Materion Corporation
Q1 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

Greetings and welcome to Materion Corporation’s First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Hasychak, Vice President, Treasurer and Secretary of Materion Corporation. Mr. Hasychak, you may now begin.

[Michael C. Hasychak:]

Good morning. This is Mike Hasychak. With me today is Dick Hipple, President, Chairman and CEO; and Joe Kelley, Vice President of Finance and Chief Financial Officer 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, Dick Hipple will provide his commentary. Following Dick, we will open up the call for your questions. A recorded playback of this call will be available until May 15 by dialing area code 877, the number is 660-6853 or area code 201, the number is 612-7415. The conference ID number is 13606106. The call will also be archived on the company's Web site, materion.com. To access the replay, click on Events & Presentations on the Investor Relations page. For 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. Now, I’ll turn it over to Joe for comments.

[Joseph P. Kelley:]

Thank you, Mike, and good morning to everyone joining us on the call today. During my comments, I will cover our first quarter 2015 financial highlights, review first quarter profitability by segments, make some brief comments on the balance sheet and cash flow and finally cover the earnings outlook for the remainder of 2015. Following my comments, Dick Hipple, Chairman and CEO, will provide comments on the company’s key strategic initiatives. Let me start with the first quarter financial highlights. I am very pleased to report our first quarter 2015 financial results. Once again, our team 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 over the prior year first quarter. This marks the fourth consecutive quarter of meaningful year-over-year value-added sales growth and double-digit earnings growth. The first quarter results represent a very strong start to the year, despite significant headwinds from foreign exchange and the declining oil and gas market. First quarter 2015 value-added sales, which exclude the impact of pass-through metal costs, grew 12% over the prior year to $163 million. On a constant dollar basis, excluding the impact of foreign exchange rates, value-added sales grew 14% over the prior year first quarter. Sales for new products, defined as those introduced in the last three years, represented 11% of our value-added sales in the first quarter of 2015, growing 29% over the first quarter of 2014. Gross margin dollars expanded 15% to $52.4 million from $45.5 million in the prior-year first quarter. Expressed as a percent of value-added sales, gross margins expanded 80 basis points to 32.1% when compared to the first quarter of 2015. The improved profit margins were primarily driven by leveraging sales volume growth. Selling, general and administrative expenses increased to $36.9 million or 22.7% of value-added sales compared to 31.3 million or 21.6 in the same quarter of the prior year. The increased expense ratio was attributable to increased equity and incentive compensation expense, higher pension expense related to the lower discount rates and new mortality tables and higher legal expense, partially associated with the pebble plant settlement. Looking forward, SG&A expense is forecasted to return to approximately 21% of value-added sales. Research and development expense increased year-over-year by approximately $600,000, representing 2% of value-added sales as we continue to invest in advancing our new product pipeline including specific quarterly investments in bulk metallic glass, also known as liquid metals, plus advancing the development of 3D optical coatings, SupremEX, and our eStainless product lines, just to name a few. Operating profit in the quarter totaled $14.2 million compared to $11.1 million in the first quarter of 2014. Both periods includes special one-time gains, which management excludes when analyzing results. The first quarter of 2015 includes a net insurance recovery related to the pebble plant construction and other nonrecurring legal expense totaling a $2.1 million benefit. The first quarter of 2014 operating profit included a net gain of $2 million attributable to the sales of fixed assets. Excluding these net benefits from both periods, adjusted operating profit in the first quarter of 2015 grew 33% to $12.1 million or a $3 million improvement over the 2014 first quarter. Adjusted 2015 first quarter operated profit expressed