Materion Corp (MTRN) 2009 Q3 法說會逐字稿

Greetings and welcome to the Brush Engineered Materials Inc. third quarter 2009 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. You may begin.

Good morning, this is Mike Hasychak. We 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 third quarter 2009 results and the outlook, and Dick Hipple will give a market update and general comments. Thereafter, we will open up the teleconference call for questions.

A recorded playback of this call will be available until November 13th by dialing 877-660-6853, account number 286, and conference ID number 334765. 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 Events and Presentations on the Investor page.

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 will turn it over to John Grampa for comments.

Thank you, Mike. Good morning, everyone, and welcome to our third quarter call. Today's format is the same as that of past calls. I will review the quarter, and then comment on the outlook.

Following my prepared comments, Dick Hipple will provide you with a market update, and a review of other key company factors. Dick will also provide a briefing on the recently announced acquisition, and how it fits into the Company's strategy. Hopefully some of our comments will pre-answer some of your questions, and following our reviews we will open the call for questions.

I will focus on some of the key points identified in the press release, covering both the quarter and the outlook for the fourth quarter. We will not comment on the outlook beyond the fourth quarter and into early 2010, which while showing signs of additional improvement, remains we think in this environment simply too unpredictable, and too uncertain to be specific about. There just isn't much visibility in our markets.

First, I will review the sales and earnings levels along with the key items affecting them, and the comparisons to the preceding quarter, including metal prices, certain market factors, and other factors affecting the reported growth.

I will also review the key items that affected the current quarter's earnings levels, then I will review our cash flow and the state of our balance sheet, which as you know is very strong, and is expected to continue to improve.

Third, I will comment briefly on some of the financial dimensions of the Barr Associates acquisition. And then following my comments in these three areas, I will review the outlook.

Let's begin with sales and earnings. As you know, this morning we reported sales of approximately $191 million for the third quarter. While below the prior year, third quarter levels of approximately $50 million, were about $16 million, or 9% better than the second quarter sales. Sales for the quarter were slightly above the high end of the guidance we had provided, primarily due to stronger businesses from our consumer electronic oriented markets.

Approximately $6 million of the prior-quarter's sales was represented by shipment of hydroxide, and we had approximately $1 million of hydroxide shipments in the third quarter. Hydroxide shipments generally occur in only one or two quarters of the year. Excluding this $5 million difference from the comparison, the Company's core businesses improved sequentially by approximately $21 million, or 12% from Q2 to Q3.

Metal price movement did not have a significant impact on the comparisons to the same quarter of the prior year. 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 1 percentage point in the quarter, compared to the prior year. Thus the decline in the real business levels or volume in the quarter compared to the prior year quarter was about 20%.

Metal price increases raised sales in the third quarter by about $5 million, or 3 percentage points compared to the second quarter. Considering this, and the hydroxide shipment difference that I mentioned earlier, real business levels in the third quarter were up approximately 9% sequentially, comparing to the second quarter. I should also note that the foreign exchange impact on revenue was de minimis, a fraction of a percent in these comparisons.

Comparing to the second quarter of the year, about $16 million of the $21 million sequential growth in the third quarter was in our Advanced Materials segment. $6 million was in the Engineered Alloys segment, and $2 million in our Engineered Material Systems segment. The sequential growth in these segments is due principally to the recovering consumer electronics business levels. Our Beryllium and Beryllium Composites business declined from the second quarter by about $3 million, due to the push-out of very high margin defense business.

The reported profit for the quarter was $0.01 a share, an improvement from the first quarter loss of $0.40 a share, and the second quarter loss of $0.04 a share.

The quarter was consistent with the guidance we provided, which was that the Company expected to generate a slight profit in the third quarter. There were several factors, both positive and negative, that affected reported results in the quarter.

Increased volume and cost reductions did favorably affect third quarter, when compared to the second quarter. The third quarter was also favorably affected by a discreet tax item, which was expected. The third quarter was negatively affected by unexpected manufacturing issues, acquisition-related costs, and delays in the shipment of the high-margin defense business.

The manufacturing issues and the acquisition-related costs hurt the quarter, versus our initial expectations, by about $0.05 a share. And the delays in the defense business hurt the quarter by an additional $0.05 a share. The discreet tax item, again which was expected, was $0.04 a share, and resulted from the reversal of reserves that are no longer required.

