Materion Corp (MTRN) 2010 Q2 法說會逐字稿

Greetings. Welcome to the Brush Engineered Materials second quarter 2010 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, Inc. Thank you. You may begin.

Good morning. This is Mike Hasychak. With me today is Dick Hipple, our Chairman, President, 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 second quarter 2010 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 August 14th by dialing area code 877-660-6853, account number 286, and conference ID number 353877. 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. These factors are listed in the earnings press release issued this morning.

Now I will turn it over to John Grampa for comments.

Thank you, Mike. Good morning everyone. Thank you for taking the time to join us today. As Mike indicated, today's agenda is similar to that of past calls. I will review several of the key financial points for the quarter, and then comment on the outlook for the third quarter and the balance of the year. Following my comments, Dick Hipple will review the state of our key markets. And then following Dick's market update, we will open the call for questions.

I believe that given the economic conditions that existed in the prior year, it is important in certain areas to compare the second quarter sequentially to the first quarter of this year, as opposed to the prior year where I believe that is relevant I will do that as well. For those who have not had a chance to review the press release in any detail, I will begin my remarks with a brief summary of the key points in the release. Then I will cover the factors affecting the reported sales growth, isolating real or organic growth from the effect of metal price increases, as well as the effect of the Barr acquisition that closed in the fourth quarter of 2009, and the effect of the academy acquisition that closed in the early part of the first quarter of 2010. I will follow that with a review of how the growth, the metal price inflation, and the acquisitions affected reported margins for the Company in total.

And in addition, I will review the Advanced Materials segment margins, and in particular the effect that precious metal mix, precious metal price increases, and the added precious metal volumes from the acquisition had on the reported margins for this segment. Then I will follow with a review of the balance sheet, and I will also comment on the impact of the acquisitions on earnings to date. And then finally I will review the outlook.

Let's begin with a brief summary of the release. Today we reported significantly stronger-than-expected results for the quarter, raised our outlook for the year, and announced the reinstatement of our stock repurchase program. We couldn't be more pleased with the reported performance. The results for the quarter clearly demonstrate the Company's earnings power during reasonable economic environments. The leverage from the cost reduction initiatives and other actions taken during the 2009 recession began to become visible in the reported first quarter performance, and are now very visible in the second quarter results. Second quarter growth brought with it continued margin expansion.

Sales for the quarter were approximately $152 million, or 87% greater than, to a $326 million level, a new Company record. Sales were up sequentially from the first quarter of the year by approximately 11%. This brings sales to date in 2010 to $621 million, double that for the first six months of the prior year. The reported EPS for the quarter was much improved and stronger than expected at $0.67 a share, which compares sequentially to an earnings of $0.37 per share in the first quarter. This brings EPS for the first six months of the year to a dollar a share, which includes as you may recall, about $0.12 a share of charges taken in the first quarter of the year.

In the release, we also noted that due to stronger margins and better-than-expected overall market conditions, we are raising our estimates for the balance of the year. This is the third consecutive increase in the estimates for the year. We have raised our earnings per share guidance to the range of $1.75 to $2.00 a share from our previous guidance of $1.45 to $1.75 a share. I will speak more on the outlook later in this discussion, and Dick will also cover the market outlook in his review of the state of our markets.

As the release noted, the Company's Board of Directors has authorized the repurchase of up to 700,000 shares, or approximately 3% of the Company's outstanding shares of common stock. This is a reinstatement of the original authorization to repurchase up to 1 million shares, which was initiated in July of 2008. After purchasing 300,000 shares, the initial program was suspended due to the economic downturn. The primary purpose of the repurchase program, both then and now, is to offset the dilution created through shares issued under Company stock-based compensation plans.

The authorization provides the Company the flexibility to use its strong balance sheet to repurchase shares while at the same time maintaining an appropriate level of liquidity to support the Company's primary strategic goals, which include utilizing organic capital for organic growth and strategic acquisition opportunities. The stock repurchases will be made from time to time through brokers on the New York Stock Exchange. The repurchase program may be suspended or discontinued at any time at the discretion of the Company's Board of Directors.

