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Executives

Michael Hasychak - VP, Treasurer and Secretary

Dick Hipple - Chairman, President and CEO

John Grampa - SVP Finance and CFO

Jim Marrotte - VP and Corporate Controller

Analysts

Chuck Murphy - Sidoti & Company

Avinash Kant - D. A. Davidson

Anthony Sorrentino - Sorrentino Metals

Mark Parr - KeyBanc Capital Markets

Yvonne Varano - Jefferies & Company

Rob Young - Wm Smith & Company

Mario Gabelli - Gabelli & Company

Brush Engineered Materials Inc. (BW) Q2 2010 Earnings Call July 30, 2010 11:00 AM ET

Operator

Greetings and welcome to the Brush Engineered Materials Second Quarter 2010 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, Michael Hasychak, Vice President, Treasurer and Secretary for Brush Engineered Materials, Inc. Thank you. You may begin.

Michael Hasychak

This is Mike Hasychak. With me today is Dick Hipple, our Chairman, President and CEO; John Grampa, Senior Vice President, Finance and Chief Financial Officer; and Jim Marrotte, Vice President and Corporate Controller.

Our format for today's conference call is as follows. John Grampa will comment on the second quarter 2010 results and the outlook, and Dick Hipple will give a market update. Thereafter, we will open up the teleconference call for questions.

A recorded playback of this call will be available until August 14th by dialing area code 877-660-6853, account number 286 and conference ID number 353877. The call will also be archived on the company's website beminc.com. To access the replay, click on Events and Presentations on the Investor 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 a variety of factors. These factors are listed in the earnings press release issued this morning.

Now I will turn it over to John Grampa for comments.

John Grampa

As Mike indicated, today's agenda is similar to that of past calls. I will review several of the key financial points for the quarter and then comment on the outlook for the third quarter and the balance of the year. Following my comments, Dick Hipple will review the state of our key market and then following Dick's market update, we will open the call for questions.

I believe that given the economic conditions that existed in the prior year, it is important in certain areas to compare with second quarter sequentially to the first quarter of this year as opposed to the prior year, where I believe that is relevant, I will do that as well.

For those who have not had a chance to review the press release in any detail, I will begin my remarks with a brief summary of the key points in the release. Then I will cover the factors affecting the reported sales growth, isolating real or organic growth from the effect of metal price increases as well as the effect of the Barr acquisition that closed in the fourth quarter of 2009 and the effect of the Academy acquisition that closed in the early part of the first quarter of 2010.

I will follow that with a review of how the growth, the metal price inflation and the acquisitions affected reported margins for the company in total and in addition, I will review the Advanced Materials segment margins and in particular the effect that precious metal mix, precious metal price increases and the added precious metal volumes from the acquisition had on a reported margins for the segment. Then I will follow with a review of the balance sheet and I also comment on the impact of the acquisitions on earnings-to-date and then finally I will review the outlook.

Let's begin with a brief summary of the release. Today, we reported significantly stronger than expected results for the quarter, raised our outlook for the year and announced the reinstatement of our stock repurchase program. We could not be more pleased with the reported performance.

The results for the quarter clearly demonstrate the company's earnings' power during reasonable economic environment. The leverage from the cost reduction initiatives and other actions taken during the 2009 recession began to become visible in the reported first quarter performance and are now very visible in the second quarter results. The second quarter growth brought with it continued margin expansion.

Sales for the quarter were approximately $152 million, or 87% greater than to $326 million level, a new company record. Sales were up sequentially from the first quarter of the year by approximately 11%. This brings sales to-date in 2010 to $621 million double that for the first six months of the prior year.

The reported EPS for the quarter was much improved and stronger than expected at $0.67 a share, which compares sequentially to an earnings of $0.37 per share in the first quarter. This brings EPS for the first six months of the year to a $1 a share, which includes as you may recall about $0.12 a share of charges taken in the first quarter of the year.

In the release, we also noted that due to stronger margin and better than expected overall market conditions, we are raising our estimates for the balance of the year. This is the third consecutive increase in the estimates for the year.

We have raised our earnings per share guidance to the range of $1.75 to $2 a share from our previous guidance of $1.45 to $1.75 a share. I will speak more on the outlook later in this discussion and Dick will also cover the market outlook in his review of the state of our markets.

