Materion Corporation (MTRN) Q4 2013 Earnings Report, Transcript and Summary

Greetings and welcome to the Materion Corporation Fourth Quarter and Year End 2013 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. I would now like to turn the conference over to your host, Michael Hasychak. Thank you, Mr. Hasychak. You may begin.

Good morning, this is Mike Hasychak. With me today is Dick Hipple, President, Chairman and CEO; John Grampa, Senior Vice President, Finance and Chief Financial Officer; Joe Kelley, Vice President of Finance; 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 full year 2013 results and the outlook, and Dick Hipple will give a market update and comments. Thereafter, we will open up for teleconference call for questions. A recorded playback of this call will be available until March 14, by dialing area code 877-660-6853 or by dialing area code 201-612-7415, conference ID number 13575400. The call will also be archived on the company's website, materion.com. To access the replay, click on Events and Presentations on the Investor Relations page. Any forward-looking statements made in this announcement, including those in the outlook section and during the question-and-answer portion are based on current expectations. The company's actual future performance may materially differ from that contemplated by the forward-looking statements as a result of 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 his comments.

Thank you, Mike. Good morning everyone, thanks for taking the time to join us this morning. This morning we will deviate somewhat from our traditional agenda, to allow time upfront, to review the events that led to yesterday's filing of the 8-K. That filing identifies a necessary correction to the reported results of two of the company's earlier quarters of 2013. Of particular note, is the correction to the second quarter of the year. Following that review, I will then return to the traditional agenda and review the results of the fourth quarter, including a review of value added sales by market, margins, a more detail on costs and benefits of the facility consolidation and product line rationalizations, our cash flow and the stock repurchase program that we have initiated. I will also add some color on the performance of the advanced materials technology segment. I will conclude with an update on the outlook for 2014, which as you already know, is expected to be much stronger due to the significant progress that the company is seeing on a number of fronts, including market improvements, new product initiatives, progress with the ramp up of the beryllium pebble facility, and the benefit of the cost reductions and margin improvement initiatives that were undertaken in the fourth quarter of 2013. Following my comments, Dick Hipple will review the current state of our key markets, and provide his perspective on certain specific key new product initiatives. There is a good bit of encouraging news on this front. Let's begin with a review of the Form 8-K. To be clear, nothing that we say or imply during the course of today's call, is to make excuses, minimize or rationalize the occurrence of events leading to this filing. This is an unfortunate event that should not have occurred. You can be assured that we do not take this nor the circumstances that created it, lightly, and that we have already taken or are in the process of taking the necessary corrective actions to prevent this from occurring again. A procedural error in recording of the results of the company's regular second and third quarter 2013 physical inventory accounts, has created the need to restate the financial statements for these two periods. The procedural error was identified during the year-end review, and evaluation of the company's fourth quarter physical inventory. The error related to the use of a new report from the company's existing enterprise-wide software system. The system report was accurate. The error was in the use, a misuse of an accurate new system generated report. This error first occurred in reporting of the results of the physical inventory count during the second quarter of 2013, and had gone undetected by the company's review processes. At this time and pending the completion of the external audit, the company believes that the error understated to book the physical adjustment, and therefore understated cost of sales in the second and third quarters of the year. As a result, second quarter net income was overstated by approximately $4.8 million or $0.23 per share. Third quarter's net income was overstated by approximately $100,000. Third quarter EPS remained at $0.24 per share. While the error had a year-to-date impact of $7.5 million pre-tax as of the quarter ended September 27, the full year impact of the error was $4 million pre-tax. This $4 million pre-tax is $2.8 million after tax or approximately $0.13 per share, and is the main driver of the difference between our full year results of $0.94 per share and our January guidance of $1.05 to $1.10 per share for the full year. The error was identified following the guidance that we provided on January 14, and the prior quarterly impacts were only recently identified, triggering the filing. The same error, the misuse of an accurate systems report that resulted in the overstatement of our inventory in the set [ph] guidance. Attached six to the press release summarizes the restated quarterly and year-to-date financial information. As highlighted in that attachment, these are currently estimates and are subject to change, pending the final audits. Over the past several years, the company has been engaged initiatives that are significantly improving its internal practices in a number of areas. One such initiative, has been the installation of a variety of systems, including enterprise-wide systems. Without a doubt, the effort to utilize these systems has upgraded processes, provided better management information, lowered working capital costs, lowered costs, providing information that leads to better pricing and better procurement and has improved cash flow. The implementation of these systems is complete at the vast majority of the company facility. These systems were installed at the company's Buffalo, New York facility over three years ago, back in 2010. The new report was implemented in early 2013, to replace a manual process, that was historically used in the reporting of the results of the physical inventories at this facility. Again, the new report was accurate, but a procedural error, one that was clerical in nature, occurred in the use of this report, creating the issue. As a result of the error, the operating results of the company's Buffalo-based business appeared to be in line with expectations, while in reality, out of [indiscernible] yields were negatively impacting margins. Corrective actions are in place and others are in the process of being put into place. These include adding