Materion Corp (MTRN) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Brush Engineered Materials fourth quarter 2007 earnings conference call At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentations. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Michael Mike Hasychak, Vice President,Treasurer and Secretary for Brush Engineered Materials.

Good afternoon. This is Mike Hasychack. With me today are Dick Hipple, President, Chairman and CEO, John Grampa, Senior Vice President, 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 2007 results and the outlook and Dick Hipple will give a market update. There after we will open up the teleconference call for questions. A recorded playback of this call will be available until February 23rd, by dialing area code, 877-660-6853, account number 286 and conference I.D. 270860. The call will be archived on the Company's website, beminc.com. To access the replay click on quarterly earnings conference call under the investors page. The broadcast requires RealPlayer 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.

Good afternoon. Thank you, Mike. Welcome to our fourth quarter and year end 2007 teleconference. Today's format is identical to the format in the past. I'll review the quarter as well as the year and then comment on the outlook. My comments are prepared, and following those comments Dick Hipple will provide with you a market update and then we'll open the call for questions. I'll attempt to adequately reinforce and expand on the key points that were made in the press release today both about the quarter and the year.

I'll comment on eight specific items. First, the continued strong organic growth we experienced in 2007, and what drove it, including the factors that affected the fourth quarter and what we currently expect will drive our growth looking forward. Second, I'll review the specifics of the growth in media. Since significant swings in ruthenium metal prices, material sources and demand factors, as well as new product and market ramp rate, can and as most of you know, has dramatically reflected quarterly results, it's important to review what is happening with our materials support, perpendicular media launch that continues to occur. Third I'll review the volatile cell phone handset market where lower than expected third quarter and fourth quarter demand levels from a key customer have had a negative impact on earnings comparisons to prior periods and our specialty engineered alley segment. Fourth I'll review the favorable EPS impact from the sale of product containing the low cost ruthenium inventory that was in the production system at the beginning of 2007 and to the related abnormal material price movements that resulted in offsetting noncash lower cost or market charges. These factors affected quarterly results significantly, adding variability and will affect future earnings comparisons, especially the comparisons in early 2008. Fifth, I'll review the balance sheet and sixth, the favorable litigation settlement announced in the fourth quarter. Seventh, the acquisition of the assets of Techni-Met and then finally I'll review earnings the items identified in the press release to reconcile the differences between the GAAP reporting and the operating run rates for both 2006 and 2007. Following my comments on those eight points, I'll review the outlook as I've identified in the press release, we are currently expecting continued gains in 2008 in spite of weaker macro-economic outlooks.

Let's begin. First on growth. As you know, this morning, we reported sales for the year that were up 25% or about $188 million to the $951 million level. Another record year. Fourth quarter sales were up 14% or about $28 million to the $236 million level. This was the second consecutive year of organic growth above 20%. The 20th consecutive quarter where sales were higher than the comparable quarter of the prior year and the ninth consecutive quarter of double-digit growth. Over the past two years, the company's revenue has grown by 76% or by about $410 million to $950 million level from the $540 million level. Earnings on a comparable basis have nearly tripled in the two years. Metal price inflation or said differently, that portion of both precious and nonprecious metal price increases that we were able to pass on to customers in the quarter had a bit more of an effect on the reported sales increase than in the earlier periods of the year. Approximately 7 percentage points of the reported 14% growth in the fourth quarter is due to higher metal values. Thus real growth or organic growth was approximately 7% in the quarter. For the year-to-date, metal prices represent about 5% of the growth, plus organic growth was approximately 20% for the year, 2007. Growth net of metal prices was 28% in 2006. Plus our real growth for the two years is close to 50%. We continued to see solid growth in many of our key markets throughout the year. Growth of our new products remains very strong. I'm going to address the media market and the cell phone handset market here and Dick Hipple will follow later with additional comments on both as well as comments on our other markets and our other new products.

