Materion Corporation (MTRN) Q2 2015 Earnings Report, Transcript and Summary

Greetings and welcome to Materion Corporation’s Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Mr. Mike Hasychak, thank you. You may begin.

Good morning. This is Mike Hasychak. With me today is Dick Hipple, President, Chairman and CEO; and Joe Kelley, Vice President of Finance and Chief Financial Officer Our format for today's conference call is as follows. Joe Kelley will review the financial results for the quarter and the outlook. Following Joe, Dick Hipple will provide his comments. Following Dick, we will open up the call for your questions. A recorded playback of this call will be available until August 14 by dialing area code 877, the number is 660-6853 or area code 201, the number is 612-7415. The conference ID number is 13612965. The call also be archived on the company's website, materion.com. To access the replay, click on Events & 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 Joe for comments.

Thank you, Mike, and good morning to everyone joining us on the call today. During my comments, I will cover our second quarter 2015 financial highlights, review second quarter profitability by segment, make some brief comments on the cash flow and finally cover the earnings outlook for the remainder of 2015. Following my comments, Dick Hipple, Chairman and CEO, will provide comments on the company’s key strategic initiatives and market conditions. Let me start with the second quarter of financial highlights. I am pleased to report solid financial performance in the second quarter of 2015. Once again our team delivered strong topline value-added sales growth because across most of our key end markets, as well as profit margin expansion resulting in a 19% earnings growth over the prior year second quarter. This marks the fifth consecutive quarter of meaningful year-over-year value-added sales growth and double-digit earnings growth. Second quarter 2015 value-added sales which excludes the impact of pass-through metal costs grew 2% over the prior year to $162 million. On a constant dollar basis excluding the impact of foreign exchange rates value-added sales grew 4% over the prior year second quarter. Value-added sales from new products defined as those introduced in the last three years grew approximately $5 million over the prior year and represented 11% of our total value-added sales in the second quarter of 2015. The strategy is working as topline growth driven by new products is delivering above GDP growth rates, in spite of headwinds from foreign exchange weakness in key end markets like oil and gas and softening in China. Gross margin dollars expanded 3% to $51.3 million from $49.8 million in the prior year second quarter. Expressed as a percent of value-added sales gross margins expanded to 31.6% of 40 basis point improvement over the second quarter of 2014. The improved profit margins were primarily driven by leveraging sales volume growth and improved product mix. This gross profit margin expansion is more impressive that it appears on the than pure service given the unfavorable impact the strong U.S. dollar have had on gross margins. On a constant dollar basis gross profit margins in the quarter were approximately 33% of value-added sales almost 200 basis points above margins in the same quarter of the prior year. The negative impact of foreign exchange rates have on our gross margin is partially offset by our FX hedge games recorded in other income and expense. Selling, general and administrative expenses were $34.9 million or 21.5% of value-added sales comparable to the same quarter of the prior year. Higher pension expense related to lower discount rates and new mortality tables was offset by decreased equity incentive compensation expense. Research and development expense continues to represent approximately 2% of value-added sales as we are investing and advancing our new product pipeline including specific quarterly investments in bulk metallic glass also known as liquid metal as well as advancing the development of 3D optical coatings, SupremEX and our eStainless product lines just to name a few. Other net with income of $2.9 million in the prior year second quarter and expense of less than $100,000 in the second quarter of 2015, the prior year income amount included the gain of $6.8 million from the insurance recovery related to the precious metal effect from our Albuquerque facility. The current year includes $1.7 million of foreign exchange hedge gains and the legal settlement from the pebble plant construction. Operating profit in the quarter totaled $12.8 million compared to an adjusted operating profit of $10.7 million in the second quarter of 2014 at 20% improvement. On a GAAP basis the second quarter of 2014 operating profit of $14.6 million included a net benefit of $3.9 million attributable primarily to the insurance recovery associated with the 2012 inventory flet from our Albuquerque facility which offset with recovery costs and related incentive