resources to prevent such errors, additional review processes and procedures, and the installation of new capital equipment, with upgraded instrumentation and control devices, to better monitor purity levels and process yields on a more timely basis. Recent inventories taken at other company facilities were all within the normal type progresses [ph]. I'd like to now move on to the review of the quarter, and the current state of our business. There are favorable developments and good momentum is building. Reported net income for the fourth quarter was $0.18 a share, excluding the impact of the costs related to the facility and product line rationalizations, adjusted earnings were $0.34 per share. This was well ahead of our previously provided adjusted earnings guidance of $0.20 to $0.25 per share, and as I noted earlier, the majority of the improvement from our guidance is linked to better yield and higher margins that were being met by the earlier discussed inventory count error. For the sake of clarity, let me again reconcile to the full year guidance of $1.05 to $1.10 per share provided on January 14. Full year earnings were $0.94 per share. The error discussed was identified after we provided that guidance, and had a full year impact of $0.13 per share, excluding the identification of the error, results were in the middle of that range of $1.70 per share. On an adjusted basis, fourth quarter earnings were one of the strongest of the year, and sequentially ahead of the third quarter earnings by $0.10 per share. A key factor driving the sequential improvement was the shipment of a portion of the beryllium and composites backlog, that developed in the latter part of the third quarter of the year. I'd like to now turn to the facility consolidations and add little additional color there. The facility consolidation and product line rationalization costs that were absorbed in the fourth quarter, totaled approximately $4.9 million pre-tax or $0.16 per share, which is in line with the high end of the range for these that we had previously provided. These are detailed in the reconciliation attached to the press release as attached with five, and are contained primarily within the Advanced Material technology segment. The initiatives included staff reductions, facility closures, product line rationalizations and a consolidation of manufacturing operations at multiple locations within our Advanced Material technology segment. We reduced our Albuquerque, New Mexico base manufacturing footprint by half, by exiting two facilities. We completed a transfer of the majority of the Buellton, California based operations to our Westford, Massachusetts facility, and we simplified the organizational structure throughout the business segment, to better serve customers and eliminate redundancy. These initiatives are almost entirely complete and we are beginning to achieve the benefit that we expected. The ongoing annual cost savings are approximately $9 million, about half of which is from workforce reductions, and about half of which is from the facility consolidations themselves. The benefit is approximately $0.30 per share. A year-over-year swing of approximately $0.46 per share, when considering the costs recorded in 2013. I will turn the conversation now to value-added sales. Business levels improved nicely in the fourth quarter comparing to both the prior year and sequentially to the third quarter. Value-added sales for the fourth quarter were about $157 million, up approximately 4% compared to the fourth quarter of the prior year. Comparing sequentially to the third quarter of the year, fourth quarter value added sales were up approximately 6%. The increase in value added sales, when comparing to the prior year fourth quarter, is primarily due to stronger business levels in the medical, consumer electronics and energy markets. Shipments into the medical market were up 10% year-over-year. In part, due to market growth, and in part due to share gain. Consumer electronics was up 12% year-over-year and shipments into energy applications were up 27% year-over-year. The stronger demand in these areas, was partially offset by weaker shipments into defense and science, which was down 2% year-over-year, as softness in defense optics offset higher business levels in beryllium and composites. Automotive Electronics was down 5% from very strong prior year levels, primarily due to destocking, and telecom infrastructure was down about 9%. When comparing sequentially to the third quarter, about half of the 6% increase is a result of improving conditions in the consumer electronics, industrial components and commercial aerospace, telecommunications infrastructure and energy markets, while about half of the improvement is in the company's beryllium and composite segment, again, driven by the shipment of orders delayed in the prior quarter. Sequentially, Defense and Science is up about 20%, again, due largely to the shipments of the orders delayed in the prior quarter. Consumer Electronics was up about 5%. Industrial Components and Commercial Aerospace was up 4%, and Telecom Infrastructure was up 7%, while Energy was up about 30%. For the full year, value added sales were down about 1% from the 2012 level of $616 million. The principle driver of the 1% decline in business levels, where weaker conditions, especially earlier in the year, in Defense and Science, which was down 6%, Industrial Components and Commercial Aerospace down 4%, Telecom Infrastructure down 4% and Consumer Electronics down 3%. Weakness in these areas were almost entirely offset by increases in Automotive, in Medical and in Energy. I'd like to now spend a few minutes on margins; in the fourth quarter, operating profit was $5.4 million. Operating profit adjusted to exclude the impact of the facility consolidation and product line rationalizations was $10.4 million, sequentially almost double the third quarter level. Adjusted operating profit percent of value added sales grew 300 basis points to 0.6% of sales in the quarter. While not yet back to the double digit level, this was a solid improvement in the quarter. I thought it would be useful to spend a minute on the Advanced Materials Technology segment. The profitability of this segment has been hard hit over the past two years by a number of events, including defense sequestrations that affected demand levels in our optics business, systematic margin compression in our precious metal refine and products business, in part, driven by the nearly 20% market price reduction in precious metals; customer substitution of other materials for expensive precious metals in new products -- in their products, because of the relatively high volatility in pricing of these metals; competitive price pressures, particularly in the Asian DLP optics markets, and in the domestic DVD target [ph] business. In response to these changing business conditions, we have taken a number of actions, including a