Brush Engineered Materials Inc. Q1 2008 Earnings Call Transcript

May. 2.08 | About: Materion Corporation (MTRN)

Brush Engineered Materials Inc. (NYSE:BW)

Q1 2008 Earnings Call

April 24, 2008 10:00 am ET

Executives

Michael C. Hasychak - Vice President, Treasurer and Secretary

John D. Grampa - Senior Vice President of Finance and Chief Financial Officer

Richard J. Hipple - Chairman, President and Chief Executive Officer

Analysts

Chuck Murphy - Sidoti

Avinash Kant - Broadpoint Capital

Anthony Sorrentino - Sorrentino Metals

Bob Schenosky - Jefferies

Phil Gibbs - KeyBanc Capital

Rob Young - Wm Smith

Operator

Welcome to the Brush Engineered Materials’ first quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Michael Hasychak, Vice President, Treasurer and Secretary for Brush Engineered Materials.

Michael C. Hasychak

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

Our format for today’s conference call is as follows. John Grampa, will comment on the first quarter 2008 results and the outlook, and Dick Hipple will give a market update. Thereafter, we will open up the teleconference call for questions.

A recorded playback of this call will be available until May 9 by dialing area code, 877-660-6853, account number 286 and conference ID 280902. The call will also be archived on the company’s website, beminc.com. To access the replay, click on “Quarterly Earnings Conference Call” under the Investors page. The broadcast requires RealPlayer software which is available as a free download from the icon as indicated.

Any forward-looking statements made in this announcement, including those in the outlook section and during the question-and-answer portion, are based on current expectations. The company’s actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release issued this morning.

And now, I’ll turn it over to John Grampa for comments.

John D. Grampa

Welcome to our first quarter 2008 earnings teleconference. Thanks for taking the time to join us today. As in the past, I’ll review the quarter, and then comment on the outlook. And then, following my prepared comments, Dick Hipple will also provide you with a market update, focusing on some encouraging developments. Then, we’ll open the call for questions.

I’ll attempt to adequately reinforce, as well as expand, on the key points made in the press release about the quarter, as well as the outlook. I’ll comment on six specific items. First, I’ll review the factors affecting the reported lower sales compared to the prior year and the important progress that is embedded in those numbers, once you remove the influence of metal price, media market factors and handset customer impacts.

Then, I’ll review the factors that affect the reported lower profits, especially the favorable prior year one-time benefit that significantly affects the comparisons. I’ll also provide added insight to the non-repeating charges recorded in the first quarter.

Third, I’ll cover the specifics of the trends in media. Significant swings in ruthenium market prices, material sources and demand factors, as well as new product and market ramp up rates, can dramatically affect quarterly results. It’s therefore important to review what is happening with all of our new materials that support the perpendicular media recording launch that continues to occur. And Dick will be updating you on the status of our product qualifications in media and the current order trends.

Fourth, I’ll review the volatile cell phone handset market, where the expected lower demand levels from a key customer continue to have a negative impact on the earnings comparisons in that segment to prior periods. And then I’ll review briefly our balance sheet, which is strong and is expected to remain strong, and finally, the acquisition of the assets of Techni-Met.

And following those six points, as I indicated, I’ll cover the outlook, whereas we identified in the press release we’ve reaffirmed our previous guidance on the year.

Before I begin the review of those six points, I should reinforce what most of you should already know, and that is the fact that the first quarter comparisons to the prior year are the most difficult comparisons of the year due to both last year’s media launch and the current quarter’s weak media volume. We don’t expect this to be the case in the coming quarters.

So, let’s begin on the six points. This morning we reported sales for the first quarter that were about $24 million below the prior year’s record first quarter level. The current quarter was the first quarter in over five years where we didn’t report sales growth. Prior to the current quarter, we had 20 consecutive quarters where sales were higher than the comparable quarter of the prior year, and nine consecutive quarters of double-digit growth.

The primary factor in the lower sales is lower shipments to the media market, which is directly linked to the re-qualification process we’ve been reporting on, the last year’s heavier perpendicular media launch volume, and metal prices, all three factors.

