Materion Corp (MTRN) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Brush Engineered Materials second-quarter 2007 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. Mike Hasychak, Vice President, Treasurer, and Secretary for Brush Engineered Materials. Thank you, Mr. Hasychak. You may begin.

Good afternoon. With me is Dick Hipple, Chairman, President, CEO, John Grampa, Senior Vice President, Finance and Chief Financial Officer, and Jim Marrotte, Vice President Corporate Controller. Our format for today's conference call is as follows: John Grampa will comment on the second quarter 2007 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 will be available until August 18, 2007, by dialing area code 877-660-6853, account number 286, and conference ID 248108. The call will also be archived on the company's web site, beminc.com. 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 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 call today. As in the past I'll review the quarter and then comment on the outlook. Then following my prepared comments, Dick Hipple will provide you with a market update. Then we'll open the call for questions.

I'll attempt to adequately reinforce and expand on the key points that were made in today's press release. I'll comment specifically on the continued strong organic growth, what continues to drive that growth, including what will drive it looking forward. I'll also comment on the two charges identified in the press release that negatively affected results in the quarter. The margin benefit will also be reviewed, the related sale of our product containing the low cost of ruthenium inventory will be covered, and the impact of weaker market conditions leading to production levels, lower public sector levels, and the impact of that on our margins. Then I'll review the outlook, including the current improvements we see in demand for our new materials from the perpendicular media market as well as in the ruthenium metal prices. Both are reversals of the second-quarter trends. Let's begin.

As you know, this morning we reported sales and earnings that while not consistent with the expectations we had published coming into the quarter, were consistent with the update provided in mid June. Sales for the quarter were up 25% or about $47 million to the $234 million level. This of the 18th consecutive quarter where sales were higher than the comparable quarter of the prior year, and the seventh consecutive quarter where our sales growth was greater than 20%. Metal price inflation, or said differently that portion of metal prices both precious and nonprecious metal price increases that we were able to pass on to customers in the quarter had far less of an effect on the reported sales increase than in recent periods. Approximately 3 percentage points of the reported 25% growth is metal price. Thus, our real growth, or our organic growth was approximately 22% in the quarter. Year to date, sales are up 36% or about $129 million. Metal prices represent about 5% of the year-to-date growth, thus organic growth for the first half was approximately 31%. We do expect similar organic growth in the second half of the year.

As you know, the most significant factor driving our growth in 2007 is the growth of our new ruthenium-based magnetic media materials for the date storage market. The growth here is driven by the rate at which the market transitions to perpendicular media, and our ability to capture a significant share of that market. These materials accounted for approximately $85 million of the growth in the first half. About $30 million of that occurred in the second quarter, and $55 million in the first quarter. The lower growth in the second quarter was driven by a combination of factors, including some softer overall hard disk drive demand levels, slower than expected PMR transition rates, inventory screak due to supply chain filling during the initial ramp-up, and some temporary lost share due to the internal issues we previously announced.

Many of the factors that drove second-quarter demand in the hard drive market to levels below the first quarter did carry into the third quarter, but those factors now appear to be reversing, perhaps at a significant rate. Reported net income in the second quarter was $0.38 a share. This includes the three factors identified in the press release that negatively affected earnings by approximately $4.3 million pretax, or $0.14 a share after tax. Net of these factors, our operating run rate was $0.52 a share compared to the prior year's $0.35 a share.

Let's review those three factors in a little more detail. First you'll recall in mid June we announced that an isolated production ramp-up quality issue was encountered with a new product. This resulted in higher costs and some lost magnetic media business in the quarter. The company took charge of approximately $4.8 million pretax or $0.15 a share after tax due to this event. The issue affected two customers, and it has been resolved. We have resumed shipping to the accounts affected at low -- at volume levels that are ahead of the Q2 levels.

Second, a combination of factors including lower overall demand for perpendicular media materials led to a rapid and significant decline in base prices for ruthenium. Prices fell by more than $200 an ounce from roughly $640 an ounce at the beginning of the quarter to approximately $430 an ounce at the end of the quarter. This led to a noncash lower of cost or market inventory charge of approximately $4.5 million pretax or $0.13 a share after tax. As market conditions improve and ruthenium prices strengthen, portions of this may be recovered through higher margins in subsequent periods. Prices today, for example, are at $490 an ounce or about $50 an ounce above the levels they were at the end of the quarter.

