Materion Corporation
Q4 2014 Earnings Call Transcript

Published: 20 Feb 2015

[Operator:]

Welcome to the Fourth Quarter and Year-End 2014 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Mr. Mike Hasychak. You may begin.

[Mike Hasychak:]

Good afternoon. This is Mike Hasychak. With me today is Dick Hipple, President, Chairman and CEO; Joe Kelley, Vice President of Finance and Chief Financial Officer and Steve Shamrock, Vice President and Controller. Our format for today's conference call is as follows. Joe Kelley will review the financial results for the quarter and the outlook. Following Joe's comments, Dick Hipple will comment on key strategic initiatives. Following Dick, we will open up the call for your questions. A recorded playback of this call will be available until March 6 by dialing area code 877, the number is 660-6853 or area code 201, the number is 612-7415. Conference ID number is 13599289. The call will also be archived on the company's website, materion.com. To access the replay, click on events and presentations on the investor relations page. Any forward-looking statements made in this announcement, including those in the outlook section and during the question-and-answer portion, are based on current expectations. The company's actual future performance may materially differ from that contemplated by the forward-looking statements as a result of variety of factors. Those factors are listed in the earnings press release issued this morning. And now, I will turn it over to Joe for comments.

[Joe Kelley:]

Thank you, Mike. And good afternoon, everyone joining us on the call today. During my comments I will cover our fourth quarter 2014 financial highlights. I will review profitability by segments including fourth quarter and full-year 2014 results. I will make some brief comments on the balance sheet and cash flow and modeling assumptions and finally cover the earnings outlook for 2015. Before I begin, let me remind investors that some of my comments with regard to operating profit margins, net income and earnings per share reflect the adjusted numbers shown in attachment number 5 in this morning's press release. The adjustments for comparative purposes increased 2013 GAAP performance by removing cost associated with facility consolidation and product line rationalization costs incurred in the fourth quarter of 2013. The adjustments in 2014 reduced results for the net benefit recorded from the recovery of insurance, legal settlements and certain tax benefits. Let me now review 2014 financial highlights. I'm very pleased to report our fourth quarter 2014 and full-year financial results. Our team once again delivered strong top-line value-added sales growth across most of our key end markets as well as profit margin expansion and meaningful earnings growth. This is the third consecutive quarter of strong earnings as we leveraged volume growth and continued to realize the benefits of our facility consolidation and product line rationalization initiatives. Fourth quarter 2014 value-added sales, which exclude the impact of pass-through metal costs, grew 6% over the prior-year fourth quarter value-added sales and 1% sequentially over the third quarter, to $167 million in the fourth quarter of 2014. This marks the third consecutive quarter of establishing a new record level of value-added sales as we continue to gain traction in most of our key end markets and expand new product sales. Sales from new products, defined as those introduced in the last three years, represent 13% of our total fourth quarter 2014 value-added sales, growing 25% over 2013 fourth quarter value-added sales levels. Gross margin dollars expanded 13% to $55.8 million in the fourth quarter of 2014 from $49.2 million in the prior-year fourth quarter. Expressed as a percent of value-added sales, gross margins expanded 210 basis points from 31.3% in the fourth quarter of 2013 to 33.4% in the fourth quarter of 2014. The improved profit margins were primarily driven by leveraging the 6% volume growth and realizing the manufacturing cost savings from our facility consolidation efforts. Operating profit in the fourth quarter of 2014 grew 34% to $13.9 million or a $3.5 million improvement over 2013 fourth quarter adjusted operating profit of $10.4 million. Operating profit expressed as a percent of value-added sales grew to 8.3%, a 170 basis point improvement over prior-year fourth quarter adjusted operating profit margins. Net income in the fourth quarter of 2014 totaled $12 million, which is reflective of a 10% effective tax rate in the quarter. There were several discrete items including an R&D tax credit, deferred tax asset revaluation and provision to return adjustments, totaling $1.8 million, which drove the quarterly tax rates below the third quarter year-to-date rate of 27%. Excluding the discrete tax benefits, the adjusted net income for the fourth quarter of 2014 is $10.2 million, an increase of $3.1 million or 44% over the prior-year fourth quarter level. Earnings per share grew from $0.18 in the fourth quarter of 2013 to $0.58 in the fourth quarter of 2014. On an adjusted basis fourth quarter 2014 earnings grew to $0.50 per share, a 47% improvement over the $0.34 per share of adjusted earnings recorded in the fourth quarter of 2013. Let me now briefly comment on our full-year 2014 consolidated financial performance. For the full year, 2014 value-added sales grew five over 2013 value-added sales to $637.1 million. This growth was leveraged to deliver adjusted operating profit of $48.5 million, representing growth of $16.7 million or a 53% improvement over 2013 profit levels. Adjusted earnings per share grew 50% from $1.10 per share recorded in 2013 to an adjusted earnings per share in 2014 of $1.65. Looking at the full-year consolidated performance, it is clear we delivered on the restructuring savings, the top-line value-added sales growth and forecasted profit expansion. Before I review the quarterly and full-year results by segment, let me remind investors of our announcement last week that we realigned our business in the fourth quarter, resulting in changes to our external reporting segments. The details of the segment change and all relevant historical financial information was provided in the February 12th press release, which was designed to bring more transparency to our investors. I encourage everyone to reference this detailed financial release to assist in modeling the company's performance as we move forward under the new segmentation of our business. Now let's review our 2014 performance by business group. First, our Performance Alloys and Composites segments. As a reminder to listeners, this segment's products include strip and vault form alloy products, strip metal products with clad inlay and overlay, beryllium-based metals, beryllium and aluminum matrix composites, beryllium ceramics and bulk metallic glass materials. Value-added sales for this segment grew in the fourth quarter of 2014 to $93.9 million, a 5% increase from the prior-year fourth quarter value-added sales of $89.4 million. Operating profit expanded to $9.9 million or 8.8% of net sales, a 