Sales here were approximately $57 million below the prior year. In addition, in the first quarter, defense push-outs and lower engineered alloy volume, primarily to the cell phone handset market, drove sales down an additional $6 million. Sales grew in our other businesses collectively by over 20% in the quarter.

Metal price inflation or, said differently, that portion of both precious and non-precious metal price increases that we were able to pass on to customers in the quarter had a more significant effect on reported sales than in recent periods. Approximately 12 percentage points of the 20% growth is due to higher metal values.

We continued to see solid growth in many of our other key markets, including growth in oil and gas, growth in heavy equipment, in wireless and photonics, as well as in medical, consistent with the trends noted throughout the prior year.

Growth of our new products remained very strong. The benefit of these sales gains were offset by alloy handset sales and the defense push-outs, which now appear to be returning in the second quarter.

I’m going to briefly address the media market and the cell phone handset market in a moment, and then Dick Hipple will follow with additional comments on both, as well as comments on our other markets and our other new products.

As for the lower profits compared to the prior year, as the earnings report indicated this morning, while consistent with our expectations and on track with the guidance we provided for the year, we are well below the prior year. Excluding the noted one-time ruthenium benefits and the negative effect of the small subsidiary sale, the prior year’s operating run rate for the first quarter was $0.62 a share, $0.50 lower than the GAAP reported $1.12 a share.

In the current quarter, we identified three non-operating factors that resulted in $0.13 a share of charges, lowering reported earnings from the $0.35 a share run rate. $0.09 of the $0.13 a share is due to the need to correct a $2.6 million billing error from last year that was discovered late in the first quarter.

We adjusted the carrying value of our deferred tax assets, as well, which resulted in a higher than normal first quarter effective tax rate. This had a $0.02 a share impact. It’s important to note that we do anticipate the effective tax rate for the rest of the year to be lower than the first quarter rate and lower than last year’s rate.

The final factor in the $0.13 of non-recurring items was a non-recurring purchase price allocation charge, or $0.02 a share related to the acquisition of Techni-Met. Net of these, the operating run rate difference is, thus, $0.27 a share which is driven primarily by the lower media volume, plus the defense push-outs and the lower volume to the engineered alloys handset customer. The full impact of these factors was partially offset by the growth in the other areas.

Turning to media, the most significant factor driving our growth in both 2007, as well as our expected growth in 2008 is the growth of our new magnetic media materials for the Perpendicular Media Recording segment of the data storage market.

The growth here is being driven by the rate at which the market and the customers we serve transition to the new perpendicular media recording technology and our ability to capture and maintain a share of their business with our new products and our production capabilities. You’ll recall that a rapid product launch resulted in very high sales and profit levels in the first quarter of 2007. Then, as previously announced, during the fourth quarter, the company experienced a major setback in this market.

The setback was driven primarily by a changing material specification at our largest media customer which, in turn, resulted in necessary manufacturing process changes and a lengthy product re-qualification process. This resulted in lower shipments to that customer while the re-qualification process was underway. This process was completed in the first quarter of the year.

Media sales were approximately $5 million in the first quarter, compared to $62 million in the same quarter of last year. Given what we presently expect, comparisons to prior periods in media will be far better in the coming quarters. Dick Hipple will comment more on that in a moment.

I’ll turn now to the cell phone handset market. Now, as you well know, the cell phone handset market has historically been one of our most volatile and unpredictable markets on a quarter-to-quarter basis. Demand from quarter-to-quarter and inside quarters can be very choppy. We serve this market with products for specific customers and specific applications from both our Advanced Material segment and our Specialty Alloy segment.

In Advanced Materials, we continue to see strong growth in this market throughout 2007, and that carried through the first quarter of 2008 and is expected to continue through the remainder of 2008 as well.

But, while the overall handset market continues to be strong, products and applications we supply from the Engineered Alloy segment haven’t been at normal levels since mid-2007 due principally to lower demand for a key customer’s handsets. As with the magnetic media market, comparisons here should be better in the coming quarters.

