Materion Corp (MTRN) 2006 Q2 法說會逐字稿

Greetings, Ladies and Gentlemen, and welcome to the Brush Engineered Materials second quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

It is now my pleasure to introduce your host, Mr. Michael Hayschak, Vice-President, Treasurer and Secretary of Brush Engineered Materials. Thank you, Mr. Hayschak, you may begin.

Good afternoon. This is Mike Hayschak.

With me today is Dick Hipple, Chairman, President, and CEO, John Grampa, Vice-President of Finance, and Chief Financial Officer, and Jim Marrotte, Vice-President and Corporate Controller.

Our format for today's conference call is as follows, John Grampa will comment on the second quarter 2006 results and the outlook and Dick Hipple will give a market update. Thereafter we will open up the teleconference call for questions. A recorded playback of this call will be available for 15 days by dialing 877-660-6853, account number 286 and conference ID 205236.

The call will also be archived on the Company's website, www.beminc.com. To access the replay click on quarterly earnings conference call under the investor's 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 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 welcome to our second quarter conference call. Thanks for joining us. As in the past, I'll review the quarter and then comment on the outlook. Following my prepared comments, Dick Hipple will review with you the market update and then we'll open the call for questions.

I'll reinforce and expand on the key points that were made in the press release, especially those related to sales growth as well as margins and the effect that escalating copper and precious metal prices have had on both sales and margins.

I'll also review the effect that our acquisitions have had on the quarter as well as how the previously announced change in the accounting treatment of the Company's deferred tax asset allowance affects the overall year-over-year comparisons.

As you know, this morning we reported sales and earnings that were well ahead of the expectations that we had coming into the quarter. Both sales and earnings were at the high end of the revised outlook we published in early July.

Sales for the quarter were up 39% or about $52 million to approximately $187 million which was a new quarterly high. Net income was up 26% to $7 million or $0.35 a share which compares to the $0.29 per share reported in the second quarter of the prior year.

I'd like to call your attention to two important factors that continue to affect the year-over-year comparison. First, metal price inflation or said differently, that portion of both precious and non-precious metal price increases that were passed on to customers in the second quarter had a much more significant effect on the reported sales increase than in recent periods.

Approximately 17 points of the reported 39% growth is metal price. Real growth including acquisitions was approximately 22% in the second quarter, about the same as the first quarter. Secondly, the previously announced change in income tax accounting negatively effects our year-over-year comparisons.

In the second quarter, the reported earnings per share improvement of $0.06 per share was negatively affected by approximately $0.08 per share due to the prior year having a lower effective tax rate.

A more appropriate measure of the Company's year-over-year performance improvement is found in pre-tax income. Pre-tax income grew approximately 76% in the quarter on the 22% real sales growth. You'll recall that we entered the second quarter with strong overall order entry and with mix showing some signs of improvement from the weaker mix we had seen through most of the prior year.

The weaker mix in the prior year was driven by softer demand from the applications we serve in the automotive electronics and the computer and telecommunications infrastructure markets. While these are our slower growth markets, there was notable improvement in these markets throughout the first half of this year.

We grew by approximately 30% in these markets in the second quarter after growing by 16% in the first quarter of 2006 and 12% in the fourth quarter of 2005. The three growth quarters followed these markets declining by about 10% through the first three quarters of 2005.

Net of metal price and currency, our growth in the quarter in these markets was in the 16% to 18% range. In the quarter the markets we serve that were stronger than through most of the prior year continued to develop nicely.

These are our fastest growing markets. They include magnetic data storage, wireless plutonics, handsets, semiconductor, industrial components and heavy equipment.

Here, we grew by approximately 50% compared to the second quarter of the prior year. Net of metal prices, our growth in the quarter in these markets was in the 25% range. Our new product initiatives were important in the overall growth in these markets.

In the second quarter of 2005, we were shipping materials for the James Webb telescope program. That program was substantially complete by the end--by mid-year 2005 and thus in the second quarter of the current year , we had no shipments which in turn negatively affects the overall year to year comparisons by about $2.6 million or two points of growth.