number of new product initiatives to reposition the business, several of which Dick will cover. We are also investing in new refining equipments and systems to improve manufacturing yields. We have consolidated our Newburyport manufacturing operation into our Singapore facility, to better serve the Asian customer base, while lowering our cost structure for these products. We have exited our Buellton, California facility and transferred production across from this facility to our Westford, Massachusetts based optics operation. We have consolidated our Albuquerque manufacturing operation from four buildings to two buildings, by transferring some of the production to our Buffalo-based operation. We have closed the Czech Republic shield cleaning operation, and finally, we have streamlined our management structure within the business, by eliminating the [indiscernible] structure and some internal complexity and consolidating back office functions. All these actions have corresponding headcount reductions associated with them, and we have permanently lowered the cost of this business heading into 2014, we anticipate $9 million in annual savings compared with the prior year, and actions associated with the restructuring that we are taking in the fourth quarter. These savings, combined with the non-recurring charges taken in the fourth quarter, along with new products and improved market conditions, should have this segments profitability recovering to well above the $20 million per year level in 2014. Layering in some new products and some continued market growth, we anticipate this segment getting back to the profit levels gained during 2011, within the next two fiscal years. Now let's turn to the balance sheet and cash flow; both the balance sheet and the statement of cash flows are attached to the press release. The company began and ended 2013 with a very strong balance sheet. The strength of the company's balance sheet and its cash flow provided the flexibility to return cash to shareholders in the form of a regular quarterly dividend, which was initiated during 2012 and increased in 2013. The company's net debt to total capital level further improved in 2013 to 8%. Fourth quarter cash flow was very strong, and debt, net of cash, decreased by approximately $23 million in the quarter, and we do anticipate the strong cash flow to continue into 2014. This brings me to our share repurchase authorization. In the past, we have committed to considering share repurchases as a component of our capital allocation strategy, when we were confident that the headwinds brought on by the unique events of the past 18 to 24 months were behind us. Earlier this year, we announced an authorization to repurchase up to $50 million of the company's common stock. This reinforces our confidence in the company's earnings growth, its cash generating capacity and the outlook for 2014 and beyond. In the current year, we expect to fund our expected organic growth and pursue strategic initiatives, while returning cash back to the shareholders in the form of both the dividend and stock repurchases. As noted in the press release, the company has already initiated repurchases under this authorization, and at this time, intends to continue repurchasing shares, utilizing various methods, including open market repurchases. I'd like to now turn to the outlook for 2014. As we noted in the press release, our guidance for 2014 is intact. Business levels entering 2014 are up approximately 10%, when comparing their business levels that existed at the beginning of 2013. While order entry is stronger coming into the year, we do expect that earnings for the first quarter of 2014 will be negatively affected by approximately $0.10 per share, given the extreme weather. Many of our factories are in the Midwestern Northeast and have been shutdown for several days already due to the weather. In addition to the related added costs, there are fewer shipping days in the quarter. The facility and product line rationalization initiatives taken during 2013 are expected to provide up to $0.30 per share benefit in 2014. The full impact on earnings from these initiatives is expected to be visible in the earnings by the second quarter. The beryllium plant, which endured significant startup and ramp-up issues throughout the prior year, is continuing to ramp up at a pace to meet production requirements to support increased business levels in 2014. These factors plus the benefits from our new product pipeline, should result in sequentially stronger second quarter of 2014, when comparing to the first quarter and a stronger second half. Earnings for the full year are expected to be well above 2013 and in the range of $1.75 to $1.95 per share, consistent with previous guidance. To add some additio9nal color, we expect value added sales growth in 2014 to be in the range of 5% to 7%. We also expect solid profitability improvement. Our operating profit as a percent of value added sales, should grow to the 9% to 10% range with about half of that improvement coming from the cost reduction actions taken in 2013, and about a half from the growth in the business overall. EBITDA in 2014 would be in the range of $95 million t$105 million. We expect depreciation and amortization to be in the range of $40 million to $45 million, and capital spending is expected to continue to be well below depreciation, in the range of $30 million to $35 million. At this time, we see a tax rate of approximately 30%, to the point that we expect free cash flow to be in the range of $50 million for the year. One final comment before I turn the call over to Dick Hipple to review the current state of our key markets. As you know, it is not our normal practice to provide quarterly guidance. However, given the number of factors that I have highlighted today, many of which are difficult for sell-side analysts and shareholders to model, I thought it would be helpful to provide some insight to how we see the 2014 quarters unfolding at this time. On top of the normal seasonal factors, quarterly earnings in 2014 will be affected by the timing of the benefits of the facility consolidation, and the benefits of the ongoing ramp-up of the new beryllium facility, both of which will lead to stronger earnings in the later second, third and fourth quarters of the year. The timing of these, especially their impact on each quarter will be greater as the year progresses, and thus earnings levels in the earlier quarters of the year will be below the later quarters. Considering this and the first quarter weather related factors, we at this time do expect the first quarter to be the lowest of the year, with earnings on a GAAP basis in the range of $0.20 to $0.25 per share, approximately $0.10 per share below the guidance provided earlier, due to the weather related factors. That concludes my remarks, I will now turn the call over to Dick Hipple. Dick will provide you with a market update.