as a percent of value-added sales expanded to 7.4%, a 110 basis point improvement over the prior year. This improvement is in spite of adverse changes in foreign exchange rates, which negatively impacted year-over-year operating profit comparisons by $1.6 million in the first quarter of 2015. Net income in the first quarter of 2015 totaled $9.6 million, which is reflective of a 29% effective tax rate in the quarter. There were two discrete items recorded in the quarter, which drove the rate above our forecasted 27%, which is what we continue to forecast as our long-term effective tax rate. Earnings per share grew from $0.35 in the first quarter of 2014 to $0.47 in the first quarter of 2015. On an adjusted basis, first quarter of 2015 earnings grew to $0.41 per share, a 41% improvement over the $0.29 per share of adjusted earnings recorded in the prior year first quarter. This marks the fourth consecutive quarter where we have delivered double-digit quarterly earnings growth. Now let’s review our 2015 Q1 performance by business. Our Performance Alloys and Composites segment grew sales 6% in the first quarter of 2015 to $103.3 million. Value-added sales for this segment grew in the first quarter of 2015 to $85.6 million, a 7% increase from the prior year first quarter value-added sales of $80 million. Despite the challenges with declining demand from oil and gas customers plus the FX [ph] impact of a strengthening dollar against the euro and the yen, this segment delivered meaningful sales growth. Leveraging our differentiated product portfolio, we were able to increase volumes into numerous industrial component end markets, including plastic injection molding and foundry applications for die casting. Also, we were successful in growing our top net sales into the consumer electronics end market. These more than offset the decline from oil and gas and foreign exchange impacts. Operating profit in the Performance Alloys and Composites segment grew approximately 10% to $6.8 million or 6.6% of net sales. While profits and margins grew year-over-year, the growth was limited by the adverse $1.1 million impact from foreign exchange and an unfavorable product mix within the segment. Looking sequentially, you can see the impact of product mix within this segment. Performance Alloys and Composites contain our high purity beryllium product line and the sales of this product, as most of you are aware, frequently have large individual customer shipments, which are not consistent quarter-to-quarter. Sales of high purity beryllium products were soft in the first quarter of 2015, while the second half of 2014 reflects two consecutive quarters of strong high beryllium sales. The 2015 forecast for this product line is unfolding similar to 2014 where the high purity beryllium orders are stronger in the second half of the year as compared to the first half. It is this product mix shift within the segment that has the profitability of this segment fluctuating in any given quarter. Moving now to our Advanced Materials segment. Value-added sales in the first quarter of 2015 grew 24% to $51.7 million from the first quarter of 2014 value-added sales of $41.7 million. The above-market growth rate in our Advanced Materials segment resulted from our success in penetrating the broader semiconductor market with our diverse portfolio of high purity materials and services combined with expanding our product offering into numerous consumer electronics end markets. The double-digit volume growth combined with improved product mix drove significant operating profit margin expansion. From the first quarter, operating profit increased by 62% to $8.9 million or 17.2% of value-added sales, a 400 basis point improvement of profitability over adjusted operating profit in the prior year first quarter. The profitability to this segment has returned to pre-2013 levels as restructuring actions taken during 2013 have consolidated the manufacturing footprint and enhanced our ability to respond quickly to customer needs. This improvement in customer service is not only being reflected in the financial results but our customers are also acknowledging this improvement in service levels and responsiveness. In the first quarter of 2015, we were formally recognized with supplier awards from both Analog Devices and [indiscernible]. These top tier semiconductor manufacturers are recognizing Materion for the value our products and services provide. Finally, the Precision Coatings group, which included the Precision Optics and