Transcript of
Brush Engineered Materials,
Inc. (BW)
Third
Quarter 2009 Earnings Conference Call
October 29, 2009
Michael C. Hasychak,
Vice President, Treasurer and Secretary
Richard Hipple,
President, Chairman and Chief Executive Officer
John D. Grampa, Vice
President of Finance and Chief Financial Officer
James P. Marrotte,
Vice President in Corporate Control.
Operator
Greetings and welcome
to the Brush Engineered Materials Inc. Third Quarter 2009 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. 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 Michael Hasychak, Vice President, Treasurer and
Secretary for Brush Engineered Materials. Thank you, you may begin.
Michael Hasychak – Brush
Engineered Materials – VP, Treasurer & 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 in Corporate Control.
Our format
for today’s conference call is as follows: John Grampa will comment on the
third quarter 2009 results in the outlook and Dick Hipple will give a market
update and general comments. Thereafter we will open it up, the teleconference
call for questions. A recorded playback of this call will be available until
November 13 by dialing area code 877, the number is 660-6853, account number
286 and conference ID number 334765. The international replay number is area
code 201 and the number is 612-7415. The call will also be archived on the
company’s website beminc.com. To access
the replay, click on ‘Events & Presentations’ on the Investor page.
Any
forward looking statement 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 – VP Finance & CFO
Thank
you Mike. Good morning everyone and welcome to our third quarter call.
Today’s format is the same as that of past calls. I will review the quarter
and then comment on the outlook; following my prepared comments Dick Hipple
will provide you with a market update and a review of other key company factors.
Dick will also provide a briefing on the recently announced acquisition and how
it fits into the company’s strategy. Hopefully some of our comments will
pre-answer some of your questions and following our reviews, we will open the
call for questions.
I’ll focus on some of
the key points identified in the press release covering both the quarter and
the outlook for the fourth quarter. We will not comment on the outlook beyond
the fourth quarter which while showing signs of additional improvement remains,
we think in this environment, simply too unpredictable and too uncertain to be
specific about. There just isn’t much visibility in our markets. First I’ll
review the sales and earnings levels along with the key items affecting them
and the comparisons to the preceding quarter including metal prices, certain
market factors and other factors affecting the reported growth. I will also
review the key items that affected the current quarters earnings levels. Then
I’ll review our cash flow and the state of our balance sheet which as you know
is very strong and is expected to continue to improve. Third, I will comment
briefly on some of the financial dimensions of the Barr Associates acquisition
and then following my comments in these three areas I will review the outlook.
Let’s begin with
sales and earnings. As you know this morning we reported sales of
approximately $191 million for the third quarter while below the prior year,
third-quarter levels [audio skip] approximately $50 million were about 16 million
or 9% better than the second quarter sales. Sales for the quarter were
slightly above the high-end of the guidance we had provided, primarily due to
stronger businesses from our consumer electronic oriented markets.
Approximately $6 million of the prior quarter’s sales was represented by a
shipment of hydroxide and we had approximately 1 million of hydroxide shipments
in the third quarter. Hydroxide shipments generally occur in only one or two
quarters of the year excluding this $5 million difference from the comparison,
the companies core businesses improved sequentially by approximately $21
million or 12% from Q2 to Q3. Metal price movement did not have a significant
impact on the comparisons to the same quarter of the prior year. Metal price deflation
or said differently, that portion of both precious and non-precious metal price
declines that we normally pass on to customers lowered sales by approximately 1
percentage point in the quarter compared to the prior year. Thus the decline
in the real business levels or volumes in the quarter compared to the prior
year quarter was about 20%. Metal price increases raised sales in the third
quarter by about $45 million or 3 percentage points, compared to the second
quarter. Considering this and they hydroxide shipment difference that I
mentioned earlier, real business levels in the third quarter were up
approximately 9% sequentially comparing to the second quarter. I should also
note that the foreign exchange impact on revenue was deminimous[ph], a fraction
of a percent in these comparisons.