compensation. Second quarter 2015 operating profit expressed as a percent of value-added sales expanded to 7.9% and 120 basis point improvement over the prior year adjusted operating profit percentage. Net income in the second quarter of 2015 totaled $8.9 million, which reflects a 27% effective tax rate in the quarter. The tax rate is in line with what we forecasted as our effective tax rate for the year. Earnings-per-share were $0.43 in the second quarter of 2015 this compare $0.36 per share of adjusted earnings in the second quarter of 2014 and 19% improvement. Now let me review our 2015 Q2 performance by business. Our Performance Alloys and Composites segment sales were $107.7 million in the second quarter of 2015 compared $109.6 million in the same quarter of the prior year. Value-added sales for this segment grew in the second quarter of 2015 to $91.5 million, at 2% increase from the prior year second quarter value-added sale of $89.9 million. On a constant dollar basis segment value-added sales grew 5% over the prior year second quarter. This increase is in spite of the significant challenge from a 41% decline in value-added sales into the energy end market and a 63% decline in shipments into medical applications. The decline in the energy market is primarily related to oil and gas exploration, which is directly tied to the greater than forecasted reduction in North America rig counts which is down over 50% from the prior year level. The decline in shipments to the medical market is due to normal quarterly volatility and large beryllium orders for nuclear medical applications. The drop in quarterly sales is not reflective of market share loss, but rather the lumpy nature of beryllium orders into this end market. Leveraging our differentiated product portfolio we are able to increase volumes and in numerous industrial component end markets including plastic injection molding and foundry applications for die casting. Also we were successful in growing value-added sales into the defense end market. These increases more than offset the declines realize from oil and gas and the medical end market. Leading to the 5% overall growth in this segment on a constant dollar basis. Operating profit in the Performance Alloy and Composites segment grew approximately 47% to $9.3 million or 10.2% of value-added sales in over 300 basis point improvement from the prior year. The improved profits and margins were primarily due to improved product mix volume growth, foreign exchange hedge gains and LIFO benefit. The hedge gains offset the majority of the negative impact foreign exchange had on gross margins. This increase profitability marks the third of the last four quarters were this business segment as delivered double-digit operating profit margins. Moving now to our Advanced Material segment. Value-added sales in the second quarter of 2015 grew 4% to $46.7 million from the second quarter of 2014 value-added sales of $45 million. This growth was driven by stronger demand for solar products as well as increases in the medical and telecommunication infrastructure end markets. The strength in the semiconductor end market which contributed nicely to the segments Q1 2015 performance was softer in Q2 as we forecasted. However the softness in this market is forecasted to recover slightly here in the second half of 2015. Operating profit in the second quarter of 2015 was $7.4 million compared to the $12.5 million in the second quarter of 2014. Prior year operating profit included the net benefit of the insurance recovery associated with the 2012 inventory felt. On an adjusted basis operating profit increased 4% to $7.4 million in the second quarter of 2015 compared to $7.1 million in the second quarter of 2014. Operating profit was 15.8% of value-added sales in the second quarter, which is comparable to the adjusted operating profit margin in the prior year second quarter. Despite the year-over-year value-added sales growth profit margins remain flat because of unfavorable price and product mix particularly in the consumer electronics end market. Moving now to the Precision Coatings group. This group include the Precision Optics and Large Area Coatings businesses, which are included in the other segment along with unallocated corporate cost. Value-added sales for the Precision Coatings group were $25.2 million in the second quarter 2015, compared to $24.9 million in the prior year second quarter. The 1% growth in value-added sales was primarily driven by growth in medical and automotive electronics end market, which offset a meaningful decline in the projector display business, which we categorize in the consumer electronics market. The medical growth was a combination of penetrating new customers and expanding market share with existing customers as several of our new products are gaining acceptance. Specifically our Large Area Coatings business generated 40% of their current quarter value-added sales new products. This is by far the highest ratio of new product sales in the company