Netting this and other factors highlights that our base businesses continue to grow significantly. We continue to see strong real growth in the quarter.

Real growth or our organic growth if you will was approximately 20% consistent with the first quarter's real or organic growth of 20% as well. Including the acquisitions and excluding one-time programs, our growth is in the 26% to 27% range.

We were pleased to see the continued improvement in gross margin in the quarter. Gross margin as a percent of sales improved by an additional one point in the quarter compared to the first quarter.

Year-to-date, compared to the fourth quarter of 2005, gross margin is up 2.4 points. The improvement is due to a combination of factors including the improved mix, better pricing, our acquisitions, and real volume growth.

Although gross margin as a percent of sales continued to improve, it was impacted compared to both the prior year and the prior quarter by higher precious metal and base metal prices. The Company continues to only be able to pass through to customers a portion of the higher costs primarily, copper.

While we continue to be successful at passing along a higher percentage of our copper costs, the second quarter brought with it even more of an unprecedented volatility in copper prices. Copper prices increased an additional 40% during the second quarter after increasing 15% in the first quarter and 40% in the whole year of 2005.

In fact, at one point during the second quarter, copper was up over 60% compared to where it ended the first quarter. This hurt our gross profit and our pre-tax profit by approximately 2.4 million in the quarter compared to the prior year.

Precious metal and base metal costs pass through in sales without any margin benefit coupled with a portion of costs that could not be passed through combined to lower the second quarter 2006 gross margin as a percent of sales by approximately 4.4 points. A majority of this margin decline is due to the inflated value of the top line.

As we announced in December of last year and have reinforced in several communications since, the Company expected to record a higher provision of income tax in 2006. This negatively affects the quarterly earnings comparisons to the prior year.

This was due to a change in the accounting treatment of the Company's deferred tax asset allowance. It's important to note and to continuously reinforce that since the Company continues to have significant net operating loss carry forwards, most of the additional tax provision is non-cash expense.

A 31.5% effective tax rate was applied in the second quarter's income before income taxes. This compares to 4.3% effective tax rate for the second quarter of 2005. The major difference between the two rates is found in domestic federal tax expense which in 2005 was offset by the reversal of a portion of the Company's deferred tax asset allowance.

As I indicated earlier, the second quarter 2006 earnings per share comparison to the prior year is negatively affected by approximately $0.08 per share due to the prior year having the lower effective tax rate. On a pre-tax basis, earnings were $10.2 million in the quarter compared to $5.8 million in the second quarter of 2005, an increase of 76%.

Year-to-date this factor affects the earnings per share comparison by approximately $0.13 per share and year-to-date pre-tax income is up approximately 70%. Now turning to the outlook.

Most of our markets were stronger than expected during the first two quarters of the year, and we continued to make good progress with our new products and our initiatives to penetrate new markets. We also made good progress in the first two quarters with our initiatives to improve margins and our acquisitions are adding to our growth in profits as well.

These positive factors have continued thus far in the third quarter. We believe this condition will help cushion the effect of the normal seasonal factors that usually result in a significantly lower revenue base in the second half relative to the first half.

At this time, sales for the third quarter are expected to be in the range of $170 to $180 million, up approximately 25% to 33% compared to the same quarter of the prior year. Pre-tax earnings are expected to increase in the range of 55% to 95% in the third quarter, and earnings per share are expected to be in the range of $0.23 to $0.28 per share.

And while we see some overall seasonal softening of demand in certain segments of our markets and our markets are subject to inventory swings, we are optimistic about the balance of the year. Assuming no significant change in overall market conditions whether driven by macroeconomic conditions or in the Mid East conflict, we are raising the outlook for the year, and at this time we expect sales for the year to be in the range of $690 to $710 million up approximately 28% to 31% compared to the prior year.

And earnings for the year are now expected to be in the range of $1.09 to $1.17 per share compared to our previous estimate of $0.95 to $1.10 per share. I have to continue to remind everyone though that it is really difficult to get clear short-term signals from our varied markets and our geographically disbursed markets.