130 basis point improvement in profitability over the prior-year fourth quarter profit margins. The fourth quarter results bring the full-year 2014 adjusted operating profit margins of this segment to $33.3 million or 7.7% of sales. This represents an 8% year-over-year increase in operating profit resulting from a 5.5% increase in full-year value-added sales. The growth in this segment particularly came from growth in ToughMet and high beryllium content product lines. ToughMet sales have run steadily over the past several years as we continue to develop new alloys and new applications which allow us to penetrate new markets. ToughMet sales grew 19% year-over-year in 2014 and sales represented approximately 10% of the segment's total 2014 sales. Sales of our beryllium product line were particularly strong in the second half of 2014 into nuclear medical applications. Beryllium product line sales grew 13% year-over-year in 2014, supported by the increased production of the beryllium pebble plant. The future growth prospects for both ToughMet as well as the beryllium product line remain very attractive looking forward the next several years. We will now turn our attention to the Advanced Materials segment. Our Advanced Materials business produces precious and non-precious metal targets for physical vapor deposition, advanced chemicals and microelectronic packaging. This segment also provides deposition, reclamation and refining services. Advanced Materials value-added sales in the fourth quarter of 2014 grew 12% to $48.3 million from the fourth quarter 2013 value-added sales of $43 million. Operating profits expanded to $7.2 million or 14.9% of value-added sales, a 300 basis point improvement in profitability over adjusted operating profit in the prior-year fourth quarter. For the full year of 2014 value-added sales grew to $181 million, 7.4% above the 2013 value-added sales level. Adjusted operating profit grew to $27.6 million or 15.2% of value-added sales, greater than double the profit recorded in the prior year. The profit margins of this business segment have returned to historical levels as our efforts to right-size the manufacturing footprint and streamline the marketing and product line management structure delivered the forecasted profit improvements over 2013 results. The realignment of our cost and management structure in this business is complete. Going forward, value-added sales growth should leverage our existing cost structure and deliver further profit margin expansion. Finally, the Precision Coatings Group, which is included in the other segment along with unallocated corporate cost - the Precision Coatings group includes the Precision Optics and Large Area Coatings businesses. This group delivered strong results in the fourth quarter, growing value-added sales 2% above prior-year fourth quarter levels to $26.5 million. This growth was leveraged to expand profit margin to $2.5 million or 9.4% of value-added sales, which is a 480 basis point improvement from an adjusted operating profit margin of 4.6% in the prior-year fourth quarter. The Precision Coatings Group in the full year of 2014 recorded $102.4 million in value-added sales, 2% below the prior-year level. The slight deterioration in value-added sales is reflective of product line and customer rationalization associated with restructuring initiatives launched in late 2013, along with ongoing decline in defense sales in 2014. These value-added sales losses were largely mitigated with new growth platforms such as wafer level processing for thermal imaging and sensing. Despite the net decrease in top-line value-added sales for the full year of 2014, adjusted operating profit expanded 17% over 2013 levels to $6.8 million or 6.6% of value-added sales. The improved profitability of this business group in 2014 and, in particular, in the fourth quarter of 2014 is evidence that the restructuring and rationalization actions taken in late 2013 and early 2014 are delivering the intended results. The lower cost structure combined with new product wins is delivering impressive margin expansion. The new product pipeline in this business group is very rich and should continue to drive future profitable growth. Turning now to the balance sheet and cash flow, the company began and ended 2014 with a very strong balance sheet, ending with $13.2 million in cash and $24.3 million in debt. For the year, debt decreased by over $40 million. This reflects the net impact of paying down approximately $30 million of a gold-denominated short term loan with the transfer of gold ounces held in inventory. The company's balance sheet and its cash flow provided the flexibility to return approximately $29 million of cash to shareholders during 2014 in the form of regular quarterly dividends and share repurchases. A total of approximately 690,000 shares were repurchased in 2014 at an average stock price of $32.28 per share. The company's cash flow from operations for the year totaled $60.3 million, which included a net investment in inventory of $30 million to support volume growth. The magnitude of the working capital investment is largely a timing issue to support schedule 2015 production equipment outages. The required inventory investment is forecasted to reduce substantially prior to the end of 2015. For ongoing financial modeling purposes, assume a 27% effective tax rate. Excluding the fourth quarter 2014 discrete tax items, our 2014 effective tax rate was 26%, in line with our 2015 guidance of 27%. Capital spending should run approximately $30 million to $35 million excluding mine development expenditures. Mine development investments should be $20 million to $25 million as we're opening to separate pits in 2015 to support the anticipated future demand for beryllium hydroxides. Annual depreciation and amortization should run approximately $40 million in 2015. And finally now the earnings outlook for 2015, we’re pleased with our 2014 performance and we clearly have momentum moving into 2015. We're forecasting to grow earnings approximately 10% to 20% in 2015 over the adjusted earnings of $1.65 per share recorded in 2014. Our earnings guidance range for 2015 is $1.80 to $2 per share. The 2015 earnings guidance is reflective of meaningful growth that more than offset the headwinds we faced from increased pension expense driven by the lower discount rates and new mortality tables, a stronger U.S. dollar and a forecasted drop-off in the energy markets tied to oil and gas exploration. Looking at our 2014 second-half results, we're particularly confident in our earnings power and our ability to deliver double-digit annual earnings growth in 2015. First quarter 2015 earnings are forecasted to be over 15% above prior-year first quarter adjusted earnings of $0.29 per share. That said, first quarter 2015 will most likely be the softest of the four quarters of 2015, given the lack of any large one-off beryllium shipments in the quarter and normal seasonality. That concludes the review of our financial performance and I would now like to turn the call over to Dick, who will provide updates on several of our key strategic initiatives.

