Greetings, ladies and gentlemen, and welcome to the Brush Engineered Materials fourth quarter 2007 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Michael Hasychak, Vice President, Treasurer and Secretary for Brush Engineered Materials. Thank you, Mr. Hasychak. You may begin.

Good afternoon. This is Mike Hasychak. With me today is Dick Hipple, President, Chairman 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 fourth quarter and 2007 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 February 23 by dialling (877) 660-6853, Account Number 286 and Conference I.D. 270860. The call will also be archived on the company's web site, 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.

Good afternoon. Thank you, Mike. Welcome to our fourth quarter and year end 2007 teleconference. Today's format is identical to the format that we've used in the past. I'll review the quarter as well as the year and then comment on the outlook. My comments are prepared, and following those comments Dick Hipple will provide you with a market update, then we'll open the call for questions. I'll attempt to adequately reinforce and expand on the key points that were made in the press release today, both about the quarter and the year. I'll comment on eight specific items: First, the continued strong organic growth we experienced in 2007 and what drove it, including the factors that affected the fourth quarter and what we currently expect will drive our growth looking forward. Second, I'll review the specifics of the growth in Media. Since significant swings in ruthenium metal prices, material sources and demand factors, as well as new product and market ramp rate can and, as most of you know, has dramatically affected quarterly results, it's important to review what is happening with our materials that support the perpendicular media recording launch that continues to occur. Third, I'll review the volatile cell phone handset market, where lower than expected third quarter and fourth quarter demand levels from a key customer has had a negative impact on earnings comparisons to prior periods in our Specialty Engineered Alloy segment. Fourth, I'll review the favorable EPS impact from the sale of product containing the low-cost ruthenium inventory that was in the production system at the beginning of 2007 and the related abnormal material price movements that resulted in offsetting non-cash lower-cost or market charges. These factors affected quarterly results significantly, adding variability, and will affect future earnings comparisons, especially the comparisons in early…

Thank you, John. As we 2007 behind us, and like to say I'm proud of the Brush organization for again achieving another year of strong organic growth, strong earnings growth, strong global expansion, and adding new capabilities through acquisitions. I'd now like to provide some further comments on the two key disappointments in our recent performance. First, there are two dynamic affecting their performance in the Specially Engineered Alloy cell phone market. As recently published by our largest customer, Motorola, their cell phone sales declined by 38% in the fourth quarter of 2007 as compared to the fourth quarter of 2006. This obviously has had a major impact on our sales into this market. Another longer-term trend which has slowed growth is the design trend towards thinner material. As phones get smaller, the designs require smaller connectors. Although this is a good trend from demanding higher grade materials like ours, there is also a negative impact when the thickness of the design is reduced. Essentially, more funds are made with less material. We are obviously not sitting still and are aggressively engaged in pursuing the cell phone supply chain of the growing cell phone companies such as Samsung in Korea. We also had lower production yields in the fourth quarter in Alloy which negatively affected performance. Our yield has since recovered, and we are off to a good start in 2008. Meanwhile, our cell phone business in the physical vapour deposition applications, in our Williams Advanced Material group remained strong and has not been impacted by individual customer issues. Bookings remain strong, and we anticipate global growth of cell phones to 1.2 billion units this year. Now with regard to the media market for hard disk drives, we took us the backwards in the fourth quarter as we needed to…

Thank you. (Operator Instructions) Our first question comes from the line Chuck Murphy with Sidoti and Co. Please proceed with your question.

Good afternoon, guys.

Good afternoon.

I guess it's safe to say never a dull moment?

Yeah, it seems to be that.

Just to check my facts here, you said media or ruthenium sales were $160 million for the full year?

Media.

Media.

It's just dominated by ruthenium.

Okay. Okay.

Today.

Okay. As far as your '08 sales guidance goes, what kind of contribution are you assuming there from the oxide layer?

In the 2008 plan?

Uhm.. uhm..

When you say contribution, Chuck, are you asking for profit information?

No, basically sales. How much in sales do you expect from the oxide layer in 2008?

I don't have that information in front of me. The ramp rate on oxide is not going to be unlike the ramp rate of ruthenium once it begins. The question becomes the timing of when it begins, and while we're reporting actuals to you as we move forward on ruthenium because of its significance, we'll begin to do that when oxide gets significant. But we will not share that level of detail on our business plan.