Thank you, John. First of all, allow me to begin by expressing my disappointment in the events that John described that led to the need to restate the second and third quarters. As John said, we have not taken this lightly, and corrective actions are in place, to ensure that something of this nature does not occur again. On the business front, I am encouraged by the increase in sales in the fourth quarter versus last year, and our sequential growth from the third quarter; and with 10% stronger bookings versus last year at this time, we are off to a good start this year, towards our objective of at least 6% organic growth in 2014. Of note, as we finish this year, is another record year in our tough net sales, in 17% over 2012. The majority of our markets are now gaining strength. A few are seeing some inventory adjustments in the first quarter, such as Automotive and Medical, after a very strong year in 2013. But these are not same and systemic issues going forward. Our consumer electronics bookings are holding up in the first quarter, which is actually not what is normally seen at this time of the year. I am also very encouraged that we are putting behind several operating challenges, that has held our performance and margins back during the last six months. Our beryllium pebbles plant continues to ramp, and should be reaching over 75% of our targeted production rate in the first quarter, heading towards 90% in the second quarter. Also, we have struggled with some production yield issues in our performance alloy division. The root causes have been identified and resolved, setting us up for good performance in the second quarter. As John mentioned, our new restructuring actions were essentially completed last quarter, and we will now see the margin benefits, as we move through 2014. Several weeks ago, we announced our introduction of numerous alloys to support the amorphous alloy for our liquid metal market. This market and application base is expected to grow over the next several years, as the supply chain and technology to support it is becoming more robust, as we plan to play an integral role as the alloy supplier to this market. Other factors that will begin [ph] this tailwind, is our relocated packaging and production in Singapore, focused on the telecom infrastructure market. The facility is seeing increasing strength in the order book. Our inorganic chemical continues to see increased demands from our new LED phosphorous product, and we will be considering capacity expansion in Asia as our next step. Product expansion on our ToughMet alloys should continue to support further record growth next year, across several markets. Commercial Aerospace, Oil and Gas, other industrial applications and now in Consumer Electronics. After struggling with the loss of our Defense business and our Optics business during the last several years, we have now repositioned the business for growth, and we expect to see the results this year from several initiatives. The key ones are from our investment in leading technology for wafer level processing for optical devices, and from developing the capability to produce gesture control optics, which are currently used for gaming devices, with growth of other applications expected. So overall, we are very encouraged about the current market dynamics, our new products and initiatives that we have taken to deliver the stronger performance that we shared with you in our outlook. The headwinds of the past 18 to 24 months are behind us and while weather related factors seem to be tempering our Q1 performance, I am confident that we will be back on track in delivering solid results by quarter end. Operator, we will now take questions.