Let's now review the sales growth in a bit more detail. The reported 87% increase in sales compared to the second quarter of the prior year, and the 11% increase compared to the first quarter of the current year was due to three primary factors. The first is a significant and broad-based increase in demand for the Company's materials, especially from the consumer electronics oriented markets, as well as from the telecom infrastructure market, data storage, automotive electronics, defense, oil and gas, commercial aerospace, and optics. The second factor is metal price increases, and the third factor is the two acquisitions.

Metal price increases, that is that portion of both precious and nonprecious metal price increases that the Company generally passes onto customers accounted for approximately $29 million, or 17 percentage points of the 87%, or $152 million reported sales growth compared to the prior year. The acquisitions accounted for approximately 27 percentage points, or $48 million of the growth. Organic growth thus was a healthy $75 million, or 43% year-over-year. Sequentially comparing to the record first quarter of the year, sales were up approximately 11%, or about $31 million to a new record high. The 11% sequential growth was primarily organic.

I will now turn to margins. Reported operating margins continued to improve, and in fact improved significantly in the quarter. Gross profit percent of sales was 17.1%, up approximately 440 basis points from the second quarter of 2009. This is a solid indicator of the leverage the Company has from its growth following the cost reduction actions taken in 2009. Margins also grew from the first quarter levels. Operating profit percent of sales reached 6.3% from the first quarter's level of 4.5%. What is most relevant about these improvements is that they are occurring with significantly higher metal values, especially precious metal values, and higher precious metal volumes in the reported sales of the Company.

As we have noted in the past, having significant amounts of precious metal in the top line has the effect of diluting reported margin percentages for the Company, and lowering them to levels below what one would normally expect to see from Advanced Materials companies. The precious metal content of our sales has increased significantly due to our growth, the acquisitions, and metal price increases. Factors such as these can at times result in margin percentages that appear to be decreasing, or conversely not increasing as much as they really are. This is affecting the reported margins for the Company in the aggregate, as well as the reported margins for the Company's Advanced Materials segment.

Internally, we measure margins with the high value metals excluded from the top line. While we do not disclose the specifics of those margins for competitive reasons, we do track and monitor our margin percentages on this basis routinely. In looking at margins on this basis, the Company operating profit percent in the second quarter is in the mid-teens, as opposed to the reported 6.3%, and on this basis the change from the first quarter to the second quarter is 2.8 percentage points, or 1.0 percentage points greater than the 1.8 percentage point operating profit improvement noted in the GAAP reported results. In the Advanced Materials segment, the second quarter operating profit percent on this basis is in the mid-20% range, and is flat compared to the first quarter. Margin percentages did not increase in this segment when comparing the second quarter to the first quarter sequentially, due to the negative effect of unfavorable product mix, and the other factors noted in the press release.

Now let's turn to the balance sheet. The balance sheet is attached to the press release. The Company began 2010 with a very strong balance sheet. In spite of the difficult economic conditions experienced during 2009, the strength of the Company's balance sheet and its cash flow provided the flexibility to take advantage of the opportunity to complete the two important acquisitions. The total investment for the two acquisitions was approximately $78 million.

During the first and second quarters of 2010, the Company's balance sheet remained strong, with debt to total capital at approximately 25%. Debt increased by approximately $12 million in the second quarter, following an increase of approximately $44 million in the first quarter. Our growth and the acquisition of Academy drove the increase. Receivables and inventory have increased by approximately $65 million in support of the growth. Cash for the acquisition net of metal put on our leased lines was approximately $15 million, while all other factors netted to a favorable $24 million cash flow. At this time we anticipate favorable cash flows as the balance of the year progresses, and expect an even stronger balance sheet at year end 2010. We are pleased to have the liquidity we do and the flexibility to support the recovery and our related growth, plus important strategic initiatives such as the recent acquisitions.

