Transcript of
Brush Engineered Materials, Inc. (BW)
Q2 Earnings Release Conference Call
August 3, 2007
Michael Hasychak, Vice-President,
Treasurer and Secretary
Dick Hipple, President, Chairman and
CEO
John Grampa, Senior Vice-President
Finance and CFO
Jim Marrotte, Vice-President and
Corporate Controller
Operator
Greetings, ladies and gentlemen, and
welcome to the Brush Engineered Materials second quarter 2007 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 Brush Engineered
Materials. Thank you, Mr. Hasychak. You may now begin.
Michael Hasychak ‑ Brush
Engineered Materials ‑ VP, Treasurer and Secretary
Good afternoon. 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 second quarter 2007
results in 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 18, 2007, by dialing area code 877‑660‑6853
account number 286 and conference ID 248108.
The call will also be archived on
the company's website beminc.com. To access the reply, click on quarterly
earnings conference call under the investor's page. The broadcast requires
Real Player software which is available as a free download from the icon as
indicated.
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.
John Grampa‑ Brush Engineered
Materials ‑ CFO
Thank you, Mike. Good afternoon
everyone. And welcome to our call today. As in the past, I'll review the
quarter and then comment on the outlook. And then following my prepared
comments, Dick Hipple will provide you with a market update. Then we'll open
the call for questions.
I'll attempt to adequately reenforce
and expand on the key points that were made in today's press release. I'll
comment specifically on the continued strong organic growth, what continues to
drive that growth, including what will drive it looking forward. I'll also
comment on the two charges identified in the press release that negatively
affected results in the quarter.
The margin benefit will also be
reviewed, the related sale of our product containing the low cost inventory
will be covered and the impact of weaker market conditions leading to
production levels, lower production levels and the impact of that on our
margins.
Then I'll review the outlook,
including the current improvements we see in demand for our new materials if
the perpendicular media market as well as in the ruthenium metal prices. Both
are reversals of the second quarter trends.
Let's begin. As you know, this
morning we reported sales in earnings that while not consistent with the
expectations we had published coming into the quarter were consistent with the
update provided in mid June. Sales for the quarter were up 25 percent or about
47 million dollars to the 234 million dollar level.
This was the 18th consecutive
quarter where sales were higher than the comparable quarter of the prior year
and the seventh consecutive quarter where our sales growth was greater than 20
percent.
Metal price inflation or said
differently that portion of metal prices both precious and nonprecious metal
price increases that we were able to pass on to customers in the quarter had
far less of an effect on reported sales increase than in recent periods.
Approximately three percentage
points of the reported 25 percent growth is metal price, thus our real growth
or our organic growth was approximately 22 percent in the quarter.
Year to date sales are up 36 percent
or about 129 million dollars. Metal prices represent about five percent of the
year to date growth, thus organic growth for the first half was approximately
31 percent.
We do expect similar organic growth
in the second half of the year. As you know, the most significant factor
driving our growth in 2007 is the growth of our new ruthenium based magnetic
media materials for the data storage market. The growth here is driven by the
rate at which the market transitions to perpendicular media and our ability to
capture a significant share of that market.
These materials accounted for
approximately 85 million dollars of the growth in the first half, about 30
million of that occurred in the second quarter and 55 million in the first
quarter. The lower growth in the second quarter was driven by a combination of
factors, including some softer overall hard disk drive demand levels, slower
than expected PMR transition rates, inventory corrections due to supply chain
filling during the initial ramp‑up and some temporary loss share due to
the internal issues we previously announced.
Many of the factors that drove
second quarter demand in the hard drive market to levels below the first
quarter did carry into the third quarter but those factors now appear to be
reversing perhaps at a significant rate.
Reported net income in the second
quarter was 38 cents a share. This includes the three factors identified in
the press release that negatively affected earnings by approximately 4.3
million dollars pretax or 14 cents a share after tax.
Net of these factors our operating
run rate was 52 cents a share compared to the prior year's 35 cents a share.
Let's review those 3 factors in a
little more detail. First, you'll recall that in mid June we announced that an
isolated production ramp‑up quality issue was encountered with the new
product. This resulted in higher costs and some lost magnetic media business
in the quarter.
