Materion Corp (MTRN) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Brush Engineered Materials fourth quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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 introduce your host, Mr. Michael Hasychak, Vice President, Treasurer and Secretary of Brush Engineered Materials. Thank you, Mr. Hasychak. You may begin.

Good afternoon. With me today is Dick Hipple, President, Chairman and CEO; John Grampa, Senior 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 fourth quarter and 2006 results and the outlook for 2007. 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 until March 9, 2007, by dialing area code 877-660-6853, account number 286 and conference ID 229430. 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. Now I will turn it over to John Grampa for comments.

Thank you, Mike. Good afternoon, everyone, and welcome to our fourth quarter and year end earnings teleconference. Thanks for joining us today. As in the past, I will review the quarter as well as the year and then comment on the outlook. Following my prepared comments, Dick Hipple will provide you with a market update and then we'll open the call for questions.

I'll reinforce and expand on the key points made in the press release about the quarter and the year, especially those related to our sales growth and our margin growth. I will also review the effect that the announced reversal of the Company's domestic and foreign deferred tax asset allowance had on our results and the impact that that reversal had on the year-over-year comparisons for both the quarter and the year. Then I will review the outlook including the factors behind the announced increase in our projections and the factors driving the increase for the first quarter and the full year 2007 numbers. Let's begin.

As you know, this morning we reported sales and earnings that were ahead of the expectations that we had coming into the quarter. Sales for the fourth quarter were up 48% or about $57 million to about $208 million which was a new quarterly high. The previous quarterly high was the most recent quarter, the third quarter of the year. Net income excluding the effect of the deferred tax asset allowance reversal was $0.44 a share which compares to $0.10 a share reported in the fourth quarter of the prior year excluding the impact of the nonrecurring items booked in 2005.

I would like to call your attention, once again, to two important factors that affect the year-over-year comparisons. First, metal price inflation, or said differently, that portion of both precious and non-precious metal prices that we were able to pass onto your customers in the fourth quarter, had a similar effect on reported sales increase as it has had in recent periods. Approximately 12 percentage points of the reported 48% growth is metal price. Thus real growth, including our acquisitions, was approximately 36% in the fourth quarter which was the strongest real growth rate of the year. Organic growth, that is growth excluding both metal prices and the influence of acquisitions, was approximately 32% in the quarter, also the strongest organic growth quarter of the year.

The second factor, is the change in income tax accounting, which as you know, affects our year-over-year comparisons considerably. In addition, in the fourth quarter of the prior year the Company took a charge related to the prepayment of expensive subordinated debt. This, too, affects the year-over-year comparisons. A more appropriate measure of the Company's year-over-year performance improvement for the quarter is in pre-tax income. Pre-tax income, excluding the subdebt charge, grew almost sixfold on the 36% real sales growth. We're pleased with that kind of sales to earnings leverage, the kind that we saw in the fourth quarter.

You'll recall that we entered the fourth quarter with most of our markets having delivered strong overall order entry. With our new products and our initiatives to penetrate new markets delivering solid top line benefits, and our margins expanding in spite of the metal price pressures. We expected that these conditions would help counter the lower seasonal demand the Company often sees in the fourth quarter, and this, in fact, did occur with both our sales and our margin growth exceeding our expectations.

In the fourth quarter, the markets that we serve that were stronger through most of the year continued to develop nicely. These are our fastest growing markets, much of which is driven by consumer electronics. They include magnetic media, wireless photonics, handsets, semiconductor, industrial components, oil and gas and heavy equipment. Again, we grew by approximately 48% compared to the fourth quarter of the prior year and again net of metal prices our growth in the quarter was in the 36% range. Our new product initiatives are important in the overall growth.

Coming into the latter part of 2006 we were pleased to see the continued improvement in the Company's gross margins. Gross margin as a percent of sales had improved by approximately 3 points compared to the levels we were operating at at the end of 2005. The improvement we were seeing was due to a combination of factors including better mix, better pricing, operating improvements and real volume growth. The factors that helped drive gross margin up during the first half of the year haven't changed. These factors continue to yield solid benefits, actually increasing benefits in the fourth quarter.

Although gross margin as a percent of sales continued to be negatively affected all year by higher precious and base metal prices, we made good progress in our efforts to pass along a higher percentage of the material cost increases we had seen. The fourth quarter brought with it even more visible progress. In the fourth quarter an increased pass-through level combined with our hedging programs, as well as more stable copper prices, eliminated the negative impact copper had had on our P&L. This compares to a negative impact of approximately $3.2 million in the first three quarters of the year.