Now let's turn to cash flow and the balance sheet. As you know, our balance sheet is very strong, and in the quarter it improved even further, as debt net of cash declined an additional $5 million. The Company's debt net of cash to capital ratio was approximately 3% at the end of the quarter. The condition of our balance sheet, including our available cash and our existing credit lines, is a major factor in our ability to pursue quality acquisitions, such as the Barr Associates acquisition recently announced. Dick will comment further on Barr in a moment.

We are pleased to have the liquidity we do to support our operations, as well as the flexibility to capitalize on even other important strategic initiatives that might present themselves in this economic environment.

I would like to comment briefly now on certain of the financial dimensions of the Barr acquisition, and then Dick will cover the strategic fit. The Barr Associates acquisition was an important acquisition for the Company. The acquisition was announced on the 23rd of October, and is described briefly in today's press release. The purchase price was approximately $55 million.

The acquisition was financed through internally generated cash, plus proceeds of approximately $25 million from the Company's $240 million revolving line of credit. Barr will be consolidated with the Advanced Materials segment of our Company. And as many of you know, we do not disclose sales, profits, and other financial information related to individual units within our segments.

Nonetheless I do feel it is appropriate to at least attempt to put some framework around the acquisition for you. The precision thin film optical mark -- materials that Barr manufactures, enable complex technologies in a variety of markets, as Dick will describe later. We expect the growth in these markets to be consistently in the double digits. Acquisitions of technologies such as this are usually at EBITDA multiples from 7 to 9.

Operating profit percentages are generally in the double digits, and at this time, we expect that this acquisition will be accretive to the Company's earnings in 2010.

I will now turn to the outlook. While the Company did experience significant wide-spread weakness in an environment with limited visibility across the majority of its markets earlier in the year, the level of our overall business activity began to improve as the first quarter ended and the second quarter began. That improving trend continued throughout the second and third quarters, and into the early part of the fourth quarter.

Overall, the Company is seeing improvement in its order entry, driven primarily by the consumer electronics-oriented markets. Certain of its other markets, especially the industrial markets had however, not shown any significant signs of improvement, and the defense market, which remained strong throughout the first half, did weaken in the third quarter. While it is difficult in this environment to clearly envision future trends, the Company does expect business levels to continue to improve.

Generally the fourth quarter of the year, sales are noticeably lower due to seasonal factors. At this time though, due to the improving trends noted earlier, and the impact of the acquisition, fourth quarter sales are expected to improve by up to 8% from third quarter levels, and be in the range of $195 million to $205 million in the fourth quarter.

Looking beyond the fourth quarter, the Company expects markets to remain unpredictable, and is not assuming a robust economic recovery. Thus we expect to continue to monitor and where possible maintain our aggressive cost-reduction actions and capital control initiatives.

It is important to always reiterate that the Company's outlook is subject to significant variability, especially given the current economic environment. Changes in demand levels, metal prices, metal supply conditions, new product qualification and ramp-up rates, swings in customer inventory levels, changes in the financial health of key customers, acquisition-related costs, and other factors can have a significant effect on actual results. The outlook that I provided is based on the Company's best estimates at this time, and is subject to significant fluctuation, due to these as well as other factors.

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

Thank you, John. The market continues to be encouraging, particularly in the consumer electronics sector, which is a major driver for our overall sales. From regions of the world, Asia remains the strongest, with slower growth coming from the US and Europe. The ongoing increase in sales quarter-to-quarter this year, with the expectation of this to continue through the fourth quarter, supports the combined impact of an improving global economy, and inventory replenishment.

In the meantime, in the non-consumer markets, we have not seen a substantive increase in demand. Such as, from the oil and gas and commercial aerospace markets. Our high [BE] defense business has seen a decline, as programs have unexpectedly been delayed, although not canceled. The heavy industrial markets have not yet rebounded, however, they are expected to improve as we move in to 2010, as the inventory situation appears to be improving.

I would now like to briefly discuss our recent acquisition of Barr Associates. During this downturn, we have been able to maintain a strong balance sheet and liquidity, and as we have discussed before, we are interested in pursuing acquisitions and continue to be, should the right strategic opportunity present itself.

We are excited about the recent addition of Barr to the Brush team. Barr is the leading independent designer, developer, and manufacturer of high precision, thin film coatings, and optical filters. The addition of Barr rapidly expands our technology and market footprint in the growing specialty thin film optics area, ranging from ultraviolet, visible, to 4 infrared spectral regions.