and is a direct reflection of the changing specification requirements in the blood glucose testing market. Here we are continuously evolving and modifying our product offering to me tightening, specifications and provide increasing value to our customers. It is this commitment to innovation and collaboration with customers that has medical end market sales for the group growing 9% in the quarter and 16% year-to-date compared to the prior year periods. Offsetting our value-added growth into the medical end market was a decline in sales of our optical coded color wheel product which we sell into the projector display market primarily in Asia. The overall market was down in the quarter double-digits compared to the prior year period. Operating profit for the Precision Coatings group in the second quarter of 2015 total $0.6 million consistent with the adjusted operating profit recorded in the second quarter of 2014. Turning now to cash flows. The company's balance sheet remains strong in the second quarter as net debt remains relatively low at $24 million and the company continues to have significant available liquidity to support meaningful organic growth opportunities as well as to pursue strategic growth alternatives. Cash flow provided from operating activities total $21 million for the first six months of 2015, which represents a $23 million improvement over the prior year period. The primary drivers of the improved cash flows were year-over-year improvements in working capital. Cash used in investing activity increased approximately $16 million over the first half of 2014 to $26.6 million in the first half of 2015. The increase with price driven primarily by two factors; one investment in mine development totaling $10.1 million related to pit openings in our Utah mine, and two the prior period included a favorable $3 million from an asset disposal in the Precision Coatings business. As we remind investors this investment in the pit opening is forecasted to be in the range of $20 million to $25 million in 2015. Additionally we forecast spending $30 million to $35 million on internal capital projects during the full year of 2015. This concludes my review of the second quarter 2015 financial highlights. Before reviewing our outlook for the remainder of the year, let me remind investors that our solid second quarter financial performance represent several consecutive quarters now of growing profit and meeting or exceeding our provided guidance. The $0.43 per share reported in the second quarter of 2015 was that the high-end of our quarterly guidance provided during the Q1 2015 earnings call. Despite the strong performance and clear momentum there’s building uncertainty and volatility in the markets we serve and more macroeconomic challenges. Specifically the continued strength of the U.S. dollars not only impacting the margins denominated sales, but we are beginning to see impacts on our USD denominated sales transactions related to increased activity of foreign competitors. From an end market perspective the North American oil rig count is now down year-over-year by more than 50%, which has a direct impact on the value-added sales within our Performance Alloy and Composites segment that go into the energy market. This percentage decrease in the recount is worse than we’ve previously forecasted. The telecommunications infrastructure market in China specifically related to the 4G build-out been strong in the first half of 2015. For both the Advanced Materials and Performance Alloy and Composites. However our customers forecast in our recent order entry suggest a sharp drop off of value-added sales in the second half of 2015 for this niche end market. On the macroeconomic front uncertainty in China and volatility in Europe is impacting our customers demand levels. As a result the company has revised its annual 2015 adjusted earnings forecast range to a $1.65 to $1.85 per share diluted. This represents a range that is flat to up 12% over the prior year 2014 adjusted earnings of a $1.65. Looking at the quarter we would expect the third quarter of 2015 adjusted earnings to be comparable to slightly below the average adjusted earnings in the first two quarters of 2015 with the fourth quarter being the strongest of the year. The increase fourth quarter profitability is largely driven by the timing of defense orders already received. Although we are reducing our annual guidance due to these factors rest assured we are executing against the strategic plan and remain confident in the company's long-term growth targets and earnings growth potential. We are confident in our growth strategy and continue to execute our new product introductions. Year-to-date we have successfully grown new product value-added sales 36% over the prior year first half. As we penetrate new and existing markets and customers with our differentiated products. This concludes my include my prepared remarks and I will now turn the call over to Dick Hipple who will review the company’s strategic initiatives.