[Dick Hipple:]

Thank you, Joe. I thought I would take a slightly different approach with this call and step aside from the usual market-by-market review. Instead, I'll focus on how our momentum is carrying Materion to a higher sustained level of profitability growth even if the world economy remains in a more muted growth mode. The second half of 2014 represents a defining period for Materion. In the second half we began to realize the positive impact of the tough actions we had taken since 2012 to close and consolidate facilities, improve manufacturing efficiencies and eliminate low-margin product lines. It also marks a time when the beryllium pebble plant delays were finally behind us. Our results and the leverage that fuels our momentum points to an exciting new phase in our transformation, for 2015 and beyond we have sharpened our focus and investment in delivering on our leading differentiated positions. For example, our Advanced Materials group has restructured to better leverage its leading semiconductor capabilities and excellent customer relationships for even stronger but more focused presence in the market. We're upgrading our precious metal refinery capabilities and have expanded our packaging business in Asia. We're aggressively pursuing greater market share with current customers and building a larger pipeline of new business opportunities, specifically in the area where technology is emerging. We're already seeing the results of the significant value-added sales growth and gross margin improvement in 2014. Our Precision Coatings Group is now transitioning to strong growth in the infrared, sensor and 3D imaging applications used in cell phones, virtual reality systems, tablets and other evolving applications. Our recent investment in dedicated high volume facilities for wafer level coatings to meet this new demand is proving very timely. Many investors are asking about our unique capabilities to provide the highly specialized precision coating and optical filters for these newer applications as well as more traditional end uses including medical, science, defense and industrial. We're growing our coatings business for blood glucose test strips by expanding our capacity and leveraging our technology to develop solutions geared more to future market needs versus simply meeting specific customer requirements. In our Technical Materials business we have refocused the business model and new product pipeline to create breakthrough and unique process technologies that can usher in larger market wide opportunities. Most recently, Technical Materials developed an exciting new metal composite with the trade name [inaudible]. This proprietary material, now being prototyped at customers ahead of our anticipated commercial production later this year, shows promise as a higher performing structural alternative to conventional stainless steels in consumer electronics like smart phones and tablets. To further ramp up the robust growth of ToughMet, our premium copper-nickel-tin alloy, we're proactively developing new alloy forms and new applications that further capitalize on this material's incredible range of end-use attributes, whether it is strength, weight savings, corrosion, galling resistance, or self-lubrication. Again, our investment in recent years to increase our ToughMet capacity again has been proven to be very timely. In our copper alloy business we have stepped up to meet increased demand for Asia following the announcement by Mitsubishi Electric Metecs that it will stop copper alloy production activity next month. And we're increasing production processing capabilities for beryllium hydroxide in Utah to gear up to a larger share of the growing global demand in the wake of diminishing stockpiles. As the world's only fully integrated mined and milled beryllium producer, we're incredibly well placed to benefit from this rebalanced supply situation. As you can see, our aggressive growth goals are supported by our innovation and new product introductions from all of our business groups, which contributed to our growth in 2014. We intend to sustain this with a new product portfolio that is even more robust and sustainable than it has been at any point in our recent history. You will be able to read about many of these innovative breakthroughs in our upcoming annual report. We have had some great wins. In fact, new products introduced in the previous three years represents 11% of our total value-added sales in 2014. That's actually a 19% increase year on year. While we have not made any acquisitions in the last several years, due to our primary focus on restructuring and the pebble plant start up, we have a disciplined process in place and a very solid