The good news is we expected to be and are now over 90% effective with metal pass through neutralizing the metal price risk to the Company's margins. Our gross margin for the fourth quarter was the highest of the year at 23.3 percentage points, an increase of 4.4 points compared to the prior year's fourth quarter, and net of metal price influences, the margin actually grew 5.5 points compared to the fourth quarter of the prior year.

As we announced in December of last year and reinforced in several communications since, the Company expected to record a higher provision for income tax in 2006. This, in fact, did occur, and it 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 is important to note and to continuously reinforce that since the Company continues to have significant net operating loss carry forwards, the majority of the additional tax provision is non-cash expense.

Similarly, in the fourth quarter of 2006 the Company reversed its remaining domestic and foreign deferred tax valuation allowance. This amounted to approximately $21.3 million dollars and resulted in a non-cash benefit of $1.04 per share for the quarter and $1.07 per share for the year. For the full year, sales hit a record $763 million, up 41%. Excluding metal prices, sales were up 28%. The fourth quarter market factors I referenced earlier were the factors that drove the full year's real growth, as well.

Earnings for the year hit $2.45 a share. However, without the $1.07 per share impact of the reversal of the deferred tax asset allowance, earnings would have been $1.38 per share. While this compares to a reported $0.92 per share for the prior year, on the same basis that is removing the effect of the prior year's deferred tax asset allowance accounting and the debt prepayment charge taken then the $1.38 per share would compare to $0.62 per share.

The Company continued to strengthen its already strong balance sheet in 2006 and ended the year with significant financial flexibility. Debt was reduced further during the year bringing debt to debt plus equity to approximately 15% from 21% at the beginning of the year. This was accomplished while investing over $26 million in an acquisition and approximately $57 million in inventory and receivables to support the substantial increase in our sales.

During the year, we worked with our financial partners to add both scale and flexibility to our credit lines to support our expected growth. One final point before turning to the outlook. Beginning with the fourth quarter the Company changed its segments to more closely align with the way the Company is currently managed. As a result, there are now four segments being reported. Our larger segment, Advanced Material Technologies and Services as well as Specialty Engineered Alloys and two smaller segments, Beryllium and Beryllium Composites and Engineered Materials Systems. Now I will turn to the outlook.

As I already summarized, most of our markets were much stronger than expected throughout 2006. We made good progress with our new products, our efforts to penetrate new markets, our global expansion initiatives and with our initiatives to improve margins. This brought significant growth in both sales and profits in 2006, especially in the second half of the year. We believe that the Company's global markets will continue to present double-digit organic growth opportunities in 2007.

The year is off to a good start, stronger than we had been expecting. Inventory corrections in our markets have been mild thus far, and our margin improvement gains appear to be holding. We are also seeing a significant ramp-up with our new products in the media market. In addition to these favorable operating factors, the Company expects a sizable cash and earnings benefit in the early part of the year from the sale of ruthenium inventory that was in our production system to support the development of an initial ramp-up of new media-related products. This inventory was in our system to support our product launch efforts and due in large part to very low initial yields.

In recent weeks market prices have increased significantly, and as a result the sale of this material will yield a benefit that we would not have normally expected. As a result of these factors, the Company at this time expects 2007 sales growth to be in the 25% to 30% range. Assuming no change in these trends, sales for 2007 would then be expected to be in the range of $950 million to $1 billion. The first quarter of 2007 will be positively affected by all of these factors, and we'll see additional growth from the initial supply chain ramp-up of the new products into the media market.

First quarter 2007 sales are currently expected to be in the range of $250 million to $265 million, up 50% to 60% compared to the prior year. Excluding the additional benefit from the inventory that was in the production system, earnings for 2007 are currently expected to be in the range of $2.00 to $2.75 per share. Assuming current metal prices hold, the benefit for the year from the sale of the inventory is estimated to be approximately $1.00 per share which brings the full year 2007 to an estimated range of $3.00 to $3.75 a share.

For the first quarter, the Company currently expects earnings excluding the inventory benefit to be in the range of $0.60 to $0.75 a share. The higher margin on the inventory that was in the system at lower costs is expected to add approximately $0.75 per share to the first quarter earnings, bringing the total currently expected for the first quarter to the range of $1.35 to $1.50 per share.