The company’s balance sheet remained very strong in the first quarter, even considering the acquisition, and the company continues to have significant financial flexibility. Debt to debt-plus-equity remains at a healthy 20%, and debt-to-EBITDA is still well below one. While the Techni-Met acquisition was approximately $87 million, balance sheet debt increased by only $55 million in the quarter. You’ll recall also that our credit lines are healthy.

The company increased its precious metal consignment lines by $95 million to $205 million and increased its revolving credit agreement by $115 million to $240 million in late 2007, adding both financial flexibility and financial capacity. The increased capacity and flexibility adds liquidity to support the expected organic growth and to take advantage of acquisition and augmentation opportunities, plus other capital structure considerations as they surface.

I’d like to now spend only a moment on the recent acquisition. On February 4, the company completed the acquisition of the assets of Techni-Met, Inc., a manufacturer of precious metal-coated films headquartered in Windsor, Connecticut. This highly complimentary business extends the company’s leadership and geographic reach in high growth, technically demanding thin film markets and allows the company to pursue strategic growth opportunities in the medical diagnostics market, as well as other targeted markets.

The acquisition was accretive to the first quarter. I understand that many of you would like us to disclose more financial information about the acquisition and, in particular, the accretion level that we expect for the year. But we, as a rule, do not disclose line of business or product line financial data, especially competitively sensitive information which this is for this acquisition.

That completes my comments on the first quarter. I will now comment on the outlook. The specific guidance we reaffirmed in the press release today is guidance on the outlook for the full year only. This is consistent with the change in practice that we announced in mid 2007.

The company, at this time, still expects the sales growth for the full year 2008 to exceed 10% and still expects earnings to be as much as 30% above the prior year operating run rate and, thus, in the range of $1.80 to $2.30 a share. For clarity, this excludes the $0.13 a share of charges taken in the first quarter, and it, of course, also assumes that a global macroeconomic downturn does not develop.

As previously communicated, the company expected first quarter shipments to the media market to be weak. In addition, demand from specific customers and for applications served by the company’s Specialty Engineered Alloy segment were expected to be, and in fact were, below last year’s levels as well. Also, demand from specific customers and applications served by the company’s Beryllium and Beryllium Composites segment were expected to be weaker due to several program delays and push-outs.

In each of these areas, continued strength as the first quarter developed and media of qualifications progressed. As a result, the company is seeing stronger demand as the second quarter begins and expects to resume higher shipments of perpendicular media materials in the second quarter and beyond.

Helping to offset the impact of the weaker shipment levels to these markets was stronger demand from the cell phone handset market for the company’s Advanced Materials and Technology segment products, as well as stronger demand for the company’s products from the medical, oil and gas, heavy equipment and other industrial markets. Conditions in these markets also strengthened as the first quarter progressed and our backlogs climbed.

Based on this, the company is encouraged about the outlook for the balance of the year and, at this time, expects to show significant quarter-over-quarter improvement in both sales and earnings as the year progresses. It is nonetheless important to continue to reiterate that the company’s sales and earnings estimates are subject to significant variability.

Metal price changes, metal supply conditions, fluctuations in demand levels driven by such factors as customer inventory swings, product qualification rates, new product ramp-up rates in critical markets such as the media market, can all have and have had a significant effect on actual results. The outlook for the year is based on what the company sees today and is subject to significant fluctuations due to these factors, as well as other factors.

I’ll now turn the call over to Dick Hipple, and Dick will provide you with a market update.

Richard J. Hipple

First of all, I’d like to reinforce how frustrating this first quarter was for Brush. Fundamentally, we are pushing very hard on many fronts, and we were unable to convert all of the initiatives to the bottom line as fast as we would have liked. And as the second quarter unfolds, I’m encouraged from the perspective that we will be seeing substantially improved performance.

To cover the most significant issues, first of all, we are seeing good solid market conditions across our product lines. The only significant softness we see is in the U.S. automotive market, but this is a fairly small factor for our company. And even here, we are seeing benefits from the dollar-euro exchange rates, allowing us to gain new sales in Europe from our U.S. manufacturing base.