The company took a charge of
approximately 4.8 million dollar pretax or 15 cents a share after tax, due to
this event. The issue affected two customers and it has been resolved. We
have resumed shipping to the accounts affected at low volume ‑‑
at volume levels that are ahead of the Q2 levels.
Second, a combination of factors,
including lower overall demand for perpendicular media materials led to a rapid
an significant decline in base prize for ruthenium. Prices fell by more than
$200 an ounce from roughly $640 an ounce at the beginning of the quarter to
approximately $430 an ounce at the end of the quarter.
This led to a non cash, lower cost
or market inventory charge of approximately 4 and a half million dollars pretax
or 13 cents a share after tax.
As market conditions improve and
ruthenium prices strengthen, portions of this charge may be recovered through
higher margins in subsequent periods. Prices today, for example, are at $490
an ounce or about 50 dollars an ounce above the levels they were at the end of
the quarter.
Third, helping to offset the
negative impact of the above two charges was a margin benefit of approximately
4 and a half million dollars pretax or 14 cents a share after tax related to
the sale of very low cost ruthenium inventory that was in the production system
at the beginning of the year.
While this benefit was expected, it
was lower than expected due to the significantly lower ruthenium prices.
Before moving on to the outlook, I'd
like to review several other additional important factors. First, while the
second quarter gross margin was 18 percent compared to 21 percent in the prior
year, about two points of the three‑point decrease relates to the three
media and ruthenium inventory factors I just reviewed.
Other factors, including the
company's business mix which today includes significantly more higher priced
materials and lower production levels affected gross margins negatively
compared to the prior year.
Lower production levels and
especially engineered alloys driven by softness and wireless handset
applications negatively affected gross margins in the quarter by approximately
100 basis points.
A 22 percent gross margin level is a
more normalized measure of the gross margin to expect from the company given
the new mix which includes a significant volume of the high ruthenium metal in
it.
Second, I want to reenforce that
today in our company operating profit is a better measure of profitability than
gross margin due to the precious metal and other expensive metal content that
is now in the top line.
Operating profit percent without the
impact of the sale of the ruthenium lower cost of market charge or the charge
for the production issue was 7.7 percent in the quarter compared to 5.7 percent
in the first quarter of the ‑‑ in the second quarter of the
prior year. A 200 basis point improvement.
Third, the reported change in the
income tax rate is approximately four points. The four point increase in the
reported rate effects the year‑over‑year comparison significantly.
The rate change compared to the prior year is principally do you to the
significantly higher level of income as well as a reduction in foreign source
income benefits.
The reduction in foreign source
income benefits is tied to some statutory changes. The additional tax in the
first half was approximately 2 million dollars, effecting the earnings
comparisons by about 10 cents per share when looking at earnings compared to
the prior year.
And fourth, our already strong
balance sheet continued to get even stronger in the quarter, debt to total
capitalization dropped to approximately 11 percent.
Now, I'd like to turn to the
business and then the outlook. Dick will provide a market update in a moment.
As most of you well know, we've made good progress over recent quarters with
our new products with our efforts to penetrate new markets and with our global
expansion initiatives as well as our initiatives to improve margins.
With the exception of the isolation
quality issue that affected the second quarter we've executed very well. The
progress has brought with it the sentencing growth in sales and profits that
we've seen over the last several quarters.
And we believe the company's global
markets will continue to present to us similar growth opportunities throughout
the remainder of 2007 and into 2008.
Our new products initiatives have
been instrumental to the significant growth we've seen. Especially notable is
the growth that we are presently seeing with the new ruthenium based materials
for the perpendicular media market. This added sales of approximately 85
million dollars in the first half of the year alone. However, the rapid growth
brings with it a significant forecast risk driven by the uncertainty in ramp‑up
timing, ramp‑up rates, metal price unpredictability, fluctuations in
demand levels and unclear market penetration rates for the new materials.
As seen in the most recent quarter,
this can result in less reliable and far more volatile near term outlooks.
It's becoming difficult to maintain our long history of providing reliable
quarterly guidance. We current expect that the opportunities in media for
these materials plus other new materials will continue to be significant and
that the growth rates through the balance of 2007 and for 2008 could be of the
same scale that we saw in the first half of 2007.
Because of these opportunities,
forecasting quarterly performance will become even more difficult. As a
result, the company is planning to suspend its practice of providing regular
quarterly guidance beginning in 2008.