Thank you. (Operator Instructions). Our first question is coming from the line of Martin Engler with Jefferies. Please proceed with your question.

Hi. Good morning everyone.

Good morning.

Regarding the first quarter earnings guidance of $0.20 to $0.25 per share on a GAAP basis, outside of the weather impact, are there any other extraordinary items or costs that you are expecting in those numbers?

No, there is only actually a penny or two per share associated with the carryover costs of the fourth quarter restructuring activities. So there may be up to $0.02 in that number for some of those carryover costs. But other than that, there is nothing extraordinary.

Okay. And that would be something that you would call out, as you typically do in the release?

I think we could do that, if it turns out to be that significant, yes of course.

Okay. And then, regarding the weather related impact there, can you talk about the facilities or maybe what would be more helpful to segments, which ones you expect to be most impacted, due to the facility shutdowns?

Yeah, that's a fair question. The largest impact will be on the performance alloys business. It has a very large facility near Toledo, Ohio that has been dramatically affected through the course of the past few weeks. That, as well as the beryllium composite segment, both of those in the same facility. The remaining activity is also associated with the facilities in the Northeast, and those are bridged to the certainty against materials technology segment. So I would say, if you wanted a model, maybe 70% to 75% of the impact would be on the Performance Alloys and beryllium composite segment, and the balance would be the Advanced Materials technology.

If you think about the other facilities, its just kind of unbelievable where they are. We have, the ones that John just mentioned and then we have Buffalo, New York and Boston and Providence, Rhode Island, seem to be epicenters for where this snow has come. So that's where our facilities are.

Typically what happens is, we have had instances where you actually have entire factory shutdown for multiple days, because people literally can't get to work. So those are higher costs. And you have lost shipment days that go on, but on the shipping side, you do start with the costs, when the plants aren't running. But then from the shipments, we should be getting those back. There should not be lot of shipments and we should start to see that in the second quarter, anything that hasn't been lost here; because of all the supply chain issues going on, either from our suppliers, not being able to get materials. It goes on and on. So there is certainly an impact in the first quarter for manufacturers in certain areas of the country.

Thanks. That's helpful. And then, regarding the value added sales, forecasted growth that was 5% to 7%, is that correct, for 2014?

That's correct.

Can you talk about major end markets, may be top two or three that you expect to contribute to that growth, and roughly, about what portion?

