Transcript of
Brush Engineered Materials,
Inc. (BW)
Second
Quarter 2008 Earnings Conference Call
August 1, 2008
Michael C. Hasychak,
Vice-President, Treasurer, and Secretary
Richard J. Hipple,
President, Chairman, and Chief Executive Officer
John D. Grampa, Senior
Vice President of Finance and Chief Financial Officer
James P. Marrotte, Vice President
and Corporate Controller
Operator
Greetings, ladies and gentlemen, and
welcome to the Brush Engineered Materials Second Quarter 2008 Earnings
Conference Call. At this time, all participants are on a listen-only mode. A
question and answer session will follow the formal presentation. If anyone
should require operator assistance during the conference, please press *0 on
your telephone keypad. 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 begin.
Michael C. Hasychak – Brush
Engineered Materials, Inc. – Vice-President, Treasurer, and Secretary
Good morning. This is Mike
Hasychak. With me today is Dick Hipple, President, Chairman and CEO, John
Grampa, Senior Vice President of 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 2008
results and the outlook, and Dick Hipple will give a market update.
Thereafter, we will open up the teleconference call for questions.
A recorded playback of this call
will be available until August 16th by dialing area code (877) 660-6853 or
(201) 612-7415. The call will also be archived on the company's web site,
beminc.com. To access the replay, click on Quarterly Earnings Conference Call
under the Investors page. The broadcast requires RealPlayer 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 D. Grampa – Brush Engineered
Materials, Inc. – Senior Vice President of Finance and Chief Finance Officer
Thank you, Mike. Good morning,
everyone. Thanks for taking the time to join us today.
My format today will be similar to
the formats that we've used in the past. I'll review the quarter and then I’ll
comment on the outlook. And in following my comments, Dick Hipple will provide
you with a market update focusing on some encouraging developments and then
we'll open the call for questions.
I'll attempt to adequately reinforce
and expand somewhat on the key points made in the press release about the quarter.
I'll comment on five specific items:
First, the factors affecting the
reported sales compared to the prior year and the important progress that is
embedded in the numbers once you remove the influence of metal price and the
media market factors.
Second, I'll review the factors
affecting the reported profit comparisons especially the prior year non-recurring
items, prior year non-recurring gain, and the current year lower cost or market
charge. These items do distort the operating performance comparisons and they do
need to be understood.
Third, I'll cover the specifics of
the trends in media. As most of you know, significant swings in ruthenium material
prices, material sources and demand factors as well as new product and market
ramp rates can and has dramatically affected the comparisons. It’s therefore
important to review what is happening with all of our new materials that
support the perpendicular media recording market. Dick will be updating you on
the status of our product qualifications in media and the current order levels
which have improved significantly.
Fourth, I'll review the balance
sheet which is strong and is expected to continue to strengthen.
And finally I’ll review the share
repurchase authorization and then following my comments on those five points,
I’ll review the outlook identified in the pres release,
Before I began the review, I should
reinforce what most of you should already know and that is that the fact that
first and second quarter comparisons to the prior year are the most difficult
comparisons of the year due to two factors. The first is last year’s sizable
benefit from the sale of ruthenium base materials into the media launch which
included a sizable non-repeat cash gain related to a significant increase in the
market price of ruthenium that had been purchased in 2006, a much lower cost. And
second, volumes into the media market were significantly higher in the prior
year’s first half compared to the first half of this year.
Let’s begin reviewing the five factors.
First, the factors affecting sales.
As you know this morning we reported sales for the second quarter that were
about $13 million or 6% ahead of the prior year’s second quarter level. As in
the first quarter of the current year, a major factor that negatively affected
our growth was lower shipment to the media market which is directly linked to
the requalification process we’ve been reporting on.
In the second quarter sales to media
were approximately $25 million below the prior year levels. Approximately 60%
of this is due to the lower ruthenium metal prices and customer supplying their
own metal. And the balance, approximately 40%, is from lower volume.