We focus and we want our investor
base to focus on the long term. We will therefore transition to providing
annual estimates along with quarterly updates, and with updates when material
changes are known. Additionally, the new segment reporting provides the
opportunity to offer added transparency.
Turning to the outlook. Beginning
in the first quarter of the year, we operated within softer market conditions
in automotive and in certain segments of our consumer electronics markets.
These conditions continued into the second quarter and inventory corrections in
these markets negatively affected demand. While the second quarter was weaker
than expected, due largely to these factors as well as a weaker media market
and the factors that should not reoccur we're optimistic about the balance of
the year. We're currently seeing improvement in conditions in the markets that
were weaker earlier and while cautious expect this momentum plus the continued
ramp‑up in demand for the new ruthenium based media materials to help
overcome the effect of the normal seasonal factors that can lead to factors in
the third and fourth quarters of the year compared to the first and second
quarters.
The improvement in market conditions
and the continued ramp‑up of media materials are currently expected to
lead to a sequential improvement in sales as the years progress.
Based on this, the company at this
time expects sales for the third quarter to be in the 240 to 250 million dollar
range, up approximately 20 to 25 percent compared to the same quarter of the
prior year.
Earnings are expected to be in the
range of 45 to 55 cents a share, up 30 percent to 55 percent compared to the
prior year. This estimate does not include an expected benefit of 5 cents to
10 cents a share from the ruthenium inventory that was in the production system
at the beginning of the year. Nor does it include any improvement in margins
from potential increases in ruthenium prices which is noted earlier have
occurred to date in the quarter.
It is important to continue to
reiterate that these sales and earnings estimates are subject to significant
variability such as that demonstrated in the most recent quarter. Metal prices
and supply conditions as well as fluctuations and demand levels driven by
inventory swings in the market and new product ramp‑up rates in critical
markets such as the media market can each have significant effect on actual
results.
The outlook for the quarter is based
on our best estimate at this time and are subject to significant fluctuations
due to these factors.
Now I'll turn the call over to Dick
Hipple for a market update.
Dick Hipple ‑ Brush Engineered
Materials ‑ President & CEO
Thank you, John. I'd first like to
reenforce our disappoint in not fully leveraging our growth and profit
opportunities in the quarter. Although the ramp‑up quality issue that we
encountered in the media business is behind us, our expectations were to
execute on a flaw less basis and nothing else is acceptable. As I have
indicated many times, one of our key strategic goals is to continue to expand
our international sales and service to our global customer base.
Our international sales now exceed
40 percent of our total sales, significantly higher than approximately 32
percent last year and 27 percent in 2005.
In the second quarter we saw a cross
current of market conditions, a key factor was the slower ramp‑up in the
PMR media business which occurred after a rapid run‑up in the first
quarter which was partially driven by the combination of production and
inventory builds by our customers.
The media market now appears to be
stabilized and we see good growth for the second half of 2007 and continuing on
through 2008. As John earlier commented, the exact quarterly timing of this
ramp‑up is difficult to pin down but we expect to see the drive market to
be fully converted to the PMR technology by the end of 2008.
I can comment that we do expect the
coming quarters to be sequentially stronger in the media market.
With regards to our applications in
the consumer electronic and wireless markets, we have seen differences in
demand amongst our business segments. We can see the situation from time to
time driven by our varied customer applications and their particular sales and
inventory situations.
In the second quarter we experienced
strong conditions in our Williams business while still seeing softness from
ongoing inventory corrections in our alloy and TMI business. As we enter the
third quarter, it appears that this market is now stronger across‑the‑board
in all of our business units.
Our automotive business was also
soft in the second quarter as overall automotive production in the US remained low as compared to auto sales. However, one bright spot was our European auto
business which remained very strong.
Our automotive order book has
recently picked up, but I remain cautious when seeing the recent softness in
overall automotive sales. Our heavy industrial markets remain robust in the
defense oil and gas, aerospace and heavy equipment markets. I am happy to
report that we continue to post healthy organic growth with our alloy products which
are still growing at over 30 percent annual rate.
Although our defense business
remains robust, we have seen some softness in the BE and B and composite
segments with recent push‑outs. The business is still robust but we
remain cautious as we enter the second half.