I think the overall -- our assumptions for this year, as we expect very slow, modest GDP type growth, so let's call that 2.5, and again globally, its not United States, 2.5% to 3%, and the balance which would be kind of double the rate of GDP, we are looking forward to see the high levels of growth would be in Commercial Aerospace. We would see it in our Optics business, because we have a lot of new product ramps. We will see it in some of our niches on the electronics business, with phosphorous and the LEDs, those would be examples. And we do expect also that the Oil and Gas market is going to see some higher than GDP growth this year too. So I think, Commercial Aerospace, Oil and Gas, certain niches in the electronics area, is where we are going to see the more significant growth, and our specific niche launches in the optics business.

Okay. And nothing that you are seeing at this point with those kind of three buckets, as far as inventory issues or potential for destocking, at least on the horizon?

No the ones that I had mentioned earlier on, the one that surprised me a bit was the softness that we had seen in Automotive late 2013 and into this first quarter. But again, if you look at the big picture, I just think there is just an inventory adjustment that's going on. We had a building year, last year in Automotive. We were up 12%, 15% in Automotive. So you're going to have some adjustments expected in that. So I expect Automotives would be back more than a steady player here in the second quarter.

Okay. And if I could, one last question on the share repurchase quarter-to-date. Do you have an estimate about how many shares you've repurchased thus far?

We have repurchased less than 100,000 shares at this point.

Okay. Thank you very much.

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

Good morning guys.

Good morning.

Where do I start here? If I could just follow-up on that repurchase question that was just asked, what was the share count at December 31? I am presuming that you bought shares back throughout the quarter, I know it was modest, but, the share count was up in the fourth quarter, so I was just curious [indiscernible] end of the year share count?

Year end diluted shares were 20.9 million.

Okay. So the ERP system was installed in 2010. You changed I guess the report that came out of it? When did that -- the audit took place in the fourth quarter, when did the actual change take place --?

Let me add a little more to that for you Ed. I thought I was clear, but perhaps I was not. This was a new report put in place in early 2013 to replace a manual portion of the reconciliation process in the typical inventory itself. So there was a manual process that we were using. The new report was put into place to replace that and it was an extracted data from our systems into this new report, and as it turned out, the report was accurate, it was just misused. So its an error that's clerical in nature, using the report properly will prevent -- this should prevent this problem from occurring again. Does that help?

Yeah. So you took measures to kind of remedy it. This was in the Buffalo facility you said. Wasn't it at the same facility you had the test, and is that related to anything that was --?

No, no, no, it was not the facility that [indiscernible] a year ago. That facility was Albuquerque, New Mexico, it was a different metal, it was silver, and not gold, platinum or palladium, which is generally -- which is what is processed in Buffalo, and the facility -- this was not that. That was Albuquerque related, one year ago.

Okay. And then so, you caught the error, you will restate the earnings. Is there a risk to any prior quarters? I am assuming there is not, as you kind of continue with this audit, is there risk to any of the other quarters, than what was stated in the Q?

We do not believe so. We just don't.

Okay. And if I look at last quarter, there was a $3.5 million revenue, and roughly $0.06 a share from the beryllium facility on the missed shipment. Was that shipped in Q4? Looks like it was?

We had demand levels improved in the fourth quarter. There were three shipments that were delayed -- three or four shipments that were delayed at the end of the third quarter. Two of those have already shipped -- three of them have already shipped, two in the fourth quarter, one in the first quarter, and the remaining one is yet to ship.

Okay. As I look at where your guidance is placed for 2014, and I went back and I looked at the 2013 guidance given on the fourth quarter call. It's roughly the same, I guess, the high end you are down roughly in nickel. I think your guidance range was $1.70 to $2, now its $1.75 to $1.95, but you have roughly $0.30 of restructuring benefits in that number. It looks like the pebble plant as well is going to give you kind of a tailwind there. By my own math, it looks like about $0.30. So are we starting 2014 materially, from a demand perspective and end market perspective, outside of your own control, much worse than what 2013 looked like, or what's the differential?

Well actually not, actually the opposite. 2013, we came into the year, we had demand levels that were higher than what they turned out to be very quickly in the year, across the number of markets, demand levels fell off. Coming into 2014, looking at demand levels versus the same period of a year ago, were up about 10%. Its just the opposite.

Okay. So you are just aggressive? You're saying last year in the guidance?

Last year turned out to be, that we were aggressive. Market fell off significantly quicker.

