Materion Corp (MTRN) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Brush Engineered Materials Incorporated fourth quarter and year-end 2010 earnings conference call.

At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentations. (Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Michael Hasychak, Vice President, Treasurer and Secretary for Brush Engineered Materials. Please go ahead, sir.

Good morning. This is Mike 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 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 March 12th by dialing area code 877, the number is 660-6853, account number 286, and conference ID 366804. 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'll turn it over to John Grampa for comments.

Thank you, Mike. Good morning, and thank you for taking the time to join us this morning.

Today's agenda is identical to that of our past calls. I will review the results, and then comment on the outlook. And following my comments, Dick Hipple will review the current state of our key markets and provide his perspective on certain specific key initiatives we are undertaking and the outlook for 2011 and beyond. Following Dick, we will open the call for your questions.

As in all of the 2010 quarterly calls, I believe that given the economic conditions that existed in 2009 it is important to compare the quarter sequentially to the prior quarter of the current year, as opposed to the same quarter of the prior year. I will do that in certain areas.

For those who have not had a chance to review the press release in any detail, I'll begin with a brief summary of the key points in the release. And then, as I normally do, I'll cover the factors affecting the reported sales growth, isolating the real or organic growth from the effect of pass-through metal price increases and the effect of both the Barr Associates acquisition that closed in the fourth quarter of 2009 and the Academy Corporation acquisition that closed early in the first quarter of 2010.

I will also review sales by market, comparing sequentially to the third quarter, highlighting any key changes in trends. I'll also review how the growth, the metal price inflation we saw in 2010 and the acquisitions affect reported margins for the Company in total.

In addition, I'll review the Advanced Materials segment margins, in particular the effect that precious metal mix, precious metal price increases and the added precious metal volumes from the Academy acquisition has on the reported -- has had on the reported margins for this segment.

Then I'll follow with a couple of comments on cash flow and the balance sheet, and I'll also comment on the impact that the acquisitions had on earnings in 2010.

I'll wrap up with the outlook for 2011 as we see it unfolding at this time.

With that as an introduction, let's begin with a brief summary of the release. Today, in the press release, we reported significantly stronger than expected results for the fourth quarter and provided some initial insight to the outlook for 2011. Overall, we were pleased with the progress we saw in our markets in the fourth quarter and our reported performance.

Sales for the fourth quarter were up approximately $141 million or 65% to the $356 million level. This is a new Company quarterly record, surpassing the previous quarterly sales record of approximately $326 million that was established in the second quarter of 2010. This brings sales for the full year 2010 to just over $1.3 billion, an increase of 82% when compared to the prior year. This is also a new Company record.

The reported EPS for the quarter was much improved compared to the prior year and stronger than expected at $0.61 a share, which compares sequentially to the EPS for the third quarter of $0.65 per share, $0.67 in the second quarter and $0.33 in the first quarter of the year. This brings earnings for the year to $2.25 a share.

The better than expected performance in the quarter was driven primarily by stronger demand, coupled with lower than anticipated costs related to key Company initiatives and higher value-added margin levels. The stronger than expected demand was in a number of markets, including consumer electronics, telecom infrastructure, energy, defense, and automotive electronics. The lower costs primarily related to a deferral of the startup of a new beryllium facility. Value-added margin improvements were most notable in the Advanced Materials segment, and margins were better than we expected in the other segments as well.

Let's now review sales in more detail for both the quarter and the year. The reported 65% increase in sales compared to the fourth quarter of the prior year and the reported 82% sales growth for the year are due to three primary factors. The first is the significant and broad-based increase in demand that we have seen all year for the Company's materials across almost all of the Company's key markets. Organic growth was a very healthy $45 million or 21% year over year in the fourth quarter and $251 million or 35% for the year in total. The second factor is pass-through metal prices, and the third factor is the two acquisitions.

Pass-through metal prices, that is that portion of both precious and non-precious metal price increases that the Company generally passes on to customers, accounted for approximately $26 million of the $141 million of reported sales growth in the fourth quarter compared to the prior year and $103 million of the $587 million of reported sales growth for the year compared to the prior year.

The two acquisitions accounted for approximately $70 million of growth in the fourth quarter and $233 million of sales growth for the year.

Sequentially, comparing the fourth quarter to the third quarter of the year, order entry was up about 7%, and sales were up by just over $30 million or about 9%. Metal price pass through did increase sales compared to the third quarter by about $15 million, thus, organically, sales were up in the fourth quarter when comparing to the third by about 5%. We had actually expected a 3% to 5% decline in the fourth quarter compared sequentially to the third due to seasonal factors, but markets were stronger, especially in consumer electronics, energy, defense, and telecom infrastructure. Other markets were strong as well.