Sales increased in the company’s
other businesses by 18% in the quarter. The year-to-date growth on this basis
is approximately 19%. Metal price inflation or, said differently, that portion
of both precious and non-precious metal price increases that we were able to
pass on to our customers in the quarter was approximately 12 to 13 percentage
points of the 18% growth. We continue to see solid growth in many of our key
markets including growth in oil and gas, telecom infrastructure, heavy
equipment, wireless and photonics and medical, consistent with the trends noted
in the first quarter and throughout the prior years.
Growth of our new products did
remain strong. I’m going to briefly address the media markets and then Dick
Hipple will follow later with additional comments on media as well as comments
on some of our other markets.
Now let’s review the factors
affecting the profit comparisons. The earnings we reported this morning while
ahead of our expectations were on a GAAP basis below the prior year at $0.35 a
share diluted versus last year’s $0.38 a share. Excluding the noted ruthenium
lower of cost or market charge which was previously announced and expected, the
operating run rates for the quarter was $0.53 a share, $0.18 a share higher
than the GAAP reported $0.35 a share. We pointed this out because we believe
that it is important to understand the real profitability of a quarter without
the anomaly that was brought on due to the vagaries of the ruthenium market. Ruthenium
prices dropped in the quarter from $415.00 an ounce to $300.00 an ounce
resulting in a $6 million charge. Since the end of the quarter, ruthenium
prices are up approximately 2%.
In the first half of the year, the
company had actually recorded a $21.4 million pre-tax or $0.66 per share after
tax, $4.5 million or $0.14 per share which occurred in the second quarter.
This gain, which we identified as non-operating, was due to the significant
increase in ruthenium market prices that occurred then. The company benefited
as that material was sold had been purchased earlier at a much lower cost.
In the second quarter of 2007, the
company also recorded a $4 million pre-tax or $0.13 per share lower of cost or
market charge for ruthenium. In the press release issued this morning, we’ve embedded
a table that illustrates the impact of each of these factors as well as other
factors. I call your attention to this table as we consider the presentation
of operating results in this manner to be a better representation of our
baseline business which we refer to as the operating run rate.
Now let’s turn to media. As you
know the most significant factor driving our growth in both 2007 as well as our
expected growth in 2008 is the growth of our new magnetic media materials for
the perpendicular media recording segment of the data storage market. The
growth here is dependent on the rate at which the market and our customers
transition to the new perpendicular media recording technology and our ability
to both capture and maintain a share of their business with our new products
and our production capabilities. You’ll recall that a rapid product launch
resulted in a very high sales and profit level in the first half of 2007. Then
as previously announced during the fourth quarter of 2007, the company
experienced a significant setback in this market. The setback was driven
primarily by a change in material specification at our largest media customer
which in turn resulted in necessary manufacturing process changes and a lengthy
requalification process. This resulted in lower shipments while the
requalification process was underway. Media volumes were approximately 20% of
the prior year’s level in the first quarter and began to recover reaching
approximately 70% of the prior year’s volume in the second quarter. Volumes in
the second quarter were 60% ahead of first quarter volumes. Dick Hipple is
going to comment further on this in a moment.
Now let’s turn to the balance sheet.
The company’s balance sheet remained very strong in the second quarter even
considering the acquisition made earlier in the year. And the company
continues to have significant financial flexibility. Debts to debt plus equity
ratio remain healthy at below 20% and funded debt to EBITDA is still well below
one. While the acquisition of Techni-Met was approximately $87 million,
balance sheet debt has increased by only $52 million year-to-date.
The company increased its precious
metal consignment lines by $95 million to $205 million and increased its
revolving credit agreement by $115 million to $240 million in late 2007, adding
both financial capacity and significant flexibility. The increased capacity
and flexibility adds the liquidity to support the expected organic growth and
to take advantage of acquisition and augmentation opportunities plus other
capital considerations as they surface, including the announced share
repurchase.
That completes my comments on the
second quarter. I will now comment on the share repurchase plan and the
outlook.