I am also pleased with our progress
in the numerous explanation initiatives. Our investment in the shield cleaning
business through facility startups in the Cheque Republic and New York are now
coming on stream. Additionally our sue yes fast it near Shanghai is coming
along and we expect to be operational by the end of the year.
And most importantly our expansion
at Brewster, New York, which supports our ability to grow in the media business
is up and running and we have additional space to grow as required. Thank
you. Questions? Operator, let's open it up for questions.
Operator
Thank you. Ladies and gentlemen, at
this time we will be conducting a question‑and‑answer session.
(Operator instructions). Our first question is coming from Evan ash Kent of
First Albany Capital.
<Q>: Hi, Dick and John. A
few questions. I believe you talked about the ruthenium being 55 million in Q1
and 30 million in Q2. In the 30 million number, have you included the one time
sale of ruthenium, also in
<A>: We have not.
<Q>: So how much was the one
time sale then?
<A>: Well, the one time is
one time metal price differential, not sale. Okay. So it's metal price
differential, therefore it's cost of sales and/or margin. So no, that is not
included in the revenue number.
<Q>: Not included. Right.
Because I think it was included in the 55 million, though, right?
<A>: No, it was not. The
revenue is the actual sales to the customer, the inventory benefit from the low
cost inventory that was in the production system at the end of 2006 would flow
through as a margin.
<Q>: Okay. Okay. And you
gave some numbers about international sales. Did you give out how much is
international sales so far this year in the first half?
<A>: The international
percent of the total?
<Q>: Yes.
<A>: Was 44 percent.
<Q>: 44 percent of the first
half?
<A>: Yes.
<Q>: 37 in '06 and 27 in
'05?
<A>: It was 27 in '05 and I
believe around 32 in ‑‑
<A>: A little bit higher than
that, about 35 last year.
<Q>: Could you give us an
idea where is that growth coming from outside, especially in Asia, what
product?
<A>: Well, again, the biggest
factor is just kind of take it up, first of all right now in our alloy business
it's more than 50 percent overseas as we speak and the additional growth is in
the Williams area and the media shipments are going into Asia.
<Q>: And one question I'll
come back in line again. The ‑‑ when you talked about
perpendicular media, Dick in your prepared remarks you said you cannot say that
perpendicular media shipments will be sequentially higher than the rest of the
year. Is that what's ‑‑
<A>: Repeat what you said. I
don't think I agree with what you said.
<Q>: Okay. So are you
expecting the perpendicular media shipments to be sequentially higher than the
rest of the year?
<A>: Yes, that's what I
said.
<Q>: Okay. And any idea in
terms of ‑‑ when you give the Q3 guidance what kind of
shipment do you have for perpendicular media in the quarter? Going from 32?
<A>: No, we're not going to
provide specifics there. The third quarter as you might expect began with some
of the second quarter hard drive market demand lower than the first quarter
still carrying so we couldn't expect the inventory correction occurred in the
second quarter to immediately end at the end of June.
So, obviously the third quarter
while it will be significantly above second quarter, fourth will be even above
the third. But to disclose the exact number, no, we're not going to do that.
<Q>: It will be somewhere
between the second and the first?
<A>: Absolutely.
<Q>: Okay. Thank you.
<A>: And the fourth could be
stronger than the first, if that helps.
<Q>: Thank you.
Operator
Our next question's coming from
Chuck Murphy of Sidoti and company.
<Q>: Good afternoon, guys.
I'm wondering for your full year guidance it's still $2.00 to $2.55, correct?
<A>: We haven't changed the
full year guidance, that's correct.
<Q>: And is that using the 52
cent number for the second quarter or 38?
<A>: No, the 52 cent number.
<Q>: Okay. That's what I
thought. Okay. Next question was could you talk or give us an update about
what your expectations are for being designed into other layers of the hard
drive kind of what the likelihood of it is, what the timeframe we're looking at
is?
<A>: As you might expect
that's very difficult, Chuck, but you're talking specifically of the all
materials or the single ruthenium materials and what kind of percentage of
total there, or the other layers only?
<Q>: I guess both.
<A>: Well roughly speaking,
you know, the ruthenium gets really kind of difficult when you ‑‑
because you've got metal prices involved here, but the way we look at it is
probably around ‑‑ approximately around 50 percent of the
market opportunity is in the ruthenium layer and this the other half is in the
other layers.
<Q>: But you're only doing
ruthenium right now, right?