As we highlighted in the second quarter earnings call, coming into the second half of the year we were seeing improvements beginning to surface in the telecom infrastructure, defense, oil and gas, and industrial and commercial aerospace markets following what had initially been a recovery in the first half of the year, which was led by consumer electronics and automotive electronics. We had expected that the recovery in these markets would temper and possibly offset any inventory correction that would occur in the consumer electronics markets during the third and fourth quarters of the year. This did occur.

In the third quarter, value-added sales, that is sales excluding the pass through of high-value metals, declined by about 10% sequentially in the consumer electronics market. In the fourth quarter in this market, value-added sales, while stronger than we had expected, also declined sequentially by about 10%. The effect of this was entirely offset by a sequential growth in defense, oil and gas and industrial and commercial aerospace markets.

Also, since the quarterly segment information was not available in the press release, I'll share key reference data points comparing sequentially to the third quarter for our two largest segments.

In the Advanced Materials segment, fourth quarter sales were up about 15% to $247.3 million compared to $214.8 million in the third quarter, and the operating profit was up over 40% to $12.8 million compared to $8.9 million in the third quarter. GAAP operating profit percent improved by over 100 basis points sequentially, and as noted earlier, the value-added margin percent improved by over 500 basis points sequentially.

In the Engineered Alloys segment, sales increased by about 2% to $76.8 million from $75.7 million, primarily due to higher pass-through metal. Volumes were seasonally lower as expected, and operating profit was $6.6 million compared to $8.7 million in the third quarter due to the lower volume, and both profits as well as margins were lower due to seasonal factory operating factors, one-time costs and the normal lag in pass-through metal price increases. Sales and profits in this segment are expected to return to third-quarter levels in the first quarter of 2011.

Reported operating margins improved significantly for the fourth consecutive quarter when compared to the prior year. Gross profit percent of sales was 16.7%, which is 300 basis points above the prior year level for the quarter. Excluding the dilutive effect of the added high-value precious metal and reported sales due to the Academy acquisition, gross margin improved by 540 basis points in the quarter when compared to the same quarter of the prior year. For the year, reported gross margins improved by 440 basis points and by over 650 basis points, excluding the acquisition effect.

Excluding both the impact of the acquisitions and the impact of higher pass-through metal prices, Company gross margins improved by 840 basis points year over year. This trend is reflective of the growth, as well as the structural changes that the Company has undertaken and the related mix shifts to higher-value, higher-margin markets and applications, along with better pricing and cost reductions.

It is very important to always note that in our Company, having significant amounts of precious metal in the top line has the effect of diluting reported margin percentages 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 throughout the year due to our growth. The Academy acquisition and pass-through metal prices were also a factor. These factors affected the fourth quarter by more than earlier quarters due to more rapid increases in the prices of gold, silver and copper.

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. These factors affected the reported margin percentages for the Company in the aggregate, as well as reported margin percentages for the Company's Advanced Materials segment.

Internally, we measure margins with the high-value pass-through metals excluded from the top line. While we do not disclose the specifics for competitive reasons, we do track and monitor our margin percentages on this basis. In looking at margins this way, the Company gross profit percent in the fourth quarter is above 40%, as opposed to the reported 16.7%. And on this basis, margins have improved as the year has progressed.

Similarly, as noted in the past, operating profit percent of value-added revenue for the Company is in the low- to mid-teens, as opposed to the reported 5.6%. In the Advanced Materials segment, the fourth quarter operating profit percent on this basis improved by 570 basis points sequentially compared to the third quarter. In this segment, gross profit margins measured this way are in the 50% to 55% range, and the operating profit margins are in the 20% to 25% range.

Now, let's turn to cash flow and the balance sheet. Both the balance sheet and the statement of cash flows are attached to the press release.

The Company began and ended 2010 with a very strong balance sheet. In spite of the difficult macroeconomic environment 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 acquisitions. The total investment for the two acquisitions was approximately $76 million.

Debt increased by approximately $56 million in the first half of the year due to the acquisition of Academy and the receivables and inventory increases to support our growth. In the third and fourth quarters, net cash provided by operating activities was approximately $51 million, and debt was reduced by approximately $34 million. The ratio of debt to debt plus equity, net of cash, decreased to about 15% in the fourth quarter from 22% at the end of the first half.

We're 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 acquisitions. The quality of our balance sheet should provide significant flexibility in 2011 as well.

Let's now turn to the effect of the acquisitions. As I have in our previous conference calls, I'd like to spend a minute on the financial characteristics of these acquisitions and the effect they have on some of the key Company metrics. I've noted this already in some of my earlier comments in this call.