As indicated in the press release,
the company’s Board of Directors has authorized the company to repurchase up to
one million shares or approximately 5% of the company’s outstanding shares of
common stock. The primary purpose of the repurchase program is to offset the dilution
created through shares issued under company stock-based compensation plans.
The authorization provides the company the flexibility to use its strong
balance sheet to repurchase shares over time while maintaining an appropriate
level of liquidity to support the company’s primary strategic goals which
include utilizing available capital for organic growth and strategic
acquisition opportunities. The plan to repurchase shares does not represent a
deviation from the company’s strategic focus and the company does not see any
change in its growth expectations and acquisition opportunities. The stock
repurchases will be made from time to time through brokers on the New York
Stock Exchange. The repurchase program maybe suspended or discontinued at any
time.
Those comments along with the
comments made in the press release represent the full extent of which we’ll
comment on the subject of the share repurchase plan today.
Now let’s turn to the outlook. As
you know the specific guidance we provided in the press release today is
guidance on the outlook for the full year only. This is consistent with the
change in practice that we announced in mid 2007.
The company is updating the
previously provided guidance for the year. At this time, the company expects
earnings for the full year to be in the range of $1.45 to $1.70 per share. This
includes the negative effect of the charges taken in the first and second
quarters of this year. Excluding the charges, the operating run rate is in the
range of $1.75 to $2.00 per share, up as much as 18% compared to the prior year
operating run rate. The guidance assumes that a significant macroeconomic
downturn does not develop during the second half of year.
In the media market, shipments
strengthened as the second quarter developed and as requalifications of
ruthenium-based products progressed. The company is also seeing stronger
demand thus far in the third quarter and expects to see progressively higher
shipments of perpendicular media materials in the third and fourth quarters of
the year when compared to the second quarter of this year.
The company has seen and expects to
continue to see strong demand from the cell phone handset market to the
materials provided by Advanced Material Technologies and Services, as well as
stronger demand for the company’s products for the medical, oil and gas, and
heavy equipment and other industrial markets throughout the second half.
When considering the second half,
recognize the seasonal factors that occur in our business. The third quarter
is historically, seasonally weaker than the second quarter for the company in
its markets in Europe as well as in certain of our domestic industrial
markets. We expect this to be the case this year as well. We expect added
media business to help offset a portion of the seasonally weaker third
quarter. We expect the media business to also progress leading to a fourth
quarter that is stronger than the third.
It is important to continue to
reiterate that the company’s earnings estimates are subject to significant
variability. Metal price changes, metal supply conditions, fluctuations in demand
levels driven by such factors as customer inventory swings, product
qualifications rates, and new product ramp-up rates in critical markets such as
the media market can and have had a significant effect on actual result. The
outlook for the remainder of the year is based on the company’s best estimates
at this point in time and is subject to significant fluctuations due to these
as well as other factors.
I’ll now turn the call over to Dick
Hipple. Dick will provide you with the market update and following Dick’s
comments, we’ll open the call for questions.
Richard J. Hipple – Brush Engineered
Materials, Inc. – President, Chairman, and Chief Executive Officer
Thank you, John.
First of all, I’d like to express my
congratulations to our brilliant products’ division for securing the
partnership with the government to build a new beryllium pebbles plant. This
project is strategically important to both the company and also to our
country. We expect to start the plant up by mid 2010.
The other significant news that John
alluded to in his comments is our progress in the media market. We are now requalified
at all major media producers for our ruthenium targets. And all of the
required equipments modifications have been completed to assure product consistency
to customers’ specifications. This progress explains our near term
strengthening of shipments to the media market of the ruthenium layer. Our
qualification trials for our next generation products for both the ruthenium
layer and oxide layers are progressing well and is still holding to a schedule
that would support a start-up ramp before the end of the year.
Overall, the media market or the
hard disc drive market remains robust and is expected to grow at least 15% year-on-year,
as the insatiable demand for more storage, particularly video, continues to
expand.
