Materion Corp (MTRN) 2008 Q4 法說會逐字稿

Greetings and welcome to the Brush Engineered Materials Fourth Quarter 2008 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, Michael Hasychak, Vice President, Treasurer and Secretary for Brush Engineered Materials. Thank you, Mr. Hasychak, you may begin.

Good morning, this is Michael Hasychak. With me today is 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 year-end 2008 results and the outlook, and Dick Hipple will give a market update. Thereafter, we will open up the teleconference call for questions.

A recorded playback of this call will be available until February 20th by dialing area code 877, the number is 660-6853, account number 286 and conference ID 310422. The international replay number is area code 201 and the number is 612-7415. The call will also 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 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 morning, everyone and welcome to our fourth quarter call. Thanks for taking the time to join us today. Today's format is the same as that of past calls. I'll review the quarter and then comment on the outlook. And then following my comments, Dick Hipple will provide you with a market update and a review of other key Company factors. Dick will also comment on the effect that the economic developments of the past several months have had on our business, as well as the aggressive actions that we've taken and will continue to take to insure that the Company remains healthy through the economic environment. Then we'll open the call for questions.

I'll focus on some of the key points identified in the Press Release covering both the quarter and the outlook. I'll comment only briefly on the year and I'll also attempt to pre-answer certain specific questions, some of which we have been receiving recently.

First, I believe that it's important to review the non-GAAP operating run rate defined and presented in the Press Release along with the key items affecting the comparison to the prior period. Then I'll cover the factors affecting the reported sales compared to the prior year, including the impact that metal prices and our media market issues have had on reported sales and the related comparison to the prior period. And then I'll review our Balance Sheet which is very strong, strengthened further in the Fourth Quarter and is expected to continue to strengthen in 2009. And then following those comments I'll review the outlook identified in the press release.

So let's begin. Let's start with a review of the reconciliation of the non-GAAP operating run rate to the reported GAAP earnings. As I review the non-GAAP operating run rate let me call your attention to the table in the non-GAAP financial measures section of the press release. The table is on page seven. In this table, we reinforced what many of you already know and that is that the Fourth Quarter and the full year comparison to the prior year are affected by a number of factors that cloud the underlying performance of the company's baseline business. We reported on these and discussed these in past quarters, and present them here again for reference, along with the related Fourth Quarter non-cash $0.30 per share charge that was identified in the press release.

The items identified in the table are factors that we wouldn't normally expect to occur in the ordinary course of business and thus we believe that the presentation of our operating results, excluding both the positive and negative impact of these factors, is a better representation of the performance of the company's baseline business. This is also more consistent with how management monitors performance internally.

The most impactful of these is the sizeable benefit from the sale of materials containing the raw material ruthenium to the media market during the initial stages of the significant perpendicular media product launch in early 2007. A significant and sudden increase in the market price of ruthenium then, resulted in our generating a pre-tax cash gain of $23 million or $0.70 a share after-tax due to our sales including materials that had been purchased in 2006 at a significantly lower price.

Also to be noted in this table is the lower cost or market charges taken in specific quarters of 2008 as ruthenium prices returned to historic levels. In the Fourth Quarter the market price of ruthenium declined by approximately 70%, an unprecedented drop. This resulted in a non-cash charge of approximately $9.2 million pre-tax or $0.30 a share after-tax in the quarter. And one final item to note in the table is that in the prior year Fourth Quarter, we recorded an $8.7 million pre-tax or $0.27 a share gain related to a litigation settlement. Net of the charge taken in the fourth quarter of 2008, the non-GAAP operating run rate for the quarter was $0.16 a share, well ahead of the consensus estimate for the operating run rate which was $0.07 a share For the year 2008, considering these factors plus the other factors that are noted in the table, the non-GAAP operating run rate was $1.47 a share.

Now I'll turn to the factors affecting sales. As you know this morning, we reported sales for the Fourth Quarter that were about $45 million or 19% below those of the prior year. The Fourth Quarter sales were also below the third quarter by similar levels. Metal price deflation, or said differently, that portion of both precious and non-precious metal price declines that we normally pass on to customers, lowered sales by approximately four percentage points in the quarter. For the year, metal price increases passed on to customers raised sales by about five percentage points. Therefore, while reported sales were down 19% in the Fourth Quarter, the real decline excluding metal price movements, was about 15%. And for the year, while reported sales were down 5%, considering metal prices, the real decline was approximately 10%.