Comparing to the
second quarter of the year, about $15 million of the $21 million sequential
growth in the fourth quarter was in our advanced material segment. Six million
was in the engineered alloys segment and $2 million in our engineered
materially systems segment. The sequential growth in these segments is due
principally to the recovering consumer electronics business levels. Our
beryllium and beryllium composites business declined from the second quarter by
about $3 million due to the push out of very high margin defense business. The
report of profit for the quarter was $0.01 a share, an improvement from the
first quarter loss of $0.40 a share the second quarter loss of $0.04. The
quarter was consistent with the guidance we provided which was that the company
expected to generate a slight profit in the third quarter. There were several
factors, both positive and negative that affected reported results in the
quarter. Increased volume in cost reductions did favorably affect third
quarter when compared to the second quarter. The third quarter was also
favorably affected by a discreet tax item which was expected.
The third quarter was
negatively affected by unexpected manufacturing issues, acquisition related
costs and delays in the shipment of the high margin defense business. The
manufacturing issues and the acquisition related costs hurt the quarter versus
our initial expectations by about $0.05 a share and the delays in the defence
business hurt the quarter by an additional $0.05 a share. The discreet tax
item, again, which was expected was $0.04 a share and resulted from the
reversal of reserves that are no longer required.
Now let’s turn to
cash flow and the balance sheet. As you know our balance sheet is very strong
and in the quarter it improved even further as debt net of cash declined an
additional $5 million. The company’s debt net of cash to capital ratio was
approximately 3% at the end of the quarter. The condition of our balance sheet,
including our available cash and our existing credit line is a major factor in
our ability to pursue quality acquisitions such as the Barr Associates
acquisition recently announced. Dick will comment further on Barr in a
moment. We are pleased to have the liquidity we do to support our operations
as well as the flexibility to capitalize on even other important strategic
initiatives that might present themselves in this economic environment.
I would like to
comment briefly now on certain of the financial dimensions of the Barr
acquisition and then Dick will cover the strategic fit. The Barr Associates
acquisition was an important acquisition for the company. The acquisition was
announced on the 23rd of October and is described briefly in today’s
press release. The purchase price was approximately $55 million. The
acquisition was financed through internally generated cash plus proceeds of
approximately $25 million from the companies $240 million revolving line of
credit. Barr will be consolidated with the advanced materials segment of our
company and as many of you know we do not disclose sales, profits and other
financial information related to individual units within our segments.
Nonetheless I do feel that it is appropriate to at least attempt to put some
frame of work around the acquisition for you. The precision thin film, optical
mark materials that Barr manufactures enable complex technologies in a variety
of markets, as Dick will describe later. We expect the growth in these markets
to be consistently in the double digits. Acquisitions of technologies such as
this, are usually at EBITDA modelables[ph] from 7 to 9. Operating profit
percentages are generally in the double digits and at this time we expect that
this acquisition will be accretive to the company’s earnings in 2010.
I will now turn to
the outlook. While the company did experience significant widespread weakness
in an environment with limited visibility across a majority of its markets
earlier in the year, the level of our overall business activity began to
improve as the first quarter ended and the second quarter began. That
improving trend continued throughout the second and third quarters and into the
early part of the fourth quarter. Overall the company is seeing improvement in
its order entry driven primarily by the consumer electronics oriented markets.
Certain of its other markets, certainly the industrial markets had however not
shown any significant signs of improvement and the defence market which remains
strong throughout the first half did weaken in the third quarter. Whilst
difficult in this environment to clearly envisioned future trends, the company
does expect business levels to continue to improve. Generally the fourth
quarter of the year, sales are noticeably lower due to seasonal factors. At
this time though, due to the improving trends noted earlier and the impact of
the acquisition, fourth quarter sales are expected to improve by up to 8% from
third quarter levels and be in the range of 195 million to 205 million in the
forth quarter.
Looking beyond the
fourth quarter, the company expects markets to remain unpredictable and is not
assuming a robust economic recovery. Thus we expect to continue to monitor and
where possible, maintain our aggressive cost reduction actions and capital
control initiatives. It is important to always reiterate that the company’s
outlook is subject to significant variability especially given the current
economic environment. Changes in demand levels, metal prices, metal supply
conditions, new product qualification and ramp up rates, swings in customer
inventory levels, changes in the financial health of key customers, acquisition
related costs and other factors can have a significant effect on actual
result. The outlook that I provided is based on the company’s best estimates
at this time and is subject to significant fluctuation, due to these as well as
other factors.
I will now turn the
call over to Dick Hipple and dick will provide you with a market update.
