Materion Corp (MTRN) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Materion Corporation first quarter 2011 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, Mr. Michael Hasychak, Vice President, Treasurer, and Secretary for Materion Corporation. Thank you. Mr. Hasychak, you may now begin.

Good morning. 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 first quarter 2011 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 May 8th, by dialing area code 877, the number is 660-6853, account number 286, and conference ID number 370767. The call will also be archived on the company's website materion.com. To access the replay, click on events and presentations on the Investor Relations 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, everyone, and welcome to the conference to review the results for the first quarter of 2011, and our outlook for the balance of the year. 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. Following my comments, Dick Hipple will review the current state of and outlook for our key markets. Following Dick, we will open the call for your questions.

For those who have had -- 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. 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 changes. Then I'll comment on sales by market, comparing sequentially to the fourth quarter to highlight the key changes in trends. I will also review the status of the cost associated with the initiatives that we had previously announced. In addition, I'll review margins, and, in particular, the effect of precious metal mix, precious metal price increases, and the added precious metal volumes have on margins and margin trends.

I'll also review our balance sheet, cash flow, and cash flow projections for the balance of the year. And then finally I'll review the outlook for the balance of 2011, as we see it unfolding at this time.

Let's begin with a brief summary of the release. Today in the press release, we reported significantly stronger than expected results for the first quarter of the year, and raised our guidance for the full year. Overall, we are pleased with the progress we have seen in our markets in the first quarter and the continuing improvement we have seen in our margins.

Sales for the first quarter were up approximately $80 million, or 27%, to the $375 million level. This is a new company quarterly record, surpassing the previously -- previous quarterly sales record of approximately $356 million established in the fourth quarter of 2010. Sales have set new records in four of the five most recent quarters.

The reported EPS for the quarter was much improved compared to the prior year and stronger than expected at $0.57 a share, which compares to an EPS of $0.33 a share in the first quarter of the prior year.

The better than expected performance in the quarter was driven primarily by stronger demand and higher value add margin levels. The stronger than expected demand was in a number of markets, including consumer electronics, energy, industrial components, commercial aerospace, heavy equipment, and automotive electronics.

The higher value added margins are most notable in our advanced materials, performance alloys, and technical materials segments.

Let's review sales in a bit more detail. The reported 27% increase in sales compared to the first quarter of the prior year is due to two primary factors. The first gives a significant and broad-based increase in demand that we have seen for over a year now for the company's materials across almost all of the company's key markets.

Dick will comment more on demand levels during his review of the current state of our market, and I will provide some specifics on sequential changes in growth by market in a moment.

The second factor is pass-through metal prices. Pass-through metal price increases, that is that portion of both precious and non-precious metal price increases that the company generally passes on to customers, accounted for approximately $45 million of the $80 million of sales growth in the first quarter when comparing to the prior year.

Organic growth was a very healthy $35 million, or 12%, year-over-year.

In the first quarter of the year, comparing sequentially to the fourth quarter of last year, our value-added sales increased significantly in a number of markets. Consumer electronics was up 12%, energy was up about 15%, automotive electronics was up 36%, telecom infrastructure was up 6%, and medical was up 41%.

Sequential growth in those markets more than offset a 15% decline in defense and a delay in the shipment of hydroxide from the first quarter to the second quarter of the year.

You will recall that we had previously announced that the company expected higher costs in 2011, due to certain specific initiatives. These include, among other things, the startup of -- the startup of the company's new beryllium plant, the company re-naming and re-branding, a number of organizational development initiatives targeted at long-term cost reduction and margin improvement opportunities, higher pension and healthcare costs, and higher metal financing fees.

We have estimated that these costs would be in the range of $0.35 to $0.40 a share for the year, with approximately 40% occurring in the first quarter. The actual impact on the reported first quarter results was approximately $0.13 a share, with $0.09 of the $0.13 being related to the two principal factors, the startup of the new beryllium plant and the company re-naming and re-branding initiative.

Let's now turn to margins. Operating margins improved significantly for the fifth consecutive quarter when compared to the prior year. This trend is reflective of the sales growth as well as the structural changes in the company that have been 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 for our company, having significant amounts of precious metal in the top line has the effect of diluting the 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 over the past several quarters due to our growth, the Academy acquisition and pass-through metal price increases.