As in the first three quarters of the year, another significant factor in the decline in sales in the Fourth Quarter and for the year in total was lower shipments of ruthenium containing materials to the perpendicular media segment of the magnetic media market. This is directly linked to the product and raw materials supply qualification issues that we have been reporting on for the last couple of quarters.

In the Fourth Quarter, sales here were approximately $27 million below the prior year, and for the year, sales here were approximately $142 million below the prior year. Approximately 25% of this drop is due to lower ruthenium metal prices and customers supplying their own metal, and the balance, approximately 75%, is from lower volume. These factors affected the company's comparison by 11 percentage points in the Fourth Quarter and 15 percentage points for the year. Net of both, the metal price changes and media volume changes, sales decreased in the quarter by 4% versus the reported 19%, and the year-to-date on this basis is a growth of approximately 5% versus a reported decline of about 5%. Dick Hipple will provide additional information on the media market in a moment.

Now let's turn to the Balance Sheet. It is attached to the press release. Our Balance Sheet has been strong and continued to improve by an additional $28 million in the fourth quarter. Even considering the acquisition made earlier in the year, we continue to have significant financial flexibility. Our debt, net of cash to debt plus equity ratio improved to a very healthy 6%. While the Techni-Met acquisition was approximately $87 million, balance sheet debt increased by only $6 million in the year. We ended the year with about $19 million of cash and about $2 million drawn on our revolver.

We came into the year having significantly increased our precious metal consignment lines and we significantly increased our revolving credit agreement by about $115 million to $240 million adding both financial capacity and significant flexibility. We're pleased to have the liquidity we do and the flexibility we have to support our strategic initiatives as we enter uncertain economic times.

I'll now turn to the outlook. As noted in the press release, the widespread weakness in the majority of our global markets has created an environment with minimal visibility. It is extremely difficult to predict the impact of these challenging market conditions on the outlook for the full year 2009. We had considered suspending our practice of providing annual guidance, as many companies have, but we do feel that it is important to express our current view in spite of and considering the vagaries of the economic environment that we are still in. In most of our key markets, recent reports from customers and others are indicating that the Fourth Quarter actual and First Quarter projected sales levels are well below what we experienced in the Fourth Quarter and many are indicating that improvements are not expected until the Second Quarter or possibly even into the second half of 2009, especially in the consumer oriented markets.

We have seen the order levels in the latter weeks of the Fourth Quarter were well below those of the earlier weeks and that our order levels in the post holiday period continue to weaken. Much of this we believe is due to massive inventory corrections in the supply chain and we are therefore currently assuming no near term improvement. We are also assuming no further weakness as the first quarter progresses. As noted in the press release, we do believe that as a result of these conditions, the Company will show a loss in the first quarter of the year.

Sales are currently expected to be in the range of 15% to 25% below those of the Fourth Quarter. From there, we currently expect revenue levels to improve sequentially as the year progresses. The full year is expected to be profitable. Assuming a modest economic recovery beginning in the second quarter of the year, a profit of up to $0.75 per share diluted is currently expected. It's also important to continue to reiterate that the company's outlook is subject to significant variability, especially given the current economic environment.

Changes in demand levels, metal price changes, metal supply conditions, new product qualification and ramp up rates, swings in customer inventory levels, changes in the financial health of key customers, and other factors can have a significant effect on actual results. The outlook provided above is based on the company's best estimates at this time and is subject to significant 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.

Thanks, John. Talking about the market today is almost like saying I'd like to talk to you about my recent trip to the dentist who ran out of Novocain, and so far I haven't found a dentist that has any Novocain in stock. Unfortunately, we have not been spared the severe economic downturn that has been widespread across the economy starting in the Fourth Quarter and continuing to escalate into the first quarter of 2009. I'm proud of the management team and the workforce as to how they have quickly responded to the rapidly changing conditions. The cost and inventory reductions have been rapid and effective. Our hourly workforce has also been extremely flexible in finding ways to reduce cost. Actions have been taken across the Company to reduce costs and to insure that the company's healthy balance sheet remains strong.

Actions include headcount reductions globally that have reduced total employment by more than 10% since the end of the third quarter. The Company has also implemented pay freezes, reduced work hours, suspended a portion of the 401(k) match, reduced discretionary spending, supplier costs, and deferred lower priority initiatives. In addition, working capital is being diligently managed and targeted capital spending deferrals are being aggressively implemented to insure that the company's balance sheet remains very healthy. As many of the company's markets continue to weaken through the early part of the first quarter of 2009, additional measured steps are being taken.