Our lead times continue to be short, meaning the changes in order rates quickly translate to higher or lower sales in a given quarter. With generally high incremental margins, small changes in revenue can have a rapid noticeable effect on earnings as can changes in mix. As we have seen we are very sensitive to volume and mix shifts and are subject to significant upside gains and potential downside risks in individual quarters.

Now I'll turn call over to Dick Hipple and following Dick 's market update, we'll take questions.

Thanks, John.

As you can imagine we are pleased with our results in the second quarter and my hats off to the Management team and employees at all of our operating units who are really making great things happen. John spent a lot of time focusing on our sales growth which I will return to in a few minutes but I'd first like to mention that in addition to our growth in sales, growth in new products, and successful acquisition integration, we are still making good progress on the operating front.

For example, in the second quarter, we hit an all-time high of productivity and yield rate in our Alloy division. Productivity is up 60% as compared to just where we were four years ago. As far as our markets are concerned we are seeing stronger market conditions than forecasted in most of our key market segments.

We have been enjoying strong market conditions in the cell phone and portable electronic sectors. Cell phone sales are expected to be 18% higher in 2006 than 2005, and as phones become smaller and more complex, both our Alloy and Williams divisions see application intensity rise along with the higher sales from the better market conditions.

A new area of growth for us that I have talked about before is the hard disk drive market. Technology demands continue to increase which results in our targeted growth applications at Williams in magnetic media and disk drive arms at our TMI division to see growth rates in excess of this already robust market area which is increasing at a 15% to 20% annual rate.

Our Alloy division is also seeing growth in excess of forecast in our industrial market segment, which includes oil and gas, heavy mining and construction equipment, and aerospace. These areas have remained strong and are also supporting price increases along with ongoing penetration and new application wins of our new ToughMet product line.

In our high BE products division, we have not seen the strong market lift in the defense sector as the other sectors I have discussed. We do expect the second half to be better here as several of our new product initiatives begin to gain traction with new orders.

Another key initiative for us has been to continue to grow internationally. During the first half of this year, our international sales have increased by 41% as compared to our total overall first half sales growth of 34%. So we are increasing our international sales at a faster rate than domestic.

As John mentioned, we are on track to meet our financial targets with our three recent acquisitions at our Williams division. More importantly, from a longer term perspective, we are seeing new opportunities for growth and synergies evolving from these new acquisitions, and again, we have great management teams leading the charge.

As I mentioned in the last several calls, we are aggressively seeking to achieve additional pass through on copper in our Alloy division, and I'm happy to report that we are achieving this objective. Today, we are at approximately 75% pass through on current orders and expect to be close to or over 90% by the end of the year.

In looking forward, I expect that our strong market conditions will remain for the balance of the year tempered by the normal seasonal factors that we see in the second half with the summer shut downs and our holiday periods, and obviously any significant external world events or significant changes in consumer spending patterns would change that outlook.

Now, I'd like to open it up now for questions.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question comes from Avinash Kant with Canaccord Adams, please proceed with your question.

Good afternoon, John, and Dick.

Good afternoon.

You talk about seasonality in the second half and it does seem to reflect over the historical numbers. Now, which divisions are more prone to seasonality versus the overall business?

The Alloy division and--they're all subject to that but probably Alloy and TMI are more subject to that than Williams at this point.

Okay.

And you have factors like for example, you're probably well familiar in like in Europe, basically Europe shuts down for the month of August. So for example, the highest intensity of European sales is in our Alloy division so you see that there.

And at this point given the semiconductor demand, have you heard much from the electronics customers about some slow down in the second half?

Well, what you see in the paper, we've seen a recent TFE LCD kind of over supply there and there's been some recent reports by RFMD that there might be a little build up of inventories there.

We haven't seen that at this point in time but again those are the cautions that we put out there. We are subject to swings and order books as cycles may hit the marketplace.

Okay.