It is important to note that the Company's sales and earnings estimates for both the first quarter and the full year are subject to significant variability based on metal prices and metal supply assumptions, as well as significant fluctuations in demand levels driven by both inventory corrections and new product ramp-up rates in critical markets such as the magnetic media market.

The outlook for the quarter and thus the year are based on the Company's best estimates at this time. Now I will turn the call over to Dick Hipple.

Thank you, John. Before discussing our 2007 outlook and market update, I would like to make a few comments and highlight some factors from 2006. During the last several years, each business segment has set a course to further our capabilities to develop new products and to serve our global customer base. We are driven to extend our technology and capability to help our customers solve the most demanding material challenges.

In 2006, this strategy was instrumental in supporting our strong profitable organic growth which is our highest priority. I am proud to summarize what the great team of dedicated employees has accomplished at Brush Engineered Materials in 2006. A 28% year-over-year real growth, 16 consecutive quarters of sales growth, pre-tax earnings have tripled. Positive cash flow, even after a significant working capital increase to support higher sales and a cash acquisition that occurred earlier in the year.

Our international sales are up 47% exceeding our domestic sales growth of 38%. International sales now represent approximately 35% of our sales. We also opened up three new international offices in Japan, Korea, and China to support the increasing global opportunity of Williams Advanced Materials. And our year-over-year margins expanded by 1% and 3% net of metal pricing supported by better mix, higher volume, and copper costs being passed through in our alloy business.

Now that the door has been closed on 2006, we are very excited about our 2007 opportunities. Prospects are improving at all of our segments provided that positive macro economic conditions hold. A significant opportunity for us is Williams' progress in advancing its participation in the magnetic data storage market. The magnetic data storage market was targeted as a key long-term strategic initiative by Williams several years ago.

We have invested in technical resources, research and development, invested capital, and invested in strategic alliances with several universities across the globe to earn our place in this new important market. Williams has made great strides in penetrating this market, but the combination of a dynamic factors of market ramp-up cycle, market share, and expansion start-up risks are all factors contributing to go our wide earnings forecast range. I would also like to spend a few minutes discussing the subject of ruthenium, which is a major factor in our forecasted results, particularly the one-time benefit expected in the first half of 2007.

In the middle of last year, Williams began its ramp-up to produce the new PMR targets for the magnetic media market. As a reminder, PMR, or perpendicular magnetic recording, is the new technology which dramatically increases storage capability in hard disk drive. These targets contain ruthenium which has remained at relatively stable prices during the last several years. However, in a matter of just eight weeks during November and December of last year, the price of ruthenium increased by a factor of three. Today it is over $800 an ounce, greater than the price of gold.

During this time Williams was in the middle of a ramp-up stage with excess ruthenium in our production process to allow for normal start-up issues such as higher yield losses. This material that was purchased earlier in 2006 will be sold at market prices during the first half of 2007 as targets are shipped. I would like to note that ruthenium is also used in the older LMR technology and in the magnetic media head business which we also participate in.

The dynamics of the market have changed rapidly, and we have now shifted our business model in the magnetic data storage area like our other precious metal business areas where our customers pay what we pay for the precious metal. It is not our intention to be subject to wild earnings swings caused by fluctuating metal prices. Going forward we do not expect similar circumstances of the one-time first half inventory benefit that John discussed. It is also important to note that we are focused on making ruthenium-based magnetic media market successful. So we are dedicating many resources to working with our customers to reduce costs to mitigate the escalating prices of ruthenium.

We are working on techniques and is technology to improve yields, reduce cycle times, improve product performance and to use less expensive metal constituents. I have spent a lot of time on the magnetic media market area, but felt it was important to do so because it is a major factor driving our results and opportunities.

Williams is also in the process of starting a new facility for chamber services in the Czech Republic and a new factory in Suzhou, China in the first half of 2007, so we are excited about expanding our international footprint and our ability to expand our services to our customers. Also our Brewster expansion for the magnetic data storage market will be completed in the second quarter.

Moving to our other businesses and the outlook for 2007, we're also very excited about their prospects. Our Alloy Division continues to improve product performance to help our customers in consumer electronics to continue to advance designs for miniaturization. The challenges for smaller connectors continues to advance. The oil and gas, aerospace and heavy mining equipment markets continue to expand, and our sales increases in this area are also driven by many new applications from new product developments.