These factors affected the first quarter more than the most recent quarters due to a more rapid increase in the price 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 affect the reported margin percentages for the company in the aggregate as well as the reported margins for the company's advanced material segment.

Internally, we measure margins with the high value pass-through metals excluded from the top line. While we do not disclose the specifics of this 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 first quarter is above 40% as opposed to the reported 14.9%.

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 4.8%. And on this same basis, operating profit margin in the first quarter was up approximately 200 basis points compared to the first quarter of the prior year. This improvement occurred despite the added first quarter spending related to the two principal initiatives that I noted earlier, which had the effect of diluting our first quarter value added operating profit margin by 200 basis points.

In our advanced material segment, margins on this basis were about 100 basis points higher than the prior year averages, and our performance allow segment margins were about 250 basis points higher than the prior year averages.

Now let's turn to the 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 two acquisitions.

The total investment for the two acquisitions was approximately $76 million. Over the past five years, we have invested over $175 million in strategic acquisitions, and yet finished 2010 with debt to total cap in the 18% range.

In the first quarter of 2011, [debt] increased by approximately $18.6 million, due to an increase in receivables and inventory to support the business. This is our normal seasonal pattern. Accounts receivable and inventory increased by approximately $36 million. Other operating factors were positive, lowering the increased debt to the $18 million level.

Debt to total cap at the end of the first quarter was 21%. And we anticipate that the normal, strong, positive cash flows in each of the remaining quarters of the year will bring debt to total cap to the mid- to low teens level by year end, possibly to the single digits. Our cash flow estimates assume an EBITDA in the range of $122 million to $130 million for the year, with depreciation and amortization in the $11 to $12 million per quarter range. We see capital spending in the $25 to $30 million range for the year.

The projected positive cash flows through the remaining quarters would, as in the past, be used to reduce debt or support acquisitions.

The quality of our balance sheet is a source of pride for the company. We're pleased to have the liquidity we do and the flexibility to support our growth [plus] important strategic initiatives such as acquisitions. The quality of our balance sheet should provide significant flexibility throughout 2011 and beyond.

I'll now turn to the outlook. After a record sales year in 2010, the company began 2011 with a healthy backlog. As the year has progressed thus far, the overall level of business activity in the company's key strategic markets has remained strong as evidenced by the first quarter 2011 record sales.

The book-to-bill ratio in the first quarter was 1.05, and order entry currently remains solid.

The company's well positioned to take advantage of the faster growing segments of its key markets. Considering this, the company, at this time, expects continued solid growth in 2011. And assuming no significant change in metal prices from current levels, which are much higher than the 2010 average prices, the company at this time expects sales for 2011 to be approximately $1.55 billion, up approximately 20% from 2010.

Excluding pass-through metal price changes, organic growth is forecast to be a [solid] in the range of 9% to 11%, following organic growth of 35% in 2010.

Given the above factors, the company is raising its earnings outlook for the full year to a range of $2.35 to $2.60 a share from the previously announced range of $2.20 to $2.50 a share. The range includes $0.35 to $0.40 per share of costs associated with the startup of the company's new beryllium plant, the company name change, higher healthcare costs, the impact of a lower discount rate environment on pension expense, and the higher metal financing fees noted earlier.

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

Thank you, John. My comments will be brief today as we continue to see ongoing strength moving into the second quarter of 2011. We are very pleased with our ongoing organic growth exceeding 10% and the expansion of our margins.

Our markets remain strong in spite of the numerous global events which continue to threaten stability. As an example, so far we have not seen any significant negative impact from the unfortunate earthquake and tsunami in Japan.

The Materion team is also pursuing numerous opportunities which leverage the total strength of Materion from our new re-branding effort launched in March. In fact, we'd like to call it capping the power of Materion. This will be an ongoing effort that we expect will bring solid synergies and new market opportunities over the next several years.

This month we also produced the first pellets at our new beryllium pebbles plant. This is a major milestone and represents a significant accomplishment as we move forward to achieve full production by the end of the year.