Third, helping to offset the negative impact of the above two charges was a margin benefit of approximately $4.5 million pretax or $0.14 a share after tax related to the sale of very low-cost ruthenium inventory that was in the production system at the beginning of the year. While this benefit was expected, it was lower than expected due to the significantly lower ruthenium prices.

Before moving on to the outlook, I'd like to review several other additional important factors. First, while the second-quarter gross margin was 18% compared to 21% in the prior year, about two points of the three-point decrease relates to the three media and ruthenium inventory factors I just reviewed. Other factors including the company's business mix ,which today includes significantly more higher priced materials and lower production levels, affected gross margins negatively compared to the prior year. Lower production levels in specially engineered alloys driven by softness in wireless handset applications negatively affected gross margins in the quarter by approximately 100 basis points. A 22% gross margin level is a more normalized measure of the gross margin to expect from the company, given the new mix, which includes a significant volume of the high ruthenium metal in it.

Second, I want to reinforce that today in our company, operating profit is a better measure of profitability than gross margin due to the precious metal and other expensive metal content that is now in the top line. Operating profit percent without the impact of the sale of the ruthenium, the lower of cost of market charge or charge of the production issue was 7.7% in the quarter compared to 5.7% in the first quarter of -- in the second quarter of the prior year. A 200 basis point improvement.

Third, the reported change in the income tax rate is approximately four points. The four-point increase in the reported rate affects the year-over-year comparison significantly. The rate change compared to the prior year is principally due to -- to the significantly higher level of income as well as a reduction in foreign source income benefits. The reduction in foreign source income benefits is tied to some statutory changes. The additional tax in the first half was approximately $2 million, affecting the earnings comparisons by about $0.10 per share when looking at earnings compared to the prior year. And fourth, our already strong balance sheet continued to get even stronger in the quarter, debt-to-total capitalization dropped to approximately 11%.

Now I'd like to turn to the business and then the outlook. Dick will provide a market update in a moment. As most of you well know, we've made good progress over recent quarters with our new products. With our efforts to penetrate new markets and with our global expansion initiatives as well as our initiatives to improve margins. With the exception of the isolated quality issue that affected the second quarter, we've executed very well. The progress has brought with it the significant growth in sales and profits that we've seen over the last several quarters. And we believe the company's global markets will continue to present to us similar growth opportunities throughout the remainder of 2007 and into 2008.

Our new product initiatives have been instrumental to the significant growth we've seen. Especially notable is the growth that we are presently seeing with the new ruthenium-based materials for the perpendicular medium market. This added sales of approximately $85 million in the first half of the year alone. However, the rapid growth brings with it a significant forecast risk, driven by the uncertainty in ramp-up timing, ramp-up rates, metal price unpredictability, fluctuations in demand levels, and unclear market penetration rates for the new materials.

As seen in the most recent quarter, this can result in less reliable and far more volatile near-term outlooks. It's becoming difficult to maintain our long history of providing reliable quarterly guidance. We currently expect that the opportunities in media for these materials plus other new materials will continue to be significant, and that the growth rates through the balance of 2007 and for 2008 could be of the same scale that we saw in the first half of 2007. Because of these opportunities, forecasting quarterly performance will become even more difficult.

As a result, the company is planning to suspend its practice of providing regular quarterly guidance beginning in 2008. We focus and we want our investor base to focus on the long term. We will, therefore, transition to providing annual estimates along with quarterly updates. And with updates when material changes are known. Additionally, the new segment reporting provides the opportunity to offer added transparency.

Turning to the outlook. Beginning in the first quarter of the year, we operated within softer market conditions in automotive and in certain segments of our consumer electronics markets. These conditions continued into the second quarter and inventory corrections in these markets negatively affected demand. While the second quarter was weaker than expected due largely to these factors as well as a weaker media market and the factors that should not recur, we're optimistic about the balance of the year. We're currently seeing improvement in conditions in the markets that were weaker earlier, and while cautious, expect this momentum plus the continued ramp-up in demand for the new ruthenium-based medium materials to help overcome the effect of the normal seasonal factors that can lead to lower revenues in the third and fourth quarters of the year compared to the first and second quarters. The improvement in market conditions and the continued ramp-up of medium materials are currently expected to lead to a sequential improvement in sales as the years progress. Based on this, the company at this time expects sales for the third quarter to be in the $240 million to $250 million range, up approximately 20% to 25% compared to the same quarter of the prior year.