<A>: What's that?
<Q>: But you're only doing
the ruthenium part right now?
<A>: Our primary is ruthenium
but obviously we are supplying SUL layers and qualifying in other ‑‑
you know, multiple customers in the other layers.
>A>: But through the first
half of the year ‑‑
<A>: Primarily ruthenium for
us today.
<A>: And through the majority
of the third quarter it's primarily ruthenium.
<Q>: But you feel good about
your chances of getting in with the other layers, is that‑‑
<A>: Yes, we do.
<Q>: And final question was,
John, I think you kind of alluded to it, now that you've marked down some of
this ruthenium inventory and now that prices have started to go back up, you
know, would that imply that you could have even more gains from ruthenium in
future quarters?
<A>: We have not included in
the estimate as I had indicated any assumption that we would move above the
$4.30 end of June price. As I indicated in my remarks this morning, ruthenium
was at $490 an ounce so if those kind of conditions hold, you're correct, part
of the charge we took will come back to us if the form of higher margins as the
year progress.
<Q>: Okay. Thank you.
Operator
Our next question's coming from
Anthony sore tee know of sore tee know metals.
<Q>: Good afternoon everyone.
<A>: Good afternoon.
<Q>: Going back to the
international sales as a percentage of total sales you had said that it's 44
percent of the first half. Do you have any specific targets or goal to reach,
or is your objective just to try to grow international sales to the extent that
you can?
<A>: Well, I've certainly
we're probably a little ahead of my curve where I thought we would be, but I'd
surely like to see our business greater than 50 percent.
<Q>: Okay.
<A>: The world, I mean the US is ‑‑ the world ‑‑ the US is we're not 50 percent of the
market, so I want to be bigger overseas.
<Q>: Okay. And do you have a
specific time period, whether that would be two years or three years from now?
<A>: Well, I would certainly
expect the next two to three years over 50 percent of the our sales to be
overseas.
<Q>: Okay. Has weakness of
the US dollar helped to increase your competitiveness?
<A>: Certainly.
<Q>: And that would be both
ways, are you saying an increase in demand and an ability to increase prices?
<A>: I think the answer to
the question there, Anthony is likely not. I think what really drives us is
the uniqueness of the materials and services that we provide, and weak or
strong US dollar we may not move as many other companies move with the movement
in currency relationships. So I wouldn't think that it's all that material.
<A>: Bear in mind Anthony
that a good portion of our overseas sales and practically all of our European
sales are denominated as a local currency and we do not necessarily change
prices in local currency for short‑term movements and exchange rate.
<Q>: Okay. And one final
question. What would you expect your capital spending to be in 2007?
<A>: In 2007?
<Q>: Yes.
<A>: The range that we have
provided previously still holds. We would anticipate 25 to 30 million dollar
spent in 2007 on a number of programs, one of which would we often think about
as not capital and that is mine development and the opening of a new pit at the
mine. So 25 to 30 million dollars in the aggregate, including about 6 to 8
million dollars for a pit.
<Q>: Okay. Very good. Thank
you very much.
Operator
Our next question's coming from Bob shaz of Jeffries & Company.
<Q>: Good morning. I've got
three quick once here. Dick, in terms of the new capacity that you've added,
what do you think that equates to in revenue potential and the projected ramp
of that capacity?
<A>: Well, I think ‑‑
I guess you're probably talking about the Brewster expansion?
<Q>: Yes.
<A>: And we've designed that
facility to allow us to follow this entire PMR ramp through next year. So we
have the capacity, you know, if ‑‑ to take a look at our sales
year to date, and you know, figure that the market at a minimum this year is,
you know, a minimum 50 percent of the revenue potential, I expect it might be a
little bit higher but then we're going to go to 100 percent conversion for the
following year.
<Q>: Okay. And that will
take up that Brewster capacity then at that point?
<A>: Yes. But we actually
have it, we've designed that facility that it's very ‑‑ it's a
very flexible facility from the standpoint that as we continue to need to
expand, let's say that we get ‑‑ and you know, we actually
have plans, Bob, to do better than what we're laying out. We have certain
breakthroughs in product developments we could even do better than we think we
can. That's always what we're trying to do.
And let's just say that we get
pleasantly surprised on the upside in where we can take this market. We don't
have all the equipment to follow this.