track record as we explore future acquisition opportunities. It is noteworthy that much of our recent growth and free cash flow and much of our future growth potential has been created by those businesses we acquired during the six-year period prior to 2012. To be fair, our future is not without headwinds. But nothing across the macroeconomic or geopolitical kaleidoscope has us affected any differently and certainly not anymore adversely than other market disciplines. Some examples - the effect of foreign currency exchange. The majority of our exposure is already hedged, which will protect us throughout 2015. The unprecedented and still evolving situation in the energy market. The portion of our business tied to the oil and gas exploration is limited, though, representing roughly 6% of our sales. Pension costs - we're facing increased pension expense in our domestic plan, driven by the lower discount rates and new mortality tables. Considering all these factors, we believe our future is very bright. Our commercial strategies are working and customers are recognizing the value in differentiation of our product offerings. Our sharpened focus and execution are producing renewed growth, expanded margins and improved capital utilization. So looking ahead, we believe our differentiated products and target markets will produce top-line growth at least twice that of GDP and double-digit operating profit growth. In addition to our strong organic growth plans, we have the financial capacity and ability to integrate bolt-on acquisitions to further accelerate that growth. This is an exciting time for Materion. We're energized, engaged and incredibly focused on the tremendous opportunities that do lie ahead. We will now open the call for questions.

[Operator:]

[Operator Instructions]. Edward Marshall with Sidoti & Company.

[Edward Marshall:]

So thanks for that added disclosure of each of the segments. I think that's helpful. I wanted to see if I could pick your brains and see if you would be willing to provide maybe an incremental margin on each of the three business lines, considering other would be third. But in particular I guess, AMT and the Performance Alloys businesses, if you prefer to do that.

[Joe Kelley:]

We were pleased with the incremental margins we saw in our top-line growth this year, as you see in those results. But if we were to think about the incremental margins going forward for those businesses, as I touched on in my prepared remarks. I think when you look at the Advanced Materials segments we do have opportunities for further margin expansion there as we grow the top line. So when you think about the incremental margins in that business, we would like to see it somewhere probably between 40% and 50%. When you go to the Performance Alloys and Composites, I think the incremental margins there would probably be a little bit lower, probably 30% to 40%. And then when you go to the Precision Coatings Group there, again as I mentioned in my prepared remarks. I think, given what we've done to the cost structure there in terms of the top line growth opportunities moving forward, we ought to see incremental margins again closer to the 40% to 50%.

[Edward Marshall:]

Okay. Now you brought up the Precision Coatings, I guess that leads to this question and it sounds like there's a lot of promising things happening there. And I'm wondering what, say if the hit ratio was pretty high for the customers that you are lining up or maybe the pipeline you are lining up, if indeed the hit ratio is high, how big can that segment become over the next five years? And would it expand past maybe the guidance that's been out there for the three- to five-year period? Or has been always included in there?

[Dick Hipple:]

Well on the total Precision Coatings business - I hate stumbling through that one, but we could certainly double the size of that business, I would think.

[Edward Marshall:]

Over what period of time?

[Dick Hipple:]

If some of these bigger opportunities hit. I wouldn't expect that because the world is a tougher place than you always imagine. But I could certainly see that up 50% for sure.

[Edward Marshall:]

And if you had to guess, how long do you think it would take for you to get there? Is it a couple years or is it past the five-year horizon?

[Dick Hipple:]

If certain things fall into place, I would put a three- to four-year handle on that.

[Edward Marshall:]

And then if I look at the pension, you called it out a few times - I'm not sure that you quantified that. I'm curious if - first of all, is the domestic pension in all three business segments? And I think it is. And then what was the expense for 2014 and what do you expect it to be for 2015?