Okay. I guess I'm just trying to get a sense, you know, if ruthenium-type sales were $160 million in 2007 and you're saying that oxide could be a similar opportunity, at what point are we getting that $160 million?

We have to be very careful, Chuck, because, you know, we get trapped in these you've got to stay away from revenue. It's really profit. That's what we're about here. You've got totally different metals in the oxide layer than you do in the ruthenium layer, and it's a different dynamic. I mean, sales revenue, if a target's not a target, it's not a target. You've got different material sets and the, you know, the oxide targets don't have the same metal constituencies as the ruthenium targets. So the revenues aren't equal, but we're after margins here.

I think that what needs to be clear is that we're really referencing real growth, and ruthenium, for example, at the beginning of 2007 was over $800 an ounce. Today it's more like $500 an ounce.

$415 an ounce.

$415 an ounce today. Whenever we buy the metal direct from the seller, it ends up becoming our metal in the accounting transaction and it appears in sales. Whenever we use metal provided by a customer, it's his metal and not recorded in sales. And as time goes on, more and more of the refined recycle stream ends up in our top line with margin and without a sales value. So the same - that really makes the comparisons from a revenue perspective look difficult.

I got you.

And at the same time makes the growth look like it's less than what it might otherwise be. Unfortunately, that's the nature of our business, and we don't have direct line of sight over, first of all, what's going to happen with ruthenium metal prices, and secondly, when our customer will supply us the metal versus us buying the metal and supplying it to the customer. It makes it really hard to do what you're trying to do with the estimates.

Okay. Yeah, no, that helps. But, you know, if could just elaborate a little bit, you know, as far as the profit-type opportunity, when would you expect to, you know, claim 50%, 80% of the total profit opportunity for the oxide layers?

Well, I think, as I mentioned, we would consider from a market opportunity the equivalent profit potential in the oxide layer as there is in the ruthenium layer.

I'm saying when would you reach the same profit level for oxide as you're currently doing for ruthenium?

Well, again, we're starting to ramp next year, and, you know, we would expect to get a certain level of market share, probably similar to the ruthenium. But, you know, it's very difficult to predict that curve against the qualifications and penetration and, you know, how much value do we have and differences in technologies. As I mentioned before, we think we have some advantages. We cannot predict that. That's a variable. We're confident we're going to penetrate this market, and it's a very good market for us. It will be a slow start and it will ramp and we'll report on the ramp as it occurs.

Okay. And have you started shipping any of the oxide layers yet?

They're all in qualification.

I'm sorry?

We are shipping currently oxide targets to one particular application, so we are qualified on oxide with one customer, but we have a lot more in play.

Okay. Okay, and then my final question here, what are your thoughts, I mean, as far as the synergies between the Advanced Materials business and the Alloys business. Is there much synergy there?

No.

Okay.

It's not operating synergy.

I mean, does it make sense down the road to consider splitting the two companies?

Well, you know, we're not considering that at this time, and we - what's interesting about Brush, it really gets to the models of the businesses, and although maybe we don't have overlap in operations per se, we do have overlap in how the company operates culturally, how you attack the market, how you come up with new applications, where you are on the triangle - we're at the top of the triangle for value add. That's where the Specially Engineered Materials Alloy business and the businesses actually operate very similarly to one another. It becomes the model of the businesses so, you know, are you at the value add, are you on the commodities side? So that is common amongst the businesses and even if you would dissect Williams, Williams does many different things. They make targets, they make frame lid assemblies. We're now in the coating business. We make inorganic chemicals. You could say, well, why don't we split all those up? I mean, you know, it - because what's going on here is we're able to drive technology synergy within Williams and we have very similar culture and an approach to market in what I call at the highest level for this company is Special Engineered Materials, and that's when we have across the board in every one of our operating units.

All right. We'll, I'll pass it on to somebody else. Thanks.

Thank you. Our next question comes from the line of Avinash Kant with Broadpoint Capital. Please proceed with your question.

Good afternoon, Dick and John.

Hello, Avinash.

A few questions here. The first one is that you do have a wide range of EPS guidance from $1.80 to $2.30. Could you just elaborate, what is the difference in assumptions between the low end and the high end?

Well, I think that, you know, that wide range, as we enter this year, you know, the key - the kind of two key elements would be penetration of some new layers within the media business, and we're all sitting here all around the table, no matter which side of the phone, wondering what kind of economy are we going to have this year. So, you know, there's - none of us can count on exactly what's going to unfold, so there's a lot of unknowns and anytime you have a lot of unknowns, you put a little wider range in.