Turning to media. As you know, the most significant factor driving our growth in both 2007 as well as our expected growth in 2008 is the growth of our new magnetic media materials for the perpendicular media recording segment of the data storage market. The growth here is being driven by the rate at which the market and the customers we serve transition to the new perpendicular media recording technology and our ability to capture a share of their business with new products and production capabilities. These materials accounted for approximately $130 million of our growth in the year, reaching a sales level of approximately $160 million. That represents approximately 70% of the Company's $188 million of sales growth for the year. You'll recall that following a more rapid than expected product launch, which resulted in very high sales and profit levels in the first quarter, our second quarter sales levels in this market were driven down by a combination of factors. The factors that drove second quarter results down include some softer, overall hard disk drive demand levels, slower than expected PMR transition rates at our customers, inventory corrections due to the supply chain filling that occurred during the initial ramp-up and some lost business due to the internal issues we had. Many of the factors that drove second quarter performance in this market to below the first quarter levels began to reverse in the third quarter. And while we didn't enjoy the third quarter demand level we thought we'd see, it was clear by the end of the third quarter that demand levels had increased significantly, leading to an improved third quarter end and a solid beginning to the fourth quarter. Dan has previously announced, during the fourth quarter, the Company experienced softer than expected demand from this market. This softness was driven primarily by a changing materials specification at a key customer, which in turn resulted in manufacturing process changes and a lengthy product requalification process. This has and will continue to result in lower shipments to that customer while the requalification process is underway. This process is not yet complete, but is expected to be completed with shipments resuming late in the first quarter of 2008.

I'll turn now to the cell phone handset market. As you know, the cell phone handset market has historically been one of our most volatile and unpredictable markets. 2007 was no different. Demand from quarter to quarter and inside quarters can be and was choppy. We serve this market with products for specific customers and specific applications from both our Williams Advanced Materials unit and our specialty engineered alloy segment. Williams continued to see strong growth in this market throughout the year. But while the overall handset market was strong, the products and the applications we supply from the specialty engineered alloy segment of our business did not move up to our expectations in the year and in the fourth quarter due to a number of factors, including inventory corrections and most significantly, lower demand for a key customer's handsets. s with the magnetic media market, there was stronger demand here as the fourth quarter began, but that demand weakened again as the quarter progressed and came to a close. In the aggregate, conditions in media and in cell phone hurt sales by $15 million to $20 million and profits by over $0.15 a share in the fourth quarter. And as our guidance for 2008 suggests, this will carry into early 2008 as well.

Now I'd like to shift to the one-time EPS benefits, in particular, the one-time inventory benefit. As for the reported EPS benefit related to the sale of product containing the low cost ruthenium inventory that was in the production system at the beginning of the year, you'll recall that this was a cash benefit of $0.52 a share in the first quarter, $0.14 a share in the second quarter, $0.04 a share in the third quarter, bringing the year to approximately a $0.70 per share cash benefit. The $0.70 per share benefit was partially offset during the year by lower of cost or market charges of approximately $0.15 per share. $0.13 of which occurred in the second quarter and an additional $0.02 of which occurred in the fourth quarter. Net net, 2007 earnings benefited by approximately $0.55 per share from these two factors.

The balance sheet. The Company's balance sheet continued to strengthen in 2007. And the Company ended the year with significant financial flexibility. The debt, net of cash position, improved during the year by approximately $30 million. As a result, the debt to debt plus equity ratio improved to approximately 9% in spite of an increase in over $35 million in inventory and receivables, to support the substantial increase in sales. In addition, the Company increased it's precious metal consignment lines by $95 million and increase it's revolving credit agreement by $115 million to $240 million, adding both financing capacity and significant flexibility. The increased capacity and flexibility adds the liquid to support the expected organic growth and to take advantage of acquisitions and augmentation opportunities as they surface.

As previously announced, the Company reached an agreement to settle its lawsuit against sorn of its London market insurers. The Company recorded a one time $0.27 a share benefit to earnings in the fourth quarter due to that settlement.

I'd like to now spend a moment on the recent acquisition. Earlier this week the company completed the acquisition of substantially all of the assets of Techni-Met Incorporated, a manufacturer of precious metal coated films, head quartered in Windsor, Connecticut. This highly complimentary business extends the Company's leadership and geographic reach into high growth technically demanding thin film markets and allows the company to pursue strategic growth opportunities into the medical diagnostics market as well as other targeted markets. The purchase price of the acquisition was approximately $90 million, and it is anticipated that the acquisition will be accretive in 2008. I understand that many of you would like us to disclose more financial information about the acquisition and in particular the accretion level we expect; however, as you know, we as a rule do not disclose line of business or product line financial data, especially competitively sensitive information. While we will not disclose the expected accretion level, I will offer the following. The transaction trailing EBITDA model was consistent with the historic modelables the Company paid for its acquisitions in the past and thus in the 5 to 7 range. Sales levels for the Company will increase by less than 3% due to this acquisition, since Techni-Met was a customer and previous sales to Techni-Met will now be eliminated in consolidations. Operating margins are very high, well above those of the advanced materials and services segment, and interest expense in 2008 will increase by approximately $2.5 million due to this transaction.