Large Area Coatings businesses is included in the other segment along with unallocated corporate cost. The Precision Coatings group delivered positive results in the first quarter increasing value-added sales nearly 3% above the prior year first quarter levels to $24.6 million from $23.9 million in the prior year. The growth was driven by new customer wins in the medical end market and a pickup in the defense market, which more than offset the value-added sales declines in the consumer electronics end markets. A portion of the decline in consumer electronics for this segment was the result of customer inventory destocking and strategic pruning of low margin customers as we continue to focus our efforts in the optics portion of this business on the wafer level processing for 3D, gesture control and thermal imaging applications. Operating profit for the Precision Coatings group in the first quarter of 2015 totaled $1.7 million compared to $4.1 million recorded in the first quarter of 2014. Excluding the special gain on asset disposals included in the prior year amount totaling $2.6 million, operating profit on an adjusted basis increased 13%. The modest 3% value-added sales growth was leveraged to deliver a 60 basis point improvement in profitability as the adjusted operating profit margin decreased to 6.9% of value-added sales from an adjusted operating profit margin of 6.3% in the prior year first quarter of 2014. Corporate costs net of allocations to the businesses for the first quarter of 2015 decreased to $3.2 million from the prior year first quarter amount of $4.3 million. Excluding the special items primarily related to the favorable insurance settlement in 2015, corporate costs increased from $4.1 million in the first quarter of 2014 to $5.3 million in the first quarter of 2015. The increase was primarily driven by increased spending costs as well as performance-based, equity and incentive compensation tied [ph] with improvement in profitability and increased stock price. Looking now to the balance sheet and cash flow. The company’s balance sheet remains strong in the first quarter as net debt remained relatively low at $29.5 million and the company has significant available liquidity to support the meaningful organic growth opportunities as well as pursue strategic growth alternatives. Cash flow from operations in the first quarter of 2015 was negative $4 million, in line with our expectations. Seasonal investments in working capital and timing of annual cash payments drove the negative operating cash flow in the first quarter. Investments in mine development totaling $3.7 million, as forecasted, related to the opening of a new pit at our Utah mine. As we reminded investors in our previous conference call, this investment related to the opening of the new pit that is forecasted to be in the range of $20 million to $25 million in 2015. During the first quarter, we repurchased approximately 21,000 shares at a cost of $800,000 under the company’s share repurchase plan. These repurchases were part of our systematic approach to repurchase sufficient shares to offset any incremental dilution of current shareholders related to equity grant. Finally, let me complete my prepared comment by reviewing the outlook for the remainder of fiscal 2015. We are very pleased with our first quarter performance and our confirming our prior guidance range for 2015 of $1.80 to $2 of adjusted earnings per share, representing an improvement of 10% to 20% over the prior year 2014 adjusted earnings of $1.65. The foreign exchange situation and the severe drop-off in demand from customers serving the oil and gas market will continue to put pressure on our growth. However, given our success in growing sales within our other major markets and the forecasted continued success of our new product offerings, we are confident in our ability to deliver the forecasted 2015 double-digit earnings growth we previously provided investors. Looking at the 2015 earnings on a quarterly basis, the second quarter should be in the range of 15% to 20% above the prior year’s second quarter adjusted earnings. The second half of 2015 similar to the second half of 2014 should be the strongest half of the year based on forecasted high beryllium shipments and an increase in consumer electronics demand for our new products within the Optical Coatings and Advanced Materials businesses. This concludes my prepared remarks and I will now turn the call over to Dick Hipple who will review the company’s strategic initiatives.