It is also interesting to note that last year our Alloy business had over 50% of its sales overseas, and as John mentioned, a big factor for the financial turn around in alloy was changing the business model to allow for pass-through copper pricing. The amazing multi-year advances in better yields in productivity continued last year in alloy and the Alloy team is committed to continue the solid track record. We look forward to Alloy continuing to advance in its profitability contribution to the Corporation.

Our BE Products Group, after a slow start in 2006, came on strong in the fourth quarter with record high shipments of over $20 million. Project shipments for an experimental fusion reactor called JET were the key contributors. More exciting is the high backlog of orders we have as we enter 2007. Defense bookings are strong and are being helped by a multi-year effort to create a new business model in BE Products. Today instead of selling blocks of metal, we are helping our customers by selling finished, fully engineered components. This model is broadening the base of applications and our future growth potential.

TMI has also been reengineering its business model towards new product generation. In addition to the historical automotive and telecom markets, TMI is now a leader in providing cladded metal to produce disk drive arms for the latest generation of PMR disk drives. New opportunities are also revolving in medical and global automotive connectors. Later this year new capacity will be added at TMI to provide both lighter gauge and enhanced bonding capability.

As you can tell, we're very excited about 2007. As I mentioned before, the secret of ongoing success is our business model which is geared towards creating our own future growth through creating enabling materials. Mike, I will turn it back to you as I think we may have a few questions.

Okay, operator, let's open it up for questions, please.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Charles Murphy with Sidoti and Company. Please proceed with your question.

Good afternoon, guys.

Good afternoon.

Some quite some numbers you put up today. Just wondering, most of the hard drive companies are expecting kind of the mid to high teens type growth, and Williams has been doing, obviously, much higher than that, and I was wondering is it a matter of you guys getting into new applications before everybody else or is it the application that you're already selling, selling more, if you could just elaborate a little bit on that?

Good question, Chuck. What's going on is that we're really entering a new market area for us. Williams historically has participated in the media head business, on the head side of the disk drives, and now we're into the recording disk side of the media market, so that's why the growth rate is greater than the market growth rate is because it is a whole new market area for us, so as we grow there, we're growing our market share in a growing market.

How do you take market share from the Companies that were already selling the metals for the platters?

We believe it is really driven by our IP processes. There is a whole new portfolio of products required, and so we've been working very hard from a technology standpoint to provide an improved product, and we've got an excellent service package, so as products change and you leave some historic markets, it provides some opportunities for new entrants, and we targeted that several years ago as I pointed out, and we've positioned ourselves to really satisfy the customer base with a terrific product in a terrific service package.

Okay. And my other question was I believe you said before that the Brewster construction is kind of impacted Williams margins, and I was just kind of wondering when you expected Williams margins to kind of get back to their norm.

Well, we're in the middle -- again, that's one factor of it. We had more of an impact in the really later last year as we were going through the product development cycle, so we're not expecting that to repeat as we go forward, but again there is always risk as you continue to ramp up to higher volumes.

Okay. I will turn it over to somebody else. Thanks.

Our next question comes from the line of Bob Schenosky with Jefferies & Co. Please proceed with your question.

Thanks. Good afternoon. John, first a couple house cleaning things for you. What should we be using for '07 for both the cash and book tax rate?

Book tax rate about 34%, and the cash tax rate, Bob, it is difficult depending upon what level of total performance we hit, but anywhere from -- I will give you a wide range, anywhere from 12% to 18%.

Okay. Great. What about CapEx for next year for '07, that is?

CapEx about $25 million to $30 million, and then there will be some money from mine development, so an effective range might be $27 million to $35 million.

Okay, and then finally on the housekeeping depreciation?

Depreciation around $25 million.

Okay. Great. Then either for you, John, or for Dick, given the balance sheet with your inventories coming down on the sale plus getting your accounts receivable and accounts payable more in balance, what do you anticipate doing with the cash? Are there any acquisitions that are getting potentially closer to fruition, anything you might do as shareholders? What's the direction?

As the year unfolds we'll determine what the best use of our cash will be, and certainly everything is on the table. With respect to acquisitions, we are actively pursuing acquisitions at this time. It is part of our anatomy at this point, and we do feel there is some interesting candidates out there but, however, there is nothing pending at this particular moment.

Dick, I would [guesstimate] they will be very similar to what you've done recently.

Yes. It all depends. Generally they have the same characteristic.

Okay. Great. And just to be clear on the sales figures, the numbers you talked about for both the first quarter as well as full year '07, do those include or exclude the inventory sales?