As the release noted the company's Board of Directors has authorized repurchase of up to 700,000 shares, or approximately 3% of the company's outstanding shares of common stock. This is a reinstatement of the original authorization to repurchase up to one million shares, which was initiated in July of 2008.

After repurchasing 300,000 shares, the initial program was suspended due to the economic downturn. The primary purpose of the repurchase program both then and now is to offset the dilution created through shares issued under company stock-based compensation plans. The authorization provides the company the flexibility to use its strong balance sheet to repurchase shares, while at the same time maintaining an appropriate level of liquidity to support the company's primary strategic goals, which include utilizing available capital for organic growth and strategic acquisition opportunities.

This stock repurchases will be made from time to time through brokers on the New York Stock Exchange. The repurchase program may be suspended or discontinued at any time after discussion of the company's Board of Directors.

Let's now review the sales growth in a bit more detail. The reported 87% increase in sales compared to the second quarter of the prior year and the 11% increase compared to the first quarter of the current year was due to three primary factors.

The first is a significant and broad based increase in demand for the company's materials, especially from the consumer electronics oriented markets as well as from the telecom infrastructure market data storage, automotive electronics, defense, oil and gas, commercial aerospace, and optics.

The second factor is metal price increases; and the third factor is the two acquisitions. Metal price increases that portion of both precious and non-precious metal price increases that the company generally passes on to customers, accounted for approximately $29 million, or 17 percentage points of the of the 87% or $152 million reported sales growth compared to the prior year.

The acquisitions accounted for approximately 27 percentage points, or $48 million of the growth. Organic growth thus was the health $75 million, or 43% year-over-year. Sequentially comparing to the record first quarter of the year, sales were up approximately 11%, or about $31 million to a new record high. The 11% sequential growth was primarily organic.

I will now turn to margins. Reported operating margins continue to improve and in fact improved significantly in the quarter. Gross profit percent of sales were 17.1% up approximately 440 basis points from the second quarter of 2009. This is a solid indicator of the leverage the company has from its growth following the cost reduction action taken in 2009.

Margins also grew from the first quarter level. Operating profit percent of sales reached 6.3% from the first quarter's level 4.5%. Its most relevant about this improvement is that they are occurring with significantly higher metal values especially precious metal values and higher precious metal volumes in reported sales of the company.

As we have noted in the past, having significant amounts of precious metal in the top line has the effect of diluting reported margin percentages for the company and lowering them to levels below what one would normally expect to see from an advanced materials companies. The precious metal content of our sales has increased significantly due to our growth, the acquisitions and metal price increases.

Factors such as these can at times result in margin percentages that appear to be decreasing or conversely not increasing as mush as they really are. This is affecting the reported margins for the company in the aggregate as well as the reported margins for the company's advanced material segment.

Internally, we measure margins with the high value metals excluded from the top line. While we do not disclose the specifics of those margins for competitive reasons, we do track and monitor our margin percentages on this basis routinely.

In looking at margins on this basis, the company operating profit percent in the second quarter its in the mid-teen as opposed to the reported 6.3%, and on this basis, the change from the first quarter to the second quarter is 2.8 percentage points, or 1.0 percentage points greater than the 1.8 percentage point operating profit improvement noted in the GAAP reported result.

In the Advanced Materials segment, the second quarter operating profit percent on this basis, is in the mid-20% range and is flat compared to the first quarter. Margin percentages did not increase in this segment, when comparing the second quarter to the first quarter sequentially, due to the negative effect of unfavorable product mix and the other factors noted in the press release.

Now, let's turn to the balance sheet. The balance sheet is attached to the press release. The company began 2010 with a very strong balance sheet. In spite of the difficult economic conditions experienced during 2009, the strength in the company's balance sheet and its cash flow provided the flexibility to take advantage of the opportunity to complete the two important acquisitions.

The total investment for the two acquisitions was approximately $78 million. During the first and second quarters of 2010, the company's balance sheet remained strong with debt-to-total-capital at approximately 25%. Debt increased by approximately $12 million in the second quarter, following an increase of approximately $44 million in the first quarter. Our growth and the acquisition of Academy drove the increase.

Receivables and inventory have increased by approximately $65 million in support of the growth. Cash for the acquisition net of metal put on our lease lines was approximately $15 million, while all other factors netted to a favorable $24 million cash flow.