[Richard J. Hipple:]

Thank you, Joe. I’m very pleased with our first quarter results and our execution in achieving them. In a turbulent economic environment that poses one hurdle after another, while testing a company’s ability to maintain sustainable growth, it is gratifying to report that Materion achieved a fourth consecutive quarter of year-on-year sales growth, margin expansion and improved profitability. The momentum in leverage we talked about when we last met on this call in February is clearly validated by our results. Our ability to reach this sustained level of performance reflects our breadth and strength within growing end markets, our robust new product pipeline, disciplined operating and financial stewardship and the winning culture of the Materion team. We had value-added sales growth in our top nine largest markets with increases ranging from 2% for energy and notwithstanding the drop in oil and gas, exploration and drilling activity to more than 30% for industrial components. In our largest end used market, consumer electronics, we produced a 6% year-on-year gain in sales. In summary, we are seeing a broad-based success across the majority of our end markets. We are also delivering across each of our three main business groups; Performance Alloys and Composites, Advanced Materials and Precision Coatings as they all delivered top line growth and profit margin expansion. As we have reported over the past year, we have sharpened our focus on and investment in our leading differentiated positions. That speaks to how we are able to deliver the financial results Joe just reviewed. I would now like to focus on some of our first quarter highlights. First, Advanced Materials growing value-added sales 24% year-on-year and 7% sequentially. These type of growth rates evidence our ability to leverage our differentiated product portfolio to grow at above market growth rates. It is successes like this in being recognized by our customers for supplier excellence that has me confident in our ability to continue to grow this business. Next highlight is the Performance Alloys and Composites growing 7% from last year while actually declining 9% sequentially from the fourth quarter. When considering the challenges this business unit faced in terms of rapid major currency exchange rate changes and the drop-off in oil and gas customer orders, the first quarter sales numbers are impressive. Excluding the impact of these two external factors, our value-added sales grew approximately 11% year-over-year in the quarter. This data point, again similar to the Advanced Materials growth rate, demonstrates our ability to leverage our diverse and differentiated product portfolio to grow in multiple markets and applications. The third event within the quarter that is very encouraging as it relates to looking at our sustainable long-term growth rate occurred within our Precision Coatings business. In the first quarter, we shipped our first qualified order of a newly developed blood glucose test strip material to a major global customer with a leadership position in this field. This product helps the customer reach a technical limit that had previously been unattainable. Those of you familiar with the long qualification process to sell into the medical industry can appreciate how exciting it is to finally be shipping qualified product. This customer win is significant for the Large Area Coatings business and will help in delivering sustainable growth and demonstrates our industry-leading technology and capability when it comes to Large Area PVD coating materials for the medical industry. It is this competitive advantage that has us most excited about the future of this business. Finally, let me turn to our outlook and the upcoming Investor Day we are hosting in New York City. As noted in the press release, our full year guidance for 2015 is intact at $1.80 to $2.00 per diluted share. This 10% to 20% growth in earnings is particularly significant given the headwinds we face related to foreign exchange rates and drop-offs in demand from our oil and gas customers. I am confident in our team’s ability to achieve this earnings growth in 2015. We will continue to demonstrate responsiveness and agility to react to the volatile world that we are all doing business in. It’s worth restating that we have set a goal of outperforming GDP by a factor of 2. Given our confidence in future growth prospects this company has, we want to extend an invitation to our investors to attend our Investor Day, which we are hosting in New York City on Wednesday, May 13. Specific location and times can be found on our Web site or in today’s press release. As an incentive for you to attend, I’d like to provide an overview of this event. Each business unit president will preview his respective business and outline its growth strategy. I’ll be making a presentation on our growth strategies and Joe will present long-range financial targets that we believe will provide clarity around our top line and earnings growth potential over the next three years. We will also have some displays and product samples and a number of our senior mangers on-hand so that you can get to better know our business and the strength of the Materion team. To conclude, we’re pleased with the first quarter performance and fully anticipate we will continue to be successful in executing our growth strategies and delivering earnings growth as we move forward. We look forward to seeing you at our Investor Day next month and in sharing our results with you as we go forward to the balance of the year. I’ll now turn the call back to the operator who will open the line for questions. Thank you.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Edward Marshall with Sidoti & Company. Please proceed with your questions.

[Edward Marshall:]

Hi, guys. How are you doing this morning?

[Richard J. Hipple:]

Good. Yourself?

[Edward Marshall:]

So I wanted to first ask about a press release came out in January about one of your competitors leaving the copper alloy market, and it looks like there was some material layup comparisons there that fit with the mold for what they were selling. I wanted to kind of see if I can get first, what type of response have you had from customers? And potentially what – secondly, what the potential size of the market is and your potential upside in that business?

[Richard J. Hipple:]

Thank you. I’ll take that one. That side of the business is progressing very nicely. As we said on our last call, the competitor is exiting the market. And I believe I did say on the last call that the potential there for us was probably in the range of $8 million to $10 million in sales lift from that segment or from that particular opportunity. And we’re proceeding on that basis and we’re still seeing that as an opportunity, and we’re continuing to grow through the year as we gain that business.

[Edward Marshall:]

Okay. I guess the question is, are you seeing a response to anticipate [ph] that you’d see?

[Richard J. Hipple:]

Yes.

[Edward Marshall:]

Okay.

[Richard J. Hipple:]

Obviously, we got the product that’s needed and we’re essentially the only other supplier available.

[Edward Marshall:]

Okay. Secondly, I’m looking at – I think in the prepared remarks, and it was tough to hear, but 1.1 million impact to operating results, did you mean operating income, did you mean PS [ph] as it reflects to foreign currency?

[Joseph P. Kelley:]

Ed, the 1.1 million was the impact due to FX rates and operating profit was in the Performance Alloys and Composites segment. At a consolidated level, the impact on operating profit was $1.6 million due to the change in foreign currency.

[Edward Marshall:]

$1.6 million. And just as I look at this, you didn’t choose to change your guidance, so I just wanted to kind of get your sense. Are you operating better than you thought you were at the start of the year or are you looking more towards the low end of the range, kind of help me kind of get my arms around that? Because I assume the currency kind of stays with you for 2Q and maybe even 3Q at this rate.