So, in summary, we have not, as yet, seen a significant spillover from the financial crisis having a substantial impact on our markets. But it’s obviously an area of concern, particularly if longer term, it affects consumer spending for electronic devices.

John covered several other areas that I would like to provide further details around. The biggest issue for the company is the backward steps in sales that we suffered in the fourth quarter of 2007 and the first quarter of 2008 in the media market.

Our shipped volumes of ruthenium targets significantly declined as we modified production processes and proceeded through the re-qualification process. We have completed all steps and have now been re-qualified at our customer base. So, we will be seeing significantly higher shipments in the second quarter as compared to the first quarter.

Additionally, we have made good progress at qualifying a new innovative approach to making Ru targets at a new major customer from which we hope to see shipments in the third quarter. Based upon our challenges in the fourth quarter and first quarter in the ruthenium media market, we suffered a delay in our progress in qualifying our new media oxide targets.

As you recall, the oxide layer is a significant opportunity for additional growth in the media materials market. We are now well down the road with a major customer in the oxide qualification trials and if progress continues, we should be entering this segment of the market in the third quarter of 2008.

Several other comments I’d like to make regarding our Williams business include the good news we received in the first quarter involving the new contract for our expanding precision optics business. The order was for our Visi-Lid product, which is primarily used for optics applications and defense.

And also, our target sales into wireless, handsets, and high-intensity LED applications remain strong. However, we obviously remain nervous about possible slowdowns in the consumer electronic sector, which may drive an inventory correction.

In our alloy product sector, we are still seeing the impact of the downdraft of one of our major customers in the handset business and, thus, our strip sales. However, along with picking up new business from our new customers in the handset market, we are seeing very robust sales in the telecom infrastructure market and in our heavy industrial markets of oil and gas, aerospace, and heavy mining equipment.

Our backlog coming into the second quarter is very strong which, again, supports our strengthening second quarter outlook. We are fortunate to be bringing online new capital equipment that will be relieving some capacity bottlenecks, which were beginning to evolve in our alloy bulk business. And we also raised prices in alloy several months ago, and we are now seeing positive benefits from this action.

In the last call, I mentioned there were some program push-outs beginning to occur in the defense business in our BE products division. This, in fact, did occur in the first quarter, affecting our sales, and we also saw softness due to an inventory correction in our Medical X-Ray Window business. The defense business push-outs did not last long, and we find ourselves with a strengthening booking condition, also reinforcing our view of a stronger second quarter.

As John mentioned before, we welcomed aboard a new acquisition, Techni-Met, in the first quarter, which is heavily focused in the medical market, providing the precious coated substrate used for glucose testing in the diabetes market. We are off to a good start, and we are seeing immediate accretion from the acquisition. As we look forward, we see further opportunities to expand our application base in the medical sensor market at Techni-Met.

On the international front, our Williams segments, new foreign startups in Suzhou, China, and the Czech Republic are gaining traction in the marketplace. And also, in our alloy division, where 50% of our sales are already overseas, they continue to expand sales into new fertile regions for our products, such as Turkey, Brazil, India, Sweden and Spain.

So, in summary, we see all three areas of our first quarter challenges turning the corner, sales in media, alloy, and BE products.

And I think we are ready for some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chuck Murphy - Sidoti.

Chuck Murphy - Sidoti

Could you just walk through the non-recurring charges again? And just to make sure I’m clear here, John, I thought I heard you say something about the run-rate being $0.27, but the press release said $0.35, which one?

John D. Grampa

No, no. The run-rate is $0.35. The $0.27 is the difference between the two years run-rate.

Chuck Murphy - Sidoti

Can you walk through now what those non-recurring charges were again?

John D. Grampa

The largest one was the $0.09 impact was a due to a $2.6 million billing error that occurred last year that we discovered late in the first quarter, actually discovered in mid-March. And there’s not a whole lot more to say about that.

Chuck Murphy - Sidoti

And that was for Williams, though?