At this time, we anticipate favorable cash flows, as the balance of the year progresses and expect an even stronger balance sheet at yearend 2010. We are pleased to have the liquidity we do and the flexibility to support the recovery and our related growth plus important strategic initiatives such as the recent acquisitions.

Let's now turn to the acquisitions for a moment. As I did in our previous conference call, I would like to spend a minute on the financial characteristics of these acquisitions and the effect that they have on some of the key company metrics.

While it is our practice to not disclose the sales and profit levels of individual businesses inside our segments, we feel that is important to review at least initially the impact that these acquisitions have.

As I have already noted and as we highlighted in previous call, the high percentage of the added sales from these acquisitions includes precious metals, primarily silver and some gold. This has the effect of diluting reported gross margins and operating margin percentages and as a result does reposition these records point considerably for both the company and the Advanced Material segment.

We announced earlier in the year that we expect that the acquisitions to be accretive to earnings by up to $0.20 a share in 2010 and that they were expected to add over $200 million to company sales in 2010 as well.

These acquisitions were accretive in both the first quarter and the second quarter of the year. The integration of both is progressing well and results were on track. In the first half the acquisitions added approximately $0.10 a share to earnings.

I will now turn to the outlook.

The overall level of business activity has improved sequentially, quarter-over-quarter, as the year has progressed. The company has seen a strong improvement in its order entry, driven initially by the consumer electronics oriented markets, and also in its defense and industrial markets. While there is still uncertainty in the economic environment, our markets are strong and the opportunities for the types of applications we supply are gaining momentum.

We now expect the second half business levels to be stronger than what we previously expected.

Assuming current metal prices, we expect sales for the full year to be in the $1.220 billion to $1.260 billion range.

Seasonal factors including the fourth quarter holidays and summer shutdowns in Europe should have the usual affect on second half sales and profit levels. These factors may have the effect of reducing third quarter sales when compared to the second quarter, and fourth quarter sales when compared to the third quarter, which in turn may lower second half earnings somewhat when compared to the first half.

In addition to the seasonal factors, the second half is likely to be affected by added costs associated with the start up of the Company's new beryllium plant and the costs of other key initiatives that are important to the Company's future. These factors to both seasonality and the added costs will be partially offset by the stronger margins that we have seen.

Therefore considering this we're raising our earnings outlook for the year to a range of $1.75 to $2 per share from the previously announced range of $1.45 to $1.75 per share.

Taking into account the previously announced $0.12 per share of charges taken in the first quarter are range on a run-rate basis is $1.87 to $2.12 per year compared to the current consensus of $1.76 per share.

I'll now turn the call over to Dick Hipple. Dick will provide you with the market update.

Dick Hipple

Thank you, John. All they say what a difference a year makes. Our second quarter results in improved outlook for the balance of the year are really very exciting. The rapid return is strong. Profitability is driven by both our market and product positions in our operating improvements.

I would like to highlight the particularly large turn around in profitability of Specialty Engineered Alloys. In meanwhile, our advanced material segment which remain solidly profitable through the downturn continues to gain strength in spite of the additional challenges of integrating two new acquisitions, and again both of these strategic acquisitions are on track to make our objectives.

As we moved through the first quarter, the majority of our markets returned to 2008 pre-downturn levels. Consumer electronics is particularly robust as smartphone sales continue to capture a higher percentage of the market, and we are well positioned with applications in the major platforms such as the iPhone, the iPad, the Droid. It is expected that the global demands for portable communication devices will continue to be robust in spite of lower global GDP estimates.

The increasing video demands of these devices continues to put pressure on telecom infrastructure spending but we are now enjoying global growth from applications in servers and base stations. This area is also expected to provide multi-year sustaining growth for Brush. Other major areas of our growing electronic applications, such as LEDs, are also robust and have strong sustaining high growth characteristics.

After the unfortunate oil spill occurrence in the Gulf of Mexico and the drilling moratorium that followed. We had significant concerns that we would see a downturn in this segment of sales in our alloy business. However, the opposite that has happened, as it appears the drilling companies are reevaluating the materials of choice and switching to higher end, safer and more reliable materials in their designs. In fact, our order book actually increased since the Gulf incident.

