations that negatively affected the first quarter's results by the $1.2 million we iterated in the press release. This of course depends on interest rates, and it depends on the company's stock price.

I can't project where interest rates and our stock price will do or where they will go in the second quarter but to date, in Q2, interest rates have climbed and our stock price has dropped and if these conditions hold, then Q2 would see additional benefit beyond the $1.2 million reiterated above.

Now with that operator, I'll turn the conference over for questions.

Thank you very much. If you'd like to did a question or make a comment you may signal us by pressing the star key followed by the digit one on your telephone keypad at this time. Once again press star one on your telephone keypad if you'd like to ask a question or make a comment. And we'll pause for just a moment to assemble the roster. And we'll take your first question today from Kyle Stults. Please go ahead.

Good afternoon, everyone.

Good afternoon.

John, you mentioned your Asian and foreign growth rate. How is the domestic growth rate in the quarter?

21%. Domestic was 21%.

Okay. What is your revenue mix look like right now, geographically, versus international versus domestic?

Domestic is a little are less than 70%. International is north of 30. 33, 67.

Okay. And that's been turning upward? Is that a fair assessment.

Yes, that's correct that's correct.

Okay. Has there been any major changes in your end market, the revenue mix, what does that kind of look like at this point?

Well, over the last couple of quarters, there has been an increase in the computer and telecom revenue mix and a flattening or perhaps in total percentage wise, a smaller piece in defense. Defense and aerospace. So it's been trending toward computer and telecom over the last couple of quarters.

Would you characterize that as your strongest end market at this point?

In terms of, when you say strongest end market what do you mean?

Just in terms of the growth rates you're seeing.

Yes.

Okay. Okay. Great. Thank you very much.

And moving on, we will now turn to Anthony Sorentino.

Good afternoon, everyone.

Hi, Anthony.

Hi. Some are worried about slower economic growth in China. Is this something to be concerned about or are those concerns overblown?

I am not sure whether they're referring to domestic consumption, because in our case, most of what we're doing in China is largely for assembly and then re-export. So I don't believe we would be concerned or heavily impacted by an effort on the part of the Chinese to slow their domestic markets.

Okay. And are you also seeing a pickup in the rate of growth in the other economies of the world, such as the United States, Europe, and Japan?

Yes. We saw, as he we mentioned just a minute ago, I think we were up around 21% in North America and if I'm not mistaken, it was like 44%, we were up in Europe. A lot of that being automotive.

Okay. Thank you and congratulations on a great quarter.

Thanks.

And at this point we have one name remaining on our roster and once again I'd like to remind the telephone audience they can press star one on their telephone keypad if you'd like to ask a question. We'll now go to John Walthausen.

Yes, good afternoon.

Good afternoon.

And congratulations on a very nice quarter there. I had a, I guess I'd like a little bit of explanation on a couple of items. John, your comments about what the possible impact of higher utilization rates or higher production rates in Utah, explain how that works a little bit.

John, we, as you may recall, we campaign Utah between barrel ore and bertrandite ores, and we run at lower operating rates from November through the middle of March typically, running only barrel ore. And as a result, there's a productivity and a cost penalty for not running the factory.

In the second quarter, in the middle of March we started Utah back on to bertrandite ore and in the second quarter we'll be running the facility to feed the other businesses the base stocks they need at significantly higher operating rates and that will have an impact on the quarter-over-quarter P&Ls.

And that will impact positively in the gross margin line?

Yes. And when I look at the segment stuff, that's part of the relatively high costs we have in the other segment?

In the all others.

That's Utahs and the all other segment.

Okay. Great. And then when I look at the, well I guess on the overhead reduction point, you commented that you had been beating the targets there but hadn't, in the first quarter, would beat it again, can you talk about why that was in the first quarter and why would should expect you to be back really keeping the eye on the cost side?

Well, actually, it was very close to the target in the first quarter, John. And we, a good bit of that was foreign exchange, being the reason. Jim, do you have anything else?

Yeah, also it was the effect of Utah that we were just talking about.

Okay that would be in the overhead?

Right, a lot of the overhead costs just fell right through to the P&L because we didn't make much inventory there.

Okay.

So you add those back and we would have hit the target. If Utah would operate.

And the stock-related compensation, I guess these are not strictly stock appreciation rights, can you talk a little bit about how they function and how they hit your income statement and what part interest expenses or interest rates have to play on it.

Let me comment on both with the clarity that I can give to it. On the stock-based deferred compensation plan that we're referring to, it's just that, it is a stock-based deferred compensation plan. Which fundamentally means that compensation deferred has put stock into our company stock into a plan.