But overall, I think what we take solace on is that if you step back and you look at the overall macro situation, although we may be subject to some inventory swings from time to time which we are, the overall market segments that we seem to have some pretty good robust macronumbers behind them.

And in the guidance for Q3 that you have talked about, what kind of gross margins and what kind of tax rate have you modeled?

We've modeled an effective tax rate consistent with the first half for the second half of the year, so 31.5% to 32% effective tax rate would be in our models, and then as far as margin improvement, as we've already indicated, we had set a goal and anticipated that we would see margin improvement versus the fourth quarter of last year of two points for the full year 2006, and obviously through the first two quarters of the year we've exceeded that.

We would anticipate that the 2.4 points that we have achieved in the first six months of the year will certainly maintain in the second half of the year and grow it by perhaps as much as another full point.

Thank you so much.

Our next question comes from Chuck Murphy with Sidoti & Company, please proceed with your question.

Hi, guys, how is it going?

Hi, Chuck.

Just to make sure I'm understanding you correctly, it looked like Williams, excluding the precious metal prices and excluding the acquisition impact, looked like it's still did about 28% growth in the first half; is that correct?

That's correct.

Okay, next question is what do the growth rates look like for the recently acquired company such as TFT and [Serack] as opposed to Williams?

Can you repeat the question?

The growth rates for the acquired companies versus Williams?

We don't have the data here, but individually, about the same, only very slightly below?

Okay.

Yeah, we would expect a similar growth rate from our acquisitions.

Okay.

That's one of our critical things when we're looking at acquisitions is what is the potential growth rate so we certainly have got those targeted to grow nicely.

Okay. Next question, are you still expecting to see revenue from the jet project coming in in the next half for Beryllium products?

Yes, we are.

What percentage of sales for the metal systems unit or alloy in particular are ToughMet sales?

We'll look that piece of data up. Roughly, I don't have it off the tip of my tongue. Oh, out of that, we're going to have about $14, $15 million sales coming out of that facility that produces that product this year.

Okay. And final question. What are your feelings on telecom equipment market these days and any signs from customers?

When you talk about--I want to make sure I know where you're heading with the question. Telecom equipment, are you talking about like cell phone wireless or are you talking about infrastructure?

Mainly infrastructure as it relates to Alloy products in particular.

Well we're seeing a growth pattern there right now and we believe that's coming from infrastructure build outs in China and maybe the early parts in India also, but that has picked up.

Certainly not seeing the robustness that we're seeing in some of these other segments, but we are seeing that a nice steady increase in the telecom sector right now and Alloy is seeing that.

Okay, great. Thank you.

Our next question comes from Bob Schenosky with Jefferies & Company, please proceed with your question.

Good afternoon, guys. I have got a couple here. For the quarter, what was new product growth?

We don't have that broken out specifically, the new product growth.

For the half, new product was between $25 and $30 million of total revenue and that was about an increase of 30% to 40% compared to prior years first half in the new product area.

Okay, great. And also when you think about the micro electronics group, we saw sequential margins come down a bit I'm sure because of the metal pricing scenario.

Correct.

Can you quantify it off you take that out what margins would have looked like because you gave us the number for the whole company.

In the micro electronics group?

Right.

We would have to do the math real quick but metal prices in that group for the first half was approximately 12% and then in the second quarter approximately 17%.

All right you're making me do all the math!

Your question was the second quarter, Bob?

That's fine, John, I've got it.

Second quarter was 17%. Year-to-date was 12%.

Great. As you talk about the seasonality in the second half of the year, as we think about the microelectronics group, is it now fair to model in that microelectronics group will finally surpass 50% of revenues now?

It's getting real close.

Yes.

Okay. And just a forward question, more in general than anything else, but you've talked about copper and that you'll be about 90% by year-end. Given what you've learned over the last couple of years, how would you look to handle '07 contracts and what you plan to hedge?

Well, obviously if you've got the majority of your businesses pass through, you don't really need to hedge, and we're trying to get to that position of not trying to guess and due to the volatility that copper is seeing, we're obviously finally getting that response from the customer base.