[Joe Kelley:]

Yes, it's mainly our domestic pension plan. And that does affect all businesses, although the primary impact of that is in the Performance Alloys and Composites, which has our largest domestic employee base. And so when you think about it for our modeling purposes, we lumped in FX and pension increases. And I would give you some guidance, that's probably going to have about a negative $0.15 a share impact of those two combined.

[Edward Marshall:]

Okay. So $0.15 for FX and pension combined?

[Joe Kelley:]

Correct.

[Edward Marshall:]

Okay. And what was the pension expense last year?

[Joe Kelley:]

The pension expense last year was, I believe, right around $10 million.

[Edward Marshall:]

And the last question, you mentioned Asian competitors two times, I think, in the press release, you may have mentioned it in the conference call as well. Any issues as you guys export from the West Coast and have you found any issues there as far as exporting or delays in shipments potentially?

[Joe Kelley:]

We have started actually a couple of weeks ago moving our shipments that we could go out of the East Coast. And so no delays in delivery. Just some immaterial incremental shipping costs or freight costs at this point in time.

[Edward Marshall:]

Do you have an idea of what that might run as far as the tab in maybe the first couple quarters of the year?

[Joe Kelley:]

Nothing material worth talking about on this call.

[Operator:]

Our next question comes from the line of Avinash Kant with D.A. Davidson & Co. Please proceed with your question.

[Avinash Kant:]

So my question was more about the CapEx. You talked about CapEx roughly $30 million to $35 million in 2015 and you said that could be another $20 million to $25 million as related to mine development on top of that. Could you expand a little bit on that? What exactly are you doing and how often do you do this kind of work?

[Dick Hipple:]

They are totally different. In the mine development, that's just an ongoing process that we have to open up new sections. It's open-pit mining. So basically it's about every 2 - 2.5 years we go blow the side of the hill off and then take the dirt and haul it up to our chemical plant. And the cost to do that is mine development. But it really goes into an inventory cost. It's really not capital. It's kind of an odd accounting thing that goes on. The way I look at capital is that $30 million to $35 million; that's the kind of capital that you and I think about. The mine development is kind of a strange accounting anomaly. But I'll let my financial guys pick up on that.

[Joe Kelley:]

I'll elaborate on strange accounting. But, no, Avinash, what I would say is if you go back to 2010 I think is the last time we had incurred a large investment to open up some of the mine - some of the pits, I should say. It was about $11 million back in 2010. Since then it hasn't been largely material. But here in 2015 we're going to open up two separate pits and when I say that, then it basically exposes the material that we then can mine. And so while we're investing $20 million to $25 million of cash this year, it is not going to result in an incremental or material increase to our cost of beryllium hydroxide, given the amount of beryllium that we're going to expose by opening these two pits. What drives the cost on the pit openings is how deep you have to go and how much material you have to remove. So back in 2010 we had a big investment. We haven't had to invest much in the last several years. We will have a big investment here in 2015 and then we will - a much reduced need for investment in the future years. But it's a cash flow in 2015 item that should not have a material increase to our manufacturing cost when you think about our cost of beryllium hydroxide.

[Dick Hipple:]

The other point of this is that we're opening up a little bit more than what we would normally open up to meet the higher demand that we expect starting in 2016. So that's another reason why that's up a bit on the development side.

[Avinash Kant:]

So it does look like you are definitely opening up more than what you typically do, like instead of one year going for two. So that means you should be effecting better demand for the products going forward.

[Dick Hipple:]

Well exactly. We're opening up a little bit larger situation here to prepare for 2016.

[Avinash Kant:]

2016. And then is this related to some of the conversations that you've been talking about the scarcity of beryllium both domestically and internationally?

[Dick Hipple:]

That's correct. That's correct.

[Avinash Kant:]

So at least you see that scarcity clear enough that you are willing to put up capital towards that right now?

[Dick Hipple:]

Absolutely.

[Avinash Kant:]

Okay. Now talking about bit about the pebble plant, so where is the yield right now? Or in terms of production readiness, how far are you with the [inaudible]? How much has incurred capacity?

[Dick Hipple:]

We're actually producing at a level today that matches our needs. So we're in pretty good shape there.

[Avinash Kant:]

But is the plant running at full capacity?

[Dick Hipple:]

No, because actually the plant was designed at much higher capacities by the government just in case there was any crazy peak needs. So I hope we never operate that plant at peak capacity because there are crazy things going on in the world.

[Joe Kelley:]

To give you some numbers on that--

[Dick Hipple:]

Basically, on the actual needs of the ongoing business, we're in good shape on supply.