All markets in all geographic areas of the world have been affected by this rapid downturn. The only exceptions have been the medical and defense markets. As I look forward into the first quarter of 2009, we see many customer order patterns from 50% to 80% down. With this being the case, we expect the first quarter to be the low point of 2009 as these order patterns reflect not only lower downstream demand conditions but rapid adjustments to inventory levels. So we believe that an upturn in order patterns should be realized in the second quarter, when the impact of inventory adjustments should begin to wane.

As we entered the slowdown, Brush's strategy executed during the last several years has borne fruit to provide a distinct advantage for the Company. Both our balance sheet and liquidity are very strong. We have a broader geographic reach, more diversified markets, which provide more growth opportunities, new products, and better operation management systems that help to maximize productivity, cost, and inventory control. These advantages allow us to continue to execute on our go forward strategy of providing problem solving, innovative products to our customers with the objective of continuing to expand both our markets and geographic reach.

For example, in the first quarter, we finally are fully pre-qualified and are shipping target production orders to a major hard disk drive producer. Unfortunately, this market is undergoing a severe downturn, as we speak. We expect to continue our recent progress at several other hard disk drive producers.

As I mentioned earlier, several markets have remained solid for us and we have good growth initiatives behind them. In the medical area, we are advancing current product designs to help our customers lower their cost in the glucose testing area for diabetes. Our solar initiative continues to expand in the thin film area. Solar thin film technology is still in the beginning growth stage and we are working very hard in bringing specialty coating materials to market that includes powders, evaporative and sputtering targets, rotary targets, and even a possibility of using our roll to roll sputtering process for flexible thin film coatings. We are looking to expand our reach in acoustic applications with the technical advantages beryllium foil has in high end speaker technology. And these are just a few of the exciting areas for us.

So as we go forward, we will continue to work on both the top and bottom line to position this Company as an early riser from these very turbulent waters that we are navigating. Operator, we will now take questions.

Thank you. (Operator Instructions) Our first question is from Avinash Kant with D.A. Davidson. Please State your question.

Good morning John and Dick.

Good morning.

A few questions. Am I right in understanding that if you did not take the charges related to ruthenium, your gross margin would have been roughly close to 18% or so?

That's correct.

Okay, and in terms of, as the commentary was, your customers are seeing a much steeper decline in revenues in the March quarter, you said in the order of 40%, 50% or so. How is it that your revenue decline is going to be limited to the 25%? Is that partly because of the ruthenium sales that you're starting to do again?

Could you repeat the question to make sure we captured the quarter reference correctly?

Your March guidance, the low end of the guidance is for down 25% in revenues whereas in the prepared remarks you were talking about your customers talking about a huge decline, somewhere in the 40% to 50% range.

My comment was that many customers, not all customers.

Okay. Now, that brings me, did you give out what was ruthenium sales for the quarter?

I commented on the change between the two years.

It was $27 million I believe?

I think approximately $27 million, and that leaves a very small amount, $4 million to $5 million in the fourth quarter.

If I remember correctly, your total sales for ruthenium in the last year, 2007, were roughly $160 million?

That would include sales into the head business. I was referring to sales onto the hard disk drive piece of that business being about $140 million in the prior year.

140, okay, because at one point--

I'm sorry,$ 150 million.

Okay, so now it makes sense. Okay, $150 million, down by $142 million, roughly.

Right.

So that's roughly $8 million. Okay, that makes sense. So but you did say that you did qualify the new materials again and you'll be starting to ship?

We have started to ship.

Already in the fourth quarter right?

We have started to ship.

Okay. That was in the fourth quarter or in the first quarter now?

A majority was in the first quarter.

Okay, very good, and another question I had was, going forward, of course, you were talking about some sort of recovery, hoping for some recovery from the second quarter onward. Usually, what kind of visibility do you have? Do you see these things at least three, four, five months ahead of time, or is it more of a turns business and you're expecting it based on the decline that you have seen so far?

Well, there's certainly not visibility three to four months in advance anywhere.

Right.

So it's dominated by what we see happening. In a given month for example, half the business might come to us in orders in that month.

Okay, so on a monthly basis, you do see things improving from February, March time frame or beyond that?

Well, no, we do not. What I had said in my words is I'm using some high level logic that basically says that some of these order patterns are so low that they don't really match with what the ultimate consumer pattern may be. So that that is a sign of a massive inventory adjustment going on. So that given that, that order pattern can only be sustained at that low level for a period of time, when ultimately the inventory adjustments are then made and then you see the order pattern pick up. An order pattern picking up today does not necessarily mean that the economy has improved. It simply means that the inventory adjustments have waned.