John D. Grampa

Yes, it was. It was in Williams. It was in that segment. It’s an unusual event that the customer was, in fact, billed consistent with the order entry by that customer, and it also happens to be a customer that submits his orders to us electronically, and we ship and bill electronically. But, it turns out that the metal that was associated with that order was his metal, and it shouldn’t have been billed for. It should have been billed only the fab charges but, in fact, he was double billed the metal, because it had been billed to him earlier.

Chuck Murphy - Sidoti

And what was the other stuff?

John D. Grampa

The others were $0.04 in the aggregate. $0.02 of it was a difference in the effective tax rate for the quarter driven by an adjustment to the deferred tax asset account. And the third one was the non-recurring purchase price allocation adjustments fundamentally to the first turn of the inventory that occurred with the acquisition.

Chuck Murphy - Sidoti

Dick, as far as the media market goes, Williams, did I hear you say that you have qualified the ruthenium with a new customer, but that there was a delay in qualifying for the oxide layer?

Richard J. Hipple

Yes. On the ruthenium targets, where we stepped backwards in sales, we are re-qualified now. And then, because of the intense activity required to really get back in the saddle here ASAP, we had to pushback a little bit of our development program on the oxide. And so, that’s pushed the oxide back, as I had mentioned. And we expect if all goes well, and we are proceeding well, and we’ve gone through several phases and everything is thumbs-up, we would hope to be shipping the oxide-type material in the third quarter.

Chuck Murphy - Sidoti

But, it’s just re-qualifying with an existing ruthenium customer. It’s not qualification with a totally new one.

Richard J. Hipple

Well, that’s the base, what I call the base core business. And as we move from the first quarter to the second quarter and that volume increases, all associated with existing customers, we do hope to gain a new customer in the ruthenium area in the second half of the year.

Chuck Murphy - Sidoti

And your level of confidence in succeeding in that endeavor?

Richard J. Hipple

Well, we are encouraged.

Chuck Murphy - Sidoti

Just to be clear on the full-year guidance, that assumes that the EPS was $0.35 in the first quarter, correct?

John D. Grampa

Yes.

Operator

Your next question comes from Avinash Kant - Broadpoint Capital.

Avinash Kant - Broadpoint Capital

In your prepared remarks, you did say that you see meaningful growth in the ruthenium business going forward. Are you talking about growth from the Q1 levels, or are you talking about growth from second quarter calendar year ‘07 levels?

Richard J. Hipple

Well, my comments had to do with from first quarter to second quarter is where my comments were.

Avinash Kant - Broadpoint Capital

If you look at the ruthenium business itself, the price of ruthenium has fluctuated significantly since you started ramping up in the first quarter. On top of that, we are hearing that, in fact, the average film thickness that the customers are using at this point has been coming down significantly.

And then, of course, you have the unit issue. You have the average use per wafer – per chip issue, and then you have the pricing issue. How do we reconcile that? What is the best way to look at the fluctuations or the growth in your ruthenium business going forward? Is it just by volume or price or overall business?

John D. Grampa

Going forward, I think you hit the nail on the head. You’ve got to be thinking in terms of volume as we go forward. For those factors that you’ve expressed and let me repeat them, so that everybody understands them, metal value is significantly different.

A year ago in the first quarter of the year, metal value was almost $720 an ounce on what we shipped. In the second quarter, it was $780 an ounce. In the third quarter of last year, it was $460 an ounce. So, presently we are talking about numbers in the $400 to $450 an ounce level. So, ounces could be flat and sales could drop. So, sales have to be overlooked.

In addition to that factor, in the first part of last year, as the supply chain was being loaded with ruthenium material, the amount of material coming back through the system that was customer-owned was low. As the year grew and as volumes grew, that number started to change.

The customer began to own more and more of his own material which, in fact, was really material that was left in the targets that they bought, that ended up coming starting back through the refine recycle stream. In the first part of last year, 75% of what was being shipped into this system was owned by us and, therefore, showing up as revenue.

We would anticipate that that number would drop to less than half the shipments throughout the balance of 2008, perhaps climbing to as much as a complete reversal of that trend by the end of the year. So, following dollars as an indication of growth is not really going to be relevant. It’s going to have to be discussions around ounces and probably even more importantly, numbers of targets shipped.