Let's now turn to the acquisitions for a moment. As I did in our previous conference call, I would like to spend a minute on the financial characteristics of these acquisitions, and the effect that they have on some of the key Company metrics. While it is our practice to not disclose the sales and profit levels of individual businesses inside our segments, we feel that it is important to review, at least initially, the impact that these acquisitions have. As I have already noted, and as we have highlighted in previous calls, a high percentage of the added sales from these acquisitions, includes precious metals, primarily silver, and some gold. This has the effect of diluting reported gross margins and operating margin percentages, and as a result does reposition these reference points considerably for both the Company and the Advanced Materials segment.

We announced earlier in the year that we expected the acquisitions to be accretive to earnings by up to $0.20 a share in 2010, and they were expected to add over $200 million to accompany sales in 2010 as well. These acquisitions were accretive in both the first quarter and the second quarter of the year. The integration of both is progressing well, and results are on track. In the first half the acquisitions added approximately $0.10 a share to earnings.

I will now turn to the outlook. The overall level of business activity has improved sequentially quarter-over-quarter as the year has progressed. The Company has seen a strong improvement in its order entry, driven initially by the consumer electronics oriented markets, and also in its defense and industrial markets. While there is still uncertainty in the economic environment, our markets are strong, and the opportunities for the types of applications we supply are gaining momentum.

We now expect the second half business levels to be stronger than what we previously expected. Assuming current metal prices, we expect sales for the full year to be in the $1.220 billion to $1.260 billion range. Seasonal factors, including the fourth quarter holidays and summer shutdowns in Europe, should have the usual effect on second half sales and profit levels. These factors may have the effect of reducing third quarter sales when compared to the second quarter, and fourth quarter sales when compared to the third, which in turn may lower second half earnings somewhat when compared to the first half.

In addition to the seasonal factors, the second half is likely to be affected by added costs associated with the startup of the Company's new beryllium plant, and the cost of other key initiatives that are important to the Company's future. These factors, both the seasonality and the added costs, will be partially offset by the stronger margins that we have seen. Therefore considering this, we are raising our earnings outlook for the year to the range of $1.75 to $2.00 per share, from the previously announced range of $1.45 to $1.75 per share.

Taking into account the previously announced $0.12 per share of charges taken in the first quarter, our range on a run rate basis is $1.87 to $2.12 for the year, compared to the current consensus of $1.76 per share.

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

Thank you, John. Well as they say, what a difference a year makes. Our second quarter results and improved outlook for the balance of the year are really very exciting. The rapid return of strong profitability is driven by both our market and product positions and our operating improvements. I would like to highlight the particularly large turnaround in profitability of our specially engineered alloys segment. Meanwhile our Advanced Materials segment, which remains solidly profitable through the downturn, continues to gain strength in spite of the additional challenges of integrating two new acquisitions. And again, both of these strategic acquisitions are on track to make our objectives.

As we move through the first quarter, the majority of our markets returned to 2008 pre-downturn levels. Consumer electronics is particularly robust as smartphone sales continue to capture a higher percentage of the market. And we are well-positioned with applications in the major platforms, such as the iPhone, the iPad, the Droid. It is expected that the global demands for portable communication devices will continue to be robust in spite of lower global GDP estimates. The increasing video demands of these devices continues to put pressure on telecom infrastructure spending, where we are now enjoying global growth from applications in servers and base stations. And this area is also expected to provide multi-year sustaining growth for Brush.

Other major areas of our growing electronic applications, such as LEDs, are also robust, and have strong sustaining high growth characteristics. After the unfortunate oil spill occurrence in the Gulf of Mexico, and the drilling moratorium that followed, we had significant concerns that we would see a downturn in this segment of sales in our alloy business, however the opposite has happened, as it appears that drilling companies are reevaluating their materials of choice, and switching to higher-end, safer and more reliable materials in their designs. In fact, our order book actually increased since the Gulf incident. I might add, as a matter of interest, that as you watch the TV and observe the relief well installation, the instrument tool used to guide the drilling contains a significant amount of materials supplied by Brush. High strength, high corrosion resistance, lubricity, and nonmagnetic properties are all required to support the technology, and we have unique materials in this space.