With regards to markets, overall we are enjoying solid conditions. Our wireless and telecom areas continue to enjoy ongoing secular growth led by the ongoing expansion of Smartphone devices. Automotive electronics also remain strong, driven by our expansion into global platforms in power electronics.

LED materials remain strong and continue to gain traction in expanding applications from consumer electronics into lighting. Our energy markets are robust. Both the conventional carbon base for oil and gas and newer applications for alternative energy and thin film solar and new battery storage devices.

Commercial aerospace orders continue to climb based upon our expanding applications on the new platforms. The same situation is occurring in our heavy off-road vehicle market for mining and agricultural equipment. The medical market is increasing in strength as we return to more normal levels of activity from our previous qualification issue. The defense market also remains solid, but we are obviously concerned regarding budgets moving forward.

So overall our market opportunities are solid and we expect them to continue to expand. Positive secular trends should yield double-digit organic growth again this year and hopefully well into the future.

Thank you. And, Operator, we will now take questions.

We will now be conducting a question-and-answer session. (Operator Instructions) One moment, please, while we pool for questions. Our first question comes from the line of Chuck Murphy with Sidoti and Company. Please proceed with your question. Your line is live.

Morning, guys.

Good morning, Chuck.

Good morning.

A few questions for you. I guess, first, thanks for the detail on the charges. The first question was with regard to that. So it was $0.13, I think you said, John?

That's right.

Was that a little bit below what you were kind of thinking beforehand? And I'm just wondering --

No. I think that the range is the same. We anticipate the $0.35 to $0.40 for the year, and we had suggested that about 40% of that would be in the first quarter, and that's maybe $0.13, 40%, the middle of the range. So, no, it wasn't lower.

Okay. All right. And with regarding to performance alloy, I mean, at least personally it was surprisingly strong. I was wondering if you guys expected it to be like that or if it also was stronger than you expected? And if so, why?

It was also stronger than we had expected. And I think Dick can comment on the strength of the market specifically. But it was widespread.

Okay. And also related to performance, can you give us kind of an updated breakdown on the split between bulk and strip and also kind of the recent performance of those two?

Well, the -- I don't think we talked about the split. But I can say that we're seeing growth faster right now on the bulk side. And that's -- now, strip, the strip side is solid, but the bulk is growing at a higher rate, because if you think about where are the major applications there, it's oil and gas, commercial aerospace, and the heavy off-road equipment. And all three of those areas are extremely robust right now.

But what I'm more excited about is certainly those markets are good, but we're growing faster than the markets because of some very strong growth and new applications in all those markets.

Got you. And final question, just with regard to the rest of the year versus first quarter levels. I mean, which segment would you expect to be kind of the best performer and then also the weakest performer?

Hmm. As compared to the [pertinent] quarter.

I mean, I guess like sequentially, you know. Like if I look to the June quarter, should I expect performance to continue to out perform the other guys or is it going to be more evenly split, or?

Well, it's a tough one because you're coming off of startup costs, for example, in the beryllium and composites segment. So as those ramp down through the years, the beryllium and composites business, we'll show some decent growth. I would think the technical materials segment would continue to perform in the second quarter as it did in the first quarter. Probably the most significant growth will come from the two largest segments. And I don't know that I would --

-- put one ahead of the other as far as --

-- put one ahead of the other. I think they're both going to be pretty strong.

Okay. All right. If I can just ask one last one. Promise this is it. Just in terms of those charges you mentioned --

Yes.

-- I'm guessing most of them were included in cost of goods or?

The startup of the beryllium and composites facility will be in the cost of goods sold. The re-naming initiative and the majority of other -- the other costs would be in SG&A.

Okay. All right. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Avinash Kant with D.A. Davidson and Company. Please proceed with your question. Your line is live.

Good morning, Dick and John.

Good morning.

Good morning.

Few questions [first]. I know, John, you talked a little bit about giving us some perspective on the operating margin performance. You said it was like roughly 200 basis points higher than the last -- last year same quarter. Could you also give us some idea or some reference in terms of how did it perform sequentially? And maybe if you could give us something on the gross margin and operating margin that will be better. I'm just looking at the difference, how did it do compared to the --

Well, as I indicated, versus a year ago, we were up about 200 basis points in spite of about a 200 basis point dilutive effect from the principal initiatives that we talked about in the first quarter.