Earnings are expected to be in the range of $0.45 to $0.55 a share, up 35% to 55% compared to the prior year. This estimate does not include an expected benefit of $0.05 to $0.10 a share from the ruthenium inventory that was in the production system at the beginning of the year. Nor does it include any improvement in margins from potential increases in ruthenium prices which as noted earlier have occurred to date in the quarter.

It is important to continue to reiterate that these sales and earnings estimates are subject to significant variability, such as that demonstrated in the most recent quarter. Metal prices and supply conditions as well as fluctuations in demand levels driven by inventory swings in the market and new product ramp-up rates in critical markets such as the media market can each have significant effect on actual results. The outlook for the quarter is based on our best estimate at this time and are subject to significant fluctuations due to these factors.

Now I'll turn the call over to Dick Hipple for a market update.

Thank you, John. I'd first like to reinforce our disappointment in not fully leveraging our growth and profit opportunities in the second quarter. Although the ramp-up quality issue that we encountered in the media business is behind us,our expectations were to execute on a flawless basis and nothing else is acceptable. As I have indicated many times, one of our key strategic goals is to continue to expand our international sales and service to our global customer base. Our international sales now exceed 42% of our total sales, significantly higher than approximately 32% last year, and 27% in 2005.

In the second quarter, we saw a cross current of market conditions, a key factor was a slower ramp-up in the PMR media business, which occurred after a rapid run-up in the first quarter, which was partially driven by the combination of production and inventory builds by our customers. The media market now appears to be stabilized, and we see good growth for the second half of 2007 and continuing on through 2008. As John earlier commented, the exact quarterly timing of this ramp-up is difficult to pin down, but we expect to see the hard disc drive market to be fully converted to the PMR technology by the end of 2008. I can comment that we do expect the coming quarters to be sequentially stronger in the media market.

With regards to our applications in the consumer electronic and wireless markets, we have seen differences in demand amongst our business segments. We can see the situation from time to time, driven by our varied customer applications and their particular sales and inventory situations. In the second quarter, we experienced strong conditions at our Williams business while still seeing softness from ongoing inventory corrections in our alloy and TMI business. As we enter the third quarter, it appears that this market is now stronger across the board in all of our business units.

Our automotive business was also soft in the second quarter as overall automotive production in the US remained low as compared to auto sales. However, one bright spot was our European auto business, which remained very strong. Our automotive order book has recently picked up, but I remain cautious when seeing the recent softness in overall automotive sales. Our heavy industrial markets remain robust in the defense, oil and gas, aerospace, and heavy equipment markets. I am happy to report that we continue to post healthy organic growth with our alloy toughnet products, which are still growing at over 30% annual rate. Although our defense business remains robust, we have seen some softness in the BE&B composite segments with just some recent pushouts. The business is still robust, but we remain cautious as we enter the second half.

I am also pleased with the progress in our numerous expansion initiatives. Our investment in the shield kit cleaning service business through facility startups in the Czech Republic and Wheatfield, New York, are now coming on stream. Additionally, our Suzhou facility, near Shanghai, is coming along, and we expect to be operational by the end of the year. And most importantly, our expansion at Brewster, New York, which supports our ability to grow in the media business is up and running, and we have additional space to grow as required. Thank you. Questions?

Operator, let's open it up for questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). One moment, please, while we poll for questions. Our first question is coming from Avinash Kant of First Albany Capital.

Hi, Dick and John.

Hi, Avinash.

A few questions. I believe you talked about ruthenium being $55 million in Q1 and $30 million in Q2. In the $30 million number, have you included the one-time sale of ruthenium also?

We have not.

So how much was the one-time sale then?

Well, the one-time, Avinash, is one-time metal price differential, not sale.

Right.

Okay. So it's metal price differential, therefore it's cost of sales and/or margin. No, that is not included in the revenue number.

Not included. Right. I think it was included in the $55 million, though, right?

No. It was not. The revenue is the actual sales to the customer.

Okay.

The inventory benefit from the low cost inventory that was in the production system at the end of 2006 would flow through as a margin.

Okay. Okay. And you gave some numbers about international sales. Did you give out -- how much of international sales so far this year in the first half?

The international percent of the total?

Yes.

Was --

44%.

44% of the first half.

Yes. Yes.

It was 37% in '06 and --

It was around 32% in --

The higher. About 35 last year. 35 last year.