[Richard J. Hipple:]

Yes, our forecast as it relates to the currency is that it will stay at the current level. That is what is assumed in our forecast guidance. And you’re correct that the impact of FX from when we gave our initial guidance, it did come down a little bit and the impact is a little bit worse than we anticipated. I would also tell you that the oil and gas drop-off is maybe a little bit more than we anticipated. However, offsetting that I think we have some successes on the new product, as we mentioned. It just covers the one that you mentioned related to competitor activity in the market. And then some of the other successes that we’re having I think if you look at the growth in our industrial components, I tried to highlight that with our growth there able to offset that, what I’ll call increased headwind from both FX and oil and gas.

[Edward Marshall:]

I see. Okay, that’s good news. And then finally I guess there’s a looming $3 a share kind of forecast for – I don’t know if there’s a particular timeline that you anticipate that you’re going to get there, but I seem to recall maybe 2017. First, is that accurate? And secondly, with currency and oil and gas and slowdown major, what are the confidences sounding that $3 a share number, because it is a significant increase for 2015 guidance range?

[Richard J. Hipple:]

Yes. Ed, there’s just several things that are behind our external market, which is greater than $3 a share in the next three years. And in our Investor Day, we plan for each president to go through the individual growth strategies to get there and actually provide a little more granular detail at the Investor Day. But I’ll remind you there’s a couple macro things going on besides just our organic growth and these two product initiatives. There’s also the changing demand dynamics in the beryllium state that is also going to contribute to that. That’s what’s behind our increased investment in the mine development that I referenced. So on May 13, you’ll have much more detail from each of the individual presidents as to the growth strategies behind that greater than $3 target.

[Edward Marshall:]

I’m looking forward to that day. One last question on that. Does that $3 a share assume acquisitions at all? Will that be gravy on --?

[Richard J. Hipple:]

No. We’ve said greater than $3 includes strategic bolt-on acquisitions.

[Edward Marshall:]

Great. Thanks, guys.

[Richard J. Hipple:]

Thank you.

[Operator:]

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

[Martin Engler:]

Hi. Good morning, everyone.

[Richard J. Hipple:]

Good morning.

[Martin Engler:]

Any changes in your order rates since exiting the quarter versus the trends that you were seeing throughout 1Q?

[Richard J. Hipple:]

Yes, I would -- [indiscernible] microphone was on. We are seeing a bit of a softness right now.

[Martin Engler:]

And any particular end market that you’re seeing this softness in or what would you attribute it to as?

[Richard J. Hipple:]

Well, we’re seeing an additional decline as you would expect in the oil and gas, and we’re also seeing – I would say the second piece of that would be in the electronics side, it appears that the information we’re getting is typically you’ll see maybe a stronger uplift in the second quarter. And what they’re talking about right now is that’s going to be more towards the third quarter right now. So that’s what’s going on. Those are the two biggest factors.

[Martin Engler:]

Okay. And I wonder if you can provide a little more color, the growth rate for industrial components there was very significant. I guess what product they’re going into and what platforms? Also, was there any one single big driver that was driving the 30% growth?

[Richard J. Hipple:]

Yes. First of all, I mean on the Performance Alloys and Composites side, it was mainly driven by Performance Alloys and Composites as well as Advanced Materials. So I think in my prepared remarks, I made some comments about Performance Alloys and Composites being into the plastic injection molding and foundries for die casting. There’s also some sprinkler head applications in there related to construction. And then the other growth I would tell you is in our Advanced Materials group and a lot of that is in the alloys. And if you recall, last year we were completing the restructuring of our Advanced Materials business including moving some manufacturing. And so some of the pickup there quarter-over-quarter was just because Q1 was a little bit weak in industrial components end markets for the [indiscernible] products, which will be then relocated during Q4 and Q1. So these levels we anticipate going forward will be sustainable. However, the year-over-year growth rate we’re not going to see that going forward in the quarters of '15.

[Martin Engler:]

Okay. And I imagine within the oil and gas, to the energy end markets that you’re probably seeing some destocking headwinds probably still to emerge. Anything happening with any of the other channel inventories for the main end markets there?