I'd like now to review the operating run rate for both 2006 and 2007. This was defined in the press release. To get a proper view of the Company's real operating performance trend, it's important to remove the unusual items that increased reported GAAP earnings in both 2006 and 2007. Reported results for the fourth quarter of 2007 included a previously announced benefit related to the litigation settlement and a lower of cost or market inventory charge; the net of which favorably affected reported earnings by approximately $0.25 a share. The prior year's fourth quarter earnings per share was $1.48 and included in that was a noncash benefit of $1.04 per share related to the reversal of a deferred tax evaluation allowance. Absent the deferred tax valuation allowance, the Company earned $0.44 a share in the fourth quarter of 2006. Fourth quarter 2007 earnings were negatively affected when compared to the prior year due to two factors--first, lower production, poor yields and a weak mix resulted in lower profits in especially engineered alloys and second; lower sales were recorded in the beryllium and beryllium composite segment when compared to the prior year due to a sizable nonrepeat high margin program that was completed in the prior year. Combined these factors hurt the fourth quarter earnings comparisons by approximately $0.20 a share. Net income for the year was $53 million or $2.59 a share compared to net income of $49.6 million or $2.45 per share for 2006. Excluding the reversal of the deferred tax valuation allowance, the Company earned $1.38 per share in 2006. Earnings in 2007 were effect affected by the afore mentioned litigation settlement, lower of cost or market charges, a loss on the sale of a small business and a gain on the sale of the low cost ruthenium, purchased in 2006. The combined effect of these items is approximately $0.80 per share. Excluding these items shall the operating run rate was $1.79 per share in 2007, an increase of 30% compared to the prior year's $1.38 and for reference on the same basis, 2005, was $0.62 a share.

That completes my comments on the fourth quarter and the year. I'll now comment on the outlook. As you know, the specific guidance we provided in the press release today, is guidance on the outlook for the full year only. This is consistent with the change in practice that we announced in mid 2007. The year 2007 brought significant growth in sales and profits, especially in the first half. Managing the growth we've seen over the last nine quarters has not been without its challenges. We did not execute flawlessly in 2007 and did have lost opportunity. The Company's global markets however continue to present double-digit growth opportunities and we're expecting that the Company will continue to see considerable opportunity in 2008 and beyond. The strong organic growth seen in 2007 was aided by strong demand across many of the Company's key markets. Important in 2007 was a success of the Company's new product programs which are targeted at new markets and the faster growing and higher technology applications in existing markets. The consumer electronics related markets which include portions of telecommunications and computer, as well as magnetic data storage were especially strong early in the year. The Company's oil and gas, heavy equipment, aerospace and defense markets also continued to show strong demand throughout the year. As 2007 came to a close and 2008 began, the company did expect stronger demand than what it is currently experiencing in two of its key markets. Demand from customers and for applications served by the Company's especially engineered alloy segment in the cell phone handset market are well below expectations. In magnetic media or hard disk drives, product qualifications are not where the Company expected them to be and thus the demand from the customers the Company supplies in support of the industry conversion to perpendicular media technology is below the Company's previous expectations. In spite of these weaker markets and weakening conditions in the economy which add additional uncertainty, growth in data storage together with the growth brought by the recent acquisition are at this time expected to more than offset the negative conditions I noted, thus leading to growth in both sales and earnings for 2008.

The Company at this time expects the sale growths rate in 2008 to be above 10%. In our sales growth assumptions, is metal price and mixed deflation in 2008, primarily due to the current price of ruthenium versus prices one year ago and customer sourced versus purchased metal, thus real growth in 2008 is expected to be well into the double digits. The potential is for earnings to be as much as 30% above the 2007 operating run rate and therefore in the range of $1.80 to $2.30 a share. This of course assumes the significant macro-economic downturn does not occur. Early in the year, comparisons to the prior year will not be favorable due to the aforementioned business conditions, the strong early 2007 media ramp rate and the recorded ruthenium inventory benefit and metal prices. First quarter 2008 demand in data storage as well as in our other key markets at this time appears to be similar to that of the fourth quarter. It is important to continue to reiterate that the Company's sales and earnings estimates are subject to significant variability. Metal price changes, metal supply conditions, fluctuations in demand levels driven by such factors as inventory swings in the market and new product ramp up rates in critical markets such as the media market, can, as we've seen, have an affect on actual results from quarter to quarter. The outlook for the year is based on the Company's best estimates at such time and it due to fluctuations due to these as well as other factors.