I might add, as a matter of interest, that as you watch the TV and observe the relief well installation, the instruments tool used to guide the drilling contains a significant amount of materials supplied by Brush.

High strength, high corrosion resistance, lubricity and non-magnetic properties are all required to support the technology and we have unique materials in this space.

Another macro trend is the possible shift to natural gas as a transition transportation fuel. The current legislation moving through congress supports this objective. And our heavy participation in directional drilling tools in shale is good for the long-term.

A pleasant surprise this year has been the ongoing strength of defense in our BE products division. We originally expected this business to soften in the second half, but so far the bookings are holding up, and we are in very good areas of future growth platforms, particularly in optics where surveillance and targeting is the main focus both in the air and on the ground.

Another industrial applications such as commercial aerospace, our order book has returned to pre-downturn levels. Although the commercial build schedule has decline along with the MRO rebuild schedules. We have increased our application levels in the new platforms in many new bushing applications, so our order rates are exceeding the market growth.

The automotive market has remained strong for the first half, but it appears that the build rate is currently exceeding the sales rate, so we may see some softness late during the year but we shall see.

All-in-all, our markets have been stronger than anticipated and we are well positioned in markets that should enjoy multiples of GDP growth. Moving forward our numerous growth platforms should provide solid opportunities even if we enter slowing global GDP growth rate.

We are making good progress on new solar materials. LED products, expanding our footprint in optics and ongoing growth applications in numerous industrial markets.

Thank you and we will now take questions.

Question-and-Answer Session

Operator

(Operations Instructions) Our first question comes from the line of Chuck Murphy with Sidoti & Company.

Chuck Murphy - Sidoti & Company

Nice quarter.

John Grampa

Yes, it was.

Chuck Murphy - Sidoti & Company

Need your help here to tie out some numbers, when I calculated second quarter, organic sales were up about 9% sequentially, is that about right? If we excel the metals in Barr Academy.

John Grampa

Second quarter over first?

Chuck Murphy - Sidoti & Company

Yes. No change for advanced materials.

John Grampa

For advanced materials, the company was about 11%. For advanced materials I don't have a data. Don't have a calculator again.

Chuck Murphy - Sidoti & Company

I was also wondering if that was the case, I went back and looked at the last press release, maybe something was included then, it's not now, but I think it said that Barr Academy sales for the first quarter of 10 are about $60 million this quarter was up 48. Was there any seasonality or some point that?

John Grampa

Yes, there is seasonality in that business. The Barr Academy began the year with little bit of backlog. Actually academy held from December because prior to the, with that turnover the acquisition we had shutdown for the Christmas holiday, so it was little bit backlog of business that came in to the first quarter, so that's the seasonal affect there.

Jim Marrotte

We had some differences in customer supplies now within the academy.

John Grampa

Academy business as well.

Jim Marrotte

More in that year in the second quarter than we had in first quarter.

Chuck Murphy - Sidoti & Company

My other question was in your press release you've mentioned something about medical and defense being down for advanced materials, is that sequentially or year-over-year?

John Grampa

That's year-over-year.

Chuck Murphy - Sidoti & Company

Okay, what was medical for advanced material sequentially?

John Grampa

That's situation where we have a new piece of equipment being install in Techni-Met. We are on track and we expect that to be turned around. So let's held back shipments in that particular, it's not a market issue, it's a specific that application issue that we needed new piece of equipments to continue to grow there. If that's coming in and we hope that situation is backup and growing in a fourth quarter.

Chuck Murphy - Sidoti & Company

Got it. Now is that related to, there was an issue couple of quarters is that [December timeframe]?

John Grampa

Yes, that's not a new issue. It's the same one we, we'll run on meeting a new piece of equipments there which we've taken care of.

Operator

Our next question comes from Avinash Kant with D. A. Davidson.

Avinash Kant - D. A. Davidson

First on the guidance, if I remember the last quarter when you gave the revenue guidance that was roughly $1.2 billion to $1.3 billion and now you are talking about $1.22 and $1.26.

John Grampa

That's right, we have narrowed it.

Avinash Kant - D. A. Davidson

Yes, and clearly (inaudible) it's not a big difference but if you talk about the high-end of the guidance, maybe you are tweaking it a little bit. Is that all metal price dependent?