So basically there is some element of a slowdown in the economy already if you are at the lower end of the guidance?

Yeah, that's right.

Sure.

That's right.

Okay, good. The second thing I wanted to touch base is on - I think I'll follow up with the previous question - is that in terms of your assumptions from the oxide layer, what we are trying to get at is the guidance of $1.80 to $2.30 that you have given, does it assume a significant EPS contribution from the oxide layer in calendar year '08 or not?

It assumes some. I wouldn't define it as - it's important, but I wouldn't define it as significant.

It's important and, you know, it's going to be more significant in the second half.

So in the second half, right? Then you expect to reach the kind of levels we've reached here - you talk about the similar opportunity, you talk about the similar opportunity most likely in calendar year '09, not in calendar year '08.

Well, you know, you start to really ramp the second half of 2008, and it follows in 2009, absolutely. You're correct. That's the plan.

You're correct.

So the ramp will start in the second half of calendar year '08?

Yeah.

The noticeable ramp.

The noticeable. I mean, we're going to be - if we hit what we want to, I mean, we've got a lot of qualifications targets in, and I'd hope they'll start shipping in the second quarter. But, you know, it's - you know how customers work. You qualify and then they try some and they want to make sure that you've got consistency and quality and stability, and then they start to ramp you.

And you did talk about some advantages that you have over the technology that's existing out there. Could you elaborate on that, please?

Well, this is a very sophisticated area and it has to do with fluxes and it has to do with permeability and tuning, if you will, of these targets depending on their needs for the responsiveness in the media market. So we think we have some designs there that give you the ability to fine tune these targets a little bit better.

So the end for the customer is they have a better film, they have a thinner film, they can use that material - what is it? Or is it just a cheaper target?

Well, it all depends on how the customer is designing their media products. And this is a very - the oxide layer is very tricky, and, you know, some are designing differently. They have different - some want higher permeability. Some don't. They want, you know, different magnetic properties. And so it becomes, as you tune those magnetic properties, it becomes very difficult to get those properties within the oxide layer. And so we just think we have more flexibility in our design and we'll, you know, we'll have to prove that in the marketplace.

So basically you would provide them with a better process window, if I understand it right?

Yeah, a more controllable process window, exactly right.

Okay. Good. Now -

That's our plan.

One more question. You have been talking about the cell phone business, especially from a particular customer. Now, I've done some work on your Specially Engineered Alloy business, and if I try to break down to the point, just to figure out the contribution from cell phone customers into that Specially Engineered Alloy segment, it does not come out to be more than 10%. And I grossly wrong somewhere, or - I'm trying to see how could this impact you so materially? Is it that the margins in that business are significantly higher?

The margins are very high. They're very high.

Okay. So in that case while the revenue in fact may not be that high, the margin in fact is what is impacting the business, right?

Yes.

In terms of growth coming back, though, if your particular customer that you talked about, Motorola, if they don't do very well, you did talk about Samsung. Are you in qualification at Samsung?

We're shipping.

Is this a new development?

No, this is you've just got to go out there and sell your product and, you know, getting the right stampers and go to work.

I'm saying that, you know, you talked mostly about the impact on Motorola, but have you been supplying to Samsung all through?

We have had a very low market share in that area of the world, lower than what it should be.

Has it improved recently?

We're working hard on that, Avinash.

Okay, perfect. Thank you so much.

We're positioned, you know, this is - a lot of this is Korean sales, and we're putting what I call the management and sales sweat equity to make sure we get the proper market share where we're not getting it.

Terrific. I'll let others ask questions and come back later if I have more. Thank you.

Our next question comes from the line of Phil Gibbs with Keybanc Capital Markets. Please proceed with your question.

Hello. Good afternoon.

Good afternoon.

I had one pretty detailed question, a couple of housekeeping questions. I'll just take care of the housekeeping ones first. As far as the lower of cost of inventory charge in the quarter, what was the magnitude of that on a pre-tax basis?

It was $0.02 a share after tax - $500, $600,000 dollars.

And what about the sequential volume change in ruthenium-based media technology? I mean -

Your question, your specific question, when you say sequential volume change?

I think you'd mentioned it last quarter somewhere in the range of 65% - the ruthenium-based disc drive sales.