[Richard J. Hipple:]

Well, I’m not sure I understand the question. We’re primarily positioned and oil and gas is in the drilling side of the business. So obviously when – right now the drilling rigs are down over 50% where there were just, say, five months ago. So typically when that happens you get the order rate for that. And then they’re also working off inventories in the system, so it gets pretty ugly there until they start to get adjusted. Now fortunately we’re seeing a little bit of a lift in the oil price that maybe helpful here to shorten the downturn. But the other really interesting thing for us is from a strategic standpoint, we’re also changing our emphasis and we have some very interesting opportunities on the production side of the business, which could be quite significant. We won’t see that in 2015, but certainly in 2016 and '17. So what we’re trying to do is create some new opportunities for this company outside the pure drilling side and pick up some significant opportunity in the production side.

[Martin Engler:]

Any initial thoughts on what that effort then might be from a top line perspective of value-added sales?

[Richard J. Hipple:]

I’d rather not comment on that right now but it will be significant. I’d rather get the applications moving. And we know what that market opportunity is, but at this point in time I’d like to have a little bit more volume under my belt to talk about it.

[Martin Engler:]

Okay. And one last one if I could there. Just wondering if you can provide an update on any potential acquisition opportunities, what you’re seeing in the market right now, willingness of people I guess to enter into those discussions, regions and scale as well?

[Joseph P. Kelley:]

This is Joe. We continue to invest resources, time and efforts there to pursue some strategic targets both those that are companies that are for sale as well as those that aren’t for sale currently, bolt-on, it’s important to our growth platforms. That being said, it’s pretty broad based. Our approach and we’re very cognizant not to overpay and ensure there’s a strategic fit and a value-creating opportunity for Materion shareholders. So I guess the update is we continue to invest and that’s about all I can tell you right now and examining targets. I would like to provide and additional to your question, what are we seeing in other end markets? One thing we did touch on is defense and defense orders. Defense for the last two years has been down and down for us across a couple of our different businesses. And so one of the upsides is defense was up from the last year, and so that’s an encouraging sign and it’s across a couple of businesses. And then the other one and Dick touched on it, in medical, it’s a little bit difficult to see due to the bulkiness of some of our nuclear medical shipments of high purity beryllium but what I’ll say is a base metal business excluding the high purity beryllium shipments. We’ve had some nice market share wins there in the quarter and anticipate that to continue to do well for us.

[Martin Engler:]

And what was the driver within defense and what was the growth on value-added year-on-year again?

[Joseph P. Kelley:]

Yes. So in our defense business for Materion year-over-year, it was up 14.5% and sequentially it was up 9%. And so the defense value-added sales were 9.6 million in the quarter. While it’s not one of our top end markets like it used to be several years ago and for the last several years, it’s consistently been down year-over-year. So that is one highlight I guess worth pointing out.

[Martin Engler:]

I guess, was there any specific applications within military that was driving it? What had changed since the year ago and sequentially?

[Richard J. Hipple:]

Well, one particular application is in our optics space which is what we have is a, let’s call it a ray technology, which is very sophisticated, albeit optical targeting or information collection in, it could be drones, satellites and military aircraft. And that’s lifting at this point in time and it’s really a leading technology that we have.

[Martin Engler:]

Okay. Excellent. Thanks for all the details.

[Operator:]

Thank you. Our next question comes from the line of Marco Rodriguez with Stonegate Capital Partners. Please proceed with your questions.

[Marco Rodriguez:]

Good morning. Thank you for taking my questions. I wanted to kind of get a little bit of clarification on the outlook in some your comments here. Just to make sure I understood correctly, I believe you said that Q2 earnings per share can have a 15% to 20% year-over-year increase. Did I hear that correctly?

[Joseph P. Kelley:]

Yes, that was in the comments. So Q2, we are forecasting to be up 15% to 20% over Q2 over prior year.

[Marco Rodriguez:]

Okay, got it. And adjusted – just to make sure I’ve got the numbers down correctly, so the adjusted earnings in Q2 '14 were about $0.34. So with that guidance, that’s kind of implying $0.39 to $0.49 range for Q2, which is slightly below where consensus is at. And so I’m trying to understand a little bit here that’s kind of flattish --

[Joseph P. Kelley:]

Let me just correct you for a second. Q2 last year on an adjusted basis was $0.36.

[Marco Rodriguez:]

$0.36.

[Joseph P. Kelley:]

So the math there says $0.41 to $0.43.