Avinash Kant - Broadpoint Capital

So, in terms of the number of targets shipped, there’s one more issue, even if the customers were making the same number of chips using your targets, as the average film thickness shrinks, they would need less of your targets to make the same number of units, right?

Richard J. Hipple

That’s correct.

John D. Grampa

But that factor isn’t as significant really in the growth for us as the number of targets themselves.

Richard J. Hipple

And there’s all kinds of changing dynamics even on that front. For example, the oxide layer is primarily a platinum layer. And I think everybody is aware of what’s happening to platinum prices. In fact, there’s really a pressure to take a look at the possibility of increasing the ruthenium thickness to allow them to decrease the thickness on the oxide layer. There’s engineering going around that level, too.

So, it’s a very complex set of variables here that people are working on because, now, before, they were trying to reduce the thickness of ruthenium because it was up to $800 an ounce, and now you’ve got platinum running away. And now, they are taking a look at another possibility of going back to a thicker ruthenium layers. So, it’s very difficult how this is all going, I just threw another variable at you.

Avinash Kant - Broadpoint Capital

Now, maybe another way to look at this one is that we should maybe start to think about market share that you have had. And before the re-qualification happened, what market share did you have, and where do you think you are now, and where can you get by the end of this year, that would be a better way to look at it maybe in terms of your competitive advantage?

Richard J. Hipple

Well, as I’ve said before Avinash, is that we had targeted, we’d like to be about at least the 30% player in this marketplace, and we are certainly not there now with the decrease in volume that we had. And so, that’s where we’d like to be, and we are certainly not there right now.

Avinash Kant - Broadpoint Capital

But, I think, Dick, you were closer to 20% by the end of last year’s third quarter or so? Is that a reasonable assumption?

Richard J. Hipple

We’ve never really stated what our specific market share was. I only say what our targets are.

Operator

Your next question comes from Anthony Sorrentino - Sorrentino Metals.

Anthony Sorrentino - Sorrentino Metals

Are you confident that this new media technology is the one that the industry is going to accept, that that is going to be the new industry standard?

Richard J. Hipple

Well, it already has. Basically, the whole industry has gone to this technology, which is called the PMR technology. And I would say that effectively in the second quarter of this year, which is, like right now, 95 plus percent of the drives made will be made with this technology. So, it has been accepted.

Anthony Sorrentino - Sorrentino Metals

In the cell phone handset market, the trend has been toward low-end handsets. In what way is Brush impacted by that trend?

Richard J. Hipple

Well, on the lower-end handset, that would have a bigger impact on the alloy business, because as you try to sell cell phones that are very, very inexpensive, you are surely going to try to design down the components that are in the phone.

Operator

Your next question comes from Bob Schenosky - Jefferies.

Bob Schenosky - Jefferies

John, can you give us an update on the CapEx for the year?

John D. Grampa

It’s going to be approximately $30 million. Maybe a little lower, not a whole lot different than depreciation.

Bob Schenosky - Jefferies

With the second layer relative to the platinum and the demand, potentially, for the thinner, do you foresee any other design challenges with some of your customers that could potentially push this out from, say, third quarter into fourth quarter potentially next year?

John D. Grampa

I certainly don’t know of any right now.

Richard J. Hipple

We are working very hard on a certain design, and we don’t see that changing.

John D. Grampa

The industry is now five, six quarters into their ramp. So, things have settled out quite a bit on the specifications that are coming at us and the mixes of the metals that are in some of the alloys as well. So, I wouldn’t anticipate significant change at this point. A lot of things were being sorted out across the industry last year.

Bob Schenosky - Jefferies

You talked about potential inventory concerns as the year progresses. Are there any specific markets at this point that you would be willing to talk about or highlight where you are starting to see some early concerns relative to where?

Richard J. Hipple

No. It’s the item that I lose sleep on. We are not seeing it. We think the inventories in the systems right now seem to be quite lean. We don’t see a buildup anywhere that we’ve picked up on at this point.

John D. Grampa

We’ve seen backlogs climb, and we are seeing quick lead times being requested by customers. And it’s just counter what you read in the newspapers these days about what’s happening in the economy at large.