John Grampa

It's largely metal. That's right, we had assumed, in our assumptions and in the last quarter we're continuing increase in metal prices in the guidance.

Avinash Kant - D. A. Davidson

In the current guidance what's the assumption of metal prices going forward in Q3 and Q4? Is it flat or it's down some?

John Grampa

Q3 flat to Q2 and Q4 higher than Q1.

Avinash Kant - D. A. Davidson

Q3 flat and Q4 higher than Q1 and how about higher than Q3?

John Grampa

No.

Avinash Kant - D. A. Davidson

So Q4 compared to Q3 is how?

John Grampa

I think you could take, how then I should, you know it's very difficult to estimate those numbers. I think that the reason that the numbers are we narrow them are obviously we have got line of sight over two quarters and we are headed in the last half of the years, so we have narrow the range for that reason. Our metal prices were not as high in the second quarter as we anticipate in the base. So in our forecast, the metal price outlook generally is lower for the second half of the year than it was in our previous estimate.

Avinash Kant - D. A. Davidson

Okay, that explains it. I just need to understand your assumptions and then we could see how it's tracking and then it will help us model. But the second half price assumption is lower than the first half, that's why the majority of the change is coming from, that's it.

John Grampa

Not lower in the first half, lower than our previous assumption about the second half.

Avinash Kant - D. A. Davidson

Would you give us whether it is lower than the first half or not?

John Grampa

I am sorry, I didn't understand.

Avinash Kant - D. A. Davidson

I know it's lower than what you had assumed earlier but would you venture to give us whether the second half pricing it's actually in absolute sense lower than the first half?

John Grampa

No, about the same.

Avinash Kant - D. A. Davidson

About the same? Okay. Now, the second question I had was you have the share repurchase plan, is there any timeline for that?

John Grampa

No, there is no timeline.

Avinash Kant - D. A. Davidson

What should we think about CapEx and depreciation for the year '10?

John Grampa

Yes, depreciation hasn't change. It's approximately $35 million, $36 million for the year. CapEx is probably a little bit lower than what we had forecast earlier. It's probably $20 million to $25 million. I think we had estimated $25 million to $30 million, so it's going to be a little lighter.

Avinash Kant - D. A. Davidson

Tax rate, should we assume any changes there?

John Grampa

The tax rate at a roughly 33% for the year.

Jim Marrotte

Yes. You got to remember we had in the first quarter $1.4 million hit we took, because of the Obamacare. Once we pull that out of the calculation for the first half of the year, that's about the rate we'll see down there.

Avinash Kant - D. A. Davidson

In the press release, you did talk about some costs later in the year for the opening of the new beryllium plant. Now, from what I understood, majority or most of it was paid by the government, right? So, how much of a cost are we talking about here?

John Grampa

The construction was paid for by the government but they are all big start-up risks, and so we've estimated some additional costs in the beginning in the late third quarter, but primarily in the fourth quarter, and $1 million or maybe perhaps $1.5 million, but that again that's a stuff that's always start-up risk.

Jim Marrotte

We do have an expected start-up in the numbers that we have forecasted. We are talking about here is that something would go astray.

Avinash Kant - D. A. Davidson

$1 million to $1.5 million in the fourth quarter, or third and fourth quarter combined?

John Grampa

Mostly fourth quarter.

Avinash Kant - D. A. Davidson

That's already in the guidance, right?

John Grampa

Yes.

Avinash Kant - D. A. Davidson

So if anything beyond that will now impact guidance.

John Grampa

Anything beyond that would be risk.

Avinash Kant - D. A. Davidson

The final question I had was if gross margins have improved meaningfully, I'd say at the current level. Now was there anything that was specific to this quarter, which may or may not happen going forward or this is how we should start to think of gross margins going forward?

John Grampa

I think it's probably reason we will begin to think about second quarter gross margins maybe being a reasonable surrogate from what might exist in the next couple of quarters.

Avinash Kant - D. A. Davidson

With the [first 60 profits you] declined and slight decline in revenues that you are talking about in Q3 and Q4 still margins could have stay there?

John Grampa

Again you have the issue that we always have a metal price and then customer pull metal versus our own metal and then of course metal mix. So, yes, I think assuming no change in all of that about the same margin.

