Materion Corp (MTRN) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Materion Corporation Third Quarter 2011 Conference Call. (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 Materion Corporation. Thank you, Mr. Hasychak, you may begin.

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 third 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 November 6 by dialing area code 877, the number is 660-6853, account number 286 and conference ID 381136. 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 call to review the results in the third quarter of 2011, and our outlook for the balance of the year. Thanks 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 for the quarter and comment on the outlook. Following my remarks, Dick Hipple will review the state of our key markets and provide you with a briefing on the recent acquisition. Then we will open the call for your questions.

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 quarter. Then as I normally do, I'll cover the factors affecting the reported sales growth, isolating real or organic growth from the effect of pass-through metal prices. I will comment on sales by markets comparing the third quarter to both the third quarter of the prior year and sequentially to the second quarter of the current year, highlighting some of the key changes.

I will also review the status of the costs associated with the two principal non-recurring programs that we had previously announced. Those being the start-up of the new beryllium plant and the Company renaming and rebranding initiative. I will also comment on the acquisition, the cost for the third and fourth quarter and the timing of the expected accretion. In addition, I'll review margins and in particular, value-added margins, that is margins excluding high value metals from sales. I'll comment on our balance sheet and our stock repurchase, and finally I'll review the outlook for the fourth quarter and thus the balance of 2011 as we see it unfolding at this time.

With that as my introduction, let's begin with a summary of the quarter. The third quarter was another solid quarter for the Company, in spite of the impact on results of the weakening market conditions and higher costs related to the start-up of the new beryllium plant and the recently announced acquisition.

Overall, business conditions were weaker than we had expected coming into the quarter, and both sales and earnings were at the low-end of our expected range. Sales for the third quarter were up approximately $68 million or 21% to about $393 million compared to the $325 million level of the prior year's third quarter. Comparing sequentially to the record second quarter of the year, sales were down approximately $32 million or 8%. Coming into the third quarter, sales were at record levels having set new highs in each of the prior three quarters.

The reported earnings for the quarter was about $0.65 a share, which compares sequentially to EPS of $0.57 a share in the first quarter of the year and $0.67 a share in the second quarter. The third quarter EPS included $0.10 per share of costs related to the start-up of the Company's new beryllium plant, the name change and the recently announced acquisition. EPS impact of these costs was entirely offset by a one-time favorable tax adjustment.

For the first nine months of the year, sales were up 26% or approximately $246 million to the $1.2 billion level compared to $946 million for the first nine months of the prior year. Reported EPS for the first nine months is $1.89 a share which compares to $1.65 a share to date in the same period last year. This includes approximately $0.28 a share of costs related to the new beryllium plant start-up, the Company name change and the acquisition, as well as a benefit of approximately $0.10 a share from a one-time favorable tax item. Excluding these items, EPS is up approximately 26% when compared to the prior year.

Let's review sales in a bit more detail. The reported 21% increase in sales compared to the third quarter of the prior year was driven by higher pass-through metal prices. Approximately 20 percentage points of the 21% reported growth was due to a rapid increase in pass-through metal prices in the quarter, especially from mid-August to mid-September.

Organic growth was about 1% when compared to the prior year, well below the double-digit organic growth that was experienced in each of the first two quarters of the year. The lower than normal organic growth in the quarter was largely driven by economic conditions.

We believe that the uncertain global economic environment did lead to customers adjusting inventory levels especially in consumer electronics and shipments push-out, particularly in defense. The lower business levels in these two markets were partially offset by stronger conditions in our medical, energy, telecom infrastructure, industrial and commercial aerospace markets.

Order entry was inconsistent throughout the third quarter varying significantly week to week. As we reported previously, the weaker economic conditions began to take effect and impact the order book during the latter weeks of the second quarter.

Dick will comment more on demand levels and trends 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. Pass-through metal prices that is that portion of both precious and non-precious metal price increases that the Company generally passes on to the customers accounted for approximately $63 million of the $68 million of sales growth in the third quarter compared to the prior year.

When comparing sequentially to the second quarter, this factor added approximately $15 million to sales. Year-to-date, organic growth is approximately $75 million, a solid 8%.