Bob Schenosky - Jefferies

And you are talking specifically about domestic concerns, right?

Richard J. Hipple

Yes.

Operator

Your next question comes from Phil Gibbs - KeyBanc Capital.

Phil Gibbs - KeyBanc Capital

I was really impressed with the underlying strength in Williams, if you stripped out the media market sales. I think if you exclude the sales in those respective quarters, the top line growth was somewhere north of 45% year-over-year. Can you speak to some of the momentum in that segment and some of the specific areas? I know you generally spoke about it. And what’s the impact of metal pass-through in that strength?

John D. Grampa

Just to clarify one point for everybody, that 40% growth, about half of that was metal value and some more in that neighborhood, but nonetheless, it’s still 20% growth. Just to clarify, that’s where the metal value changes occurred.

Richard J. Hipple

Well, I actually appreciate you asking that question because there’s so many things that are overshadowed by this media, is that there’s a lot of great things going on at Williams right now in other sectors of the business and a lot of the target business that’s going into the wireless area is growing very strongly. We’ve got new products there.

The area of, for example, the LED space, using high-intensity LEDs for energy conservation, a lot of new designs there are using precious metal targets for the higher-end LED markets. That’s growing very robustly. We are seeing a good growth in our Organic Chemicals business in the optics area. I had mentioned that.

And we also are seeing some real nice growth in this under bump area for the targets for under bump metallization for smaller chip size in the semiconductor area. There are a lot of things going on right now at Williams that are seeing some very, very healthy growths in other segments of the market.

Phil Gibbs - KeyBanc Capital

That Organic Chemicals business, that’s CERAC. And on the SG&A side, just for housekeeping, what are we looking for as far as a run rate? Should we look for something pretty comparable going forward? I know the fourth quarter is obviously where I know that your compensation and things like that take place.

John D. Grampa

The rate may be a little bit higher than what we had in the first quarter because of the compensation issue. We also will have the full-year effect of Techni-Met and their expenses. They were only in there for part of this quarter.

Phil Gibbs - KeyBanc Capital

We should be looking for a pickup a little bit from these levels.

John D. Grampa

Yes.

Phil Gibbs - KeyBanc Capital

There is another segment on the P&L. How do we look at that as far as what’s wrapped up in that?

John D. Grampa

That’s our corporate office, and then one of our small plants that doesn’t fit with the other segments. But, the majority of the difference there, the improvement, is actually driven by a compensation plan for our Directors that’s based on our share price. There was about a $1.5 million swing between periods on that plant due to the decline of the share price this quarter versus an increase in the share price last quarter.

There was also, in last year’s results, the operating loss and the loss on the sale of that small subsidiary that we would have had in the first quarter of last year that we do not repeat this year.

Phil Gibbs - KeyBanc Capital

And that $0.02 purchase accounting head, does that run through the cost of goods sold for Williams?

Richard J. Hipple

Yes.

Operator

Your next question comes from Rob Young - Wm Smith.

Rob Young - Wm Smith

As far as a qualification process for the oxide layer, how does that compare to the ramp-up time that you saw with the ruthenium layer?

Richard J. Hipple

Well, again, the way it would normally work, let’s say that we go through and get qualified totally in the second quarter. A customer is going to then ramp you up in a space to run you through a quarter and make sure that everything is up and running reliable within a certain set of volumes.

And then, you would kick it up again in the fourth quarter. So, we would see this steadily increasing from the third to the fourth quarter, but you are not going to see, like I always call it, a huge step function change one month to the next.

Rob Young - Wm Smith

And then, same type of question with the Alloy segment. In relation, you spoke a little bit about Samsung last quarter. How does that qualification process work? Is it similar to what you just described with the ruthenium?

Richard J. Hipple

That’s a little different. In fact, it’s a lot easier. Because in that case, there is a product that’s out there, a copper beryllium product, and we just need to make sure we are penetrating a supply chain more effectively. And that’s what we are about doing.