Barr has a worldwide brand name in a wide array of applications, in IR imaging, targeting and sensing, telecom, and spectroscopy in the commercial medical, defense, space, and astronomy markets. Barr's manufacturing expertise allows it to economically produce components for unique complex applications, as well as higher volume OEM production needs. The Barr brand and its employees are leaders in the field of advanced thin film materials science technology and innovation, and are a powerful addition to the Brush team.

We also see good synergy with our prior optical coating acquisition, TFT, which has a more limited technology reach in the optics market, while having additional capabilities in coating of hybrid circuits and large-area shapes.

The acquisition of Barr meets our strategic criteria of high-technology and differentiated products, low capital intensity, and position in markets and applications with strong growth opportunities. We will be working very hard to quickly integrate Barr, and are excited about the opportunities that can be leveraged on a global basis, with the broader global presence that Brush offers to Barr.

The combination of all three recently acquired specialty thin film coating acquisitions, TNT, Techni-Met, and now Barr, brings to Brush critical mass, in a dynamic and growing downstream high-technology, value-add thin-film coatings business.

Changing gears, I would like to discuss the outlook. As has been the case for quite a while, our visibility is very limited. However, given the macroeconomic conditions, I would expect 2010 to be better than 2009, while being softer than 2008.

Fundamentally, I would expect the consumer to be down in 2010, as compared to 2008. The availability and cost of financing to both the consumer and the business community will also be a drag on macroeconomic growth. Meanwhile, we do expect to see some additional modest growth from 2009 in our heavier industrial applications, such as oil and gas and commercial aerospace.

All-in-all, finishing out 2009 and looking in 2010 is cloudy at best, but as always, our strategic intent throughout all of our businesses is to find ways to profitably grow in spite of economic headwinds.

Thank you, and I guess we will take questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question is from Avinash Kant with D.A. Davidson. Please go ahead with your question.

Good morning, Dick and John.

Good morning.

Good morning.

A few questions. I know -- you were talking about some of the defense-related shipments that could not happen this quarter, and they were higher margin. Should we assume that those shipments will happen in the fourth quarter, hence your margin will be up disproportionately from volume, and also from better mix?

No, I wouldn't assume that. The margin will be up because that business level will be up slightly in Q4 from Q3, but the entire delay will not make itself up in the fourth quarter. Some of it will push into the first quarter.

Okay, but all of it will be taken care of between the fourth and the first quarter?

Well, we can't be certain, because we just don't know what level of additional push-outs may or may not exist, so no, I wouldn't make that assumption.

Okay. You had a tax benefit in the current quarter. What should we be modeling as a normalized tax rate?

I think you should model the statutory rate.

30%?

Perhaps around 35%.

Mid-30s.

Mid-30s.

Mid-30s. All right. Okay. And the Q4 guidance that you have given compared to Q3, what is the upside, like what is driving the upside in Q4, which is of course against the seasonality, which segments are driving the upside in Q4?

Well, at this point in time, Avinash, it is still coming from the consumer electronics area.

Consumer electronics. And I know you have significant exposure to cell phones and everything, have you seen anything in terms of some sort of inventory there for the fourth quarter?

Well, typically you are going to find in the fourth quarter in the consumer electronics area, that typically the seasonality would be a better say fourth quarter than first quarter, because you have all of the holiday sales that will go on across the board. So you still have the building going on, so what will happen in the first quarter, it will all be a function of how well do these guys guess, as to what the holiday sales are going to be.

Right. But up until Q4 you still see momentum continuing to build in that one, right? You are not seeing any slowdown yet?

That is correct.

Okay. And oil and natural gas segment is something that you have started to see some traction it looks like.

A little bit.

A little bit, right?

We are just starting to get the initial signals.

So that's more in Q4 than in Q3, right?

Yes, it was up in Q3.

No, it was up in Q3?

I said we are just seeing some very early signals now coming out of the oil and gas sector.

Okay. And the manufacturing issue that you did see, did it impact only the Advanced Materials Technology business segment, or it was into other segments too?

No, that was just the Advanced Materials Technology segment.

And could you elaborate a little bit what it was, and has it been taken care of?

Yes, it has been taken care of, and typically we are going to be -- it will still affect the fourth quarter somewhat, but it has been taken care of.

So it was a yield issue, or some -- what was it about?

Well, it was a quality issue shipping to a customer.

From you or from your suppliers?

No, from us.

Okay. Perfect. Thank you so much.

The next question is from Anthony Sorrentino at Sorrentino Metals. Please go ahead with your question.

Good morning, everyone.

Good morning.

How much has been cut out of costs to date?