In the third quarter of this year comparing to the third quarter of last year, our value-added sales increased in most of our key markets. Medical was up over 40%. Energy and telecom were both up over 20%. And both automotive as well as industrial component and aerospace were up over 7%. This is terrific growth in these market segments, especially in this economic environment. These segments in the aggregate represent about half of the Company's value-added sales.

Defense and science, which is about 15% of value-added sales reflected the ongoing softness and the push-outs that we have been experiencing in that market and was flat year-over-year. Value-added sales in consumer electronics, our largest market, which represents about 22% of the Company, was down 13% year-over-year in the quarter. Again in the current quarter, we believe that there was excess inventory in the consumer electronics supply chain driving the decline in sales volumes.

This is where the value of our market and product diversity is visible. In an environment where one of our key markets, consumer electronics was down significantly, the decline was entirely offset by solid year-over-year growth in each of our other key markets. Sequentially comparing to the second quarter of the year, the majority of our key markets were down on a value-added basis with one exception, that being energy, which was up 6% sequentially.

I'll now briefly review the costs related to the two initiatives and the acquisition. You will recall that we had previously announced the Company expected higher costs in 2011 due to certain specific initiatives. These include among other things the start-up of the Company's beryllium plant, new beryllium plant and the Company's renaming, rebranding.

In July, we estimated that these two initiatives would negatively impact earnings in the range of $0.26 to $0.29 a share for the year. The actual impact on the reported third quarter results was higher than we had expected at approximately $0.07 a share bringing the total for year-to-date to about $0.25 a share for these. Our current estimate is for the beryllium plant start-up and the Company renaming initiative to be in the range of $0.30 to $0.35 per share for the year.

In addition, as announced previously as well, acquisition-related costs of approximately $0.03 per share were recorded in the third quarter, and we expect up to an additional $0.10 per share in the fourth quarter. The third quarter costs were related to diligence and legal fees related to the acquisition and the fourth quarter costs are driven largely by purchase accounting costs and advisory success fees.

While these are polices to not disclose the specific terms of our transactions, as well as the specific financial detail of product alliance within our segments for a variety of reasons, including the confidentially and competitive reasons, we believe that it is important to frame certain specifics for you, our investors. Here are three specific reference points related to the acquisition.

The purchase price paid as noted in the press release was approximately $24 million. EIS Optics sales in 2011 will be approximately $30 million and the EBITDA multiple paid was approximately $9 million. Given the current economic environment and based on our assumptions, we expect the acquisition to be slightly dilutive as 2012 begins and accretive as 2012 progresses. As with our past acquisitions, we do expect significant benefits from technology and market synergy over time driven by our combined capabilities.

Let's now turn to margins. Our value-added margin performance in the third quarter was once again very solid and continue to reflect the value of the structural changes the Company has undertaken over the years and the related mix shift to higher value, higher margin markets and applications along with better pricing and cost reduction. It is always very important to note that for 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 an advanced materials company.

The precious metal content of our sales has increased significantly over the past several quarters due to our growth, the Academy acquisition in 2010 and the significantly higher pass-through metal values. In addition to affecting the first and second quarters of the year, these factors affected the third quarter significantly due to more rapid price increases in the prices of gold, silver, and other precious metals.

Factors such as these can at times result in reported margin percentages that appear to be decreasing or conversely not increasing as much as they really are. These factors affected 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 pass-through metals excluded. While we do not disclose the specifics, again 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 third quarter was slightly above 40% as opposed to the reported 14.6%.

Generally as noted in the past, operating profit percent to value added revenue for the Company was in the low- to mid-teens as opposed to the reported 4.4%. In our Advanced Materials Technology segment, operating profit margins on this basis were about 250 basis points higher than in the prior year third quarter.

In our Performance Alloys segment, margins were about 500 basis points lower due to lower yields and a weak product mix. Sequentially comparing to the second quarter of the year, value-add margins were about 80 basis points higher in the Advanced Materials segment. In the Performance Alloys segment, they were 380 points lower again due to yields and a weaker product mix.

Now let's review the status of our balance sheet and the stock repurchase program. The Company began 2011 with a very strong balance sheet. In spite of the difficult macroeconomic environment experienced during 2009 and early 2010, 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 then and now a third.