Avinash Kant - D. A. Davidson

There has been a lot of concerned lately specifically in the electronics good chain about some upcoming slowdown, especially from Europe or the economic slowdown that people have been talking about. Have you seen anything like that in your customers thus far?

John Grampa

No. I have not.

Operator

Our next question comes from Anthony Sorrentino with Sorrentino Metals.

Anthony Sorrentino - Sorrentino Metals

Also in the press release beyond discussing the added cost related to the beryllium plant you also refer to other key company initiatives, would you go in further detail with regard to that?

John Grampa

Sure, let me just comment briefly on that. We are investing in a number of areas. All driven at continuing to improve the effectiveness inside this company's operations and driving margins up in future period. What we're referring to specifically here, our investing is in marketing initiative, investing in purchasing, and some initiatives to improve help us improve pricing, all of which will be spending some money on, again late third quarter through the fourth quarter of the year. In third quarter I should say through the fourth quarter of the year. Benefits in 2011 probably we'll continue to expend into 2011.

Operator

Our next question comes from the line of Mark Parr with KeyBanc Capital Markets.

Mark Parr - KeyBanc Capital Markets

I wanted to add my congratulation it's awesome first half and you guys are continuing to make progress. Dick one of the things, I think that investors have been a little or feeling a little confused about maybe over the last several years is, there is in the ups and downs. There has been periods, where you have done extremely well then there has been another periods, where things come back in a bit. I'm just wondering you've been focusing marketing on trying to really address high growth segments of fast growing markets. How are you feeling right now about the sustainability of the growth track, say relative to where you were couple of years ago. You understand what I'm trying to coming out?

Dick Hipple

Yes, I do and in fact, I am glad you asked that question because I'll try to get some of that through the discussion I had after John and really, I am really quite excited about it because what we have done, if you think about some of these markets, with the position we have with the mobile electronic space and smartphones, that has got a very strong growth path ahead of us in the parallel with the infrastructure that's very sustaining with what's got to go across the globe.

Mark Parr - Keybanc Capital Markets

This is more alloy material. Is that correct?

Dick Hipple

It's for both segments. Beryllium's actually, probably is to a higher than alloy when you come to the wireless sector. So that whole space is a really strong horse to be riding right now and obviously our plan is to ride stronger than that because we are after growing faster than that market space based on growing applications.

Then you take a look at what we have done in the oil and gas space and we have really increased our portfolio of applications there. We have, similarly, on the aerospace, they are going to finally start building these new planes, they are coming and we are growing faster than that market.

We have now got a really nice footprint that's going to be growing in the alternative energy space which is another great growth market in both the solar and some other applications.

So if you spin the clock back five years ago, we didn't have this diversity of opportunities. We were talking more, one here, one there. Now, it's so darn exciting because of the numerous opportunities we have across the board on numerous growth markets but that's been our strategy.

That's where we try to position the company and so we've had an extraordinarily strong rebound from this recession and it's really driven by the strategy that we've been working on for last several years and that's really a blossoming right now.

Mark Parr - Keybanc Capital Markets

That's really helpful, and congratulations on that progress. If I could just get one and just ask one follow-up? In the energy markets, where you've had people actually upscale the quality, reliability of the respective tooling et cetera. Is that something that you would expect to be kind of a one-shot deal or?

Dick Hipple

No. That's going to be another systemic change, because if you are talking about people changing their materials and upgrading their materials, you've got a one-time thing, but that takes a while there, but then what it says is that on an ongoing basis, they are going to be using higher grade materials.

Mark Parr - Keybanc Capital Markets

Any way you could put a number around that and perhaps quantify from a revenue standpoint?

Dick Hipple

It's too early at this point in time, but we're increasing our growth estimates in the oil and gas area because of it.

Mark Parr - Keybanc Capital Markets

Any sense of how much of that could add to the second half revenues?

Dick Hipple

Not at this time, I would be guessing.

Operator

Our next question comes from Yvonne Varano with Jefferies & Company.

Yvonne Varano - Jefferies & Company

Good quarter, nice margin expansion and I did want to ask on the specialty engineered business. I think that's where we saw some significant operating margin improvement, and from the comments and the press release and it seems like that should be sustainable and I'm just wondering you think it stays in this 10% to 11% range or is there more upside to that or other factors that affected the quarter what we would like to see that for back in the back half.