From the second quarter to the third quarter, the ounces shift increased by 65% to 70%. The third quarter, the fourth quarter, they increased about 4%. And as I indicated in my scripting, the demand was especially strong in September as the third quarter ended and October, as the fourth quarter began, and then the volume dropped off in November and December. The sales [inaudible] or the sales value of those sales - and again, as we suggested, we don't think we ought to think too much about sales because of the metal source as well as the metal price question - but in the revenue line to the extent that it's relevant, the revenue in the first quarter was $63 million, the revenue in the second quarter was $33 million, the revenue in the third quarter was $28 million in spite of the ramp in volume. The revenue in the fourth quarter was $37 million.

Oh, okay. Interesting.

And again, that's reflective of metal source and metal price. First quarter metal prices certainly averaged $700 or so, and later in the year we were in the $500 range each quarter probably if I had the data in front of me.

Okay, and on those numbers, those absolute numbers that you gave me, you're speaking of just the ruthenium-based disc drive sales?

Media, which is ruthenium.

Okay. And my last question just for a little bit of elaboration, I mean, basically, the top line estimate, I mean, looks pretty much intact, the 10% year-over-year growth, but it looks like the EBIT's going to get a little bit strained due to what I think you referred to as sort of getting caught in not being able to maybe pass the metal through, I would say, as efficiently maybe with the timing. Can you elaborate more on the dynamics of the pass through and the timing of metal and --

I think I know what you're asking, and it's the correct observation. Dick just referenced a moment ago the high value add cell phone handset business, and as you might expect, double-digit margins in the media business. So you'll get margin stress year-over-year and especially in comparable - when you're looking at one quarter and comparing to the same quarter the prior year, you'll get some margin stress until those high value-add products are back in the mix.

Okay, great. Hello?

Yes?

Oh, yeah. Just to follow up that, with a 10% year-over-year revenue growth, how much of that would you attribute to the - is that all organic?

Yeah. I referenced in my - again, my script that we were talking about above 10%, so 10% is sort of a floor. And I also referenced that there is metal price deflation inside that growth rate so the real growth, if you will, if we were able to tabulate it on a per unit volume basis, which you really can't whenever you're mixing pounds with ounces, the real growth is something significantly above the low end of that 10%. It's significantly into the double digits.

Okay, great. Perfect. I appreciate the color on that. Have a good afternoon. Thank you.

You're welcome.

Our next question comes from the line of Rob Young with WM Smith Securities. Please proceed with your question.

Hi. Good morning.

Good morning.

First question is, in relation to the raw materials, the customer source as well as the Brush source, what type of changes over time have you seen as far as the mix between the two? And then what type of changes do you expect on a going forward basis?

Yeah, let me comment on that. It's really a difficult thing to estimate, but think about it this way. When we initially begin to ramp these processes, the material that was starting to feed the entire value chain, if you will, was virgin material coming from the mines. As that material starts through not only our production process but also the production processes of the customer, there are slurries that come off of the systems, the production systems, that have this metal in it that then in turn starts to head toward refiners. And the refiners then remove the metal, begin to ship it back to the owner of that metal, whether it's the customer or whether it's us.

Okay.

Those processes take anywhere from three to six months depending upon whose metal it is and which refiner they're using. So as the year 2008 progressed - 2007 progressed, you saw a significant amount of the metal start to resurface from that recycle stream in the third and fourth quarters of the year. So it has a tendency to depress recorded sales, and I think -

Let me just add a little to that, John. I get - usually we have a large macro number on that. I don't have the exact one with me, but just to give you a feel, like at the beginning of this ramp up it was 100% virgin material, and today it's less than 50%. But there's more than kind of 50%, you know, in the stream.

That's right.

So we used half of the material we were using at the beginning of the year.

Okay. [inaudible] And then in relation to the oxide layers as well as the ruthenium layer on the PMR, who are you running into as far as those two layers from a competitive standpoint?

You know, there are several competitors out there. There's [Arayas], the German company. There's a Taiwanese company called SolarTech out there, and Sanyo Metals. There's about two or three of them out there.

Okay. All right. Well, I believe that's all, and thank you very much.

You're welcome.

You're welcome.

Our next question comes from the line of Chuck Murphy with Sidoti and Co. Please proceed with your question.