I'll now turn the call over to Dick Hipple. Dick will provide you with a market update.

Thank you, John.

As we put 2007 behind us, I would like to say that I'm proud of the Brush organization for again achieving another year of strong organic growth, strong earnings growth, strong global expansion and adding new capabilities through acquisitions.

I would now like to provide some further comments on the two key disappointments in our recent performance. First there are two dynamics affecting our performance in the specially engineered alloy cell phone market. As recently published by our largest customer, Motorola, their cell phone sales declined by 38% in the fourth quarter of 2007, as compared to the fourth quarter of 2006. This obviously has had a major impact on our sales into this market. Another longer term trend which has slowed growth is the design trend towards thinner material. As phones get smaller, the designs require smaller connectors. Although this is a good trend from demanding higher grade materials like ours, there is also a negative impact when the thickness of the design is reduced. Essentially more phones are made with less material. We are obviously not sitting still and are aggressively engaged in pursuing the cell phone supply chain of the growing cell phone companies such as Samsung in Korea. We also had lower production yields in the fourth quarter in alloy which negatively affected performance. Our yield has since recovered and we are off to a good start in 2008. Meanwhile, our cell phone business in the physical vapor deposition application at our Williams Advanced Material group remains strong and has not been impacted by individual customer issues. Bookings remain strong and we anticipate a global growth of cell phones to 1.2 billion units this year.

Now with regard to the media market for hard disk drives. We took a step backwards in the fourth quarter as needed to recall ruthenium based target material for one of our key customers. Specification changes are occurring rapidly as the technology evolves and we needed to modify production processes. We have modified our processes and our new targets are now being re-qualified. We are very confident regarding their ability to meet and exceed customer requirements. Simultaneously, we're very excited about our numerous qualifications currently under way at several customers for the media oxide layer. As I mentioned before, the oxide layer represents an equivalent market opportunity to the ruthenium layer. We also believe that we have developed superior technology for oxide targets that should be attractive to our media customers. We also recently announced an additional expansion of our media capacity at our Brewster facility. In light of our recent decline in ruthenium media sales the additional commitment to a further expansion reinforced our view that we've had a temporary set back and have a lot of runway ahead of us in the media market for new oxide layer sales, recovery of ruthenium share and later in the year after our capital is in place, expansion in the soft underlayer materials. With regard to the general hard disk drive market, industry forecasts expect at least a 10% growth in 2008 and the conversion to the new PMR technology is expected to be completed before the end of this year. We are very bullish regarding our prospects with unfolding opportunities in the hard disk drive media market, led by several new product offerings. You may also remember that Williams has a long and strong presence in the hard disk drive magnetic head materials market and this market is very strong and reflects the general strong industry conditions.

I would like to quickly update you on several other key markets. Our telecom infrastructure market remains strong. In fact, last year our under sea repeater housing business came back in alloy, as new under sea optical cable lines are being installed again. We expect this market to remain strong and we expect to see additional growth in 2008.

Our industrial markets in gas, aerospace and heavy equipment all remain strong and we expect ongoing growth as well as an expanding application base for our ToughMet products. In addition to the normal heavy loaded applications in large equipment, we're now seeing ToughMet applications going into areas like food processing and general factory bushings and bearings.

The defense business also remains strong and we are gaining traction through new products and applications. Our newest product AlBeMet grew in sales over 40% in 2007 to 2006 and we're also seeing strong defense growth at our new acquisition in California, CFT, from specialized optical coatings used in infrared devices. As I have mentioned before, one of our key strategic thrusts is to continue to broaden our market base while providing new opportunities for growth.

Our new acquisition, Techni-Met gives a new strategic position in the medical market through a strong position in the diabetic glucose testing market. We supply precious metal coated substrait to the test strip providers. We have unique process know-how required to meet the quality demands of the medical market. We expect to leverage this technology into new market opportunities. In 2008, we expect to continue to strongly grow the Company's top and bottom line for the fifth consecutive year. We are well positioned in many strong markets and continue global expansion. And our balance sheet provides us with the opportunities to continue to leverage acquisitions into new profitable growth platforms.