When I think about the fourth -- you said that close the gap the $4.3 million in kind of the audit change to the second quarter results, what's the result between the GAAP -- between reported earnings and your guidance? Does that think about it, or would you be double counting that loss, because I assume that you pick it up throughout the third and the fourth quarter, as that starts to realized and you kind of adjust the costs going forward. When you pick that $4.3 million back up in the fourth -- third and fourth quarter as well, it will start matching costs to kind of revenue?

In the third and fourth quarter of 2014?

2013.

I am not understanding your question.

May be we can follow-up on that later.

Okay.

Thank you.

Our next question is from the line of Avinash Kant of D. A. Davidson. Please go ahead with your question.

Good morning Dick and John.

Good morning.

So question on the liquid metal market that you put some press release about recently. What kind of opportunity are we looking at, and what kind of profitability profile [indiscernible]?

So that's a great question Avinash, we are at the very beginning of our market. What's interesting is liquid metal has been out there for quite a while. It hasn't really gone anywhere, and I think the fundamental reason is, that there hasn't been a robust supply chain, meaning that -- it’s a nascent [ph] product, you need reliable high volume die casting technology, is really what's required. And that's -- we have developed the alloys to support this die casting technology, which actually, alloy development is very critical to help the reliability and the production of high volumes. So what's happening is, I think with our technology advancements, in combination with technology advancement in die casting, we are now set up in a total supply chain, that we can actually develop these markets more robustly. So, I think, from a near term perspective over the next couple of years, this market could be in a $5 million to $10 million range. It has to evolve than normal cycles of qualifications, people [indiscernible], always takes a little bit longer upfront, and then you can start to play mental games with yourself, that's going to be much larger; because depending on where the product ultimately goes, it can go in some very high volume size applications and if the metal is very attractive, it has forming characteristics that require minimizing or eliminating machining, and has strength and stiffness ratios that are out of this world. So [indiscernible] with yourself of how big it could get, I'd rather not do that, I'd rather say that, in the near term, I feel comfortable that the supply chain is coming around right now, that we can support and early market developments of this product, and I see a long term horizon that's pretty exciting. But in the short term, I would say that over the next several years, we could develop the market in the $5 million to $10 million range, and then beyond that, it could be much more exciting than that. That's practicality.

If I remember the history of this one, lots of patents were bought by Apple actually from liquid metals. Now, would you be making the material for Apple or not at this point?

It would depend on Apple's decision making process.

That's not final yes, right?

It would depend on Apple's decision making process.

Okay. I understand. So the next question turning to the pebble plant. You did say that you expect to get to 75% by Q1. Could you give us -- what percentage utilization did you exit the year at?

We exited the year, probably closer to 50%, 55%.

50%, 55%? And maybe John can talk a little bit about this one. So what kind of margin improvement this could result to, when we get to 90% utilization that you are talking about, right? Q3.

We are not so much thinking about margin improvement, as your year-over-year change in profits in this segment -- the year-over-year changes profits in that segment that we have consistently discussed, was up to $5 million year-over-year, in that range, up to $5 million would still be an accurate range.

I was trying to figure out, just the utilization rate going up alone, could add how much? If you went from 60% to 90%?

$2 million to $3 million to that, for a decent range. I don't have the precision here in front of me, but $2 million to $3 million.

That's a good range.

$2 million to $3 million on a quarterly basis?

No, no, no, no. The year-over-year impact, $2 million to $3 million.

So the thing is that, when we get to 90% utilization here, in pebble client, the year ago would have been something different. So what I am trying to figure out is that for 50% improvement in utilization, what kind of margin impact it is, or something like that, you see what I'm saying?

I think I have answered that. $2 million to $3 million would be that number.

Okay.

In terms of -- you want to translate it into basis points, it would be, maybe 200 to 300 basis points in that segment. I don't have that data in front of me either.

Okay. Okay. That's a good idea. Okay. And in the 2014 guidance, I think you talked a little bit about, what's the expectation about, in the electronics side, what kind of growth are you expecting on the Consumer Electronics market in 2014?

I think, the reports that I see, and I will comment from a general industry standpoint, I would say, it appears that the electronic market should be -- a growth of about 4% to 5% next year. It has not been growing. So at this point in time versus last year, it should be in that range.