Another macro trend is the possible shift to natural gas as a transition transportation fuel. The current legislation moving through Congress supports this objective, and our heavy participation in directional drilling tools and shale is good for the long term. A pleasant surprise this year has been the ongoing strength of defense in our BE products division. We originally expected this business to soften in the second half, but so far the bookings are holding up, and we are in very good areas of future growth platforms, particularly in optics, where surveillance and targeting is the main focus, both in the air and on the ground.

In other industrial applications, such as commercial aerospace, our order book has returned to pre-downturn levels, although the commercial build schedule has declined along with the MRO rebuild schedules. We have increased our application levels in the new platforms in many new bushing applications, so our order rates are exceeding the market growth. The automotive market has remained strong through the first half, but it appears that the build rate is currently exceeding the sales rate, so we may see some softness later in the year, but we shall see. All-in-all our markets have been stronger than anticipated, and we are well-positioned in markets that should enjoy multiples of GDP growth.

So moving forward are numerous growth platforms should provide solid opportunities, even if we enter a slowing global GDP growth rate. We are making good progress on new solar materials, LED products, expanding our footprint in optics, and ongoing growth applications in numerous industrial markets. Thank you. We will now take questions.

Thank you. We will now be conducting a question and answer session. (Operator Instructions). Thank you. Our first question comes from the line of Chuck Murphy with Sidoti & Company. Please proceed with your question.

Good morning, guys.

Good morning, Chuck.

A nice quarter.

Yes, it was.

I kind of need your help here to tie up some numbers. The way I calculate it, second quarter organic sales were up about 9% sequentially. Is that about right? If we X out the metals and Barr and Academy?

Second quarter over first?

Yes. I am saying for Advanced Materials. I am sorry.

Oh, for Advanced Materials?

Yes. I'm sorry.

For the Company, it was 11%. For Advanced Materials, I don't have it calculated, organic.

Okay. Because too, I was also wondering if that was the case, when I went back and looked at the last press release, maybe something was included then that is not now, but Barr and Academy sales for the first quarter of 2010 were about $60 million, this quarter it was about $48 million. Was there any seasonality, or something like that?

Yes, there is seasonality in that business. And Barr and Academy began the year with a little bit of a backlog, actually at Academy from December, because prior to the turnover of the acquisition they had shut down for the Christmas holiday. There was a backlog of business that came into the first quarter. So that is a seasonal effect there.

We also had some, this is Jim Marrotte. We had some differences in customer-supplied metal within the Academy business.

Within the Academy business as well.

There will be more of that here in the second quarter than we had in the first quarter.

Got you, okay. Then my other question was, in your press release you mentioned something about medical and defense being down for Advanced Materials. Is that sequentially or year-over-year?

That is year-over-year.

Okay. What was medical for Advanced Materials sequentially?

That is our situation where we have a new piece of equipment being installed at Techni-Met, and we are kind of on track, and we expect that to be turned around. So that has held back shipments in that particular, it is not a market issue. It is a specific application issue that we needed a new piece of equipment to continue to grow there. So that is coming in. We hope that that situation is back up and growing in the fourth quarter.

Got you. Now is that related to, I mean, there was an issue of a couple of quarters?Is that similar to --

Yes, that is the same. Yes, it is not a new issue. It is the same one. We wound up needing a new piece of equipment there, which we have taken care of.

Got you. Okay. Thank you.

You are welcome.

Our next question comes from Avinash Kant with D.A. Davidson. Please proceed with your question.

Hi, Dick and John.

Good morning.

Good morning.

A few questions. First on the guidance. If I remember, the last quarter when you gave the revenue guidance it was roughly $1.2 billionto $1.3 billion, and now you are talking about $1.22 billion to $1.26 billion?

That is right. We have narrowed it.

Yes. I clearly realize it is not a big difference, but if you talk about the high end of the guidance, maybe you are tweaking it a little bit. Is that all metal price dependent?