[Marco Rodriguez:]

Got it, okay. And so that’s still a little bit below where consensus was at for the June quarter. Were there any – I’m just trying to kind of understand a little bit in terms of the guidance here, were there – did you pull forward any sort of revenues from Q2 and Q1?

[Joseph P. Kelley:]

Q1 came in, in line with our expectations and Q2 is kind of coming in, in line with our expectations. We look at, like I mentioned, one of the things that drives some of the profitability particularly in the Performance Alloys and Composites business is the strength of the high purity beryllium product line, which is as we call [indiscernible] on any given quarter. So when you look at the second half of '15, it was very strong, $1.01. There was some heavy orders there of high purity beryllium. We, again, have those forecasted to ship in the second half of 2015. So, while the guidance that we’re giving is below the current Street estimate, it’s in line with our guidance that added up to $1.80 to $2.

[Marco Rodriguez:]

Got it, okay. And then again, another clarification aspect here. When you’re saying in your guidance that the second half of fiscal '15 is going to be similar to fiscal '14, I believe you’re just referring to the fact that it’s going to be – the second half is stronger than the first half not in terms of kind of flattish growth year-over-year. Is that correct?

[Joseph P. Kelley:]

Yes. My comment when I said similar to the prior year was when I was talking about the mix of high purity beryllium shipments. So last year again that product line was very strong in the second half, and we are forecasting that product line to be similar to last year’s performance, which is strong in the second half. So my comment similar were not to say or suggest that earnings will be flat in the second half but more so around the product line shipments of high purity beryllium products.

[Marco Rodriguez:]

Got it. And then to kind of switch gears here, on the Advanced Materials, gross margins on value-added sales were down sequentially but the value-added sales revenues were up a bit sequentially. Can you talk a little bit about the drivers there? And what sort of expectations do you have for that segment in '15?

[Joseph P. Kelley:]

Yes, so let’s just talk about that segment for '15. If you look at the operating profit as a percentage of value-added sales, it’s at 17.2%, which is above the 15% that we ran in 2014 and substantially above the 6% to 7% we ran in '13. So going forward, I think running approximately 17% or 200 basis points above 2014 is where we are forecasting that segment to be, which I’ll note for you is comparable to where we were with that business back in 2012.

[Marco Rodriguez:]

Right. And that’s the function obviously of all the restructuring and movement of manufacturing lines, et cetera that you’ve done here in the recent past. But just trying to understand on the gross margin side, was there a mix issue there or something else that kind of impacted that?

[Joseph P. Kelley:]

Yes. So there is a mix issue here in both sequentially or year-over-year. So year-over-year, it actually improved. I did not provide a comment but to your point sequentially, it deteriorated. And what drove the mix in that business at the gross margin line is the difference between some of these base high purity metals into semiconductor as opposed to high purity gold into the wireless end market. And so that was the mix shift that you’re seeing in Q1 to Q2 is the mix shift between wireless and semiconductor.

[Marco Rodriguez:]

Got it. And then just to kind of follow up on a previous question on the industrial side of your business, again really strong quarter in terms of a growth rate overall. And I heard some of the comments as far as some of the areas where you saw strength. Maybe if you provide a little more color there? Were you taking share from people or was it just new products that were kind of coming into market? Any sort of additional color there?

[Richard J. Hipple:]

It’s primarily share in that case. These are not our new product platforms. It’s primarily share. And it’s an area, as you can imagine, as the oil and gas is down, there’s some areas we can reach out to with a lower margin business but we can maintain some good growth around that just because of the strength of our products and quality.

[Marco Rodriguez:]

Got you. And just to make sure also that I understood trends going forward on the industrial side, I believe, for fiscal '15, there are some people out there that have been talking – some industrial players have been talking about them seeing some weakness and some suppliers into the industrial space also kind of talking about a little bit of weakness there as well. So I just want to make sure I understood you guys that you’re not seeing that?

[Richard J. Hipple:]

Again, if you think about what we’re saying here, we’re actually in there taking some share and a lot of this product is going into the automotive sector, which at this point in time is still holding up.