Moving on to our other significant
markets, the overall consumer electronics space continues to grow and as you
know, we have been concerned here due to the unpredictability of consumer behavior
with the instability of our current economic environment.
As we look forward to the rest of
the summer season, there are unknowns such as impacts from supply chain
discontinuities caused by the Chinese Olympics and the speed of which Europe comes back from their normal summer holidays. One needs a very good crystal ball
these days to gauge the possible negative outcomes of these events.
In the silicone space which reflects
the capital spending side of electronics, this also remains solid. It is particularly
strong in a market that almost disappeared after the telecom crashed and that
is the building of undersea communication cables where we supply what is known
as undersea repeater housings in our Specialty Alloys division.
Our defense business, focused in our
BE and Ceramics division, remains strong and the bookings have gained strength
since the push outs we saw earlier in the year. We have seen a leveling off in
our commercial Aerospace business as the MRO business or the maintenance and
repair business has been impacted by the airline cutbacks, but this softness
has been more than made up by the strength in our oil and gas applications.
And as you would expect the
automotive business is off in the U.S. and is counterbalanced by stronger
conditions in Europe, certainly being helped by exchange rates. So we see our
overall markets currently holding up through these turbulent conditions.
Another point I like to make is that
I’m very encouraged regarding our progress in our manufacturing performance and
our Specialty Alloys, BE products, and Engineered Materials Systems. Our
productivity and yields are significantly above last year’s level.
Thank you and I guess we’re ready
for questions.
Operator
Thank you. Ladies and gentlemen, we
will now be conducting a question and answer session. If you would like to ask
a question, please press *1 on your telephone keypad. A confirmation tone will
indicate your line is in the question queue. You may press *2 if you would
like to remove your question from the queue. For participants using speaker
equipment, it may be necessary to pick up your handset before pressing the *
keys.
Our first question comes from Chuck
Murphy with Sidoti & Company. Please state your question.
Chuck Murphy – Sidoti & Company
Good morning, guys.
John D. Grampa – Brush Engineered
Materials, Inc. – Senior Vice President of Finance and Chief Finance Officer
Good morning.
Richard J. Hipple – Brush Engineered
Materials, Inc. – President, Chairman, and Chief Executive Officer
Good morning, Chuck.
Chuck Murphy – Sidoti & Company
I just wondering if you could give
us some more detail on alloys’ very sharp sequential improvement and you mentioned
that the product mix was favorable there, if you could say specifically what we
were talking about?
Richard J. Hipple – Brush Engineered
Materials, Inc. – President, Chairman, and Chief Executive Officer
Well there’re a couple of things
that are going on there. As I’ve mentioned, the yields have improved. We’ve
also been very aggressive on pricing. We’ve seen a lot of raw material
increases, and I’m talking about outside of copper because copper basically has
passed through, so there are a lot of other materials pressures we have. They’ve
been very successful at passing through prices and the other is the mix
itself. We are seeing some real strength in oil and gas sector, the ToughMet
product that we have, undersea communication is also very good high-margin product
for us and so we are seeing a nice change in the mix there. So that’s helping them
out also.
Chuck Murphy – Sidoti & Company
You mentioned in the press release
that part of the reason for Advanced Material sales declined was that the
customers were using their own ruthenium and you mentioned specifically what
the impact on the sales were. Any sense on what the impact on the operating profit
was from that?
John D. Grampa – Brush Engineered
Materials, Inc. – Senior Vice President of Finance and Chief Finance Officer
Well, Chuck, the customer use of
metal versus our own metal? Obviously, just a refresher for everybody, when we
received customer metal, it’s fundamentally a toll processing charge that
appears both in the topline and in our profits. The toll charge does not
change whether it’s our metal used or their metal used, so often it is
essentially the same. There’s fundamentally no difference in the P&L,
there…. it’s indifferent, their metal versus our metal.
Chuck Murphy – Sidoti & Company
Okay.
John D. Grampa – Brush Engineered
Materials, Inc. – Senior Vice President of Finance and Chief Finance Officer
Sales line only.