[Avinash Kant:]

Okay. And then in the guidance, final question, in the guidance that you are providing do you have any benefits in the second half from higher, maybe better margins in the beryllium product or this event that you may be expecting? Or you are thinking of this to be a 2016 phenomenon?

[Dick Hipple:]

No, I'm expecting that to be a 2016 phenomenon. I don't expect to see an impact in 2015.

[Avinash Kant:]

Okay. So it's not in the guidance?

[Joe Kelley:]

Yes, right. But I would reiterate my comments and you are familiar enough with the business to know that the beryllium product line has some strong one-off shipments, as we did in the back half here of 2014. So when we look to 2015 there are some strong shipments again in the back half. We don't see any one-off large shipments of beryllium in Q1. So that was in my prepared remarks.

[Dick Hipple:]

Yes and just to add to that, those are totally different kinds of shipments. The shipments that Joe was talking about with beryllium or particularly these heavy shipments we had in the medical market in the second half of last year - those are our finished products versus the shipments that I just talked about in 2016 are really more of the raw material hydroxide side, totally different nature of products.

[Operator:]

Our next question comes from the line of Martin Engler with Jefferies. Please proceed with your question.

[Martin Engler:]

I had a question on - you mentioned the exit of your one competitor there in Performance Alloys. And then talking about bit more about the opportunity, I guess, there what you think the incremental sales opportunity is for your business lines? And then also for beryllium, when you think about 2016 and your ramp up or expanded capacity there at the mines?

[Dick Hipple:]

Well the competitor in Japan - he exited his entire copper business. He had a much larger business, broader materials. He did not really compete with us in the copper-beryllium business. But he competed with us - he had a product that competed with our ToughMet strip which we introduced several years ago. And because he's exited the market, he's exited the direct competition that we had had for the ToughMet strip. So we expect to be and we're, seeing higher orders for us right now to make up for him exiting the market. And it's a tough call right now because we're not sure exactly what that impact is going to be. But I would certainly think that we would be talking possibly north of a $10 million type sales opportunity.

[Martin Engler:]

Any expectation on what that could mean for your margins if you have a one-off competitor there? I would imagine that's a fairly consolidated market for the competition on ToughMet. Right?

[Dick Hipple:]

Well, yes. There is really not a lot out there and what you will wind up doing is you want to compete with other materials. So it could be for example, a copper-titanium strip which we would be competing against in that area. And it gets to be really technical once you go beyond that because there's different kind of formability ratios, strength ratios. It all gets back to the very, very specific applications you are dealing with as to whether you can use one material versus the other. But we think we do have some distinct advantages and particularly this particular product is used quite extensively throughout the consumer electronics market in the cameras that are both used in cell phones and tablets. And this material is used in the stabilization spring around the camera devices.

[Martin Engler:]

And any initial thoughts on the opportunity when you think about 2016 for the mine expansion and the sales stemming from that?

[Dick Hipple:]

Yes. I think we have characterized that before. I don't - from a sale standpoint I think we have probably thrown out some OP ranges. It's probably around a $5 million type OP in 2016 type of arrangement.

[Martin Engler:]

Okay. And then longer term I know you have had some guidance out there or some expectations on your value-added operating margins. What kind of ranges are you targeting on that and what kind of time horizon?

[Joe Kelley:]

Yes. Given we would like to see, going forward - we expanded margins nicely across all of our businesses, actually, in 2014 and as we look at 2015 we would like to see on a consolidated basis probably another 100 basis points of margin expansion.

[Martin Engler:]

And one last question, if I could, any initiatives with the base pricing on your products as we look into 2015 here?

[Dick Hipple:]

Well, our pricing discipline is generally up. We try to have a pretty rigid pricing policy of taking prices up over time, because we have a differentiated product, that's not always the case, you are always competing with others. But I would say in general we're not fighting a situation where every year we have to take our prices down X percent to stay competitive. That's not our model and it's not the type of products that we're in. So we spent a lot of money over the last several years in improving our systems for pricing and how we approach it, how we analyze it, how we analyze our value, our customers' needs. There is a lot of work that we've done there and I think it's a good area to spend money and to focus on because it's just as important, if not more important, on the cost side when you are talking about the profitability of the company.

[Operator:]

Our next question comes from the line of Phil Gibbs with KeyBanc. Please proceed with your question.

[Phil Gibbs:]

Just had a generalized question on the defense market as far as what you are seeing there. Talks of sequestration, bottoming and then lift in the budget for next year, how you guys are seeing that order flow maybe outside of some of the shipments that typically are lumpy for you. Anything like your optics coming back or anything you are seeing right now in the defense order book that gives you guys a little bit of a lift.