Boy, that is a moving target, Anthony. We continue to see gains quarter-on-quarter. You can tell some of the improvement in our margins from what you saw in the first quarter is due to the cost coming out of the system. You also can look at our SG&A levels, what they are now, especially if you take out some of the one-time items we had here in the third quarter. But it is a tough number. It is a significant benefit that we have had to our results thus far.

Okay. And I would presume that those cost cuts are sustainable going forward?

Did you say are or aren't?

Are, that they are sustainable going forward?

Well, no, you can't make that assumption. When we walked through earlier in the year, the actions that we had taken, the portion of those actions and those cost reductions were in areas that are related to volume, and as volume begins to respond, some of those costs will start to need to come back into the system to support the higher level of business. So, no, we can't assume that they are sustainable. We would hope that, obviously, this business comes back. Having said that, we do not believe that if business comes back to the same level, that all of the costs will be brought back.

You have got things like --- you know, we went through wage cuts and things like that. I mean, you are not going to have a permanent wage cut in the Company. I mean, we made those moves to react to some very terrible business conditions. You have got some of those, but we have also made permanent cuts in the overhead structure, and they will be sustainable, so it is a mix.

We are going to need to judge where we are as business responds.

Okay. And with regard to ruthenium media targets, you said in the release that you will have an opportunity to regain some market share. Would that likely be over the next year or so?

Yes.

Okay. Fine. Thank you very much.

You are welcome.

(Operator Instructions). The next question is from Chuck Murphy with Sidoti & Company. Please state your question.

Good morning, guys. I apologize if I am repeating a question, I have been bouncing back and forth between calls. I was wondering, what is it going to take to get the alloy business going again? What is weak there, and could get better in the future?

Well, we are seeing recovery in that business -- well, we have had tremendous cost taken out of that business.

Yes.

The breakeven point is substantially down, so that -- we certainly expect to see -- when we are seeing it now, the beginning of recovery in that market, and there are two major segments of that business. One is kind of driven by the electronics area, and we are starting to see, certainly that tick up, and then you have got more of a lag on the whole heavy side, the oil and gas, commercial aerospace.

Yes.

But again, we expect to see that start to kick in certainly early next year. So we expect to get much better performance out of that particular division as we move forward here. It has been, as you know, a horrible situation in that division, but the volume loss there was just incredible.

Yes.

We have really driven down the breakeven point, and we will see this volume coming back, and we are seeing it now.

Got you. Now why has the Advanced Materials business improved so much sequentially over the last two quarters, and alloy hasn't, when they, kind of like you said, a big part of both of their business is electronics?

Well, we saw a faster response in the Williams area in this area. Everything doesn't always happen simultaneously.

Yes.

So we saw the pickup faster at Williams, and so that is, and plus Williams is more into that whole market area, so they are impacted quicker and faster in their entirety than the alloy business. In fact what we saw in the alloy business is that the heavy side didn't bottom out until late second quarter, early third quarter. It was still going down. So what shielded some of the improvements in the alloy division, was that we started to see some pickup in the electronics sector.

Yes.

But that was over-swamped by continuing declines in the heavy sector.

Got you.

And I think you will find that same story, if you go out and take a look at some companies that are purely in that sector, be it like a Carpenter Steel, or one of those guys, if you look at what is going on, you will see some of these markets, they hadn't bottomed out yet.

Okay.

So that is a little different, and of course Williams isn't subject to those particular markets.

Got you.

So some of the improvement was just shielded is my answer.

Yes. Okay. And what about the beryllium business, what is the outlook there? Yes. What needs to happen to get things going there?

Well, actually that business is in two major categories. It is the high beryllium business, and we're seeing some softness there, as earlier reported. And then we have what I call more of the commercial business, that is downstream which is the Electrofusion business, and both of those businesses are important to the profitability of the divisions.

So what we are seeing right now is softness on the [Defense] side, and again, that is kind of a big unknown. I mean, we have got these delays going on, and we think that those delays ought to be fixing themselves over the next six months, but that still -- that story is still yet to be told. But then at the same time we are seeing on the commercial side of the business, which is our Electrofusion operation, that business is picking up, and that is the business that we provide a lot of X-ray industrial devices, and medical devices for the windows.

Got you. Okay. That is all I had. Thanks.

There are no further questions in queue. I would like to turn the call back over to management for closing remarks.

Hi, this is Mike Hasychak. We would like to thank all of you for participating on the call today. I will be around for the remainder of the afternoon to answer any questions. My direct dial number is 216-383-6823. Thank you very much.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.