I think we're ready to take questions.

Thank you.

At this time time, we will conduct a question and answer session. OPERATOR INSTRUCTIONS) One moment as we poll for questions. Our first question comes from the line from Chuck Murphy with Sidoti & Company. Please proceed with your question.

Good afternoon, guys.

Good afternoon.

I guess it's safe to say never a dull moment.

Yes, it seems to be that.

Just to check my facts here. You said media or ruthenium sales were $160 million for the full year.

Media.

Media.

We just dominated by ruthenium.

Okay. As far as your '08 sales guidance goes, what kind of contribution are you assuming there from the off side layer?

In the 2008 plan?

Yes.

When you say contribution, Chuck, are you asking for profit information?

No. Basically sales. How much in sales do you expect from the off side layer in 2008?

I don't have that information in front of me. The ramp rate on oxide is not going to be unlike the ramp rate in ruthenium once it begins. The question becomes the timing of when it begins and while we're reporting actuals to you as we move forward on the ruthenium, because of its significance, we'll begin to do that when oxide gets significant, but we will not share that level of detail on our business plan.

Okay. I guess I'm trying to get a sense---if ruthenium type sales are $160 million in 2007 and you're saying that oxide could be a similar opportunity, at what point are we getting that $160?

You have to be very careful, Chuck because we get trapped in these -- you have to stay away from revenue. It's really profit, that's what we're about here. You have totally different metals in the oxide layer than you do in the ruthenium layer and it's a different dynamic. I mean sales revenue, it's not a target, it's not a target, it's not a target. You have different material sets in the--the oxide targets do not have the same metal constituencies as the ruthenium targets, so the revenues aren't equal. But we're after margins here.

I think what needs to be clear is that we're really referencing real growth and ruthenium, for example, at the beginning of 2007, was over $800 an ounce. Today it's more like $500 an ounce.

It's 415.

It's 415 an ounce today. Whenever we buy the metal direct from the seller, it ends up becoming our metal in the accounting transaction and appears in sales. Whenever we use metal provided by a customer, it's his metal and not recorded in sales. And as time goes on, more and more of the refine, recycle stream ends up in our top line with margins and without a sales value.

Okay.

So the same -- that really makes the comparisons from a revenue perspective look difficult.

I got you.

And at the same time makes the growth looks like it's less than what it might otherwise be. Unfortunate, that's the nature of our business. We do not have direct line site over first of all what is going to happen with the ruthenium metal prices and secondly when our customer will supply us the metal and when -- versus us buying the metal and supplying it to the customer.

Okay.

So it makes it hard to do what you're trying to do with the estimate.

That helps. But in you could just elaborate a little bit, as far as the profit type opportunity, when would you expect to claim 50%, 80% of the total profit opportunity for the oxide layers?

Well I think, as I mentioned, we would consider from a market opportunity the equivalent profit potential in the oxide layer as there is in the ruthenium layer.

And I'm saying, when would you reach the same profit level for oxide as you're currently doing for ruthenium?

Well again, we're starting a ramp next year. And we would expect to get several level of market share, probably similar to the ruthenium. But it's very difficult to predict that curve. It gets the qualifications and penetration and how much value do we have in differences in technologies. As I mentioned before, I think we have some advantages. We cannot predict that. That's a variable. We're confident we're going to penetrate this market and it's a very good market for us. It will be a slow start and it will ramp and we'll report on the ramp as if occurs.

Okay. Now have you started shipping any of the oxide layers yet?

We're all in qualifications.

I'm sorry.

Actually we are shipping currently oxide targets to one particular application. So we are qualified on oxide with one customer but we have a lot more in play.

Okay. And my final question here. What are your thoughts, I mean, as far as the synergies between the advanced material and the alloys business. Is there much synergy there?

No. We're not operating synergy.

I mean does it make sense down the road to consider splitting the two companies?