They include.

Okay. And can you give us a sense of the size there, John?

Yes. The inventory piece of it is approximately $20 million.

Okay. Great. We want to keep that as a one-time item. I wanted to get that number. Then just two final things. One, you talked about in previous quarters and quite successfully in terms of new products and the percent of growth that those have accounted for, Dick, I would consider a big conservative going into last quarter, and you had such a great quarter for Q4, can you give us in any sense of in terms of that number that you're talking about, the 25% to 30% growth number, of what the potential could be in terms of it being allocated towards new products?

We've been running, you know, -- we track it like, for example, last year as we look at the number, about 25% of our sales have been introduced in less than five years, and that's kind of a broad brush, so we're generating brand new products at least at a rate of 5% a year, so that's a good rule of thumb. Currently it is about 25% of our total sales and recently introduced products. We're trying to keep that up.

Right. So with that 5% each year, should be maintaining about a 25% clip?

Yes, 25% to 30% clip.

Okay. And then, finally, I just wanted to clear up one point. You mentioned Auto, and that's always an area of concern for investors. Can you just give us some color on your Auto business in terms of how big it is now because I know it has gotten smaller as a percent. How much of it is big three and how much of it could potentially be at risk if we see a big decline in the big three this year?

The automotive market is one of our smaller markets fortunately, and it represents approximately 10% of our sales, so that, it is not going to be a big factor if the automotive market declines by 10%, you can see that's not a big factor, although we'll get some caught in some of the inventory swings that might have a little larger impact, but overall it is a smaller piece of our pie, and the automotive markets doesn't go through huge cyclical swings that drive our numbers.

Right. With the exposure to the European business, that mutes the effect of the big three as well, correct?

That's correct. One of our major strategic objectives was not to be so reliant upon the big three and so from an alloy business we're very global across the world on automotive, and our smaller division at TMI it has been a very big strategic initiatives of theirs is to broaden their base into the transplant business which they've done pretty effectively, and that's an ongoing effort.

Right. So it has basically become a non-event in the P&L to a great degree?

I would never call anything a non-event.

Well, not enough to negatively move the needle in the face of all this growth, how is that?

That's right.

Okay. Thanks for your time.

Our next question comes from the line of Avinash Kant with Canaccord Adams. Please proceed with your question.

Good afternoon, Dick and John.

Good afternoon.

I was trying to understand, and you were talking about this additional revenue and earnings in the first two quarters from the sale of ruthenium. What I did not understand is is it from the sale of ruthenium-based targets or are you also going to be selling just ruthenium as a metal?

No, no. It is the targets. We're not selling the metal.

Okay. So just because the targets were shipped now, and you had a very small base, so you're getting the gains now? Okay.

That's right.

So of course your margins are going to be very high this time around on this product. Going forward what kind of margins should we expect in this product on an ongoing basis?

We don't disclose, as you know, Avinash, margins product-by-product. I would say that you can expect that that segment which has Williams in it, the Advanced Materials segments margins would be largely in the aggregate unaffected over time by this launch. About the same margin level once we're through the initial benefit.

So I was wondering, I am not sure -- I don't know how to deal with this one, but should we keep this as an extraordinary item or not because you're actually selling the product at a high margin?

I think you should keep the $0.75 and the $1.00 that we referenced in the press release as an extraordinary item going forward. It will not repeat. Again, this was inventory that was in our production system during the ramp up, and that -- prior to even the production ramp up during the research and development phase of this product launch, and that material was purchased at extremely low costs, and eventually recovered and recycled and refined by us and is now being used for product being sold.

So in that case for Q1 what kind of margin should we model? If we take this as an extraordinary item, what should we do?

I would take it out of the numbers for modeling a margin, and I would use a margin for 2007 in the aggregate to be slightly stronger than the fourth quarter 2006 margin. Then if you put this back -- if you take this and put this in the two media volume in, you will get a margin decline year-over-year because you're putting more precious metal into the top line.

I see what you're saying. Okay. Excluding these margins, you will still improve from the Q4 '06 levels?

They should, that's correct.

Now, another question is that of course prices of ruthenium have gone up significantly. Now, is there a point where it becomes less and less attractive to (INAUDIBLE) I mean to say do they have another choice?