Richard
Hipple – Brush Engineered Materials – President Chairman & CEO
Thank you John. The
market continues to be encouraging, particularly in the consumer electronic
sector which is a major driver for our overall sales. From regions of the
world, Asia remains the strongest, with slower growth coming from the US and Europe. The ongoing increase in sales, quarter to quarter this year, with the
expectation of this to continue through the fourth quarter supports the
combined impact of an improving global economy and inventory replenishment. In
the meantime, in a non-consumer market we have not seen a substantiative increase
in demand such as from the oil and gas and commercial aerospace markets. Our
high DE defence business has seen a decline as programs have unexpectedly been
delayed, although not cancelled. The heavy industrial markets have not yet
rebounded however they are expected to improve as we move into 2010, as the
inventory situation appears to be improving.
I would now like to
briefly discuss our recent acquisition of Barr Associates. During this
downturn we have been able to maintain a strong balance sheet and liquidity and
as we have discussed before we are interested in pursuing acquisitions and
continue to be, should the right strategic opportunity present itself. We are
excited about the recent addition of Barr to the Brush team. Barr is the
leading, independent designer, developer and manufacturer of high precision
thin film coatings and optical filters. The addition of Barr rapidly expands our
technology and market footprint in the growing especially thin film optics area
ranging from ultraviolet, visible to far infrared spectral regions. Barr has a
worldwide brand name in a wide array of application is IR imaging, targeting
and sensing, telecoms and spectroscopy in the commercial, medical, defense,
space and astronomy markets. Barr’s manufacturing expertise allows it to
economically produce components for unique, complex applications as well as
higher volume OEM production needs. The Barr brand and it’s employees are
leaders in the field of advance thin film material science technology and
innovation that are a powerful addition to the Brush Team. We also see good
synergy with our prior optical coating acquisition TFT which has a more limited
technology reach in the optics market while having additional capabilities in
coating for hybrid circuits and large area shapes. The acquisition of Barr
meets our strategic criteria of high technology and differentiated products,
low capital intensity and position in markets and applications with strong
growth opportunities. We will be working very hard to quickly integrated Barr
and are excited about the opportunities that can be leveraged on a global basis
with a broader global presence that Brush offers to Barr. The combination of
all three recently acquired specially thin film coating acquisitions, TFT,
Techni-Met and now Barr brings to Brush critical mass in a dynamic and growing
downstream high technology value add thin film coating business.
A change in gears,
I’d like to discuss the outlook. It has been the case for quite a while where
visibility is very limited. However given the macroeconomic conditions, I
would expect 2010 to be better than 2009 while being softer than 2008.
Fundamentally I would expect the consumer to be down in 2010 as compared to
2008. The availability and cost of financing to both the consumer and the
business community will also be a drag on macroeconomic growth. Meanwhile we
do expect to see some additional modest growth from 2009 in our heavier
industrial applications such as oil and gas and commercial aerospace. All in
all, finishing out 2009 and looking in 2010 is cloudy at best, but as always
our strategic intent throughout all of our businesses is to find ways to
profitably grow in spite of economic [INAUDIBLE]. Thank you and I guess we’ll
take 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 can
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 * key. One moment please while we poll for questions.
Our first question is
from Avinash Kant with DA Davidson. Please go ahead with your question.
<Q:> Good
morning Dick and John.
Richard Hipple –
Brush Engineered Materials – President Chairman & CEO
Morning.
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Good
Morning.
<Q:> A few
questions to, I know, you were talking about some of the defense related
shipments that could not happen this quarter and they were higher margin.
Should we assume that those shipments will happen in the fourth quarter, hence
your margin will be up disproportionately from volume and also from better mix.
Richard
Hipple – Brush Engineered Materials – President Chairman & CEO
No I wouldn’t assume
that. The margin will be up because that business level will be us slightly in
Q4 from Q3 but the entire delay will not make itself up in the fourth quarter,
so some of it will push into first quarter.
<Q:> Okay, but all of it will be kind
of taken care up between the fourth and the first quarter?
Richard
Hipple – Brush Engineered Materials – President Chairman & CEO
Well we can’t be certain because we just
don’t know what level of additional push-offs may or may not exist so no I wouldn’t
make that assumption.
<Q:> Okay. And you had a tax benefit
in the current quarter, what should be modeling the normalized tax rate?