That is right. We had assumed, our assumptions in the last quarter were a continuing increase in metal prices in the guidance.

So at current, in the current guidance, what is your assumption of metal prices going forward in Q3 and Q4? Kind of flat or down some?

Q3 flat to Q2. And Q4 higher than Q1.

Q3 flat, and Q4 higher than Q1. How about higher than Q3, or no?

No.

So Q4 compared to Q3 is how?

Avinash, as you know, it is very difficult for us to estimate those numbers.

Right, right.

I think that the reason that the numbers are, we have narrowed them, obviously we have got line of sight over two quarters, and we are ended into the last half of the year, so we have narrowed the range for that reason. Our metal prices were not as high in the second quarter as we anticipated them to be. So in our forecast, the metal price outlook generally is lower for the second half of the year, than it was in our previous estimate.

Okay. That explains it, because I just need to understand your assumptions, and then we can see how it is tracking, and then we can kind of, it will help us model. But the second half price assumption is lower than the first half, that is why the majority of the change is coming from?

Not lower than the first half. Lower than our previous assumption about the second half.

I see, I see. Got it. But would you give us, whether it is lower than the first half or not?

I am sorry, I didn't understand.

Like I know it is lower than what you had assumed earlier.

Yes.

But would you kind to venture to give us whether the second half pricing is actually in an absolute sense lower than the first half pricing?

No. About the same.

About the same, okay. Okay. Now the second question I had was, you have the share repurchase plan. Is there any timeline for that?

No, there is no timeline.

Okay. And what should we think about CapEx and depreciation for the year 2010?

Depreciation hasn't changed. It is approximately $35 million or $36 million for the year. CapEx is probably a little bit lower than what we had forecast earlier. It is probably about $20 million to $25 million. I think we had estimated $25 million to $30 million. It is going to be a little lighter.

Okay. And tax rate, should we assume any changes there?

Well, the tax rate at roughly 33% for the year.

Yes. You got to remember we had in the first quarter that $1.4 million hit we took because of Obama care, but if you pull that out of the calculation for the first half of the year, that is about the rate we'll see for the balance of the year.

Okay. And in your press release you do talk about some costs later in the year for the opening of the new beryllium plant.

Yes.

Now, from what I understood, majority, most of it, was paid by the government, right so how much of a cost are we talking about here?

Well, the construction was paid for by the government, but there are always startup risks.

Right.

So we have estimated some additional costs in, the beginning in late third quarter, but primarily in the fourth quarter, of $1 million to perhaps $1.5 million, but again there is always a startup risk.

We do have an expected startup in the numbers that we forecasted. So we are talking about here is something would go astray.

Oh, okay. So the $1 million to 1.5 million in the fourth quarter, or third and fourth quarter combined?

Mostly fourth quarter.

That is already in the guidance, right?

Yes.

Yes.

Okay. So if anything beyond that would impact guidance?

Anything beyond that would be risk.

And the final question, your gross margins have improved meaningfully at the current level. Was there anything that was specific to this quarter, which may or may not happen going forward, or this is how we should start to think of gross margins going forward?

I think it is probably reasonable to begin to think about second quarter gross margins a reasonable surrogate for what might exist in the next couple of quarters.

With the prospective slight decline in revenues that you are talking about in Q3 and Q4, still margins are going to stay there?

Well again, you have the issue that we always have of metal price.

Right.

And then customer pooled metal versus our own metal, and then of course metal mix. So, yes, I think assuming no change in all of that, it is about the same margin.

There has been a lot of concern lately, specifically in the electronics food chain about some upcoming slow-down, especially from Europe, or the economic slow-down that people have been talking about. Have you seen anything like that at your customers thus far?

No, have not.

Perfect. Thank you so much.

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

Good morning everyone.

Good morning.

Also in the press release, beyond discussing the added costs related to the beryllium plant, you also refer to other key company initiatives. Would you go into further detail with regard to that?