Thank you, Joe. I'm very pleased with both our second quarter and first half results. Year-on-year value added sales and earnings per share were up nicely. And earnings per share is up 19% in the quarter and 31% year-to-date. Our strategy is to grow the company and grow earnings are clearly working. We remain on track to deliver our growth strategies not withstanding the current international uncertainty and short-term difficulties in certain end-use markets. Importantly each of the - of our three main business groups the performance alloys and composites advanced materials and precision coatings achieve top line value added sales growth, which continues the momentum of the past year and affirms the realization of unified one Materion. Joe covered the financial highlights, so let me now focus on a few of our operational and market highlights as well as updates on some strategic initiatives. As I mentioned during our last quarterly call in our performance alloy business, we are seeing some changes in the competitive landscape for voice coil motors. We have more than doubled our capacity to make tough met alloys used in this consumer electronics application. This reflects our strong position in the market and expectations for increasing demand and also positions us to more completely fill the gap created after a Japanese based competitor announced it was exiting the copper strip alloy market late last year. Our foil gauge, Copper Nickel Tin, ToughMet alloys are widely used in consumer electronics devices like smart phones and tablets to provide higher strength materials for miniaturization of voice coil motor and optical image stabilization components. Broadening our capabilities on our facilities in Elmore and Lorain, Ohio and Reding. Pennsylvania have allowed us to significantly reduce our global lead times and ensure supply of one of our top selling materials in the consumer electronics market. The expansion demonstrates how the consumer electronics market can continue to count on Materion. The other end market application, which is attractive for our ToughMet product is the completion and production sectors of the oil and gas market. We have had game changing results testing a new ToughMet temper with our development partner and customer Hess a large publicly traded oil and gas company. ToughMet sucker rod couplings pulled from deviated wells with a history of frequent production tube failure in the shale oil fields of North Dakota showed no evidence of either coupling of tubing wire. Wells with a history of failing more than once per year are now running into the second year without a failure, this is a very exciting development. Materion and our development partner will soon be showcasing this breakthrough in a joint marketing effort that will promote benefits of reduced well failure downtime and work over costs in a low-price energy world. Within our Beryllium business we have also having success with new products. We have recently delivered the first finished aluminum cast product; our aluminum beryllium investment cast components to Lockheed Martin for the F-35 fighter jet optical target system. We are pleased to support this long time customers cost reduction efforts on the F-35 program with our AlBeCast technology breakthroughs. Additionally we have received the contract for the next AlBeCast order from Lockheed and have been awarded materials contracts for six other high performance beryllium containing parts as part of this program. I also wanted to provide an update on our proprietary metal composite capabilities being commercialized by our technical material business. Through our GAMMA CLAD process now in start up we will be able to produce an aluminum and stainless clad product that optimizes the thermal, weight. Stiffness and formability properties of the two metals. GAMMA CLAD is opening the way for a broad family of unique clad products including the new metal composite line eStainless. eStainless is generating significant market interest and is currently in testing in three major consumer electronic OEMs as a high performing structural alternative to conventional stainless steels for components such as mid-plates and shielding in products like smartphones and tablets. Materion has four other active development programs underway within the consumer electronics market for new engineered composite products made via the Gamma Clad process. We expect the eStainless in several more of these products off the Gamma Clad platform to be commercially launched next year. In our Advanced Materials Group, our strategy to penetrate the tier 1 semiconductor market is really paying off. Recently, we shipped our first 300 millimeter precious metal targets to tier 1 customer. This is a critical milestone in validating our ability to compete in this very demanding sector of the market. We have completed capital projects that our Advanced Materials Group facilities in Brewster, New York and Limerick, Ireland to substantially strengthen our position and upgrade our overall semiconductor rate capabilities. At Brewster, we have installed the new clean room that meets tier 1 semiconductor standards. Brewster is now shipping targets that were measured, inspected and packaged from the clean room with the same specs and protocols of the semiconductor customer clean rooms where the packages will be open. This enhanced our capabilities and enables us to meet more stringent specifications at our customers as they gear up for the next generation product lines. The Limerick facility has long provided European semiconductor customers with PVD Shield Kit Cleaning and reclamation of precious metals used from sputtering targets. Now following an upgrade and expansion Limerick also provides related to bonding service which previously required a costly side trip to Materion’s facility in Buffalo, New York. The investment doubles Materion’s corporate-wide bonding capability and streamlines the supply chain for European customers. These improvements along with the earlier expansion of our packaging business in Singapore puts us in great position to pursue greater market share with current customers and build a larger pipeline of new business opportunities. Specifically we are focusing in the area were technology is emerging in the wafer size market below 200 millimeters and expanding our participation in the 300 millimeter tier 1 space. In our Precision Optics business, we just landed our first major order for an embedded IR Optical Coating going into a 2016 tablet device for a major OEM. Also our numerous qualifications and ejector control devices are progressing very well and we have full expectations that we will begin shipping our first production order during the first quarter of 2016. These are some of the successes we are having in developing new products and further penetrating key markets to grow this business. That said we have a large existing base business with significant market share in some niche end markets. As market conditions change, we are aggressively responding and managing the business. As you would expect in response to the sharp drop in volume demand for particular products, we have taken actions to reduce our cost structure. To wrap up, we are pleased with our second quarter and year-to-date performance these are strong competitive results and we’ve deliver them while continuing to stock our new product pipeline and make key investments in our manufacturing capabilities. We are focused on larger more scalable growth opportunities and we are becoming increasingly successful in locking the full potential of our one Materion rather than simple some of our individual units. We see continued opportunity ahead to generate solid organic growth across our business groups. Our market shares are strong, our innovation is robust and we will continue to demonstrate the agility and the flexibility to produce sustained profitable growth amid some of the murky and unpredictable macroeconomic issues that we are seeing across the globe. And most of these challenges we see as transitory in nature such as the oil and gas and 4G Telecommunications infrastructure markets. This concludes our prepared remarks and once again we appreciate your interest in Materion. And now operator would you please open the line for questions.