I think everybody is at that point now so that our--the need to hedge will come down significantly.

Right, Dick, but I imagine if you think about customers like the auto companies, which always push back a bit. Would you look to match your copper needs for the year at the start of the year so you have consistency or will you--

Well what we'll do is we'll work with our customer base on that. From ground zero, we do have agreements with major automotive companies that pass through on copper so I guess they are over the hump on that; however, if a customer wants to lock in pricing and is uncomfortable with that we'll do that hand in hand.

In other words right now we're kind of on a floating basis, so if we step away from that, we don't want to lock it in in case copper comes down and then we get burnt so that if the customer wants to work with us and have a joint hedging program that he will guarantee us a certain amount of product if we hedge it, we'll do that with the customer, absolutely.

Okay, great. And then finally, many of the companies have reported second quarter have been bullish for the entire back half of the year which I think is a bit premature depending upon what the fed decides to do but it appears that you have been more realistic or at least more conservative given the lack of visibility into 4Q. With that in mind what kinds of things do we need to think about that would be built into either the $1.09 or the $1.17?

I think you've characterized it very well, Bob. Should there be any negative move, let's say with what the fed does or anything that drives the macro economy and particularly our markets one way or the other, we'll move with it.

We think we've been realistic about the second half range, we think we've taken into consideration the seasonality and the trends that we have in our own margins. I would think for us it would be macroeconomic movements, world events, and/or any significant move in those metal prices.

Okay. So in other words, I just want to be very clear, John, that there's no unrealistic expectations or any reach goals I guess is a better way to put it in that $1.17 at this point?

Absolutely not.

Great. Thanks for your time again and again a great quarter.

Our next question comes from Anthony Sorrentino with Sorrentino Metals. Please proceed with your question.

Good afternoon, everyone.

Good afternoon.

Will your scheduled summer shut downs be shorter than they usually are?

Actually, Anthony, we as a Company drifted away from full scheduled shut downs two years ago and we are on rolling maintenance programs, so fundamentally, that's correct. Those shut downs, if they exist, we do have some rolling maintenance occurring in the third quarter for approximately two weeks, but fundamentally versus our history, yes, significantly lower.

Okay. Thank you very much, and congratulations on a great first half.

Thank you.

Our next question comes from Mark Parr with KeyBanc Capital Markets, please proceed with your question.

Hi, that's a new one on me. How are you guys doing?

Okay.

At first just congratulations on the progress and just I'm amazed with as good a quarter, stock is only down $1.50 right now.

Mark you got to be kidding me!

Well, yeah, there's a--Carpenter was down $15 yesterday on a good quarter so I mean, I guess it's all relative. One of the things, Dick, you had mentioned about productivity up 60%. I was just curious if you could give us some color on how you measure that?

Well it's pretty simple. This is just output per man hour. Pounds per man hour.

Okay, so this gets back to the--to kind of the right sizing that was done several years ago then?

Well it's far beyond that. It goes far beyond that.

Because we're talking about like for example, we had about 15%, 16% improvement year to year within this recent quarter and that's just doing--that's really been driven through our lien sigma effort and figuring out ways to make things more efficiently and more effectively, taking working capital out and just operating with less man hours.

This is not going to stop. There's not just some step function change we took a couple years ago. This is ongoing efforts that continue to pay dividends.

Well this is my next question was as you look at the progress that you've made and the opportunity, what inning would you say that you're in? Are we in the sixth or seventh inning on this process or where are we in the ball game?

There is no end to this game.

Okay. So but would you say that we're early in the process, well along, I'm trying to get some sense of magnitude here as we look out over the next--

Well obviously any time you start a process, you have the little hanging fruit and make great progress but we have objectives that every year we're going to be increasing productivity by 5% to 10%.

Okay.

That's what the management objective is that and we've proven that to be the case.

Okay. Thanks for that. I had one follow-up if I could. Clearly it seems as if your acquisition orientation is paying dividends.