Sure. Let me just comment briefly on that. We are investing in a number of areas, all driven and continuing to improve the effectiveness inside this Company's operations, and driving margins up in future periods. What we are referring to specifically here are investing in some marketing initiatives, investing in purchasing, and some initiatives to help us improve pricing. All of which we will be spending some money on, again late third quarter through the fourth quarter of the year. Mid-third quarter I should say through the fourth quarter of the year. Benefits in 2011 probably no continuing expense into 2011.

Okay. Very good. All right. That is all that I have for now. Thank you. And congratulations on a great first half.

Thank you.

Thank you.

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

Hey, thank you very much.

Good morning.

Good morning, Mark.

Dick, John, good morning. I wanted to add my congratulations. Awesome first half. You guys are continuing to make progress. Dick, one of the things that I think investors have been a little, or are feeling a little confused about maybe over the last several years is, there have kind of been the ups and downs. There have been periods where you have done extremely well, then there have been other periods where things have kind of come back in a bit. And I am just wondering, I know you have been focusing marketing on trying to really address high growth segments of fast-growing markets. And how are you feeling right now about the sustainability of the growth track, say relative to where you were a couple of years ago? Do you understand where I am trying to come?

Yes, I do. I am kind of glad you asked that question, because I tried to get that through the discussion I had after John. Really I am quite excited about it, because what we have done, if you think about some of these markets with the position we have with the mobile electronics space in smartphones, I mean that has got a strong growth path ahead of us, and the parallel with the infrastructure. That is very sustaining with what has got to go across the globe.

And this is more alloy material. Is that correct?

No, no.

Both segments.

Both segments. Both Williams, actually Williams probably to a higher degree than alloy when you come to the wireless sector.

Okay, okay.

So that whole space is a really strong horse to be riding right now, and obviously our plan is to ride stronger than that, because we are after, growing faster than that market space based on growing applications. Then you take a look at what we have done in the oil and gas space. We have really increased our portfolio of applications there.

Similar on the aerospace. They are going to finally start building these new planes. They are coming, and we are growing faster than that market. We have now got a really nice footprint that is going to be growing in the alternative energy space, which is another great growth market, in both the thin film solar, and some other applications.

And so if you spin the clock back five years ago, we didn't have this diversity of opportunities. We were talking more one here, one there. Now it is so darn exciting, because of the numerous opportunities we have across the board on numerous growth markets, but that has been our strategy.

Right.

That is where we try to position the Company. And so we have had an extraordinarily strong rebound from this recession, and it is really driven by the strategy that we have been working on for the last several years. I mean, it is really blossoming right now.

Okay. That is really helpful. And congratulations on that progress. If I could just get one, just ask one follow-up. In the energy markets, where you have had people actually upscale the quality, reliability of their respective tooling, et cetera. I mean is that something that you would expect to be kind of a one-shot deal?

No. That is going to be another systemic change, because if you are talking about people changing their materials, and upgrading their materials, you have got kind of a one-time thing. That takes a while there, but then what it says is that on an ongoing basis they are going to be using higher grade materials.

Any way you could put a number around that and perhaps quantify it?

Yes. It is too early at this point in time, but we are increasing our growth estimates in the oil and gas area because of it.

Alright. Any sense of how much that could add to the second half revenues?

Not at this time. I would be guessing.

Okay, all right. Well, anyway, thanks again for all the color. Good luck this quarter.

Thank you.

Our next question comes from Yvonne Varano with Jefferies & Company. Please proceed with your question.

Thanks. Good quarter, nice margin expansion. I did want to ask on the specialty engineered business, I think that is where we have seen significant operating margin improvement. And from the comments in the press release it seems like that should be sustainable. I am just wondering, do you think it stays in this 10% to 11% range? Is there more upside to that, or are there factors that affected the quarter, where we might see that pull back a little in the back half?

There were no really special factors in the quarter, which is really good news. So we have systemically improved that business. I mean that is the major message. As always, I mean we are going to continue to try to improve that business, better our margins, operating the business better, and improve productivity, and better pricing strategies, and better products, higher margins. I mean, that is the normal blocking and tackling, but the business has systemically improved, and so now, what could sacrifice those margins would be, say a significant change on the volume side. I mean, again, it is a business that has a tendency, it is sensitive to volume. So other than that, we are really proud of the job that that division has done.