Dick Hipple

They were really special factors in the quarter, which is really good news. We have systemically improved that business. I mean that's major message and as always we are going to continue to try to improve that business, better our margins and just operating the business better and improve productivity and better pricing strategies and better product, higher margins.

That's the normal blocking and tackling but the business has systemically improved and so now but to sacrifice those margins would be say a significant change in the volume side. I mean, again, it's a business that has a tendency. They are just sensitive to volume. So, other than that we are rally proud of the job that the division has done.

Jim Marrotte

I think the key point area that you picked up on, Yvonne, was that even if the volume were to drop, the cost that have been taken out, they had not and will not come back in to the break-even point in that business have been changed significantly and if you ever see the environment that we had in 2009 again in that business you won't see the loss levels fall in that business in 2009. So, significant difference and change in the cost structure.

Yvonne Varano - Jefferies & Company.

Okay, and looking at the entry businesses I know the volumes they were anticipated to come down a little on the seasonal factors you talked about maybe impacting the margins barely but any other key business that you expect to see greater margin deterioration in the back half of the year.

Jim Marrotte

No.

Yvonne Varano - Jefferies & Company

I guess, I am asking because it seems that if they are really not, outlook you put out could end of being conservative?

Jim Marrotte

That's a difficult one. The outlook is our best estimate and our best judgment considering some of those downside factors. If we don't see the start up cost, for example, that we have got baked in there, if don't see the seasonality, if we see some stronger demand from the consumer electronic side, we see some lift then you can argue that it is conservative, but at this point I think it would be unwise for anyone for predict that there is not going to be some sort of economic effect out there later in the year.

Operator

Our next question comes from the line of Rob Young with Wm Smith & Company.

Rob Young - Wm Smith & Company

Just curious, could you remind us on the permanent cost reductions on how much they were and the aggregate level of cost reduction you were able to take down last year?

John Grampa

Actually, I think that probably what you would most interested in is that on the same basis our manning levels are approximately 250 people below, still below where they were at the third quarter 2008, end of third quarter of 2008 when we started to take the cost actions.

So we have got an employment level on the same basis but when I say on the same basis excluding the employment level that's in the acquisitions. We have got an employment level that's still 12% lower.

On the costs side, including the employment level on that same basis, we still have about somewhere between 10% to 15% of the overhead structure out of the organization including the many levels.

Rob Young - Wm Smith & Company

Right, so is that a permanent thing to see going forward or you see that?

John Grampa

Well, I didn't ever say that it's entirely permanent. You do get step functions as your business grows but certainly we are not seeing any of this significant of that coming back over the next couple of quarters and I would go as far saying perhaps even in the early parts of 2011 but again it's all dependant upon growth and the statement and that makes perfect sense,depending on the state of the economy.

Rob Young - Wm Smith & Company

So obviously you were able to deal with this level of growth that's coming through the pipeline with fewer employees from the legacy business.

John Grampa

Yes, and one thing that I would add also that, I should have added in response to your volumes question is that one of the big difference is in that engineered alloy segment also is pricing. Stronger pricing, stronger margins.

Rob Young - Wm Smith & Company

Okay, and then, I was hoping that you could possibly comment on the inventory levels that your supply is as low as customers. I know that your score levels are so below the end-user but can you comment at all or is that data available?

John Grampa

Two things, yes, on the raw material side coming in there are no supply issues that we have seen. No interruption in supply of any kind. On the other side, albeit that we have maintained that maybe there is an inventory build out there, maybe there is an inventory correction, we have said, logic would suggest that that's perhaps the case, we have not seen that. We have heard that from our customer base.

Rob Young - Wm Smith & Company

Okay, and then just lastly, last quarter I think you mentioned that, and correct me if I'm wrong, but I thought it was mentioned that order entry levels were essentially at three or high. I was hoping that you could possibly comment on that a little bit. I mean has that sequentially improved or tailed off a little bit due to seasonal?

John Grampa

Yes, sequentially improved, book-to-bill was $1.13 in the first quarter and $1.07 in the second quarter.

Rob Young - Wm Smith & Company

Has that have any effect on the abilities for you to predict that, essentially predict the future? Has that helped your overall outlook and essentially extended out your ability to see the future, does that make sense?