The total investment for the three acquisitions was approximately $100 million. Since 2006, we have invested approximately $200 million in strategic acquisitions and yet finished the third quarter with debt-to-total cap in the 20% range.

Also in the third quarter of 2011, we repurchased an additional 132,000 shares of our outstanding common stock, consistent with our previously announced stock repurchase program. To date under this program, we have repurchased approximately 582,000 shares. Also as recently announced, a new revolving credit facility was put in place, a five-year, $325 million committed facility that is expandable to $425 million under certain circumstances.

The quality of our balance sheet, our credit facilities and our expected cash flows continue to be a source of pride and our strategic assets for the Company. We're pleased to have the liquidity we do and the flexibility to support our stock repurchase program, our expected long-term growth and our important strategic initiative such as the acquisitions.

I'll now comment on the outlook. As you all know after a record 2010 year, we began 2011 with a strong overall level of business activity in the Company's key strategic markets. Markets remained strong through the first and second quarters of the year as evidenced by the consecutive first and second quarter record sales level and a double digit organic growth that occurred in those quarters.

Order entry in the second quarter increased over the first quarter, but did soften in the latter weeks of the second quarter as global economic conditions began to show signs of weakening. Although our order entry patterns showed some signs of bottoming and improving off and on during the third quarter, the overall trend weakened, especially mid-quarter, and by quarter-end, order entry was lower than the second quarter. The weaker economy led customers to shorten order lead times and began to adjust inventory levels in response. And the customary consumer electronics holiday build normally seen in the latter half of the third quarter were therefore weaker than we had expected as well.

The weakness was most visible in consumer electronics and was tempered at least in part by strength in our medical, telecom infrastructure, precision optics and energy markets. The strength in these areas has continued into the fourth quarter. Taking the changes in the economic environment into account and assuming no significant change in metal prices or order entry patterns from current levels, we, at this time, expect sales for the full year 2011 to be in the range of $1.56 billion to $1.58 billion. Organic growth is forecasted to be approximately 6% for the year.

Given the weaker global economic environment and considering the costs related to the EIS acquisition, as well as the additional cost related to the start-up of the Company's new beryllium plant, we have revised the earnings outlook for the full year to a range of $2.10 to $2.20 per share, down $0.25 to $0.40 a share from the previous range. Approximately $0.15 to $0.20 of that change is related to the start-up of the plant and the acquisition. With $0.05 of that $0.15 to $0.20 having already occurred in the third quarter, the balance is related to the forecasted change in demand levels resulting from the weaker global economic environment.

That range is the GAAP range and includes costs or charges of $0.40 to $0.45 per share in the aggregate related to the start-up of the beryllium plant, the Company name change and the acquisition. The adjusted number for run rate, that is excluding the charges will thus be in a range of $2.50 to $2.65 for the year, which equates to an EBITDA of approximately $120 million to $125 million.

That concludes my remarks. I will now turn the call over Dick Hipple. Dick will provide you with a briefing on the EIS acquisition and a market update.

Thank you, John. First of all, I'd like to provide you with a briefing on the EIS Optics acquisition, our rationale for it and its strategic fit. As you know, we have been working hard over the last several years to expand our products and technologies further into advanced enabling materials, truly representing a technology based company.

This acquisition is another important step in that direction in our ongoing evolution. The acquisition is very strategic and is consistent with what we have discussed in the past about the importance of our putting assets on the ground in Asia to support our rapidly growing Asian markets and customer base. We've consistently reinforced this important strategic goal over time, and this acquisition is an important step in that direction.

We've also talked in the past about the strategic importance of acquisitions as an enabler of our strategy to consistently over time augment our geographic reach, our technology, our manufacturing capabilities and our market breadth. This acquisition does all of that and more. It brings scale, adds capacity, adds technology, products and markets and geographic expansion to one of our fastest growing businesses, our coatings group of businesses.

As you know, this is our fourth coatings business acquisition over the past five years and third optical coatings business acquisition. EIS has market share and end markets in Asia, while allowing us to avoid the time, the capital and extensive investments that would be required to build the business for this level in a greenfield environment.