I think the key point there that you picked up on, Yvonne, was that even if the volume were to drop, the costs that have been taken out, they have not, and will not come back in. So the breakeven point in that business has been changed significantly.

Right.

If we ever see the kind of environment that we had in 2009 again in that business, you won't see the loss levels that you saw in that business.

Okay.

In 2009. So a significant difference, change in the cost structure.

Okay. And looking at other businesses, I know volumes are anticipated to come down a little on the seasonal factors you talked about maybe impacting margins barely. Any of the other three businesses expected to see greater margin deterioration in the back half of the year?

No.

Okay.

No.

I guess I am asking because it seems that if they are really not, the outlook you put out, could end up being conservative?

That is the difficult one. The outlook is our best estimate and our best judgment considering some of those downside factors. If we don't see the startup costs, for example, that we have got baked in there, if we don't see the seasonality, if we see some stronger demand on the consumer electronics side, we see some lift, then you could argue that it is conservative, but at this point, I think it would be unwise for anyone to predict that there is not going to be some sort of economic effect out there later in the year.

Perfect. Thanks very much for the commentary.

Thank you.

Our next question comes from the line of Rob Young with William Smith & Company. Please proceed with your question.

Hey, guys. Congratulations on the quarter and the outlook.

Good morning. Thank you.

Could you remind us on the permanent cost reductions on how much they were, and the aggregate level of cost reductions you were able to take out last year?

Actually I think that probably what you would be most interested in is that on the same basis, our manning levels are approximately 250 people below, still below where they were at the third quarter of 2008, end of third quarter of 2008 when we started to take the cost actions. So we have got an employment level on the same basis. When I say on the same basis, excluding the employment level that is in the acquisitions. We have got an employment level that is still 12% lower. On the cost side, including the employment level on that same basis, we still have about somewhere between 10% and 15% of the overhead structure out of the organization,including the manning levels.

Right. Is that a permanent thing going forward, or do you see that --?

I wouldn't ever say that it is entirely permanent. You do get step functions as your business grows.

Right.

Certainly we are not seeing a significant amount of that coming back over the next several of quarters, and I would go as far as saying perhaps even into the early parts of 2011.

Okay.

Again, that is all dependent on growth and the state, and that to a certain extent depending on the state of the economy.

Right. So obviously you are able to deal with this level of growth that is coming through the pipeline with fewer, I guess, employees up from the legacy business?

Yes. I would add also that I should have added in response to Yvonne's question, is that one of the big differences in that engineered alloys segment also is pricing.

Right, okay, okay.

Stronger pricing and stronger margins.

Okay. And then I was hoping that you could possibly comment on the inventory levels at your suppliers as well as customers. I know that you are four levels or so below the end user, but can you comment at all, or is that data available for the --?

Two things. Yes, on the raw materials side coming in, there are no supply issues that we have seen. No interruption in supply of any kind.

On the other side, albeit that we have maintained that maybe there is an inventory build out there, maybe there is an inventory correction, we have said logic would suggest perhaps that is the case, we have not seen that or heard that from our customer base.

Okay, okay. Then just lastly, last quarter I think you mentioned that, correct me if I am wrong, but I thought that it was mentioned that order entry levels were essentially at a three-year high. I was hoping that you could possibly comment on that a little bit. I mean, has that sequentially improved or tailed off a little bit due to seasonal --?

No. It has sequentially improved. I think book-to-bill was 1.13 in the first quarter, and 1.07 in the second quarter.

Okay. Has that had any effect on your, the ability for you to essentially predict the future? I mean, has that helped your overall outlook and essentially extended out your ability to see the future? Does that make sense?

Yes it has, because having the growth there in the backlog, it gives us better line of sight obviously into what might be happening in the initial quarter of the second half. So the answer to your question is yes.

Okay. And then in terms of fiscal year 2011, would we expect to see some type of guidance in the next two quarters for what that is going to shake out --?