Chuck Murphy – Sidoti & Company
Okay. I kind of assumed that but I
don’t know if you are giving a little bit of margin by selling them your
ruthenium, but sounds like the answer is no, right?
John D. Grampa – Brush Engineered
Materials, Inc. – Senior Vice President of Finance and Chief Finance Officer
Yes, that’s right. Fundamentally,
no.
Chuck Murphy – Sidoti & Company
Alright. I know, Dick, you
mentioned that a requalification is done for the ru, can you say, kind of where
you are in the re-ramp stage? I mean, have you any idea what your market share
is currently at that customer and would do you think that you could get back up
to?
Richard J. Hipple – Brush Engineered
Materials, Inc. – President, Chairman, and Chief Executive Officer
As John reviewed earlier, the
sequential quarter-to-quarter change does reflect and getting back into the
market. We have not share the exact market share where we are. In this market
space we’ve always articulated that we felt that we write the ship and we
certainly like to see ourselves at a 30% market share in this space. We’re
certainly not there at this point in time and we’re fighting our way back in
here.
Chuck Murphy – Sidoti & Company
Okay. If you had to use kind of a
baseball analogy, would you say you’re in the second inning of the re-ramp or
at the eighth inning?
Richard J. Hipple – Brush Engineered
Materials, Inc. – President, Chairman, and Chief Executive Officer
Oh, we’re certainly not in the eighth
inning.
Chuck Murphy – Sidoti & Company
Okay. Second inning, fair?
(laughter)
Chuck Murphy – Sidoti & Company
Okay. Alright. And the final
question, as far as the new ruthenium customers that you are getting and
shipping of the other layers of the hard drive, the oxide and the cobalt, where
do you stand with that? Have you already started shipments or is it just…?
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and
Chief
Executive Officer
These are
all… it’s just a qualification shipments at this point, not production.
Chuck Murphy - Sidoti & Company
Okay. But
you do expect those to come in the second half still?
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and
Chief
Executive Officer
Well, yes,
as I mentioned, we would certainly… we hope to start to see the early shipments
for production in the fourth quarter.
Chuck Murphy - Sidoti & Company
Okay.
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and
Chief
Executive Officer
And again, as
you might expect, it’s difficult to exactly predict how that’s going to fall
but I mean, we’re… that’s what we’re targeting.
Chuck Murphy - Sidoti & Company
Okay. Great.
That’s all I have. Thanks.
Operator
As a
reminder, ladies and gentlemen, if you would like to ask a question please press
*1 on your telephone keypad.
Our next
question is coming from Rob Young with Wm Smith & Company. Please state
your question.
Rob
Young - Wm Smith & Company
Hi. Good
morning, guys. I just have a question regarding the recent weakness with
Western Digital and SanDisk and how that affects your media business.
John
D. Grampa – Brush Engineered Materials, Inc. – Senior Vice President of Finance
and Chief Finance Officer
Western
Digital and who?
Rob
Young - Wm Smith & Company
And
SanDisk, the HDD manufacturers, how does that affect some of your media
business?
Richard J. Hipple – Brush Engineered
Materials, Inc. – President, Chairman, and Chief Executive Officer
Well, the…
Are you’re talking about the two different spaces between the flash and the
hard disc drive?
Rob
Young - Wm Smith & Company
That’s
correct, yes.
Richard J. Hipple – Brush Engineered
Materials, Inc. – President, Chairman, and Chief Executive Officer
Okay.
Right now, the hard disc drive space seems to be quite robust and I don’t track
personally the flash area as closely because we’re not a big player there.