And John, on the operating side, would you say that the efforts you have made, the full impact of that was not reflected in fourth quarter and most likely will be starting to reflect in Q1 or beyond?

Very little of it would have affected the fourth quarter. There was some but not much. A majority of this will begin to take root as the first quarter progresses. Probably fully implemented at least what we are planning today, the full impact will be felt in the second quarter of the year, not even the first quarter. A majority in the first, some coming in the second.

So could you give us some idea about what's the magnitude of the impact, how do we model it going forward for the year? How much of a decline should we see in the operating expenses?

What we're looking at from these actions is around $25 million to $30 million a year, is what we expect to get out of it, and certainly as things unfold, we'll be looking for more.

And that's not just in operating expenses which you referenced, that's everything from what happens inside operations above the gross profit line as well as--

Plus overhead and operating.

Below the gross profit line.

Okay, any idea in terms of, assuming everything else being the same, metal prices and all that, when you talk about $0.75 in earning, what kind of revenue do you have in mind? Any range there? Assuming the metal price is being the same.

I wouldn't want to comment too specifically because, as you know, metal prices aren't going to remain the same and the mix of metals will not remain the same. So up to $0.75 could take us to a revenue rate that's well over $800 million, so it's a difficult number to try to be specific about.

Okay. I'll let others ask questions and I'll get back in line. Thanks.

Thank you. Our next question is from Mr. Anthony Sorrentino with Sorrentino Metals. Please state your question.

Good morning, everyone. You said in the press release that because Brush has a strong financial position, it would be able to take advantage of strategic opportunities. Would these be the usual tuck-in acquisitions or are you considering something larger?

Well, again, we've never limited ourselves. Obviously, in today's environment, I think I'd be a little bit more comfortable with tuck-ins. But again, you have to keep your eyes open, if there would be a unique win-win opportunity with a larger company, everything would be up for consideration.

Okay, and which areas or industries would you be looking to add to?

If you look at our pattern that we've had in recent history the last couple of years, what we've been doing is looking for acquisitions that provide a certain business model, and that business model is in high growth areas, high value add, low capital intensity, good working capital turnover. And businesses that provide some strategic advantages with our core businesses. And our core businesses, which is kind of interesting, today are expanding, so our old core business is different than today's core business which now gives us some additional advantages as we look to expand the Company.

Okay, thank you very much.

Thank you. Our next question is from Ms. Ann Riley with American Metal Market. Please state your question.

Hi, I'm interested in asking about staffing cuts over the quarter. It says in the release that about a 10% overall cut took place. I wonder if you have any specific numbers on how many that is by a head count?

The release didn't say that the full 10% occurred in the quarter. It referenced what we expect to be accomplished by early in the second quarter or the first quarter of the new year. At the end of the third quarter we had approximately 2,300 employees in the Company. So you can apply that 10% to that number and we would suggest that it be that number, maybe slightly larger.

Okay, you said 2,300?

2,300.

Okay, now, you're talking just now about the medical and the defense industries really being your strongest markets right now, maybe seeing some growth there. I'm wondering whether we're going to see any pulling back in the other markets, especially media which you have said under performed. Might we see more staff cuts or project deferments there?

For us or with them?

With you, with your department.

Well, we'll have this business right sized for whatever the market conditions dictate.

Okay, great. Thanks for your help.

Thank you. Our next question is from Mr. Rob Young with W.M. Smith and Company. Please state your question.

Good morning guys. Congratulations on getting pre-qualified.

Thank you.

I had a quick question regarding that. Are there any outstanding qualifications that you look to seek over the next quarter or so?

Yes. We haven't fully, because there's about four critical customers and we're over the hump on a couple of them.

Okay. From a risk standpoint, are there any issues with losing market share or potential market share in the time of not being qualified to competitors that are qualified?

Yes. We've already suffered from that.

Okay. Is there any update on the oxide layer at all?

No. That's really, we've got to improve our metal in this ruthenium layer.

Okay and then relative to the headcount reductions, are you expecting any severance costs as a result of that?

Yes. We will expect some in the first quarter.

Okay. That's all I have. I appreciate it. Thank you very much.

Thanks Rob.

Thank you, our next question is from Mr. Mark Parr with KeyBanc. Please state your question.

Hi, guys, it's Phil Gibbs for Mark Parr. How are you?

Good morning, Phil, how are you?

Pretty good. Your cost structure as it stands right now, can you give us an idea about how much of that is variable and how much of that is fixed, approximately?

We don't disclose that, Phil, and so no, we will not share that.

Okay. And Dick, did you say $25 million in cost reduction from the recent initiatives you've taken in 09?