[Dick Hipple:]

Well, all I can say about that one is that we had forecasted in our optics business for that market to continue to decline in 2015 and that's not what we're seeing. So that's our first good sign we've seen. We were hammered last year and so we just don't know where the bottom is. So we were actually forecasting it to continue to be down and we've actually seen the order book pick up a bit. So we'll see. We need a little bit more time under our belts here, but we're a little bit encouraged here that maybe we have bottomed out and we started to tilt up a little bit here.

[Phil Gibbs:]

How much of the growth in your earnings - maybe excluding the pension headwinds and the FX headwinds, how much of your growth right now is teed up off the newer products versus the legacy products on the bottom line, maybe?

[Joe Kelley:]

In the fourth quarter we were pleased. Our new products actually represented 13% of our total value-added sales. And on a year-over-year basis that was up 25%. I think Dick for the full-year numbers. So basically if you look at it, in the quarter, growth in new products drove about 50% of our growth from a top-line standpoint and these new products also tend to carry attractive margins, as you would expect. So we would anticipate to continue to grow our sales from new products double digits going forward. We have pretty robust pipeline. So I think it's conceivable to think that that will continue to drive 50% of our dollar value growth would be the growth from new products.

[Phil Gibbs:]

50% of the bottom line, you are saying?

[Joe Kelley:]

No. I was giving you a top-line value-add sales growth.

[Phil Gibbs:]

Okay. So if you're 7%ish or something like that, it's half and half?

[Joe Kelley:]

Correct.

[Phil Gibbs:]

Okay. And then maybe an update - I'm sorry if I missed it, I've been bouncing around calls today. But the priorities for capital deployment right now?

[Dick Hipple:]

Well, the priorities would certainly be - our top priority is organic growth and our dividend. And then we will be balancing, as we move forward - as you saw last year, we did have some share buybacks. We still have an open authorization, but we're actively pursuing bolt-on acquisitions that would help grow, as we redefined our three segments. Each one of these three segments have some very unique opportunities with them and we're aggressively trying to build them out. And where we think we can leverage some bolt-on acquisitions that would make sense, we would certainly put the growth in first and then reward the shareholders accordingly, if we don't find the right opportunities for the acquisition growth.

[Operator:]

Our next question comes from the line of Marco Rodriguez with Stonegate Securities. Please proceed with your question.

[Marco Rodriguez:]

I apologize; I got on a little bit late. So if someone has already asked the question, again I apologize. I just wanted to review the guidance you have out there for the high single digits on value-added sales. Can you just add some more granularity in terms of what are the underlying assumptions there that are driving the growth in 2015?

[Joe Kelley:]

Yes. I guess - so I'll touch on the new products piece of it. About half of it is probably going to come from our new products. So we have very specific new product initiatives that - as I touched on were successful in Q4 in driving half of our top-line growth, which was up 6% in the quarter. And so those new product offerings going forward are going to continue to drive about half of that growth.

[Dick Hipple:]

And we did - unfortunately, you came in late in the call. I don't want to have to repeat all that, but we did actually go through quite a long list of the new products that we're introducing.

[Marco Rodriguez:]

I'll take a look at that again, then. And then the last question I have is a follow up on a previous question. You had discussed adding about another 100 basis points to your value-added operating margin. How should we be thinking of that in terms of the new segments that you have there? Is it going to be across the board in each segment, or is it one in particular that you're going to see that extra expansion?

[Joe Kelley:]

Yes. I think the expansion opportunities there are primarily in the Precision Coatings business group and then I also think there are opportunities in the Advanced Materials Group. And if you go back on Advanced Materials to the 2012 data, you can see that we still have room to get back to where we were back in 2012. Again, if we're successful on some of these new product initiatives in the Performance Alloys and Composites business, I think there is an opportunity there also for some more modest margin expansion, but primarily coming from Precision Coatings and AM.

[Operator:]

Our next question comes from the line of Edward Marshall with Sidoti & Company. Please proceed with your question.

[Edward Marshall:]

Just a couple quick follow-ups - so the energy business, you said it was roughly 6% of sales, Performance Alloys, I guess, driven.

[Dick Hipple:]

Yes.

[Edward Marshall:]

If I'm not mistaken it's also ToughMet products? Is that right?

[Dick Hipple:]

Well, it's a combination of both ToughMet and copper-beryllium. I don't want to correct you, but if you look at our actual presentation material it will show energy at 8% of our total sales. So not all of it is within the oil and gas sector, so we take a look at and consider that about 6% is in the oil and gas area. We primarily play in the exploration side or the drilling side which is obviously the side that's getting hammered.

[Edward Marshall:]

Now, I think in your prepared remarks you said you didn't see any slowdown as of yet and I'm curious, we talked several times--

[Joe Kelley:]

Yes, we're seeing it. We're seeing it. Yes.