That space does seem to swing around quite a bit more than the hard disc
space. I don’t see any conflict, if you will, that… there’s been a lot of
discussions where flash overtakes the hard disc space and you have that natural
conflict for the storage market if you will. But what’s happening is there’s
basically room for everybody because the demand for storage is just incredible
so what happens is that for example your laptop space now is… your typical
laptop today, when you buy it, it’s got a 180 gigs is the minimum you can get
and that’s going up to 350 gigs or whatever. Your flash drive isn’t really
anywhere close to that kind of space and so what you have is you got this
growing demand everywhere. So you’ve got your hard disc drive guys growing and
you also have the demand for the flash growing but there’s room for both, if
you will, and they’re both growing so there’s not really a conflict, one
against the other. The hard disc drive is able to grow a lot more capacity.
Cost-wise it’s much more efficient capacity on the hard drives than the flash.
So that’s what ultimately protects the hard disc drive space on the long term.
Rob
Young - Wm Smith & Company
Okay,
great. And then from a ramp of flash, assuming that does occur, do you feel
that that is going to be similar to what you saw with the HDD versus say like
another technology like tape?
Richard J. Hipple – Brush Engineered
Materials, Inc. – President, Chairman, and Chief Executive Officer
I’m not
sure I quite understand …the flash space, we don’t participate…
Rob
Young - Wm Smith & Company
Right.
Right. I’m just talking about just the… just the…
Richard J. Hipple – Brush Engineered
Materials, Inc. – President, Chairman, and Chief Executive Officer
I see. I
see the flash space continuing to grow and continuing to grow in their
capacity. They do have… again, it’s a higher cost technology per storage. Certainly,
they come down the curve but so is hard disc drive coming down the curve.
There are some limitations with regards to the flash technology but, again, I
don’t see that that’s going to harm our space because our space continues to
grow. They're still trying to get additional capacity in the hard disc drives
which is the market that we play in and so, it was only two years ago your
typical laptop had 80 gigs now it’s 180 gigs plus. And really the flash… the
only time I’ve really seen the flash enter the space is with the Apple, the new…
whatever it’s called… the Apple… the thin Apple Mac. It’s a fairly small
storage capacity, I think it’s around… it might be even 80 gigs but you spend
another $400 or $600 per computer for a lot less storage capacity so you could
see, that’s really not a competition for the hard disc. So they’ll continue to
grow but so will the hard disc drive guys.
Rob
Young - Wm Smith & Company
Great. And
then I was hoping that you’d comment a little bit briefly on just some of the
R&D initiatives that you’re planning for on kind of what’s next after media
technology? Just kind of another growth area that WAM might be pursuing?
Richard J. Hipple – Brush Engineered
Materials, Inc. – President, Chairman, and Chief Executive Officer
Well, again,
media in my mind doesn’t stop. We’re in the space today which we really weren’t
in this space two years ago. So now we’re in this space and as I mentioned
before, media will continue to grow and the technology changes will continue to
grow so we expect to grow with that. So that we will have technology
developments in this space that we expect to continue to have a long term
platform in media and we expect media to be growing over time a significant
space. So I don’t think we can write that space off, if you follow me there,
so we’ve got a new platform and its called media and I see that. So… and we’re
working in a lot of other areas. We’ve got… we’re working in the new area of
solar which is the thin film side. That’s actually quite a small market at
this point in time but it will grow over time and we’re trying to get… figure
out exactly how we can grow effectively in that space. We’ve got a lot of
great technologies that we feel fit in that space. So we’re working on that.
We’ve got some interesting growth. We’ve targeted the photonics area which is
the high-intensity LEDs if you can think about energy over the long term that
as you shift from normal light bulbs to LED technology… that’s got a long term
length as we try to save energy. There are a lot of material developments in
that area that we’d be working on through our new acquisitions. Medical is now
unfolding as a new space of growth for us and we’re working hard in that area
also.
Rob
Young - Wm Smith & Company
Perfect.
And then just one more if I could. The growth in Alloy is that in any way
linked to some customer diversification in the telecommunication space?