Sequentially, and I don't like to look at one quarter versus another because of seasonality factors. But I did comment that relative to the averages from last year, the advanced materials segment was up over 100 basis points and the performance alloy segment up by over 200 basis points from sort of last year's trends.

Same quarter, yes. Okay. Or maybe then you can give us something on the gross margin side with the same period, like Q1 last year versus Q1 this year. How much was the difference? Because it's just misleading to see the metal price and everything. This will be much more gratifying if you got the difference at least.

Well, on a gross margin basis?

Yes.

Versus prior year?

Yes.

Flat on a gross margin basis. Again, we've got the impact of those costs, but --

[Right. I got you.]

-- [flat] versus prior year on the gross margin basis.

So this is --

And you've got mix in there. You've got different mix of businesses.

Yes.

But if I were to adjust for mix, it probably wouldn't be flat.

Right.

But it's flat.

Right. And this is flat including all the charges that we are talking about. So excluding --

Right.

Yes.

-- [would that] be higher?

Yes.

By roughly how much? Excluding the charges.

Less than 100 basis points. I don't have the number handy. But it would be less than 100 basis points.

Okay. Perfect. But really you would say gross margins at this point are running about 40% and operating margin in the mid --

Gross margins are running above 40% and operating profit margins are running in the mid-teens.

Mid-teens, all right.

Low to mid-teens is what I've been saying.

Low to mid-teens. Okay. Good. And the other question I had was, you've talked about the LED business a lot lately, and seems like there have been quite a bit of growth. Have you given us some idea about what percentage of your revenues come from LEDs right now? How big a business it is, and --

No, we don't talk about that specifically. But I can say that it was up significantly in the first quarter versus -- sequentially versus the fourth quarter and also up significantly versus prior year.

Up sequentially and on a year-over-year basis, all right.

Yes.

But would you say that it's become like 5% of your revenues or higher? Or 10% or -- any rough idea?

No, because -- we're not going to share revenues. Again, keep in mind you've got metal price effect in there. But it's part of the consumer electronics segment in our market, in our market reporting. And it's, in that market, it's certainly not -- it's certainly not half of it. Maybe 10%, 15% of it.

Ten to 15% of the consumer electronics market?

Maybe.

All right. Okay. And also, when you talk about margins and the impact of the rest of the initiatives that you have taken in the coming -- in the next two, three quarters, you think that the 40% -- $0.40 number that you have, $0.35 to $0.40, $0.40 may be [a bit aggressive]?

No, I'm still working off that range. I -- it's $0.35 to $0.40 for the year.

Okay. And you do have significant exposure to the telecom and the Smartphones and all those markets. And there have been some comments someplace lately about some [cautiousness] on those markets, especially in the telecommunication side. Have you heard some of that with the conversation with your customers? Are you still --

I'm -- we missed your question for some reason. You said there's been some talk about what?

Some weakness in the Smartphones (inaudible) situation or there have been some weakness in the communications sector recently talked about by some of the players in the --

At this point in time, we are not [picking] anything that we're concerned about from our customer base that they're sharing with us.

Okay. Perfect. Thank you.

Thank you. (Operator Instructions) Our next question comes from the line of Rob Young with William Smith. Please proceed with your question. Your line is live.

Hey, good morning, guys.

Good morning.

Morning.

Question on the M&A front. If you could just comment on the level of opportunities that you might be seeing and maybe compare that to years past and possibly what markets you might be thinking about going into.

Well, again, I think the opportunities are similar for what we've seen. I mean, we have really had some very unique niche-type acquisitions in the past, and we continue to see that going forward. We are active in the acquisition market as far as looking for something that would be a good fit for us from an augmentation standpoint. I see no difference in our philosophy there. It's just been a great strategy for us. The opportunities are there, and not everyone is -- works out by the time you look at the details, the right fit.