[Edward Marshall:]

And when I think about the ToughMet product I also think it's a pretty high-margin business for you too. Is that some of the margin discussion and the differentials between the two businesses that we've talked about, where it's got a slower incremental and maybe a little bit more sluggishness and maybe some uncertainty too, surrounding the order book? Is that what you are building into your guidance there? It sounds like you are.

[Dick Hipple:]

Yes, I guess. We've got to be real careful there because we've built that in our guidance, so the numbers we presented - we feel we can meet those. But you can come up with some crazy, scary stuff in the oil and gas sector. It's not - you see these guys - the rig count right now is down 25% year to year and then if you start thinking about the materials side of that, they go taking those rigs out, could be higher. And then they shut off the material - you can play games and get up to 40%, 50% loss in sales revenue in those kind of businesses when they shut them down. So we certainly pucker up when we think about that sector right now. But at the same time, it's kind of interesting. It's the nature of our company, we're not sitting back. So maybe we don't have a solution for that in 2015, but I bet you we've got a solution for that in 2016 because what we've really shifted right now is we've got some pretty good programs going on, on the production side of oil and gas. Production side is still going on, and we've got some pretty neat applications testing going on right now, on the production side, which could be some pretty high volume. So we actually said to ourselves, we've got to figure this out. And if in fact, this oil and gas exploration side gets kicked to the street, we're going to figure out how to continue to grow this oil and gas business in another area and I think we can do that. Again, it ain't a 2015 answer, but I bet you we're going to come up with something in 2016 that could be substantial.

[Edward Marshall:]

And your business is so diversified I think 6% gets diversified away pretty quickly. But I'm just curious; what is the order book showing you as far as - you mentioned some scary stuff in there - just about the market in general? What is your order book showing you right now? As we progress through the first quarter or maybe some of the end of the fourth quarter, what did you see? You mentioned 40% at one point. Are you seeing those kinds of--

[Dick Hipple:]

I'm speculating that - you are talking about oil and gas, right?

[Edward Marshall:]

Yes.

[Dick Hipple:]

Well, I'm speculating right now. We've seen a softness in that order book, but I can certainly see an impact like that coming. As you are running a business, you've got to have some what-if scenarios. And I can certainly see a scenario where you could have a fall-off of 40% in the oil and gas business.

[Edward Marshall:]

Are you willing to categorize what's the decline in spend, what you've seen in the book so far?

[Dick Hipple:]

It's a little bit too early, all I know is it has fallen off. We had a very good fourth quarter in energy. And in fact, it was probably darn near a record quarter for us in the fourth quarter and we have seen those bookings come off. And I don't have that exactly on my tip of my finger, but I bit you it's come off 20%.

[Joe Kelley:]

I remind you we're talking specifically of the oil and gas, energy. If we talk about order books in general, our order book is up. It was up mid-to high single digits in Q4 and entering into 2015 it's maintained that mid-to high single digits, which has us encouraged about the momentum.

[Dick Hipple:]

What we're seeing, that as I mentioned before, we're seeing a little bit stronger bookings than I think we expected in the electronics area. Some of this is maybe some of this upside that - we had a competitor come out of the market, that's kind of a nice break. And then defense is a little bit than we expected. The telecom infrastructure is a little bit better than we expected coming into the year. So we've got some positives a little bit stronger than we had expected coming into this year right now.

[Edward Marshall:]

It's a lot of grace on you to have that diversified business, it spreads out a lot and things get neutered away. Last question if I can, beryllium and composites, the business there - did you squeak out a profit for the year in the business on a pull through basis? I know we were pretty close heading out of 3Q. Just kind of curious - it's the old way it was reported. Did you squeeze out a profit?

[Joe Kelley:]

You bet, Ed. So the beryllium and products product line was in our Performance Alloys and Composites business segment. As you saw, through Q3 that business was improving and we went publicly and said, hey, we're going to improve the profit of this product line $5 million to $6 million. And I can tell you that we did achieve over $5 million of improvement in the profitability of that product line within that segment. It's a little bit muted when you look at the Performance Alloys and Composites segment because you had our Technical Materials operating segment and formal external reportable segment that was down in excess of $3 million in operating profit. So to answer your specific question, we did achieve that objective.

[Operator:]

There are no further questions at this time. At this point I would like to turn the call back over to Mr. Mike Hasychak for closing remarks.

[Mike Hasychak:]

We would like to thank all of you for participating on the call this afternoon. I'll be around for the remainder of the day as well as all day tomorrow. You can call me with any further questions at 216-383-6823. Thank you very much.

[Operator:]

This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.