While it is our practice to not disclose the sales and profits of individual business segments inside -- individual businesses inside our segments, we feel it is important to review the impact that these acquisitions have, at least during 2010.

As I've already noted, and as we've highlighted in previously calls, a high percentage of the added sales from the Academy acquisition includes precious metals, primarily silver and some gold. This has the effect of diluting reported gross margin and operating margin percentages and as a result does reposition these key reference points considerably for both the Company and the Advanced Materials segment.

The negative impact on reported gross margins for the Company in 2010 was approximately 2 percentage points, and the impact on reported consolidated operating profit was about 0.6 of a point. However, the impact on value-add margins, that is margins measured without pass-through metal, was slightly positive for the Company due to the acquisition. For the Advanced Materials segment, the acquisition diluted the gross margin by about 2 percentage points and the operating margin by about 1 percentage point, while not diluting the value-added margins.

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 that they were expected to add over $200 million to Company sales as well. In the first half of the year, the acquisitions added approximately $0.10 a share to earnings, and in the second half of the year about $0.20 a share, with $0.15 of that coming in the fourth quarter. Added sales from the acquisitions totaled about $233 million.

I'll now review the outlook. As noted in the past, overall market conditions have improved significantly as 2010 has developed. The Company remains well positioned in its markets with an array of advanced materials that enable it to take advantage of the faster growing segments of its markets.

Order entry was driven up early in 2010 by the consumer electronics and automotive electronics markets, which represent collectively about 35% of the Company's value-added revenue. As the year progressed, the defense, industrial and commercial aerospace, as well as telecom infrastructure and oil and gas markets, which collectively represent about 45% of the Company's value-added revenue, also strengthened. Order entry exceeded sales in each of the four quarters of 2010. The Company, thus, has begun 2011 with a healthy backlog, and the overall level of business activity in the Company's key strategic markets remains strong.

The markets and applications for the Company's materials continue to be promising. The performance characteristics of the Company's materials often make it a supplier of choice to a wide range of applications within the consumer electronics market, which it projected solid growth for 2011.

In addition, the Company's materials are used in an increasing number of LED applications, and the Company anticipates solid growth for these materials to this market in 2011 as well.

In the medical market, the Company expects a higher level of sales to exist -- to its existing customer base, while continuing to develop products and relationships with other potential customers offering solid growth opportunities for 2011 and the longer term.

The Company is also positioned well for the expected growth in the industrial components, commercial aerospace and alternative energy markets.

The growth in 2011 from the positive factors noted above is, at this time, expected to be at least partially offset by weaker demand from the Company's defense markets due to anticipated changes in defense spending. While we currently do not anticipate a significant negative impact on the demand from the higher cost of key markets -- of key materials, such as copper, gold and silver, higher costs for these materials could result in lower demand levels should customers shift to lower-cost, lower-performing materials.

Considering those factors, the Company, at this time, does expect continued solid growth in 2011. Assuming no significant change in metal prices from current levels, which are higher than the 2010 average prices, the Company, at this time, expects sales for 2011 to be in the range of $1.45 billion to $1.5 billion, up approximately 11% to 15% from 2010. About 5 points of the anticipated growth is due to the higher pass-through metal.

In 2011, the Company expects higher costs due to certain factors. These factors include the effect of the startup of the Company's new beryllium plant, higher healthcare costs, the impact of the lower discount rate environment on pension expense, and higher metal financing fees.

The Company also plans to continue to invest in specific strategic initiatives in 2011, including the Company rebranding initiative, support for growth in Asia and a number of organizational development initiatives and other long-term potential cost reduction and margin improvement programs.

These initiatives are expected to add significant long-term value, but not without some affect on short-term results. In the aggregate, they are expected to negatively affect the 2007-- 2011 results in the range of $0.35 to $0.40 a share, with approximately 40% of that occurring in the first quarter. After including these initiatives, the Company, at this time, expects earnings in 2011 to be in the range of $2.20 to $2.50 per share diluted.

Before turning the call over to Dick, I'd like to note a couple of other 2011 data points for you. First, we anticipate EBITDA in 2011 to be in the range of $120 million to $130 million. We expect free cash flow to be in the range of $55 million to $60 million, and that is after tax and after about $30 million of capital spending. Net debt is expected to decrease in the range of $45 million to $55 million, and debt to total cap is expected to drop to the single-digit level in 2011.

That concludes my remarks. I'll now turn the call over to Dick Hipple, and Dick will provide you with a market update.

Thank you, John.