There is just over 100,000 shares of our company stock in that plan. And under the accounting rules, as they value the stock moves up or down, we have expense or income, if you will, as a result. Therefore, with 100,000 shares-plus in there, each dollar move in the stock price is roughly $100,000 of P&L expense. And those --

Yeah, there is no smoothing or anything?

No.

And that's what comes into the other expense line?

Yes.

So that was the issue there. And interest plays how into that?

Okay. This is a little more complicated. We have, as you know, an interest rate swap. Now, the interest rate swap moves in value under the accounting regulations depending on movements in interest rates. This is a little less predictable. But a good, although not perfect, surrogate of how to measure movement here, at least for now, is the five-year treasury. And interest rates have been quite volatile the last six months, and in particular, during the first quarter.

In February and in March, there was a significant drop in the five-year treasury. And that in turn drove $500,000 of mark-to-market expense into the P&L.

Right. Okay, so this is, that's hedging on your borrowing, that's, okay. I didn't get that.

Right, this swap initially hedged the operating equipment lease that we had that the Elmore facility. When we paid that lease off, the swap no longer qualified for hedge accounting, and therefore changes in that swap's fair value get charged to the P&L in the current period rather than being deferred on to the balance sheet if we still had hedge accounting. We don't have hedge accounting from a technical viewpoint, but the cash payments that we have to make under the swap still serve as a hedge against our variable rate debt.

Right. And that goes through the other expense line or through the interest expense?

That goes through other as well.

Other expense.

Okay. That's helpful in understanding that. And I guess the final question is, on, you know, your registration, if I remember, when you announced that your stock was higher than it is now, can you talk about what the attitude is on going forward with this vis-a-vis the stock price.

John, this is Mike Hasychak. We have filed a registration statement with the Securities and Exchange Commission regarding the proposed public offering of our common stock. But due to the SEC rules and regulations, however, we cannot discuss the proposed offering at this time. If you have any questions regarding proposed offering, you know, please review the registration statement we filed with the SEC on April 2nd.

All right. Thank you, Mike. That will do it.

And moving on, we'll now take a question from Mark Parr.

Thank you. Good afternoon, guys.

Hi, Mark.

Congratulations. A great job. One thing I was curious about, you know, you had yet some very strong revenue numbers, and you know, I guess, you know, I'm thinking back to, I want to say like around 1993, after, you know, a certain slightly younger CEO had a couple of years to develop a marketing organization and there was an awful lot of recovery that was going on, or a lot of momentum on the top-line, as a result of new marketing programs. And I just wonder if this is an appropriate time to ask the question, whether or not, I'm sure there is some in-demand recovery going on but I'm guessing there may be some success with, you know, a resuscitated marketing effort, and I don't know if, Gordon, could you talk a little bit about maybe the, you know, the contributions of just pure economics as opposed to, you know, things that you're doing inside the house?

Yeah, Mark, I'll try, without, you know trying to be too specific as to numbers. I believe John mentioned in his comments that alloy in the quarter had about 30% of its growth coming from, you know, some of their initiatives. Be it new product, some of the new market efforts, and in particular, you know, the investments that we're making to penetrate the Asian marketplace. So all three are contributing. And I think we feel encouraged by our progress.

I think we're really starting to see some traction in the ToughMet product line, in heavy equipment, and that I think is certainly a positive. Plastic mold materials has definitely started to recover. It's interesting to see some of that now emerging in Asia. You probably read now about how much of the tooling market is starting to move over there, you know, because of the lower cost to fabricate tooling. So it's again good that we have the capability to serve that market in Asia.

I'm again encouraged about Williams. The work that is going on there to expand their penetration, particularly in vapor deposition targets, they're moving and making progress as they try to penetrate data storage, semiconductor markets so I'm, my recent visits there give me reason to feel that they're making, you know, some real traction. And TMI as well is starting to see some growth coming in their area.

So I think you're right. The lesson learned was that we needed to kind of keep our focus on developing product and market and I'm encouraged but I would frankly say that the biggest lift in the quarter clearly had to be the emergence of the computer telecom market again. So I mean we shouldn't pretend to suggest that the lift from the basic market wasn't very important in the quarter.

Okay. Terrific. I missed the first few minutes of the call so I apologize if this question has already been asked. But just looking at the first quarter cash flow it looks like you had almost $20 million of cash invested into receivables and inventories. And I'm just wondering, you know, what the outlook on the working capital side is over the next several quarters?

That's a good question. It's worth repeating.

I did comment on that, Mark, and fundamentally there was a 20 to $21 million increase in inventories and receivables in the first quarter due to the increase in business. And my comment was that debt climbed by less than that. Debt climbed by about $14 million in the first quarter. And that we would anticipate that through the second and third quarter that we would be, that that climb would be entirely eliminated.