I was wondering if you could give us an idea of how much dry powder you'd have for the M&A arena over the next 12 months or so and also are there any new internal Brownfield, Greenfield kinds of projects you're contemplating that could increase your organic growth opportunities?

John, why don't you answer the first and I'll answer the second.

Yeah, Mark, nothing has changed from what we have publicly said previously relative to our annual ability to finance small augmentations in the Company without affecting our year-over-year key financial metrics.

In other words what can we finance from our cash flows and that goal for us has been approximately $50 million per year and as you know, last year, we spent about $38 million. So if there are transactions that look like augmentations to our businesses available to us that are in that ballpark, we would continue to take advantage of that in that range.

With regards to the second part of that question, the answer is yes, we do see some areas. I mean some of our new products are taking off so rapidly that we're going to have to spend some modest capital but I don't see that our situation is changing.

Basically we've been spending a little bit below depreciation. That might go up just slightly, but it's very exciting because what we're going to be able to do is respond to some of these market increases with the new products with what I consider some very very small modest capital but we're not looking at any significant expenditures here to bring some of these new products through, so we'll have a couple but I look at those as just some great opportunities that we have going forward to follow the marketplace that we have.

Okay. I appreciate it. Thanks for that and just one last question if I could.

Could you give us an update on the Beryllium metalization opportunity that you've been discussing with the government?

Well that's proceeding very well. The government did approve and I'll probably get the number wrong but it's around $10 million for the first phase and what that phase includes is all of the detail engineering for the new facility and to go out for competitive bids for construction, and all that is proceeding on schedule and we'll be looking at the second part of that project next year and looking for the second phase of the government approval to build the plant.

Do you have any idea where you're going to build it at this point?

That has not been announced at this point.

Okay, terrific. Again, congratulations on all of the progress.

Thank you.

Our next question comes from [Martin Heilbrun] with Winchester Group, please proceed with your question.

Hi, just as aside, which I wasn't planning to make, I was around for the last time, I think the GSA paid for the whole facility back in 1962.

But anyway, to get back to my question, I noticed in your tax treatment, if I figured this right, you had a tax for the six months, you had a tax item of $5.660 million, and a deferred tax decrease of $4.383 million, so roughly $1.25 million net. Was that your actual tax payment? And the 4.4 million was cash?

The difference there represents state and local and foreign taxes.

Right. So basically, you got 4 million, tax loss for credits?

In that ballpark, yes.

Okay. Another question, in your first half or first or second quarter, what kind of increase in unit in inventories did you have or poundage, however you want to describe it?

The value you see on the balance sheet essentially is all real growth in inventory. The use of the LIFO accounting method essentially strips out the increased price and charges that all off to the P & L so when you look at our balance sheet inventory of $132 million, that essentially is volume growth and it's important to point out that while the inventory values are up, our inventory turns have remained fairly constant.

In fact they actually have improved earlier in the year but they are constant with the end of last year.

Your LIFO inventory I think was up $22 million in the six months. So most of that in the second quarter, that means 12 million in the second quarter but if you have more--if you're having real growth, you'll be increasing your poundage.

The pounds in inventory are up, yes.

So I'm really saying is if I had such a huge increase in your LIFO which is $12 million or $0.60 a share--

That LIFO reserve increase is the offset to the FIFO value that is driven by the higher metal prices.

Right, I understand that. But that comes out of earnings.

So basically my question comes down to is if your copper remains at this present price of about 350 or so, what happens to the LIFO reserve for the next six months assuming your actual inventory requirements stay flat or go down a little bit seasonally ?

LIFO reserve is there. The increase in the LIFO reserve, let's get this so we all understand, is an offset to the FIFO value.

That increase, that $12 million increase of the LIFO reserve was not a direct P&L hit. And the LIFO reserve will move up and down with changes in the copper prices and also gold prices that also affects the LIFO reserve. Whatever happens with those prices in the metals in the second half of the year.

Other factors can also affect the LIFO reserve, the general inflation rate, the overall level of our inventories as well.

But doesn't the increases in the LIFO reserves reduce earnings and decrease or increase earnings?