First of all, wrapping up the 2010 results and looking forward to the next several years is really very exciting. The record profitability in sales in 2010, right on the back of the severe 2009 downturn, is truly remarkable and is a testimony to the Brush employees and our ongoing strategic platform to improve our long-term performance and profitable growth.

And as we look forward, the majority of our markets are in a very positive secular growth trend, and we are investing in achieving even stronger positions in material applications to reinforce these growth opportunities.

As of this time, our key markets of consumer electronics, focused on the wireless 3G and 4G growth, energy, both oil and gas and alternative energy opportunities, commercial aerospace, medical, and heavy industrial, such as mining equipment, are all entering 2011 with solid demand trends and forecasts by our customers. So, we are expecting 2011 to be another record year for the Company.

Keeping in mind our commitment to build an even stronger company over the long term, we are also making some very strategic investments in 2011. These investments include our rebranding of the Company from Brush Engineered Materials to Materion, the start of our new beryllium pebbles plant and investments to support our growth in Asia and to add other important capabilities across the Company.

So, as of March 8th, all of our operations across the globe will be under one name, one brand and one logo, bringing far better customer recognition and leverage to our capabilities to serve our growing markets. Today, we have many brands, many names, many logos, and many websites. Although our investors know us as Brush Engineered Materials, we are not recognized by a single name, brand or logo in the marketplace, and this must be fixed.

We are also in the final stages of the startup of our new beryllium pebbles plant. We will now be fully integrated back to our own source of beryllium from our mine in Utah. This is very important as Be is a strategic rare material that cannot be obtained in the global marketplace in sufficient quantities or quality to support our business. However, during the startup phase, we will be encountering added cost throughout the year during the ramp-up and transition phase.

As our markets continue to grow in Asia, we will be making investments in 2011 to allow us to better serve our customers in that region of the world. We will be reinforcing our manufacturing footprint to better position us for the long term.

And we are investing in systems, including human resources, procurement and other margin-improvement initiatives, all of which should add value in 2011 and beyond.

In many respects, 2011 is a set-up year, as we are investing now for an even stronger 2012 and beyond, with a focus not only on existing products and markets, but also for additional promising opportunities in medical, solar, LED, optics, next-generation optical materials, energy, battery designs, and nuclear.

In our 2011 forecast, we are assuming an organic sales growth rate between 6% to 10%, which is below our average 10% organic compounded annual growth rate that we have accomplished over the last 9 years. Considering the incredible growth rate last year, in combination with the likely inventory build that occurred last year, we believe this is a reasonable forecast. So, in balance, we expect to continue to grow our sales and profitability in 2011, while investing for an even better future.

Thank you, and we'll take questions.

Thank you. We'll now conduct a question-and-answer session.

(Operator Instructions) Rob Young, William Smith.

Congratulations on the quarter.

Just two quick ones. You mentioned the defense spending was one of the things that you were looking at to possibly contract from your growth on a year-over-year basis, and I was wondering if you could possibly quantify that at all or break that out from your estimates?

No, we can't because that's speculation at this point. Just common sense would say that could be coming, and we don't see that at this point in time in the order book.

Okay.

But, we can give you two examples that recently occurred. We have two orders that have pushed from the first quarter to the second quarter, for example, that are of significant scale. So, we're starting to see push outs and slowdown in releases.

Okay.

And from a pass-through perspective, you mentioned -- as it relates to most of the metals that you're using and possibly some of your clients moving to some other replacement metals. I mean, is it in your strategy to possibly -- to take some of that metal price inflation and put it through your own books, as opposed to passing it along?

Do you mean lower prices?

Yes, just potentially --.

-- No, it's not in our strategy.

Our reference there is to -- sometimes the customers might shift themselves to lower value-add materials. And in some cases, that might mean materials from us, okay, that are lower value add, but it's just a difficult thing to predict.

The point that we were making with that comment is it shouldn't see extraordinary shift, and right now we are seeing higher metal values. And if we should see extraordinary and rapid shifts, it's really difficult to say what our customer base might do.

Okay, got you. That's all I have for right now. Thanks.

Thank you. (Operator Instructions) Phil Gibbs, KeyBanc Capital Markets.

Hey, good morning, guys. Congratulations. It's a very solid result.

When we look out to 2011, some of these investment costs and startup expenditures with the beryllium plant, how should we be thinking about that incremental impact, 2011 over 2010? Is there any way to couch that? Is it $5 million, $10 million? I apologize if I missed the comments earlier on.