John D. Grampa – Brush Engineered
Materials – VP Finance & CFO
I
think you should model the statutory rate.
<Q:> 30%
John D. Grampa – Brush Engineered
Materials – VP Finance & CFO
Perhaps
around 35%.
Richard
Hipple – Brush Engineered Materials – President Chairman & CEO
Mid-30’s.
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Mid-30s.
<Q:> Mid-30’s
right. Okay and the Q4 guidance that you have given, compared to Q3, what’s
the upside, like what is driving the upside in Q4 which is of course against
the seasonality. Which segments are driving the upside in Q4?
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Well
at this point in time Avinash, it is still coming from the consumer electronics
area.
<Q:> Consumer
electronics. And I know you have a significant exposure to cell phones and
everything, have you seen anything in terms of some sort of inventory there for
the fourth quarter?
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Well
typically you’re going to find, in the fourth quarter, in the consumer
electronics area, that you know, typically the seasonality would be a better
say fourth quarter than first quarter because you have all the holiday’s sales
that will go on across the board, so you still have the building go on, so you
know what will happen in the first quarter, will all be a function of how well do
these guys get as to what the holiday sales are going to be.
<Q:> Right but
up until Q4, you still see momentum continuing to build in that one, right?
You’re not seeing any slow down yet.
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
That
is correct.
<Q:>
Okay. And oil and natural gas segments is something that you kind of have
started to see some traction it looks like
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
A
little bit.
<Q:> Little
bit right.
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
We’re
just starting to get the initial signals.
<Q:>
So that’s more in Q4 than in Q3 right.
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Yeah
there was nothing in Q3.
<Q:> It was up
in Q3?
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
I
said it, you know we’re just seeing some very early signals now, coming out of
the oil and gas sector.
<Q:> Okay.
And the manufacturing issue that you did see, did it impact only the advanced
materials technology business segment or it was in two other segments too?
Richard
Hipple – Brush Engineered Materials – President Chairman & CEO
No that
was just the advanced materials technology segment?
<Q:> and could
you elaborate a little bit what it was and has it been taken care of?
John D. Grampa – Brush Engineered
Materials – VP Finance & CFO
Yeah
it has been taken care of and typically, you know we’re going to be, you know
it will still affect the fourth quarter somewhat but it has been taken care
of.
<Q:> So it was a yield issue or some,
what was it about?
John D. Grampa – Brush Engineered
Materials – VP Finance & CFO
Oh
it was a quality issue, shipping to a customer.
<Q:> From you or from your suppliers.
John D. Grampa – Brush Engineered
Materials – VP Finance & CFO
No,
from us.
<Q:> Okay. Perfect, thank you so much.
Operator
The next question is
from Anthony Sorrentino with Sorrentino Metals. Please go ahead with your
question.
<Q:> Good
morning everyone.
Richard
Hipple – Brush Engineered Materials – President Chairman & CEO
Good morning.
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Morning.
<Q:> How much
has been cut out of costs to date?
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Boy,
that’s a moving target Anthony. We continue to see gain quarter on quarter,
you can tally up some of the improvement in our margins from what you saw in
the first quarter, the cost coming out of the system. You also can look at our
SG&A levels, what they are now, especially if you take out some of the one
time items we had here in the third quarter but it is a tough number, it is a
significant benefit that we’ve had to our results so far.
<Q:> Okay and
I would presume that those cost cuts are sustainable going forward.
Richard
Hipple – Brush Engineered Materials – President Chairman & CEO
Did you say are or
aren’t?
<Q:> I said
are, that they are sustainable going forward?
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Well
no, you can’t make that assumption. When we walk through the, earlier in the
year, the actions that we have taken, the portion of those actions and those
cost reductions were in areas that we related to volume and as volume begins to
respond, some of those costs will start to need to come back into the system to
support the higher levels of business. So no we can’t assume that they’re
sustainable. We would hope that obviously the business comes back. Having
said that, we do not believe that if business comes back to the same level that
all of the costs will be brought back.
Richard
Hipple – Brush Engineered Materials – President Chairman & CEO
Sorry, I know you’ve
got things, like you know the wage cuts and things like that, you’re not going
to have a permanent wage cut of the company, you know, we made those moves to
react to some very terrible business conditions, so you know you’ve got some of
those, but we’ve also made permanent cuts in the overhead structure and those
will be sustainable, so it’s a mix.