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
Not
really. We were finding that… well, let me step back a minute on that… The
growth… Alloy is growing in new customer spaces today in what I call the bulk
area. You got the strip products, which basically goes into electronic
connectors and then the bulk side goes into heavy mining equipment, oil and
gas, aerospace. It’s that bulk space where we’re getting a new diversity of
customers based on the expanding application base. But when I mentioned the
telecom space that’s the… there is a global investment going on the telecom
infrastructure. And if you think about the different markets, it’s… a lot of
its Asia-driven although you’ve got next generation stuff going on in this
country and in Western Europe because simply the demands for… you can imagine
what the… example, the I-phone demands and the new Nokia platforms with just tremendous…you
want to have streaming video on your phone. I mean the backbone technology now
really has to increase and so that results in telecom infrastructure. The one
I have mentioned was actually the connectivity, if you will, from different
regions of the world where they… when the telecom boom was happening back in
2000 or so, they were building undersea lines to keep up with the internet, if
you will, and those lines are basically full now. It took quite a long time to
fill them all up and now there’s a whole other generation going on with
additional capacity required and actually new regions of the world of being
connected that weren’t connected before so that’s kind of what’s driving the
undersea optic build.
Rob
Young - Wm Smith & Company
Okay. Thanks.
That’s all I have. Thank you.
Operator
Our next
question is coming from Bob Schenosky with
Jefferies & Company. Please state your question.
Bob Schenosky - Jefferies & Company
Thanks.
Good morning.
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
Good
morning, Bob.
Bob Schenosky - Jefferies & Company
First
question I had is the inventory levels were up from the year end, is this the
function of the ramp back into media or is it a function of certain metal
prices that are higher?
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
No,
actually it’s neither of those cases. Media inventory is down a little bit
from the year end. Most of our inventories across the other business have
increased in order to support the higher level. Part of the increase is also
due to our acquisition of Techni-Met and then our Utah operation actually has
started. We opened a new pit this year so we’re pulling more ore out of the
ground so we’re creating inventory out there in Utah. The price increases in
copper and the precious metals primarily are offset by the use of LIFO
accounting. So that’s not really affecting that balance of the inventory.
It’s more quantities on hand rather than the price effect.
Bob Schenosky - Jefferies & Company
Okay.
Great. And the second question I had is: John, you mentioned short of an
economic downturn in the second half, is this relative to the second quarter?
And would a scenario of a second half GDP in the 1% to 1.5% range coupled with
a slowdown in Europe put risk to your range?
John
D. Grampa – Brush Engineered Materials, Inc. – Senior Vice President of Finance
and Chief Finance Officer
A
significant one would put risk to the range but we certainly don’t see that
unfolding certainly at this point and everything that I was referring to was
relative to where we stood in the second quarter.
Bob Schenosky - Jefferies & Company
Okay.
Great. Thanks.
Operator
Our next
question is coming from Mark Parr with KeyBanc
Capital. Please state your question.
Mark Parr - KeyBanc Capital
Thanks.
Good morning, guys.
John
D. Grampa – Brush Engineered Materials, Inc. – Senior Vice President of Finance
and Chief Finance Officer
Good
morning, Mark.
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
Hi, Mark.
Mark Parr - KeyBanc Capital
I have a
couple of questions. John, did you quantify or talk about in the second
quarter earnings impact from foreign exchange gains?
John
D. Grampa – Brush Engineered Materials, Inc. – Senior Vice President of Finance
and Chief Finance Officer
I did not.
Mark Parr - KeyBanc Capital
Alright.
Do you have any color on that you can share?
John
D. Grampa – Brush Engineered Materials, Inc. – Senior Vice President of Finance
and Chief Finance Officer
Sure.
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
It’s about
$0.02 or $0.03, somewhere in that versus the second quarter of last year.
Mark Parr - KeyBanc Capital
Okay.
That’s helpful. Another thing, I just… we’re starting to get into this phase 2
technology investment on pure beryllium on the pebbles and I was wondering, how
should we think about the financial impact of that from a GAAP perspective
during the construction phase and then once that facility is operational, what
sort of a financial change, financial impact change should we think about
versus the current sourcing situation you have for beryllium?