35. Could you give us an idea where is that growth coming from in -- outside, especially in Asia? What product?

Well, again, the -- the biggest factor is -- you know, just ticking up -- first of all, right now, in our alloy business it's more than 50% overseas as we speak. And then the additional growth that we're seeing is in the Williams area, and the media shipments are going to Asia.

One question, I'll come back in line again. The -- when you talked about the particular media, Dick, in your prepared remarks you said you cannot say that the perpendicular media shipments will be sequentially higher in the rest of the year. Is that -- what's in the --

Repeat what you said. I don't think I agree what you said.

Okay. So are you expecting the perpendicular media shipments to be sequentially higher to the rest of the year?

Yes, that's what I said.

Okay. Any idea in term of what's in the -- you know, when you give Q3 guidance, in terms of what's in the -- you know, when you go from 32 --

No, we're not going to provide specifics there. The third quarter, as you might expect, began with some of the second-quarter hard drive market demand lower than the first quarter still carrying. We couldn't expect the inventory correction that occurred in the second quarter to immediately end at the end of June. So obviously the third quarter, while it will be significantly above second quarter, fourth will be even further above the third. The -- but to disclose the exact number, no, we're not going to do that.

It will be somewhere between the second and the first?

Absolutely. And the fourth could be stronger than the first --

Okay.

The next question comes from Chuck Murphy from Sidoti and Company.

Good morning, Chuck.

For the full-year guidance it's still $2 to $2.55, correct?

We haven't changed the full-year guidance. That's correct.

Okay. Is that using the $0.52 number for the second number or 38?

No, the $0.52 number.

Okay, that's what I thought. Okay. Next question was -- could you give us an update, you know, about what your expectations are for being designed into other layers of the hard drive. Kind of what the likelihood of it is, what the timeframe we're looking at is.

As you might expect, that's very difficult, Chuck. But you're talking specifically of the -- the all materials or the single ruthenium materials and what kind of total percentage there or the other layers only?

I guess both.

Oh. Well, roughly speaking, the ruthenium, it gets really difficult when you -- because you've got metal prices involved here. But if you -- the way we look at it, it's probably around, approximately around 50% of the market opportunity is in the ruthenium layer. The other half is in the other layers.

Huh. But you're only doing the ruthenium now, right?

What's that?

You're only doing the ruthenium?

Our primary is ruthenium. But we are supplying layers but multiple customers in the other players.

But through the first half of the year --

Primarily ruthenium through the --

In the third quarter, primarily ruthenium.

But you feel good about your chances of getting in with the other layers?

Absolutely.

Yes, we do.

Okay. And final question was, John, I think you alluded to it. Now that you've marked down some of the ruthenium inventory and prices have started to go back up, would that imply that you could have even more gains from ruthenium in future quarters?

We have not included in the estimate as I had indicated any assumption that we would move above the $430 end-of-June price. As I indicated in my remarks, this morning ruthenium was at $490 an ounce. If those kinds of conditions hold, you're correct. Part of the charge we took will come back to us in the form of higher margins as the year progresses.

Okay. Thank you.

Our next question is coming from Anthony Sorrentino of Sorrentino Metals.

Good afternoon, everyone. Going back to the international sale as a percentage of total sales, you had said it was 44% in the first half. Do you have any specific targets or goal to reach, or is your objective just to try to grow international sales to the extent that you can?

Well, I -- certainly we're probably a little ahead of my curve where I thought we'd be. I'd certainly like to see our business greater than 50%.

Okay.

And the US is -- the world is -- the US is not 50% of the market. So I want to be bigger overseas.

Okay. And do you have a -- a specific time period, whether that would be two years or three years from now?

Well, I would certainly expect the next two to three years at over 50% of our sales would be overseas.

Okay. Has weakness of the US dollar helped to increase your competitiveness?

Certainly.

And that would be both ways? Are you seeing an increase in demand and an ability to increase prices?

I think the answer to the question there, Anthony, is -- is likely not. I think what -- what really drives us is the uniqueness of the materials and services that we provide. And weak or strong US dollar, we may not move as other companies move -- the movement in currency relationships. So I wouldn't think that it's all that material.

Bear in mind, Anthony, that a good portion of our overseas sales and practically all of our European sales are denominated in the local currency. And we do not necessarily change prices and local currency for short-term movements and exchange rates.