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
We’re going to need
to judge where we are as business responds.
<Q:> Okay and
with regard to ruthenium media targets, you said in the release that you will have
an opportunity to regain some market share, would that likely be over the next
year or so?
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Yeah.
<Q:> Okay,
fine. Thank you very much.
Richard
Hipple – Brush Engineered Materials – President Chairman & CEO
You’re welcome.
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Thank
you.
Operator
As a reminder if
you’d like to ask a question, please press * followed by 1 on your telephone
keypad. The next question is from Chuck Murphy with Sidoti & Company.
Please state your question.
<Q:> Morning
guys.
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Good
morning.
<Q:> I
apologize if I’m repeating a question, I’m bouncing back and forth between
calls. I was wondering, what is it going to take to get the alloy business
going again, what’s weak there and you know, could get better in the future?
Richard
Hipple – Brush Engineered Materials – President Chairman & CEO
Well, you know we’re
seeing recovery in that business, like we had tremendous costs taking out of
that business. The break-even point is substantially down so that, you know we
certainly expect to see, when we’re seeing now, the beginning of recovery in
that market and there’s you know, two major segments of that business, one is
kind of driven by the electronics area and we’re starting to see certainly that
kick up and then you’ve got a more of a lag on the whole heavy side, the oil
and gas, commercial aerospace, but again we expect to see that start to kick
in, certainly early next year. So you know we expect to get much better
performance out of that particular division has been moved forward here. It’s
been, you know, as you know it’s been a horrible situation in that division but
the volume loss there was just incredible, so we’ve really driven down the break-even
point and we will see this volume coming back and we’re seeing it now.
<Q:> Gotcha,
now why has the advanced materials business improved so much sequentially over
the last two quarters and alloy hasn’t when they, kind of like you said, they,
a big part of both of their business is electronics.
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Well
the, we saw a faster response in the Williams area in this area. You know
everything, it doesn’t always happen simultaneously, so we saw the pick-up
faster at Williams and so that, and plus Williams is more into that whole
market area so their impact is quicker and faster in their entirety than the
alloy business. In fact what we saw in that alloy business is that the heavy
side didn’t bottom out until late second quarter, early third quarter, it was
still going down so what shielded some of the improvements in the alloy
division was that we started with decent pick-up in the electronic sector but
that was over swamped by continuing declines in the heavy sector, and I think
you’ll find that same story if you go out and you just take a look at some
companies that are purely in that sector, if it be like a carpenter steel or
one of those guys, if you kind of look what’s going on, you’ll see you know
some of these markets and they were still, they hadn’t bottomed out yet, so
that’s a little different and then of course Williams isn’t subject to those
particular margins. So some of the improvement was just shielded is my answer.
<Q:> Okay.
And what about the beryllium business, I mean what is the outlook there, yeah,
what needs to happen to get things going there?
John D. Grampa –
Brush Engineered Materials – VP Finance & CFO
Well
actually that business is in king of two major categories, it’s the high
rolling business and we’re seeing some softness there as earlier reported, and
then we have what I call more of the commercial business, that’s the downstream
which is the electrocution business and both of those businesses are important
to the profitability of the division, so what we’re seeing right now is the
softness on the defence side and again that’s kind of a big unknown, I mean
we’ve got these delays going on and we think that those delays ought to be you
know fixing themselves over the next six months but that is still, that story
is still yet to be told but then at the same time we are seeing on the
commercial side of the business which is our electrocution operation, that
business is picking up, but that’s the business that we provide a lot of x-ray,
industrial devices and medical devices, you know for the windows.
<Q:> Gotcha.
Okay, that’s all I had. Thanks.
Operator
There
are no further questions in queue, I’d like to turn the call back over to
management for closing remarks.
Michael Hasychak –
Brush Engineered Materials – VP, Treasurer & Secretary
Hi, this is Mike
Hasychak. We’d like to thank all of you for participating on the call today.
I’ll be around for the remainder of the afternoon to answer any questions, my
direct dial number is 216-383-6823. Thank you very much.
Operator
This concludes
today’s teleconference. You may disconnect your lines. Thank you for your
participation.