A couple follow ups, guys. What would you expect the kind of long-term growth of Techni-Met to be about?

Well, the major market today is in the medical diabetes market, so that's a pretty steady growth market unfortunately. I mean, good news, bad news there. Right now the test strip market is growing at around 10% a year. So that, you know, our objective would be - as is the same objective in all of our businesses - we intend - we hope to grow that faster then. We have the regular macro market growth, and then we will try to get additional share within that market through our technology advantages, we believe. So you've got that place. You've got the basic glucose test market growing at a good rate - we'll try to grow faster than that - and then you go beyond that. We do think on a longer-term basis that that has some very intriguing technology to us that we think we can leverage into some other markets.

Okay. Any, like, new products you have in mind that you could talk about there?

Again, it would be - we think we have some opportunities in the defense area, and we also think there might be some longer-term plays in the solar market.

Okay. And my other question, as far as the requalification goes, I mean, is that something that the other suppliers to this hard drive customer were having to do or was it just for you guys?

Well, I - you know, I can't answer what others are doing. I have no idea.

Okay. And as far as the customer buying the ruthenium rather than you, was that at their request or your request - what was the -

Oh, that's always at the customer's request. It all depends how they want to play it.

I mean, it would seem to me, like, that would actually maybe be a little bit better for you guys, though, just because you don't have the volatility of the metal part.

Yeah, that's right. It's all, you know, we're very responsive to the customer's request. We don't demand one way or the other.

Okay. That's all I had. Thanks.

You're welcome.

Our next question comes from the line of Avinash Kant with Broadpoint Capital. Please proceed with your question.

This is a follow up. In your prepared remarks you talked about the qualification activity not going as expected. Do you mean the requalification activity of your customer or the qualification for the oxide layer?

When we referenced that, Avinash, I believe, if it was me that was referencing it, I was talking about the requalification process of the ruthenium layers at the key customer that changed his specifications.

Okay, so not about the oxide layer. You're running on track there?

Pardon me?

You think you're running on track there?

Yes.

Okay. And in terms of the facility extension, though, when do you expect this to be ready?

The Brewster expansion?

Yes.

Well, we've got a couple of different things going on there. The longest lead item is - let me put it this way. We think that we can support, you know, a couple things in the near term basis which would be a ramp up in the oxide and the return of share on the ruthenium side. We're going to need - the longer-lead stuff has to do with the SUL layers, some new developments we have there, and that's really more towards the middle of the year - the SUL, but we can support anything that'll come our way in the oxide or ruthenium.

From the middle of the year, right?

No, SUL we're going to need to get some certain longer-lead items in before the SUL growth. We think we can support on a near-term basis in the first half. Let's say that we get some upside surprises, okay? You know, it'd be nice to have some upside surprises. If that happened to happen, we'll be able to support them in the oxide layers. Let's say that ramp is quicker than we're forecasting. We're going to be able to support that.

Okay. Okay. And have you quantified your opportunity from SUL alone?

Well, yeah, we've certainly internally qualified. Again, there's market sizes and opportunities and [chairs] and - sure.

Could you give us some idea about how big would that opportunity be?

Well, again, I think we've said before - and this is where it gets really crazy - we've said that the, you know, the market size is in this, you know, billion to a billion and a half, and what does that mean? I mean, what's the price of metals? How much does the customer own? It gets crazy on you. But it's a very large market, and so, you know, it's that kind of metric.

And who would be your key competitors in the oxide layer? Would it be the same people as the ruthenium or would it be different there?

It changes a little bit, but right now it's Arayas who is the main player, also, in the ruthenium and then solar.

So is there somebody with a very large market share?

Well, Arayas has generally, you know, has been the big media player for many years.

Okay. Okay, perfect. Thank you so much.

You're welcome.

You have a follow up question from Rob Young with WM Smith Securities. Please proceed with your question.

Hi, yes, just one more quick one. Are you guys in the qualification process for Nokia by any chance?

Nokia - what application? I mean -

For the cell phone handset market?

We shipped to them today.

You shipped to them today? Okay. Perfect. That's all I have. Thank you.

There are no further questions at this time. (Operator Instructions)

Operator, I think we're going to conclude.

Okay. There are no questions anyway.

And this is Mike Hasychak. We'd like to thank all of you for participating this afternoon, and I'll be around the remainder of the afternoon to answer any further questions. My direct line is 216-383-6823. Thank you.