Yes.

And how much is that going to show up in SG&A versus other areas of the business through rationalization?

It's roughly 50/50.

50/50? Okay. As far as the margin impacts from lower copper prices we've seen lately, is there going to be a delay in the pass through of that, what we're going to see in the first quarter or some sort of a mismatch? How should we be looking at that?

There's a slight lag there, as we've talked in the past, a month or two between the time of the order and time of fulfillment but obviously order levels are down now so you're not going to see as great of an impact in the first quarter, but if copper prices continue to decline, we will see the benefit there.

Okay. You've alluded to the fact that the medical markets and the defense business have been strong. We've heard that on past calls, that your defense business has been good, and I've heard from other companies that the defense business has been solid. Is a lot of that going to be baked into the beryllium business? Would you say the strength you saw as far as the solid margins, the above 15% margins in the solid sales growth, is that going to be sustainable through next year?

Well, the first question, yes. I'm glad you brought this up because generally this company has always talked about the defense business centered around our beryllium business, and that is true for the beryllium business. But what's interesting is that our footprint has expanded in the defense business, really through our acquisitions. For example, the business that we acquired out in California several years ago, the TFT we call it, their primary business is defense and it's growing very very strongly. Our business, our inorganic chemical business that we bought up in Milwaukee, they are a big supplier to TFT, and they have a nice core defense business. So actually, our defense business footprint is expanding within the company.

Is that TFT business, is that the infrared business, is that right?

No, the -- well, yes, you're right. It's the filters, the coating for the filters, the infrared filters, that's correct.

But would you expect the strengthen in the beryllium business in the fourth quarter to continue, or is that a depiction of some lumpiness?

Well I think, let me put it this way, we expect a good year in 2009. It's one of the few businesses that you have some forward look to them because of lead times. We did a very strong shipping quarter in the fourth quarter in the beryllium business. Now will we repeat that every quarter? I don't think so, but that's just a reflection of lumpy shipments. I think the business itself is solid for 2009.

Okay, fair enough. Thanks guys.

Thank you. (Operator Instructions) Our next question is from Mr. Avinash Kant with D.A. Davidson. Please state your question.

Just a quick follow-up. Any comments on the development of the new plant that was coming out, the beryllium plant?

Yes, all of the building steel is up, foundation's in, building steel is up, it's on schedule. And I don't have the schedule committed to memory but I think our startup is scheduled right around the end of the first quarter of next year, and so everything is in order there.

End of Q1?

2010.

Okay, perfect. And is that the production time? You'll start producing at the end of Q1?

No, what we'll do, that's pretty much all the construction will be completed right around that, probably around April, and then we'll go into a start up mode, so I would expect us to be seeing some decent production out of that facility certainly before the end of the year.

Before the end of the year?

Correct.

Okay. Perfect. Thanks so much.

Thank you. (Operator Instructions) Our next question is from Mr. Mark Parr with KeyBanc. Please state your question.

Just real quick. Had you mentioned your CapEx plans for next year?

Thanks for asking that question. No, we did not, but as you recall, we've been operating in the range of $25 million to $30 million over the last couple of years. We would expect that in 2009, given some of the actions that we've taken, that we'll be well below $20 million in CapEx. So for a range, effective range, $15 million to $20 million.

And just the last question on the balance sheet. The retirement and pension benefits that went up about $40 million on the balance sheet in the quarter, can you give some color around that?

Yes, that's the peculiarities of pension accounting, and that's the unrecognized loss that we had on our investments this year plus changes in the various assumptions like the discount rate. So here in the fourth quarter we had to raise our liability. The offset there was that it was a hit to what we call OCI within shareholders equity. I'm sure you're seeing that same type of adjustment from a lot of your other clients.

Right, right. Is there a pension funded status that you can lead us to?

Sure. Our valuation of our pension fund as of the pension fund plan year-end which is May 31, the last one was May 31 of 2008, and taking into consideration the cash that we'll be putting in during 2009, we would be up at the 80% funded rate. Of course, we'll have to redo that as of May 31 of 2009 to see what the shortfall may be given the performance of the assets for the remainder of the year of 2008, and to May 31 of 2009.

Now is there going to be a cash outlay that we're going to see?

Yes, we'll be putting in about $18 million into the fund in 2009.

Okay, perfect. Thanks.

The majority of that has been expected for quite some time. Right.

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 closing comments.

This is Mike Hasychak. We would like to thank all of you for participating on the call this morning. I'll be around for the remainder of the afternoon to answer any further questions. My direct dial number is area code 216, the number is 383-6823. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.