The major cause for that increase in the LIFO reserve was strictly metal price.

Right.

And it's offset by the increase in the FIFO Value of the inventory.

Anyway, I thought you would probably have a fairly significant increase in your profitability if your inventory goes down a bit or flat in the second half, but anyway, that was my question. Thank you.

Thank you.

Okay.

Our next question comes from Brian Harvey with Wm Smith, please proceed with your question.

Hi, guy guys, good afternoon. I was just hoping that you could shed a little bit more light on the comment about where those acquisitions are driving new opportunities and synergies?

Sure. The three acquisitions that we have are in, they are different segments. One is shield kit cleaning, chamber services, which is a great growing area for us and we were able to increase our technology base there and it's a business that we're able to put a fence around our business with the targets, PVD targets at Williams, so that Williams can sell the targets and then also help service--the return of the equipment that has to be serviced that the targets are used in and then that becomes very synergistic because the equipment that comes back needs to be refined and recover the precious metals off of it which is where Williams comes into play because they have the refining capabilities.

So now that they can provide a much broader service base to our customer, so the synergies that are happening there are two-fold. One is it's helping expand the market opportunity for Williams because they are able to offer this additional service and by the way nobody else offers that service from our competitor's standpoint so we're able to offer something different.

This is also given us a opportunity for growth overseas that we have plans to expand that business both in Eastern Europe and also hopefully in Asia, so this is a methodology to help grow the core business by providing better service. So that's one aspect to highlight. We made two other acquisitions last year, the inorganic chemical business at [Sarack].

[Sarack] does--first of all, it augments our market base because they're big in the optics area, and they are also a supplier of physical paper deposition targets but they are chemical targets so it's augmented us from some markets and also some of the material base beyond just metals, and that in combination with the acquisition we made last year on actually we've gone downstream a little bit into the sputtering area, TFT in California, they actually sputter targets and [Sarack] was a big supplier in the TFT and Williams was a supplier of packages that TFT is producing so right now, we've got the ability in a lot of these new growing optics areas to supply the coatings on the optics, the packaging, and also supply the coatings technology which TFT has some very unique capabilities.

It's one of the very rapid growing areas right now is in the Homeland Security and even telecom area of special IR applications that we're able to combine all three companies together and offer a total technology package which again nobody else is able to serve.

The other synergy that we're seeing is through the Williams is a broad--it has a broad sales and marketing base across the world whereas [Sarack] was pretty much a U.S. company so we've been able to leverage the international breadth of Williams to bring international sales into [Sarack] so that's another synergy that we have so those are probably the key ones.

Thanks, that's very helpful. So within the increased guidance you guys just laid out for the year, how much would these new acquisitions contribute to that in the past? I believe you said they were going to contribute about $6 to $7 million in operating profit. Is that still the case for them or is there a little increase there?

There's no increase there. The increase in the guidance was related to the other businesses.

Okay. All right, thank you. Good luck in the remainder of the year.

Thank you.

[OPERATOR INSTRUCTIONS]

We have a follow-up question from Avanish Kant with Canaccord Adams, please proceed with your question.

Maybe you did talk about this one, but the full year guidance that you have at this point, what kind of assumptions do you have for the corporate prices for the rest of the year in that guidance?

The assumptions there is that there's no additional movement up or down in copper from where it was at the end of the second quarter.

The assumption that's also inherent with that is related to the comment that Dick had made about what percentage of the copper on new incoming orders we're able to pass on to customers which Dick--as Dick had indicated 75% of the incoming orders now are copper pass through based.

A combination of that with our hedges leaves us feeling that in the second half of the year, our margins will climb from where they were at the end of the second quarter, so copper diminimus impact second half versus first half.

Great. Thank you.

There are no further questions in the queue. Do you have any closing remarks?

Yes, I'd like to thank everybody for participating on the call this afternoon. This is Mike Hayschak. I'll be around for the remainder of the afternoon to answer any further questions. My direct dial number is 216-383-6823. Thank you very much.

Ladies and Gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.