Now, the good news is we have the
space and the other good news is it doesn't take that long to get this new
equipment in, if in fact we exceed our say our plans and let's just say that we
have some breakthroughs we're going to be able to quickly respond within a
facility that we have. So we have the real estate to go there, we're not going
to be blocked, need to be buildings, maybe we will be three months away from a
piece of equipment we need but it's that kind of flexibility we have. So
there's no question that we have the ability to support the volume through next
year, but we're trying to even beat that if we can get certain product
breakthroughs and then but we're going to be able to follow that, too.
<Q>: Okay. Great. And then
secondly you noted that you lost some share because of the quality issues. Who
did you lose it to and have you gotten it off ‑‑
<A>: Again, what I said, I
didn't say we lost share, I said we lost sales. And obviously when you lose
some shares you have a temporary loss of share. And you know, there's some
other competitors in the marketplace, the biggest one is there's shurz, there's Hitachi in Japan, there's a smaller playing floating around in Taiwan. But as I mentioned in my comments we
haven't lost share, we had a bump in a road there and we had some of our
competitors pick up the slack while we were recovering from our quality burp.
But we've got those sales back and we don't believe that we have lost market
share here.
<Q>: Okay. Very good.
<A>: And the key thing about
this, Bob, is remember is the way you establish this is this is not a commodity
marketplace, and what we bring to the table is our value add service on
technology development. And that's why the customers are working with us. We
are right up front working on the next generation of all the changes that are
going on and that's what we pride ourselves and that's were the customers work
with us. And that's the kind of thing that keeps us back in the ball game and
once in a while we have an unexpected burp and we're very disappointed as I
mentioned earlier, but our customers certainly hung with us and quite satisfied
with the product we are shipping today.
<Q>: Right. Because your
customers need the expertise and the R&D development.
<A>: You got it.
<Q>: Okay. And finally, I
have to ask the question, John pointed out how strong the balance sheet has got
and you're down to 11 percent debt to cap, the CapEx requirements of 25 to 30
aren't necessarily that constraining, the stock has pulled back relatively
materially over the last two, three months here. Have you or the board had any
conversations in regard to a share repurchase program?
<A>: Well, you now, that's
always on the top of mind is certain opportunities as we evaluate it. We still
believe our opportunities for using or capital to grow the company are still
far better return of the shareholders at this point in time than a stock
buyback program again at this time, but the question is constantly revisited.
<Q>: Okay. Would you say
that there's any more diligence on the subject now with the share pullback?
<A>: Not at this time,
because we have other opportunities right now that we're heavily involved
with.
<Q>: Okay. Thank you.
Operator
Our next question's coming from
Andrew burr done of capital partners.
<Q>: Hi. Most of my
questions have been asked and answered. Just to elaborate on Bob's question,
could you talk about the other opportunities that you are pursuing in place of
a stock buyback?
<A>: Well, I mean the ‑‑
well, just to give you the priority for ourselves, we have the organic growth,
we've got some opportunities for expansion, but the bigger issues really are
with regards to acquisitions. So we do have some acquisition opportunities
that we've been looking at and working on and they're active.
<Q>: And is there a
limitation on the size of an acquisition you would make? Or can you give us
any guidance on what kind of acquisitions we could expect?
<A>: We provided some
guidance on that in the past and let me reiterate, we think that as a company
we can ‑‑ we use the word augmentation a lot, and by that I
mean that there are a number of opportunities scale of which I'd define as less
than 100 million dollars, that could make nice augmentations of various
segments of our business that bring with them market breath, market reach,
product reach, technology and potentially other leverage benefits.
So our primary focus is ‑‑
are on those kinds of opportunities. That's not to say that we wouldn't
consider an acquisition of scale larger than that, if it fits the dimensions
that I just described.
We've also indicated in the past
that we felt that we could fund these acquisitions from our cash flow and from
our debt and from our ability to leverage the balance sheet. And there are no
real changes to that mind‑set.
Operator
Our next question's coming from Mark
par from KeyBanc Capital Markets.
<Q>: Good afternoon. I'm
sorry if I'm not coming in very well, I'm on a little different phone.
<A>: Are you on a boat from
the Bahamas, or what?
<Q>: Oh, I wish. More like
the DMV.
<A>: Okay.