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
Mark, you
will see a grossing up of the balance sheet, if you will, as we spend money
you’ll see our investment in property, plant, and equipment growing and you’ll
see an offset of a liability for unearned income growing from the amount that
the government is actually going to pass. So you’re going to see liabilities
and assets growing together. The net income statement effect in the long term is
going to simply be the added depreciation and/or lease expense associated with
the project of our own money that we put into the facility which is only going
to be a fraction of that $90 million that the whole project is going to cost.
Mark Parr - KeyBanc Capital
Okay. Do
you have any sense of what the anticipated return on capital is for that
project?
John
D. Grampa – Brush Engineered Materials, Inc. – Senior Vice President of Finance
and Chief Finance Officer
Well, Mark,
the way you think about is that it’s infinite because we are… our investment in
the facility is 20% of the total and that investment is a leased facility and
some land.
Mark Parr - KeyBanc Capital
Okay. Alright.
So…
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
That’s
pretty good. (Laughter)
Mark Parr - KeyBanc Capital
Not too
bad. I have one other question, if I could, in the Alloy business. Clearly,
you got some nice benefits from mix there in the quarter and also some growth.
Let’s go back to baseball analogies, I mean, if you are looking at your mix say
on a scale of 1-10, maybe this isn’t a baseball analogy, but how do you
characterize the mix, in terms of one being very poor mix, ten being highest
possible mix… the mix in the Alloy business in the second quarter versus say
the first quarter of last year?
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
It’s not
the highest it can possibly be. That’s a tough question, Mark. But…
Mark Parr - KeyBanc Capital
I mean, I
realize that, I mean you could never get there but I mean you are over 50% as
far as the most recent mix?
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
Yes, I
mean, it’s a good mix.
John
D. Grampa – Brush Engineered Materials, Inc. – Senior Vice President of Finance
and Chief Finance Officer
It’s good
but there’s still the traditional business…
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
Yes, I mean
for example, I’d like to see… I’d like to see our strip business stronger. The
gold side of that business and it’s not as strong as it could be. I mean we
could… let me put it this way, we could actually have a better mix than we have
today.
Mark Parr - KeyBanc Capital
Okay. Is
that something that you think is… if I was going to try to think about the
potential mix momentum in that business over the next 12 months should I think
about it stabilizing, improving, maybe like calling back a little bit? I mean
how would you think about that right now?
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
Well, I
never… I certainly wouldn’t look at… for improvement, we’re going to try to do
everything we can to improve obviously but I just, I don’t see anything in the
horizon that would that’s going to really…
John
D. Grampa – Brush Engineered Materials, Inc. – Senior Vice President of Finance
and Chief Finance Officer
…suggest a
major change…
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
To suggest
a major change in the current mix.
Mark Parr - KeyBanc Capital
Okay.
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
I mean, for
example, all of a sudden if you had one of these strong legs all of a sudden
disappear on you, it would be a problem so the if the telecom would just
disappear like it did one time before, that’s an issue or… right now, we see
these markets being fairly stable right now and so I don’t see a major mix change
going on.
Mark Parr - KeyBanc Capital
Okay. Alright.
Thanks for all the color and congratulations on the good second quarter.
Richard
J. Hipple – Brush Engineered Materials, Inc. – President, Chairman, and Chief
Executive Officer
I appreciate
the comment.
Operator
As a
reminder, ladies and gentlemen, if you would like to ask a question, please
press *1 on your telephone keypad at this time. One moment please, while we
pool for questions.
We have no
further questions at this time. I’d like to turn the floor back over to
management for any closing comments.
Michael C. Hasychak – Brush
Engineered Materials, Inc. – Vice-President, Treasurer, and Secretary
Yes, this is Mike Hasychak. I
wanted to point out that I neglected earlier to -- for the recorded playback
when you dial the number (877) 660-6853 or for international calls (201) 612-7415
that you need to provide an account number of 286 and a conference ID number of
291059.
I’d like to thank all of you for
participating on the call this morning. I’ll be around for the remainder of
the day to answer any questions. My direct dial number is (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.