Okay. And one final question. What would you expect your capital spending to be in 2007?

In 2007?

Yes.

The range that we have provided previously still holds. We would anticipate $25 million to $30 million spent in 2007. On a number of programs, one of which would -- we often think about not -- as not capital, and that is mine development, and the opening of a new pit at the mine. So $25 million to $30 million in the aggregate, including about $6 million to $8 million for a pit.

Okay. Very good. Thank you very much.

Our next question is coming from Bob Schenosky of Jefferies and Company.

Good morning, Bob.

I've got three quick ones here. Dick, in terms of the new capacity that you've added, what do you think that equates to in revenue potential and the projected ramp of that capacity?

Well, I think, I guess you're probably talking about the Brewster expansion --

Yes.

And we've designed that facility to allow us to follow this entire PMR ramp through -- through next year. So we have the capacity, if you take a look at our -- sales year to date, and figure that the market at a minimum this year is -- a minimum 50% of the revenue potential, I would expect it might be a little bit higher. But then we're going to go to 100% conversion for the following year.

Okay. And then that will pick up that Brewster capacity then at that point?

Yes. But we actually have it -- we've designed that facility that it -- it's very -- it's a very flexible facility from the standpoint that as we continue to need to expand -- let's say that we get -- we actually have plans, Bob, to do better than what we're laying out. I mean, we have certain breakthroughs in product developments, we could even do better than -- than we think we can. I mean, that's always what we're trying to do. And let's just say that we get pleasantly surprised on the upside in where we can take this market. We -- we don't have all the equipment to follow this. Now, the good news is we have the space. And the other good news is it doesn't take that long to get this new equipment in if in fact we exceed our plans and let's just say that we have some breakthroughs.

We're going to be able to quickly respond within a facility that we have. So we have th real estate to go there. We're not going to be blocked. Need to be building -- maybe we'll be three months away from a piece of equipment we need. But it's that kind of flexibility we have. So there's no question that we have the ability to support the volume through next year. But we're trying to even beat that if we can get certain product breakthrough. We're going to be able to follow that, too.

Okay. Great. Secondly, you noted that you lost some share because of the quality issues. Who did you lose it to, and have you gotten it all back?

We didn't -- what I said, I didn't say we lost share, I said we lost sales. And obviously when you lose some shares, you have a temporary loss of share. And, there's some other competitors in the marketplace, the biggest one is -- is there's Hureyes, Hitachi smaller player floating around in Taiwan. We didn't have loss last year, we hit a bump in the road there. And we had some competitors pick up the slack while we were recovering from our quality burp. But we've got those sales back, and we don't believe that we have lost market share here.

Okay. Very good. I just wanted --

And with -- the key thing about this, Bob, is remember, is the way you establish this. This is not a commodity marketplace. And what we bring to the table is our value-added service on technology development. And that's why the customers are working with us. We are right up-front working on the next generation and all the changes that are going on. And that's what we pride ourselves and that's why the customers work with us. So that's the kind of thing that keeps us back in the ball game. And once in a while we're going to have an unexpected burp, and it's unacceptable. We're very disappointed with what happened as I mentioned earlier. But our customers have certainly hung with us. And quite satisfied with the product that we're shipping today.

Right. Because your customers need the -- the expertise and the R&D development.

You got it.

Yes. Okay. And finally, I have to ask the question -- John pointed out how strong the balance sheet has gotten. You're down to 11% debt-to-cap. The CapEx requirements, 25 to 30, aren't necessarily that constraining. The stock has pulled back relatively materially over the last two, three months here. Have you or the board had any conversations in regard to a share repurchase program?

Well, you know, that's always on the top of mind as a certain opportunities as we evaluate it. We still believe our opportunities for using our capital to grow the company are still far better return of the shareholders at this point in time than a stock buy-back program. Again, at this time. But the question is constantly revisited.

Okay. Would you say that there's any more diligence on the subject now with the share pullback?

Not at this time because we have other opportunities right now that we're heavily involved with.

Okay. Thanks, Dick.

Our next question is coming from [Andrew Burton of ArcLight Capital Partners].

Hi, most of my questions have been asked and answered. Just to elaborate on Bob's question, though, could you talk about the other opportunities that you are pursuing in -- in place of a stock buy-back.

Well, I mean, the -- well, just to give you the priority for ourselves, we have the organic growth, we've got some opportunities for some expansion. But the bigger issues really are with regards to acquisitions. So, we do have some acquisition opportunities that we've been looking at, working on, and they're active.