I think, Avinash, there is always a point. I personally don't know where that point is, but you're in a consumer-driven market, and so pricing is always a big sensitivity, so that's why I had mentioned earlier that we were working very hard to help reduce the impact because there is lots of things we can do to help our customer base, and there is moves afoot to use thinner layers of ruthenium, try to figure out how to use less of it, to improve recoveries and recycled streams and things like that, so we're working on all those initiatives that help them out and on a longer-term basis, you know, there is other thoughts about other material sets, but for us that's okay because we should be there as the technologies advance, if things over time go to a different targets made out of different material basis.

We're going to be there because we're on the forefront of those technology developments.

So in the near term today it does not look like there is another material as a substitute or there is one?

That is correct.

In the near term there is not, right?

That's correct, not to my knowledge.

Good. Very good. Thank you so much.

You're welcome.

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

Good afternoon, everyone.

Good afternoon.

Would you give a break down of your capital expenditures for 2007, how much would be maintenance capital, how much would be growth capital, and if possible break down the growth capital by project or by facility?

We're not going to break it down by project or by facility, Anthony. It is about half maintenance and about half growth.

Okay. Fine. And with regard to the alloy products facility, will fuller capital capacity utilization of the alloy products facility lead to further improvements in yield and productivity in 2007?

Absolutely. That's ongoing, and we continue to improve productivity and yields every year.

Okay. Thank you and congratulations on the great results.

Thank you.

Our next question comes from the line of Mark Parr with KeyBanc Capital Markets. Please proceed with your question.

Good afternoon.

Good afternoon, Mark.

Can I hire you guys to run my metals portfolio? (LAUGHTER). That was a joke. Sorry. Congratulations, though, on the great results. I had a couple questions. Dick, one of the things you had talked about as far as growth is this media portion of the storage device. Could you give us some sense of what's your penetration in this side of the device is compared to what your penetration is for the heads or penetration on this new side relative to where you think it could be in 12 to 18 months?

That's one of the big variables. We're not going to reveal what we think our specific market shares are on these niche products. That's really competitive information, but what I will say, though, is that in the head business, which is our historic business, we do have a very strong market share position, and in the media side we basically came from a zero position, so we're aggressively trying to grow that side of the business, and we're being very successful.

Yes.

So as I mentioned, some of the range of these earnings forecasts is a function of how strong can we grow the market share within these segments, and it is still a little bit too early to tell although we're being very successful.

Is the competitive profile on the two sides relatively similar?

Yes.

Okay. Okay. So if you -- is it fair to say on the heads side you would be a leader?

Yes.

And can you tell us who the leaders are on the other side?

No, I prefer not to talk about our competitors.

Okay. I don't blame you. But just asking.

It is fine.

If I could just carry this growth discussion another step, in looking into '07 and '08, you know we've talked about this optical media, but could you talk about, say, what are another four or five other growth opportunities that you've identified that could really look great for '07?

Well, I mean we've talked about these before. We're still growing very strongly with the new product that we introduced several years ago because the product derivatives continue to increase and the ToughMet product line in Alloy is continuing to go grow at a very rapid pace. We've got new products.

Back in Williams we got a lot of new products in the wireless area which is different than the media area so we expect to see some strong growth there, and as I mentioned earlier in the call we have got some really nice platforms going on both in our TMI business and the Beryllium Products business, so that's our mantra is really to continue to come up with new ideas and new products to broaden this application base that we have.

Okay. What's the current capacity utilization of AEP right now?

Well, the AEP is interesting, is probably at a lower utilization rate. We have a higher utilization rate at our Reading facility. The AEP, which is really our direct ship area , is feeding Reading, but we still have some nice capacity left within that facility, even in spite of the growth we're seeing, both at the primary end and the direct ship end since you're familiar with that facility.

Okay. All right. Congratulations on all the progress. One other question if I could. It sounds like your CapEx plans given the magnitude of growth remain fairly modest. Are we getting near a point where the Company is going to have to undertake some significantly more meaningful capital projects?

I think it is important. We've got the very tight discipline on the capital spending, and we do spend it where we need to address our capacity. I think we have kind of a unique business model right now to where the Alloy and the Beryllium businesses are our high capital intensity businesses, and as we continue to grow these businesses, we're not facing any what I call the big blowout type expenditures we had let's say for example with the AEP.

We're able to continue these expansions with very modest capital. We don't see any major expansions required there.

Then on the other major side of the house in Williams it is a different business model where we can for very, very small capital increase capacity significantly, so it is really more IP driven versus equipment driven. For example, we're expanding our Brewster facility by a factor of two right now as we speak, and that was done for very low capital.