Mark, I think it's also important to know that despite that increase in inventory, our turns did improve in the first quarter. And our day sales outstanding on receivables got just slightly worse, which is not unusual for the first quarter for us, and it's also not unusual when you consider that a large percentage of the growth came from international, which tends to have longer collection periods.

Okay. And one other question, if I could ask just on the raw material side. I realize that there's been a lot of press about, you know, China slowing down, but I think that at least from my end, the way I'm looking at things, China is just being a huge sponge as far as raw materials, you know, pretty much, you know, almost from A to Z. And I'm wondering if you're seeing any potential shortages of raw material inputs in the second or third quarter that may disrupt shipping activity?

No, not at all. I mean we've all seen increases in prices of those raw material, copper, nickel have all escalated, but no shortages.

Okay. Terrific. Well, congratulations on a great result. Look forward to the seasonally stronger second quarter.

Thank you.

And as a final reminder it's star one if you would like to ask a question. We'll now go to Martin Halabrin. Mr. Halabrin if you have a question, please go ahead.

Hi, nice numbers. A couple of questions. One, your European numbers seem extremely strong considering that European auto build really isn't going up very much. And I think European economics aren't still so great, especially in Germany. So what do you attribute this increase to?

I'm not sure I'm as close, Martin, this is Gordon Harnett as I might. But I think you're seeing a couple of things. One, a lot of that are components that might end up being re-exported for assembly in cars that are, you know, being built in other places. I think it probably also speaks to the growing electrical and electronic content on vehicles. And I think it also speaks to frankly the low inventories that we saw in some of our customer base over there.

So I know for a fact, as an example, in Switzerland and in France, we saw our partners over there increase orders, in part because they had, their inventories had been depleted and their customers as well. So there's no doubt in the quarter some of the demand we saw was for starting to refill pipelines that had largely been drained.

Thank you. Have you got a feel as to what's been happening in April? How, you know, we've completed four weeks. How was April compared to March?

Marty, we can't comment about the second quarter specifically or any week or month in that quarter.

You can't get an idea how the orders are coming in?

Well, certainly we know how the orders are coming in, and as I had indicated, in my comments, relative to coming into the quarter, we had an order trend in the first quarter that was up significantly and we came into the second quarter with orders entered exceeding orders shipped by about $12 million. But beyond that, we can't comment.

How about breaking down in the third quarter, the first quarter, I'm particularly interested about that third month, March, compared to the first two. How was March compared to the other?

Well, as I already indicated, the strength accelerated through the quarter.

Okay. Okay. Very good. I guess you can't answer my next question, which is that normally, the second quarter beats the first quarter and based upon your 15 to 25% projection that would, the top end would just about equal the first quarter so --

Well, let me, I won't comment beyond the projection but let me also suggest that the second quarter has not always beaten the first quarter.

But normally --

More often than not it has, but it hasn't always. A good bit of this depends on what happens with the summer shut-down periods and when Europe starts to slow down, and doesn't. It just, it's a quarter that sometimes is a little unpredictable.

Do you have any feel for inventories at this stage, they should be pretty light in the channels, but what kind of feel do you get?

I don't think that they're, I mean I think as I mentioned there was some replenishment starting to occur in the first quarter. I don't sense any excess inventories in the channels. I think everybody still remains, you know, fairly conservative, and because we have done so well relative to improving our lead times, and on time shipments, to customers, we were 95% on time in the quarter despite the surge in volume. That I think our customer base again doesn't give us a lot of lead times, but I'm not sensing excess inventories out there.

Thank you.

And our next question will come from John Walthausen.

Yes, I just wanted to come back and try to understand the tax rate, why it was so low and what that implies for the future.

Jim, go ahead.

Okay, I'll give it a shot. This goes back to the valuation allowance that we took at the tail end of 2002, where we took a valuation allowance against our deferred tax assets --

Oh, right, yeah, yeah.

So what this allows us to do is in periods where we make a profit, any tax expense, any domestic federal tax expense essentially is offset by reversing that valuation allowance that we had.

Right. And how much do we have as a deferred tax that is --

The -- I don't have the exact figure.

I can pull it out.

It was over $20 million coming into the year.

Okay. So we should see very low tax rate through the balance of the year.

The tax expense that we have right now is just simply state and local and some miscellaneous foreign taxes as well.

Okay. Good. Thanks a lot.

Gentlemen, at this point we have no further questions. Mr. Hasychak, I'll turn things back to you for any additional or closing comments have you today.

We would just like to thank you all for participating in the call this afternoon. I'll be around for the remainder of the afternoon to answer any other questions you may have. My direct dial number is 216-383-6823. Thank you very much.

And that concludes our program. Once again, everyone, thank you for your participation and have a pleasant afternoon.