And is there a limitation on the size of an acquisition you would make? Or can you give us any guidance on what kind of acquisitions we can expect?

We provide some guidance on that in the past. And let me -- let me reiterate. We think that as a company we -- we can -- we use the word augmentation a lot. By that I mean that there are a number of opportunities, scale of which I define as less than $100 million that could make nice augmentations of various segments of our business, that bring with them market breadth, market reach, product reach, technology, and potentially other leverage benefits. So our primary focus is -- are on those kinds of opportunities. That's not to say that we wouldn't consider an acquisition of scale larger than that if it fits the dimensions that I just -- just described. We've also indicated in the past that we could fund these acquisitions from our cash flow. And from our debt -- our ability to leverage the balance sheet. And there are no real changes to that mindset.

Our next question is coming from Mark Parr of KeyBanc Capital Markets.

Hey, good afternoon.

Good afternoon, Mark.

I'm sorry if I'm not coming in very well. I'm on a little different phone.

Are you on a boat from the Bahamas, or what? Oh, I wish.

More like the DMV.

Okay.

I was wondering if you could talk a little bit about the supply chain adjustments going on in the mobile phone arena. I know that was something that was indicated as a source of weakness in the second quarter. How much of a -- how much of a delta could that be on the revenue side in the second half if that market continue to improve and gets back to normal?

Delta first half versus second half. Mark, not significant. There was inventory correct in the first half, as we had defined. And as we enter the third quarter, yes, we are seeing lift in order. We think the inventory correct is behind us. But relative to the total growth, it's not a significant piece of it.

All right. Then if I could ask one more question -- a lot of -- Dick, I think you've already had some good commentary around this. But for modeling purposes is it okay to think about this ruthenium issue as a straight line implementation between now and the end of '08?

No, it probably is not.

He means in terms of every quarter are we going to see the same ruthenium. It's not all ruthenium.

That's the problem that we have, Mark. Is that, again be it's difficult to predict. We got in trouble with that before because the market didn't convert as quickly. But it appears that the market is back on track again.

Okay.

I would say by the end of the year, it should be fully implemented by the end of 2008. But I would kind of -- I would guess that it won't be an even split. I think that you're going to -- a lot of things are like bell curves. I would say that fourth quarter of next year is not going to be at 25%. Do you follow me?

Yes, okay. All right. I understand. Well, good luck on making some incremental progress during the second half.

We -- we plan to do that.

All right. Thank you. Take care.

(OPERATOR INSTRUCTIONS). Our next question is coming from Avinash Kant of First Albany Capital.

Hi, guys. One more followup question, actually. In the past you talked about achieving a market share of roughly -- you have given a wide range, 10% to 40% in the perpendicular media. Where do you think you stand at this point in the first half of the year?

Again, we're not going to discuss that one, but we're surely going to be within the range.

Okay. Okay. And some housekeeping questions. What should we model as a tax rate going forward?

The second-quarter rates. I'm sorry, first-half rate. The first-half rate.

The best -- as best we know right now.

The best. Okay. Do you have an expectation of what will be the cash flow for calendar year '07 given your guidance?

No. We have not given guidance on that. Certainly stronger than the second quarter in the first half of the year where there was significant working capital commitment to support the higher level of business. I don't think as you model the cash flow that you can expect that we'd see the inventory receivables climb at that pace. Second half, significantly stronger than the first half from a cash flow perspective.

First half, what was the final number? So far?

The cash flow from operations was about $11.4 million.

So far. And -- you don't know at what level it's going to be higher. It's going to be higher but how much? Do you have an idea?

Yes. It will be at least double that. Yes. If not triple.

All right. And also if you could break up the line items for the charges, like where are the line items? You talked about the $0.15 being $4.8 million pretax. Where is that coming from, which line item?

They're all cost of sales.

All on cost of sales?

Yes.

And so are other line items, too? How about $0.13 for the ruthenium?

Cost of sales.

All the pretax numbers are flowing through cost of sales.

So on an operating basis you still think you would get $0.52, right?

Sorry, we didn't hear you.

On the operating basis, you are still thinking you did $0.52 versus $0.38 GAAP basis, is that right?

Yes. The run rate we would -- we would say is$0.52

Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

This is Mike Hasychak I 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 questions. My direct dial 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.