Perfect. Thank you so much.

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

Good morning guys. Thank you for taking my questions. I was wondering if you could talk a little bit more about your fiscal 2014 guidance? I know you provided some general color in that. You obviously have the restructuring initiatives that are going to give you positive impact, market improvements for [indiscernible] ramp up and new product initiatives. I was wondering, if you could put may be some more color on the market, beryllium and new products and how you see those making up, the difference between that 30%, that $0.30 and the remaining implied EPS within your guidance for fiscal 2014?

I think you had two questions there, one was what percentage of growth might be new products versus market in general?

Yeah. I am just trying to get a sense of -- we obviously can do the math there on the $0.30 what you have given us. But then there is an additional $0.35 to $0.55 in your -- implied your guidance that's coming from those other areas, right, through the market, beryllium. So just any kind of color that you can put around, that will be helpful?

Yeah, let me rec out the year a little bit for you, for all of you; because there are a couple of things that may not be quite obvious. First of all, the tax rate difference between the two years is probably worth about may be $0.15 a share, if you look at 30%, the number I provided for 2014, and then some discrete items and other benefits that we had in 2013. So you have a negative impact year-over-year on tax. You also have a negative impact year-over-year in a variety of incentive compensation plans, because of the assumption that we have in our guidance is, that we will make plan in 2014. We obviously did not in 2013. If you begin with the one-offs that we have already acknowledged and then try to bridge from there, you have the pebbles plant benefit, we had some benefits from the savings that we have already, from the restructurings that we had already indicated. And then the rest of the difference, if you will, is a combination of the growth in the company about, and that's worth about $0.30, about half of that or less, slightly less than half is the new products and the remainder would be market growth in general. Does that help you?

Yeah, that's helpful. Okay. And then, Dick, maybe from a larger viewpoint, perhaps you can talk a little bit about what are your top strategic focal points for fiscal 2014, and also, if you could talk about what the top risks are, that you are kind of watching out for?

That's pretty simple, the top priorities are really two. One is the, make absolutely sure we drive and accomplish and get the $0.30, all of the restructuring activities, and that's well executed and all that is [indiscernible] at the bottom line. That's priority one. And then priority two, is to make sure, we are back on a greater GDP growth platform at this point in time, driving with the new products that we have. Those are the two top priorities, and then once you go beyond that, we have got a lot of blocking and tackling in the company of driving other costs out. Lean sigma initiatives and procurement initiatives and to get our margins up. But so it’s a combination of the efficiency of the company, and getting some of these new products into market as fast as we can from the growth side of it.

Got it. And the new product launches, is there anything special that you are doing from a marketing standpoint, or is this just kind of a bigger focus on the blocking and tackling, if you will?

Each one is unique with which customer you are working with, and its really how fast you support the customers with what I call, turnaround cycles on the development side, that's the key. And so, what we have done in the last couple of years, has been to invest in some improved infrastructure in the company to be a lot more responsive on the product development side of -- its one thing to come up with a new idea and a new product, and you develop it. But typically, when you do that, there is always going to be 10 variations before you get to the end line with the customer. So its that ability to take the idea, take the concept, and then be able to drive it quickly with variations, until you get it finally to a point that really drives home the acceptability of the customer. To that side, we found that that's where it’s the secret to help accelerate the product introductions.

Got it. Thanks. And last quick question here, kind of a housekeeping item, do you by chance have the gross margin by segment for Q4 2013?

Yes we do. For Advanced Materials, if we are looking at gross margin as a percent of value add, Advanced Materials is around 36%, Performance Alloys is around 27%, the Beryllium is 23, and Technical Materials was seeing over 40%.

Over 40%?

Yes.

Okay. And then with the restatement for Q2 and Q3, is that all in the Advanced Materials? So if I wanted to kind of go back and back into, what will be the restated gross margin there? Would I be doing the math correctly there, or is there a different number?

Yeah. That was all in the Advanced Materials segment.

Got it. Thanks a lot guys.

This is Mike Hasychak. We are out of time for questions. I am going to be around the rest of the day to answer any of your questions. My direct line is 216-383-6823 and we thank all of you for participating today.

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