[Marco Rodriguez:]

Got it, okay. So --

[Richard J. Hipple:]

Yes, a lot of it goes automotive. It’s automotive welding tips is an example of where we go and also in plastic tooling, our materials that go into plastic tooling. So that goes into a combination of both the automotive sector and forming panels and things like that, and also in just general industrial products.

[Marco Rodriguez:]

Got it. Thanks a lot, guys.

[Richard J. Hipple:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets. Please proceed with your questions.

[Phil Gibbs:]

Good morning.

[Richard J. Hipple:]

Good morning.

[Phil Gibbs:]

Just had a question on the second quarter. Did you provide any – and I may have missed it, did you provide any color on the momentum into the second quarter from just what you’re expecting from an earnings standpoint? I know you had talked about a little bit of softness in the consumer business with the expectation that it gets better in 3Q, but just what should we be thinking about here in this quarter?

[Joseph P. Kelley:]

Yes, so the only guidance we provided was on earnings, Phil, but from a momentum standpoint, I mean if you look at the oil and gas while we forecasted that to be down in the full year in consideration of our guidance, that really started to ramp up. I would tell you it really starts to drop off until late February and March and then April. So from a momentum standpoint, the impact from the drop off in oil and gas is increasing as we go into Q2. And then I think you’ll have full year and fourth quarter impact and the FX impact if it stays where it is. Offsetting that, we have some seasonal uptick I will tell you typically in Q2, and then there’s some softness if we look at the current quarter rate related to the semiconductor consumer electronics, like Dick mentioned. We’re here [Technical Difficulty] are being pushed out to pull an increase in Q3. So that’s what we’re seeing in end markets.

[Phil Gibbs:]

And you had mentioned you did provide some EPS color, what was that, I’m sorry?

[Joseph P. Kelley:]

Our guidance on a quarterly basis, but we confirmed our full year at $1.80 to $2 for full year and then quarterly we said Q2 should be 15% to 20% above prior year Q2 adjusted earnings, which was $0.36. So translated, $0.41 to $0.43.

[Phil Gibbs:]

Okay. And then were there any puts and takes in the $1.80 to $2, meaning was there something in that number that was better or worst within the remaining pieces?

[Joseph P. Kelley:]

Yes, I think that’s become – it works as the degree of drop-offs in oil and gas, the FX impacts are a little bit greater than what we anticipate. So I’ll tell you those two are negative. On the upside, we talked about some of our successes in growing with the new products into the industrial components end market. Also some consumer applications whether it be with the competitors stepping out, but taking market share of both consumer electronics and some medical applications. So those are the puts and takes that causes to keep the guidance the same.

[Phil Gibbs:]

Okay. So basically oil and gas, FX, stronger headwinds and the base business and new products potentially being offset.

[Richard J. Hipple:]

Yes and market share.

[Joseph P. Kelley:]

And market share gains, I wouldn’t discount that when you think about some of these newer products, not new products as much as some of those are market share gains.

[Phil Gibbs:]

Okay. I appreciate that. And then has the defense outlook gotten better from your perspective relative to maybe two months ago, has that accelerated at all?

[Joseph P. Kelley:]

Yes, I would say that that’s a positive. In the initial guidance, we were optimistic that that might be better. But after two years of thinking it might have bottom down, it didn’t. We were hesitant. But after delivering Q1, it was in double digit and year-over-year in almost double digit sequential growth in defense, I would tell you that in another year [ph], we’ll be on the positive side.

[Phil Gibbs:]

Okay. And then any update – and I apologize if I missed it in advance, but any update on the free cash flow for this year?

[Joseph P. Kelley:]

Yes, I touched on the investment that we’re doing in the mine development, as I did last quarter reminding that’s going to be about 20 million to 25 million in opening that pit. Our CapEx is running around 30 to 33, maybe. So from a free cash flow standpoint that would suggest about $40 million, $50 million, because we do have forecast and some improvement in working capital efficiencies. As you know, we ended the year with some investments through some planned outages. So free cash flow should be $40 million to $50 million.

[Phil Gibbs:]

Thanks and good work.

[Richard J. Hipple:]

Thank you.

[Operator:]

Thank you. There are no further questions at this time. I would now like to turn the floor back to management for any additional or closing remarks.

[Michael C. Hasychak:]

Hi. This is Mike Hasychak. We’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 area code 216, the number is 383-6823. Thank you very much.

[Operator:]

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