John Grampa

Yes. It has, because having the growth there in the backlog and it gives us a better line of sight obviously to having an initial quarter of the second half. So the answer to your question is yes.

Rob Young - Wm Smith & Company

In terms of fiscal year 2011, would we expect to see some type of guidance in the next quarters for what's out to shake out?

John Grampa

As we began get our own line of sight over 2011, we'll provide the guidance. We generally provide that guidance in the first call after the end of the year.

Operator

(Operator Instructions). Our next question comes from the line of Mario Gabelli with Gabelli & Company.

Mario Gabelli - Gabelli & Company

As you look out to, unfortunately I have been grazing on four conference calls at the same time, as we look at the 2011, 2012, you done a good job in using cash flow to buy Academy and Barr. What do you feel you need to reinforce the trends that you see in the markets you want serve and is it tuck-in acquisitions or is it larger acquisition? Can you do it internally through organic growth?

Dick Hipple

I think Mario, Dick Hiple, how you are doing today. I think we have had a practice here where we have been basically would be doing tuck-in acquisitions. We think strategically that's right on the mark.

Obviously it's a little bit safer route to go. In case something would blow up you haven't really disturbed the company so much and we have been very strategic about this tuck-in and acquisitions that when we buy them we really we are buying them with some pretty high confident that their ability to grow is pretty strong.

They have also been based on expanding our footprint of technology end-markets. So they really work well for us. That's never precluded us from saying that we don't want to do larger acquisition but if we would do that we have to be very confident that it would be building sustainable growth at a fairly low risk profile and so what we wanted to be here is stable and growing stable over time versus, it's a very large acquisition that might have a larger risk profile to it, but that does not preclude us from having that philosophy should the right opportunity come along and I must say that we have looked at those opportunities. However, we have not been totally comfortable with them.

Mario Gabelli - Gabelli & Company

That's a fair Statement. Everyone is in the world of uncertainty. Uptick, as you are looking out, you got smartphones, you talked about the big 787 Dreamliner and the Airbus. Did you talk about how much dollar per smartphone you get as content?

Dick Hipple

No, we don't talk about that, reveal that information. The type of applications we have in a smartphone are kind of two fold, one is from our alloy division where we provide connector materials into those devices for the very high end reliable, our reliability connector materials and then in our Williams Advanced Materials group we provide a lot of precious metal targets that are used for sputtering compounds semiconductor devices that go into cell phone, smartphones.

Dick Hipple

That's helpful. How about on the 787 in the airbus on a dollar content and what do you do there in dollar content per chipset?

Dick Hipple

Again we haven't talked about the dollars per plane but we're in a lot of bushing applications, on the landing gear, on the parts of the plane that, for example, where you have the air flaps, I won't get the technical words right.

So there. We've got a flyer in the team here. Where you have the bushing material in those devices. So we're in a lot weird areas of the plane where they need, where they don't want to do a lot of lubrication and they get a lot of high loads.

They are going to our material base because it's a higher strength and a better wear resistant overtime. So what they can actually do is they can use less metal on their planes because we're about double the strength of the metal that we replace. Therefore we're not a light weight metal in the case of what we are providing but they use half of it because our strength is high.

Mario Gabelli - Gabelli & Company

Is it too late to get more content for plane and to the designs of the 787 and the new 737 single bodies or anything like that?

Dick Hipple

That has a very long design phase ahead of that but what's been really nice for us is for example, we have a very unique metal that's going on these planes and we worked hard for several years to get the material certified at the major airplanes. So anytime you have a new metal, I can tell you, it's very, very difficult to get it specified and certified on commercial airline designs.

We have accomplished that. So now the airlines, the engineers have full capability to use our materials that they need the design of the plane. They now have the flexibility because we are certified from an engineering perspective.

Mario Gabelli - Gabelli & Company

That's terrific. I just want to figure where the new products, the markets that you are targeting in the 2011, 2012, 2013 period. I will look at that offline at some point. Thank you very much.

Operator

There are no further questions in the queue this time. I would like to turn the floor back over to management for closing comments.

Michael Hasychak

This is Mike Hasychak. We would like to thank all of you for participating on the call this morning. I'll be around this afternoon to answer any further questions. My direct dial number is, area code 216, the number is 383-6823. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Brush Engineered Materials Inc. Q2 2010 Earnings Call Transcript
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