Okay. Terrific. Just one more thing if I could. Could you give us an update on the status of the new hydroxide operation that you're in discussions with with the government, and then I will pass it on? Thanks and congratulations.

We're still proceeding on the detail engineering on that facility, and we are finalizing the cost estimate, and so we're still negotiating with the government to work on the final release on the construction side.

Thanks a lot.

Our next question comes from the line of Paul Krieger with Sidus Investment Management. Please proceed with your question.

I am still confused about this ruthenium issue. You talked about selling about $20 million worth of excess metal, and you're also using the metal in the recording heads, how much of the value of the recording head is being inflated by the metal price being higher, and, in aggregate, how large is this business?

Let's take them separately. Ask your first question.

There seemed to be two pieces here. You said we're selling excess inventory.

No, we're not selling excess inventory.

I thought it was raw material inventory.

No, that's not correct. John, you want to speak to this?

No, no. We were referencing the increase in the value of the metal that was in the production system.

Okay.

That has an impact as it turns on the revenue stream, certainly, but it is not the sale of excess material. It is the increase in the value of that material.

How much greater -- how much of an inflation in this revenue stream in aggregate will there be? You threw out a $20 million number, but I thought that was a separate issue?

That's a separate issue. The inflation in the value of the material Dick had referenced that ruthenium increased in value over threefold since the beginning of November, so while ruthenium earlier in '06 would have been less than $200 an ounce, it is presently over $800 an ounce.

Okay.

While we have a low base to compare to year-over-year in our total revenue, what is hitting our revenue line in 2007 is based on a much higher per ounce value of ruthenium, so we've got the growth in what we're shipping and a higher value of the metal. I don't know that we could relate to that total as a growth because, clearly, we didn't have the ounces in the prior quarter -- prior year.

I understand. If I look from December to the March quarter, you're roughly talking about a $40 million plus revenue increase. How much of that would be attributed just to this specific issue?

From the two quarters comparing the fourth quarter to the first quarter of 2007?

Yes.

Is that what you're asking? I would say that -- let me give you sort of a rough estimate for the entire year. This I think would help everyone. When we look at the year-over-year growth, the non-media related markets in revenue we believe are going to grow at 8% to 12%. The remaining growth in the Company would, therefore, be in the business unit that has the media related products in it. That number would be north of 60% year-over-year.

All right. That does help. A separate question. The industry experienced a similar kind of inventory correction back in 2004. This time around you kind of ballooned through it. What's been different between the two?

Well, I think the -- the market was coming from, in 2004 the market was coming from what I call the telecom crash where the market just -- the bottom fell out in 2002 -- from the 2001 to 2003 standpoint, so as the market started to pick up and the whole business cycle turned around, there was a huge increase, in that particular cycle, so that kind of got carried away for itself and then it softened up in 2005, and at this point in time I think that we're not coming from an extremely low level.

The market is continuing to be robust, and so that we haven't seen that big correction from a massive inventory build, so it is a little different kind of a cycle, but at the same time we've also grown the business from a market breadth and geographical reach so that hopefully we're a little less subject to the cycles going forward.

Thank you.

Our next question is a follow-up question from the line of Charles Murphy. Please proceed with your question.

Yes, I was just wondering, I know you have kind of switched around the way you're reporting the different segments. I was just wondering if it would be possible to get the operating profit numbers on a metal systems versus microelectronics basis?

That would not be appropriate, and we also don't have them with us.

Okay. The other thing, are you going to be seeing any revenue still from the JET project in the first quarter?

Very insignificant.

Okay. And I'm imagining that the JET did help, though, the margins in the fourth quarter, though, correct?

Yes, it did.

Okay. Thank you.

That's correct.

Our next question comes from the line of James [Gullick] who is a private investor. Please proceed with your question.

Dick and gentlemen, I am a private investor and a retired employee of Brush Wellman. I simply would like to congratulate the new management team. It appears like you're finally going to have the opportunity to capitalize on all of the assets and the opportunity of those assets, and it makes for an exciting outlook for Brush Wellman. So keep up the good work and good luck to you.

Well, thank you.

Thank you.

[OPERATOR INSTRUCTIONS] Gentlemen, there are no further questions in the queue. Do you have any closing remarks?

Sure. This is Mike Hasychak. We would like to thank all of you for participating on the call this afternoon. I will 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. Thank you for your participation. You may disconnect your lines at this time.