So we'll be finding them just like we have in the past. I don't see that changing at all. And the -- what I think you'll find is you'll find us to -- us to be having the ability to continue to have the same strategy which is to continue augment our capabilities from technology [end] markets and continue to build out the company and continue to build out our growth opportunities. That's what it's all about.

Perfect. Perfect. And is there a particular geographic location that you're specification looking at or they're just all over?

Well, no. I would -- our preferences right now would be certainly Asia and the United States.

Okay. And relative to metal price, with the increases that we've seen, have you seen any talk about customers potentially switching metals? And if so, how are you dealing with that?

Well, that's always going to be the case because we have -- we're using high priced metals with gold and platinum, and we all know where those prices are, so.

Right.

They also have magical properties to them. That's why they're being used in the first place. They've always been expensive metals. But at the same time, those customers that try to experiment with changes, we're also working with them on the possibility of other alloys and the changes and -- or to minimize the use. There's always approaches of using less of the precious metal if you can get innovative with technology.

So we're on the front to that. I mean, we're working hand-in-hand with our customers to try to help them manage their cost down. So those -- there are activities going on to try to minimize the use of precious metals, and we're right there with t hem.

Okay. Perfect. And how do you guys see working capital playing out for the rest of the quarter? Or for the rest of the year.

As I had indicated, Rob, in my dialog about the balance sheet projections and cash flow, we would have positive cash flow the remainder of the year, which is our typical pattern.

Right.

And it would drive our debt to total cap down to, potentially, down to single digits, but likely in the low double digits from where it is. Implicit in that is receivables and inventory may be flat to coming down at yearend, which is also part of our seasonal pattern.

Okay. And is that [mine] amortization cost, is that expected to continue going forward?

Yes.

Yes.

Okay. So the depreciation amortization of capital equipment should be in the $12 million range, is that correct?

That's right.

Okay. Going forward? Okay. Perfect. Perfect. Thank you very much.

You're welcome.

Thank you. Our next question comes from the line of Jason [Broshert] with KeyBanc. Please proceed with your question. Your line is live.

Hey, this is Phil Gibbs. How are you?

Good morning, Phil.

Hi.

A lot of good questions. I -- Rob stole my thunder a bit on the M&A question. I was just curious about your sense of the mix of business going forward and how we should be viewing just the underlying momentum there. I believe you said that the margins, the value added margins were up about 200 basis points year over year. Is that correct, John?

That's correct, including the dilutive effect of the first quarter's program cost.

And you said that was $0.13?

Another 200 basis points or $0.13 a share, right.

Okay. So how should we be thinking about the underlying mix going forward, pretty steady? I know that you've -- you're starting to get some of the medical business back.

Well, if you think about the company going forward and the shifts, we expect the medical to get stronger. And we're certainly battling our issues in the beryllium and composites business right now because of the startup. And we plan to have a successful startup as we move forward, and that should improve [what's] being moved through.

So I mean, there's fundamental pockets here in the business that should be getting fundamentally better in addition to our -- just the overall improvement and organic growth of the company from a margin standpoint.

Can you give us -- Dick, can you give us a little bit more color on the telecom infrastructure side of things? I know it's strong. But what are you seeing out there to give you confidence in the next couple years as far as where we are in the process of the build out?

Well, to me, in what I call the foreseeable future, everybody is -- they continue to buy Smartphones and iPads and you pick it. All those devices, they all need to be sending videos everywhere. I mean, that's what's happening. So the demands on the backbone of all of the telecom companies across the world continues to expand. So we're seeing very strong business. And certainly what I call the foreseeable future, for the next several years, I don't know why that would change, because there's just tremendous demands on the systems. And you've got areas in the world right now that are still behind the eight ball.

So it's been a very good business for us, very solid, and I don't see that for the foreseeable future changing.

Okay. Great. And just one last one. And I apologize if I missed it. But I know the value added revenue in the consumer electronics business has been down just as more of a correction or pause, if anything, the last two quarters. What did we see in the first quarter relative to the fourth?

I did make that comment. The comment I made was the first quarter relative to the fourth was up 12%.

Okay. Perfect. Thanks a lot gentlemen.

Thank you.

You're welcome.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to you for any closing comments you may have.

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

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time, and we thank you all for your participation. Good day.