Let me -- yes, I did comment briefly. We talked about $0.35 to $0.40 a share in the year with about 40% of it occurring in the first quarter from a number of our initiatives, including the -- and in the four areas -- and let me just elaborate on all four. The discount rate and the healthcare cost increase, this is probably 15% to 20% of that number. The beryllium facility itself is maybe 30% to 35% of that number. Branding initiative is approximately 30%, and then the other activities are maybe 20%.

So, that should help you a little bit. So, maybe 30% of that $0.35 to $0.40 number is a first quarter -- I mean, a beryllium effect. And the majority of those costs are non-repeat going into the following year.

That's great.

Is there also any incremental color you could give me on the $30 million of capital expenditures? Is that mostly going to be tied into things that you're doing as far as rebranding initiatives or is it specific markets that you're targeting? I'm sure you're, obviously, looking at several different markets, but anything specific? It's a big number.

Yes, it's double what we spent this year, and actually the number may -- it's probably better defined as $25 million to $30 million. It's not tied to the branding initiative. It is -- a piece of it, a significant piece of it, is tied to revenue growth initiatives. There is -- there are investments in Asia to support the growth in the business in that region, and a normal maintenance level, maybe, of $10 million or so.

Perfect.

And then, last question -- again, I apologize if I had missed this, but on the value-added revenues, what color did you give there as far as -- for total Company, as far as margin, operating profit as a percentage of value added or did you give some directional number from the third quarter?

I'll comment on that both from the third quarter, as well as into 2011 because I think that's relevant because it's what you're asking.

The -- what we had described and what I had said was that the value-added operating profit percent for the Company remains in the low- to mid-teens, as it was throughout the beginning of the year. And the operating profit percent -- value-added operating profit percent for the Advanced Materials segment is in the mid-20s. In the fourth quarter, the margin for that segment was slightly higher, and in the fourth quarter the margin for the Company was about the same as it was in the third quarter -- the Company consolidated.

Looking at 2011, when you consider the level of investments that we have, there could be, depending upon growth, dilution in the margins -- could be, depending upon the growth. So, at this point, our assumption is that margins would be slightly dilutive, less than 100 basis points, but potentially accretive, maybe, as well, less than 100 basis points. It really does depend on the growth because the level of spending that we've talked about here, when you start to model the numbers, will show you some dilution.

Okay, perfect.

And just a last housekeeping item. Your book-to-bill in the quarter, roughly?

Slightly favorable.

Slightly favorable.

Okay, perfect. Thanks a lot, guys. I appreciate it. Good work.

Arthur Weise, Lord Abbett.

Yes -- it looks like we're witnessing a nice transformation in this business. And just to better understand the investment, are we expecting that this will result in enhanced top line going forward? And if the case -- that is the case, when do you think that would occur? Would that occur in 2012 and beyond?

Is this a question on the beryllium plant?

No, this is just overall this -- you're making a lot of investments, rebranding, Asian operations, beryllium plant, it's --.

-- Right. That's our objective is to continue to grow this Company.

We've been growing the Company at organically 10% a year and with acquisitions closer to 13% to 14% a year. We've been on a strong trend, and we hope to continue that path forward.

So, yes, 2012, 2013.

Okay, perfect. Thank you.

Ray Rund, Shaker Investments.

Thank you for taking my question.

Do you have any sense of what seasonality will be like in 2011? I -- you gave projections for the year, but you didn't give any hint of how you see it playing out between the first quarter, second quarter, et cetera.

Sure, I can comment on that.

Maybe the best way to think about it is that the first quarter and fourth quarter are kind of bookends. Certainly, I noted in my comments about the $0.35 to $0.40 of expenses that there'd be a little weighting in the first quarter to the rebranding initiative and the pebbles plant, the beryllium plant, startup. I noted in my comments about 40% of those costs would occur in the first quarter.

So, in addition, I just commented a minute ago about the push out of a couple of sizable beryllium orders from the first quarter into the second. So, I think you can interpret from that that we're kind of saying -- when I use the word bookend, we're probably saying first quarter is a little weaker, fourth quarter seasonally weaker and the middle two quarters stronger.

Okay.

And the 35% to 40% in additional cost per share -- excuse me, $0.35 to $0.40 in additional cost per share, you're saying that most of that -- or 40% of that occurs in Q1?

Yes.

So, the Q1 EPS will be reduced by that amount below what it would have normally have been because of that?

That's kind of what we're saying.

Okay. Thank you.

Ladies and gentlemen, there are no further questions at this time.

I'll turn the conference back over to management for closing remarks.

Thank you. This is Mike Hasychak. We would like to thank all of you for participating on the call this morning.

I will be around for the remainder of the day to answer any further questions. My direct dial number is area code 216-383-6823. Thank you very much.

Thank you.

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