EIS is a well-run company with modern equipment and sophisticated systems. It is not a start-up. The company was identified by an advisor engaged by us to scan the Asian region for acquisitions such as EIS. We pursue the company, it was not initially for sale. The addition of EIS augments our technology along with our markets and products. EIS provides an Asian sales presence that will help our entire optics business and over time, we'll bring significant synergistic benefits. And as noted in the announcement on this acquisition, EIS Optics itself is the leading producer of optical thin film filters, glass processing, lithography and optical subassemblies that allows for the precision management of the light in a broad range of end-use applications throughout the projection display, entertainment lighting, sensors, medical instruments and gaming industries.

Products manufactured with EIS Optics materials and assemblies include projectors, cinema components, HDTV, high-end handheld cameras and gaming systems. EIS Optics is the world's largest manufacturer of color wheels and light tunnels for color splitting in field sequencing, lighting management and digital production, video production and video imaging.

EIS operates a modern 97,000 square foot manufacturing site in Shanghai, China that employs 350 people. The Shanghai facility includes state-of-the-art clean rooms with vacuum deposition or sputter machines, and adjacent processes such as assembly to support the full value-add offering.

EIS and its predecessor companies have more than 60 years experience in the industry. The acquisition brings an Asian manufacturing base to Materion for its Advanced Material Technologies' optical coatings businesses. EIS also complements Materion's existing leadership position in thin film optical filters that enable complex technologies and components throughout the defense, aerospace, medical, energy, semiconductor, telecommunications, lighting and astronomy markets.

When EIS' technology and capabilities are combined with Materion's knowledge and expertise in materials and optical coatings, the combination is expected to enable the development of new technology and expand the range of applications, which will drive future growth far beyond what the separate organizations could have accomplished. We now have an advanced coatings business, which exceed $140 million in sales with expected strong growth ahead.

And now I would like to just talk about our general market situation and first of all, I am quite pleased with our first nine months of performance with good organic growth of 8% and growth in earnings of 16% or 26% excluding one-time events. In the third quarter, we saw a mix of year-to-year results in our key markets. It certainly appears that we are now being affected by a reset of future expectations from a general slowdown across the globe.

A good overall indicator is the significant decline in the global PMI Index during the last several months. For example, when comparing quarterly sales year-to-year, we saw a decline of approximately 13% in overall consumer electronic sales, as inventories were being adjusted this year, purchased an inventory build with increasing sales in 2010. Our overall defense sales were similar in 2011 as they were in 2010, which was a positive based upon the uncertainty in the sector.

On the positive side, automotive grew year-to-year by over 7%, our energy markets grew by over 23%, represented mainly by oil and gas and our alloy business, but also from solar and architectural glass in our materials businesses.

Our telecom sales were up about 22% driven by additional builds of undersea cable lines, and if you remember, our alloy business is critical for the production of cable connectors across the ocean. Our industrial and commercial aerospace rose by 7% year-to-year, and we certainly expect this area to gain further traction ahead. We are a little later on the aero build cycle here as they are now building the long lead engines and other materials like ours should be following soon on certainly higher growth.

Finally, our medical sales were up by about 42%, representing both market growth and a recovery in sales from the production issue we suffered from last year, and we expect strong further growth ahead of us in medical.

All in all, the strategy we have been following to broaden our markets is now paying dividends during a time when the electronic supply chain is undergoing adjustments. With regards to our delayed Be pebble plant start-up, we are now finalizing the solutions for two key bottleneck issues, one being the final filtration system and the other is our automated material handling system, those are well in hand, but will take an extra quarter. As we look forward, there is an obvious risk overall for global market softening. However, we expect our broad-based market positioning and numerous growth opportunities will provide far less cyclicality and much better results should market dynamics further deteriorate.

However, we do expect the fundamental wireless markets to remain robust in 2012 after the inventory adjustments have been made. And today's announcements out of Europe may certainly lift some of the malaise and stall of recent macroeconomic conditions.

Operator, well, we will now take questions.

Thank you. (Operator Instructions) It appears there are no questions at this time. I'd like to turn the floor back over to you for additional comments.

And this is Mike Hasychak, we'd like to thank all of you for participating on the call this afternoon. I'll be around for the remainder of the afternoon to answer any questions. My direct dial-in number is 216-383-6823.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.