So, there’s not a, what I call, a sophisticated qualification process as you might find in the media market, although you still have to get qualified. You need to ship your product in, as it goes into stamping machines. But, it doesn’t have a specification, so I would call it a faster or a qualification cycle there.

Rob Young - Wm Smith

I think, or at least my assumption is with what you were talking about with revenue growth, that it’s more of a stair step from the second to the fourth quarter, fourth quarter being the highest revenue growth on a quarter-over-quarter basis. Is that a correct assumption?

John D. Grampa

That’s correct.

Rob Young - Wm Smith

On relation to some of your balance sheet stats, it looked as though your AR days sales outstanding grew slightly in comparison to last year and the average over the 2007 fiscal year. Is that something that you expect to come on down to historical levels, or is that a new watermark?

John D. Grampa

Yes, we do. We expect it to comeback. It’s not unusual for us, if you look at our pattern over a long time, for the first quarter, DSO to be higher than we had at year end. It’s also a function of some shifts in the business as well. We expect that to come down. And I would also like to reiterate that our normal bad debt expense continues to be very, very low.

Operator

You have a follow-up question from Chuck Murphy - Sidoti & Company.

Chuck Murphy - Sidoti

Regarding this new potential ruthenium customer that you are hoping to penetrate in the second half of the year, is this something that you have been expecting for a while? Why would they start to accept your targets in the second half of the year when they hadn’t done it in the past? Maybe you have changed something about the targets for them.

John D. Grampa

Yes.

Chuck Murphy - Sidoti

What’s changed?

Richard J. Hipple

What we have, it’s a different target, which we believe will offer a significant cost reduction and also provide some working capital improvement. So, it’s a new innovation.

Chuck Murphy - Sidoti

Is this the same customer that you are hoping to penetrate with the oxide layer?

John D. Grampa

Yes.

Chuck Murphy - Sidoti

You mentioned that alloy had some capacity changes. Can you elaborate on that again?

Richard J. Hipple

Yes. That’s in our Alloy bulk products are opposed to our chip products. And as I’ve mentioned, we have been growing very strongly in our bulk products in alloy. And we started about six months ago, determined, we were going to hit some capacity bottlenecks. And so, we got ahead of that curve. And as we speak, we are bringing some equipment online to help alleviate some of those bottlenecks.

Chuck Murphy - Sidoti

And was that Lorraine or Elmore?

Richard J. Hipple

That actually is in Elmore.

Operator

You have a follow-up question from Avinash Kant - Broadpoint Capital.

Avinash Kant - Broadpoint Capital

What was your international sales overall for the quarter? And what should we think of the tax rate for the rest of the year?

Richard J. Hipple

Certainly below last year’s rate. And Avinash, it will in the end depend upon the mix of business, and domestic versus international, and where it occurs as well. It could be as much as one to two percentage points lower by year-end.

John D. Grampa

And the international sales were approximately $77 million. It’s a drop-off from last year in the first quarter because a good portion of the media business was international.

Avinash Kant - Broadpoint Capital

The quarterly growth that you are expecting for the rest of the year, maybe if you could qualify that a little bit further. Do you expect a jump in June, or the real jump will come in the September quarter?

Richard J. Hipple

We expect to see a significant increase starting in the second quarter versus the first quarter.

Avinash Kant - Broadpoint Capital

And then, from then on it will be a gradual improvement to that.

John D. Grampa

That would be a one way to think about it. Here again, from a sales perspective, let me remind you what I already said about metal prices, and then what will or will not occur, what may occur with metal mix and the source of the ruthenium, whether it’s customer owned or material that we provide direct from purchased sources and the effect on those numbers.

Avinash Kant - Broadpoint Capital

Given the high amount of copper and ruthenium prices that you use, if we were to assume that the prices of copper and ruthenium and the other precious metals stay at current levels, your top-line growth will be 10%?

John D. Grampa

That’s right. That’s what we’ve said.

Avinash Kant - Broadpoint Capital

But, if the prices go up, it could be higher than that.

John D. Grampa

That’s right.

Operator

There are no further questions at this time.

Michael C. 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 number is 216-383-6823. Thank you very much.

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