<Q>: But I was wondering if
you could talk a little bit about the supply chain adjustments going on in the
mobile phone arena. I know that was something that was indicated as a source
of weakness in the second quarter. How much of a delta could that be on the
revenue side in the second half if that market continues to improve and gets
back to normal?
<A>: Delta first half versus
second half, Mark, not significant. There was inventory correction in the
first half as we have defined, and as we enter the third quarter, yeah, we are
seeing some lift in orders. We think the inventory correction is behind us but
relative to the total growth, it's not a significant piece of it.
<Q>: Okay. And if I could
ask one for question. A lot of, Dick I think you've already had some good
commentary around this, but for modeling purposes is it okay to think about
this ruthenium issue as kind of a straight line implementation between now and
the end of '08?
<A>: No, it probably is not.
He means in terms of every quarter are we going to see the same ruthenium.
It's not all ruthenium. You know, that's the problem that we have, Mark, is
that again it's difficult to predict. We got in trouble with that before the
market didn't convert as quickly, but it appears that the market's back on
track again.
<Q>: Okay.
<A>: You know, it's ‑‑
I would say by the end of the year, it should be fully implemented by the end
of 2008, but I would kind of ‑‑ I would guess that it might be
a little bit ‑‑ you know, that you won't be an even split. I
think that you're going to ‑‑ you know, a lot of things are
like bell percent, I would say that fourth quarter of next year is not going at
25 percent. Do you follow me?
<Q>: Yes. Okay. I
understand. Good luck on making some incremental progress here in the second
half.
<A>: We plan to do that:
<Q>: All right. Thank you.
Take care.
Operator
As a reminder if you would like to
ask a question press star 1 on your telephone keypad at this time. Our next
question is coming from Evan ash from First Albany Capital.
<Q>: One follow‑up
question, actually. In the past you have talked about achieving market share
of roughly, you have given a wide range, 10 to 40 percent in the perpendicular
media. Where do you think you stand at this point in the first half of the
year?
<A>: Again, we're not going
to discuss that one, be but we're surely going to be within that range.
<Q>: Okay. Okay. And some
housekeeping questions. What should we model as a tax rate going forward?
<A>: The second quarter
rate. I'm sorry the first half rate.
<A>: The first half rate.
<A>: First half rate.
<A>: As best we know right
now.
<Q>: And did you give ‑‑
do you have an expectation of cash flow, what would be the cash flow for
calendar year '07 given your guidance?
<A>: No, we have not given
guidance on that. Certainly stronger than the second quarter in the first half
of the year where there was significant working capital commitment to support
the higher level business. I don't think as you model the cash flow that you
can expect that we'd see the inventory and receivables climb at that pace.
Second half significantly stronger than the first half from a cash flow
perspective.
<Q>: First half what was the
final number so far?
<A>: The cash flow from
operations was about 11.4 million dollars.
<Q>: So far.
<A>: Yes.
<Q>: And you don't know at
what level it's going to be higher, it's going to be higher but how much you
don't have an idea?
<A>: Yeah. It will be at
least double that.
<A>: If not triple.
<Q>: All right. And also if
you could break up the line items for the charges, like where are those line
items? You talked about the 15 cent being 4.8 million pretax, where is that
coming from, which line item?
<A>: They're all on cost of
sales.
Q>: All on cost of sales?
<A>: Yes, ma'am.
<Q>: And so are there other
line items, too? How about the 13 cent for the ruthenium?
<A>: Cost of sales.
<A>: All the pretax numbers
are flowing through the cost of sales.
<Q>: Is so on a operating
basis you still think you'll get 52, 52 cents, right?
<A>: Sorry. We did hear
you.
<Q>: On the operating basis
you still thinking you'll get 52 versus 38 GAAP basis, right?
<A>: Yes.
<Q>: The run rate we would
say is 52 cents.
<Q>: Okay. Thank you.
Operator
Thank you. There are no further
questions at this time. I would like to turn the floor back over to management
for any closing comments.
Michael Hasychak ‑ Brush
Engineered Materials ‑ VP, Treasurer and Secretary
This is Mike Hasychak. We'd like to
thank all of you for participating in the call this afternoon. I will be
around for the remainder of the afternoon to answer any questions. My direct
dial number is area code 216‑383‑6823. Thank you very much.
Operator
Ladies and gentlemen, this does
conclude today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.