Well, we're not considering that at this time. What is interesting about Brush, it really gets to the models of the businesses. And although maybe we do not have overlap in operations per se, we do have overlap in how the company operates culturally, how you attack the market, how you come up with new applications, where you are on the triangle. We're at the top of the triangle for value at. That's where the specially engineered alloys business is and businesses actually operate very similarly as one another. It becomes the model of the business. So are you at the value add or are you in the commodity side. So that is common amongst the businesses and even if you would dissect Williams, Williams does many different things. They make targets, they frameless assemblies. We're now in the coating business. We make inorganic chemicals. So why don't we split all of those up? Because what is going on here is we're able to drive technology synergy within Williams and we have a very similar culture and an approach to market what I call at the highest level for this Company is especially engineered materials. And that's what we have across the board in every one of our operating units.

Okay. All right. Well I'll pass it on to somebody else. Thanks.

Thank you. Our next question comes from the line of after Avanish Kant, with Broadpoint Capital. Please proceed with your question.

Good afternoon, Dick and John.

Hello Avinash.

A few questions here. The first is that you do have a wide range of EPS guidance from $1.80 to $2.30. Could you just elaborate, what is the difference in assumption between the low end and the high end?

Well I think that wide range, as we enter this year, the key, the two key elements would be penetration of some new layers within the media business, and we're all sitting here all around the table, no matter which side of the phone wondering what kind of economy are we going to have this year. So none of us can count on exactly what is going to unfold. So there is a lot of unknowns and any time you have a lot of unknowns you put in a wide range there.

So basically there is some element of a slowdown in the economy already if you are at the lower end of the guidance.

That's right. Sure. That's right.

Okay. Good. The second thing I wanted to touch base upon is I'll follow-up with the previous question is that in terms of your assumptions from the oxide layer, what we're trying to get at is the guidance of $1.80 to $2.30 that you've given, does it assume a significant EPS contribution from the oxide layer in the calendar year '08 or not.

It assumes some. I wouldn't define it as significant.

We think it's important and it's going to be more significant in the second half.

So in the second half, right.

Yes.

But then you expect to reach the kind of levels, we talked about the similar opportunity, you talk about the similar opportunity most likely in calendar year '09, not in calendar year '08.

Well you start to really ramp the second half of 2008 and into 2009. That's the plan.

You're correct.

So the ramp will start in the second half of calendar year '08.

Yes.

The noticeable.

Yes. The noticeable, I mean we're going to be -- if we hit what we want to. We have a lot of qualification targets in and I hope to start shipping in the second quarter. But you know how customers work. You qualify and then they tried some and they want to make sure they have consistency and quality and stability, and then they start to ramp you.

And you did talk about some advantages that you have over the technology that existing out there. Could you elaborate on this, please?

This is a sophisticated area and it has to do with fluxes and permeability and tuning if you will of these targets depending on their needs in the responsiveness in the media market. So we think we have some design there that give you the ability to fine tune these targets a little bit better.

So the end result for a customer is they have a better film, a thinner film? They can use that material What is it. What is the cheaper target?

It depends on how the customer is designing their media products and this is a very -- the oxide later is very tricky and some are designing differently. They have different, some want higher permeability and some don't. They want different magnetic properties and so it becomes, as you tune those magnetic properties, it becomes very difficult to get those properties within the oxide layer. And so we think we have more flexibility in our design and we'll have to prove that in the marketplace.

So basically you would provide them with a better process window, if I understand it right.

Yes. More controllable process window, exactly right.

Okay. Good.

That's our plan.

Now one more question. You have been talking about the cell phone business especially from a particular customer. Now I did some work on your speciality engineered alloy business and if I try to break down to the point, just to figure out the contribution from cell phone customers into that alloy segment, it does not come out to be more than 10%. Am I grossly wrong somewhere, or -- I'm trying to see how this could impact you materially. Is that the margins in that business are significantly higher?

They're very high. They're very high.

In that case, while the revenue in fact may not be that high, the margin impact is what is impacting your business right.

Yes.

In terms of growth coming back, if the particular customer you talked about, Motorola, if they do not do well, you did talk about Samsung. Are you in qualification at Samsung?

We're shipping.

Is this a new development?

No. This is just got to go out there and sell your product and get in the right stampers and go to work.

I am saying you talk mostly about the impact from Motorola but have you been supplied to Samsung all through?

We have had a low market share in that area of the world. Lower than what it should be.

Has it improved recently?

We're working hard on that,Avinash.

Okay. Perfect.

A lot of this is Korean sales and we're putting what I call the management and sales sweat equity to make sure we get the proper market share where we're not getting it.

Okay. I'll come back later with questions if I have more. Thank you.