Yes. As we begin to see, get our own line of sight over 2011, we will provide the guidance. We generally provide that guidance in the first call after the end of the year.

Perfect, perfect. Okay. Well, thank you very much. Again, congratulations.

Thank you.

(Operator Instructions). Our next question comes from the line of Mario Gabelli of Gabelli and Company. Please proceed with your question.

Hi. Thanks for taking the call.

Good morning.

Good morning. As you look out to, unfortunately I have been grazing on four conference calls at the same time. As you look out to 2011-2012, would you have done a good job in using cash flow to buy Academy and Barr. What do you feel you need to kind of reinforce the trends that you see in the markets you want to serve? Is it tuck-in acquisitions? Is it a larger acquisition? Can you do it internally through organic growth?

I think, Mario, Dick Hipple, how you doing today?

Hi, Dick.

I think we have had a practice here where we have basically been doing tuck-in acquisitions. We think strategically that is right on the mark. Obviously it is a little bit safer route to go. I mean, in case something would blow up. I mean, you haven't really disturbed the Company so much. We have been very strategic about these tuck-in acquisitions, that when we buy them we really are buying them with some pretty high confidence, that their ability to grow is pretty strong. They have also been based on expanding our footprint of technology and markets. So they have really worked well for us.

That has never precluded us from saying that we don't want to do a larger acquisition. But if we would do that, we would have to be very, very confident that it would be building sustainable growth at a fairly low risk profile. So what we wanted to be here is stable, and growing stable over time versus say a very large acquisition that might have a larger risk profile to it, but that does not preclude us from having that philosophy should the right opportunity come along. And I must say that we have looked at those kind of opportunities, however we have not been totally comfortable with them.

Well, that is a fair statement. I mean everyone is in a world of uncertainty. Dick, as you are looking out, you got smartphones, you talked about the big 787, the Dreamliner and the Airbus. Did you talk about how much per dollar per smartphone you get of content?

No. We don't talk about that, reveal that information. The type of applications we have in a smartphone are kind of two-fold. One is from our alloy division where we provide connector materials into those devices for the very high end, reliability connector materials, and then in our Williams Advanced Materials group we provide a lot of precious metal targets that are used for sputtering compound semiconductor devices that go into cellphones/smartphones.

That is helpful. How about on the 787 and the Airbus, do you talk about dollar content? What do you do there in dollar content per shipped set?

Again, we haven't talked about the dollars per plane, but we are in a lot of the bushing applications, and the landing gear, on the parts of the plane that, for example, where you have the air flaps, I won't get the technical words right. We got a flyer on my team here. Aileron.

There you go.

Where you have the bushing material in those devices, so we are in a lot of wear areas of the plane, where they need, where they don't want to do a lot of lubrication and they get a lot of high load. And they are going to our material base because it is a higher strength and a better wear-resistant over time, so what they can actually do is they can use less metals on their planes, because we are about double strength of the metal that we replace. Therefore we are not a lightweight metal in the case of what we are providing, but they can use half of it, because our strength is high.

Is it too late to get more content of the plane, into the designs of the 787, and the new 737, single bodies, or anything like that?

That has a very long--

Lead time, yes.

--design phase ahead of that, but what has been really nice for us, is for example, we have a very unique metal that is going on these planes, and we worked hard for several years to get the materials certified at the major airplanes. So any time you have a new metal, I can tell you it is very, very difficult to get it specified and certified on commercial airline designs. We have accomplished that. So now the airlines, the engineers have full capability to use our materials on any of the designs of the plane. They now have the flexibility, because we are certified from an engineering perspective.

I got you. Okay. Hey, that is terrific. I am just trying to figure out the new products and new markets that you are targeting in the 2011, 2012, 2013 period. I would love to chat offline at some point in the future. Thank you very much.

Sure. Bye.

Thank you.

There are no further questions in the queue at this time. 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 will be around this afternoon to answer any further questions. My direct dial number is area code 216-383-6823. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.