Our next question comes from the line of Phil Gibbs from Keybanc Capital Markets. Please proceed with your question.

Hello. Good afternoon.

Good afternoon.

I had one pretty detailed question, a couple of housekeeping questions. I'll just take care of the housekeeping ones first. As far as the lower cost of inventory charge in the quarter, what was the magnitude of that on a pretax basis?

It was $0.02 a share after tax.

$500--

$500,000, $600,000.

And what about the sequential volume change in ruthenium based media technology. I mean--

Your question -- your specific question, when you say sequential volume change?

I think you had mentioned it last quarter, somewhere in the range of 65%. Ruthenium based disk drive sales.

From the second quarter to the third quarter, the ounces shipped increased by 65% to 70%. The third quarter to the fourth quarter, they increased about 4%.

Okay.

And as I indicated in my scripting, the demand was especially strong in September as the third quarter ended and in October as the fourth quarter began and then the volume dropped off in November and December. The sales value of those sales, and again as we suggested, we do not think we ought to think too much about sales because of the metal source as well as the metal price question, but in the revenue line, to the extent that it's relevant, the revenue in the first quarter was $63 million, the revenue the second quarter was $33 million, the revenue in the third quarter was $28 million and in spite of the ramp in volume, the revenue in the fourth quarter was $37 million.

Oh, okay. Interesting.

And again that's reflective of metal source and metal price. First quarter metal prices, certainly averaged $700 or so. And later in the year, we're in the $500 range each quarter probably. If I had the date in front of me.

And those absolute numbers that you gave me, you're speaking just the ruthenium media disk drive sales.

Yes. Media which is is ruthenium.

And my last question just for a little bit of elaboration, basically the top line estimate looks pretty much in tact, the 10% year-over-year growth; but it looks like the EBIT will get strained due to, I think what you referred to as sort of getting caught in not being able to maybe pass the metal through. I would say as efficiently maybe with the timing. You can elaborate more on the dynamics during the timing of metal.

I think I know what you're asking and it's the correct observation. Dick just referenced a moment ago the high value add hand, cell phone business and as you might expect, double digit margins in the media business. So you'll get margin stress year-over-year and especially in comparable, when you're look at one quarter and comparing to the same quarter of the prior year, you'll get some margin stress until those high value-add products are back in the mix.

Okay. Great. Hello.

Yes.

And just a follow-up. With a 10% year-over-year revenue growth, how much of that would you attribute to -- is that all organic?

Yes. I referenced in my -- again my script.

I apologize.

That we were talking about above 10%. So 10% is sort of a floor. And I also referenced that there is metal price deflation inside that growth rate so the real growth, if you were, if we were able to tabulate it on a per unit volume basis, which you really can't whenever you are mixing pounds with ounces. The real growth is something significantly above that low end of 10%. So significantly into the double digit.

Great. Perfect. I appreciate the color on that. Have a good afternoon. Thank you.

Your welcome.

Our next question comes from the lines of Rob Young with William Smith Securities. Pease proceed with your question.

Hi. Good morning.

Good morning.

First question is, in relation to the raw materials the customer source as well as the Brush source, what type of changes over time have you seen as far as the mix between the two and then what type of changes do you expect on a going forward basis.

Let me comment on that. It's really a difficult thing to estimate, but think about it this way. When we initially began to ramp these processes, the material that was coming into -- starting to feed the entire value chain if you will, was virgin material coming from the mines. As that material starts through not only our production process but also the production processes of the customer, there are slurries that's come off of the production systems that have this metal in it that then in turn starts to head toward the refiners and they refine it and ship it back to the refiner of the metal, whether it's the customer or us. Those processes take any anywhere between three to six months, depending on whose metal it is and which refiner they're using. So as the year 2008 progressed, 2007 progressed, you saw a significant amount of the metal start to resurface from that recycle stream in the third and fourth quarters of the year. So it has a tendency to depress recorded sales.

Let me add a little to that, John. There is usually a large macro number on that, I don't have the exact one with me, but just give you a feel; at the beginning of the ramp up it was 100% virgin material and today it's less than 50%.

In the stream. That's right.

So you used half of the material you're using at beginning of the year.

Okay. I understand. And then in relation to the oxide layer as well as the ruthenium later on the PMR, who are you running into as far as those two layers from a competitive standpoint?

There are several competitors out there. It's [Horasse], is a German company, there is Taiwanese company called Solar-Tech out there, and Sanyo Metals. There is about two or three of them out there.

Okay. All right. Well I believe that's all. And thank you very much.

Your welcome.

Our next question comes from the line of Chuck Murphy with Sidoti & Company. Please proceed with your question.

A couple of follow-ups. What would you expect the kind of long term growth of Techni-Met to be about?

The major market today is in the medical diabetes market, so that's a pretty steady growth market, unfortunate. Good news-bad news there of it. Right now the test strip market is growing at around 10% a year. So that our objective would be, as the same objective in all of our businesses, we intend, we hope to grow that faster. We have the regular macro market growth and then we will try to get additional share within that market through our technology advantages that we believe. So you've got that place. You've got the basic glucose test market growing at a good rate. We'll try to grow faster than that. And then you go beyond that. We do think on a longer term basis, I have some very intriguing technology that we think we can leverage into other markets.

Any new products in mind that you can talk about there? Again, it would be -- we think we have some opportunities in the defense area and we think there might be some longer term plays in the solar market. Okay. And my other question, as far as the requalification goes, I mean, is that something that the other suppliers to this hard drive customer were having to do, or was it just for you guys?

Well, I can't answer what others are doing. I have no idea.

Okay. And as far as the customer buying the ruthenium rather than you, was that at their question, question -- their request, your question.

That's at the customers request. It always depends on how they want to play it.

That would be better for you guys because you do not have the volatility of the metal.

That's right. We're very responsive to the customer's request. We do not demand one way or the other.

That's all I had. Thanks.

Your welcome.

Our next question comes from the line of Avinash Kant with Broadpoint Capital. Please proceed with your question.

This is a follow-up. In the prepared remarks you talked about the qualification activity is not going as expected. Do you mean the requalification to your customer or the qualification for the oxide layer?

When we referenced that, Avinash, I believe if it was me that was referencing it, I was talking about the requalification process of the ruthenium layers at the key customer, that changed his specifications.

You're not talking about the oxide layer?

Pardon me.

Do you think you're running on track there?

Yes.

Okay. And in terms of the facility expansion, when do you expect this to be ready?

The Brewster expansion?

Yes.

We have a couple of different things going on there. The longest lead item is -- let me put it this way, we think we can support a couple of things in the near term basis which would be a ram up up in the oxide and the return of share on the ruthenium side, we're going to need -- the longer lead stuff has to do with the SUL layers and that's more toward the middle of the year. But we can support anything that will come our way in the oxide and the ruthenium.

In the middle of the year, right.

No. SUL we're going to need to get some certain longer lead items for the SUL growth. We think we can support on a near term basis in the first half. Let's say that we get some upside surprises, okay. It would be nice to have some upside surprises. If that happens we'll by able to support them in the oxide layers. Let's say that ramp is quicker that we're forecasting, we're going to be able to support that.

And have you quantified your opportunity from SUL alone?

Well, yes. We certainly internally qualified. You know, there is market sizes and opportunities and chairs and sure.

Could you give us some idea about how big could that opportunity be?

Well, again, I think we've said before and this is where it gets crazy, the market size is in a billion, billion and a half, and what does that mean? I mean what is the price of metals? How much does the customer own? And it gets crazy on you. But it's a very large market. And it's that kind of metric?

And who would be your key competitives in the oxide layer. Would it be the same people for the ruthenium?

It changes a little bit but right now it's Horasse, who is also the main player which is also in ruthenium and solar.

So is there somebody with a very large market share?

Horasse has been the big media player for many years.

Okay. Okay. Perfect. Thank you so much.

You're welcome.

We have a follow-up question from Rob Young with William Smith Securities. Please proceed with your question.

Hi. Just one real quick one. Are you guys in the qualification process for a Nokia by chance?

Nokia, what application?

For the cell phone handset market?

We shipped to them today.

You shipped to them today?

Yes.

Okay. Perfect. That's all I have. Thank you.

There are no further questions at this time. (OPERATOR INSTRUCTIONS)

Operator, I think we're going to conclude.

Okay. There are no questions anyway.

And this is Mike Hasychak We would like to change you for participating and I'll be around the remainder of the afternoon to answer any questions. My direct line is 216-383-6823. Thank you.

Ladies and gentlemen, this concludes today's telephone conference. You may disconnect your lines at this time. Thank you for your participation participation.