Thank you. At this time we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Marco Rodriguez with Stonegate Capital. 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 the revised guidance, you provided some good color on the call here and your point on three particular items that are negatively impacting your forward view, maybe if you can kind of, if you can rank them and how they impact that $0.15 reduction in your fiscal year guidance?

You bet. This is Joe. I would rank those as follow. I think the FX, the impacts that FX is having on our foreign sales, both those denominated in foreign currencies plus the U.S. dollar denominated sales impact from foreign competitors. I will tell you that and probably the slowdown in China primarily the 4G build-out, that the pullback that we’re seeing there those two are probably are have going to have an equal impact on reducing our guidance. The other thing that is impacting our guidance is the great than. But not the same degree I guess if you ask me to rank them, is the greater than forecasted pullback in oil and gas. We saw that, we have forecasted but just not to that degree. So that’s not a significant of an impact in the reduction of our guidance as FX impacts in China. And on the flipside you know I think defense has been stronger than we had forecasted and is offsetting that. So that’s an improvement, I would tell you, so big picture FX and the 4G China slowdown combined are probably about equal, follow them by oil and gas offsetting by stronger defense. If I had characterize that.

Got it, that’s very helpful. And kind of talking about the FX impact on the foreign sales or rather the increasing competition that you're seeing out there, can you talk a little bit about the dynamics that are out there, are these people that you would normally see in the markets that are obviously just getting a pricing advantage or do you have new people coming in because of the volatility on FX?

I would tell you, is normal competitor that we see, but when you look at our foreign sales, a portion of remark denominated in USD and a portion were denominated local currency. We actively hedge as you are aware those that are denominated in a foreign currency. And so we’re seeing competitors, local competitors basically impact of the profit margins of those that are denominated in U.S. dollars more than historically preciously forecasted.

Okay, but they are not coming out with lower pricing per se. So let’s just take an advantage of the volatility and FX

Correct.

Got it. And then moving, shifting here I guess a bit to the oil and gas market. Are you seeing any changing sentiment from your end clients or is it pretty much kind of a status - from Q1?

Hi, this is Dick Hipple. I don't know they were saying changing viewpoint it’s simply that if you consider what's going around the world is the Saudi Arabia is pumping more oil than what was expected you've got to the U.S. production up versus last year, we've got probably Iran sanctions coming up. So I would say that the forward viewpoint is probably softening in the oil and gas market. I think it wasn't too long ago everybody was thinking this thing was going to start to pop back up and pricing in the fourth quarter this year, I saw many reports to that effect. But I think as the dollars gotten stronger and these other items are coming to bear again with even China slowing up. I think the overall forecasting in the oil and gas market is softer then it was beginning this year. So I think the tenor is down in the oil and gas market.

Got it. And shifting here to couple of kind I guess housekeeping items on the other net expense line item, you mentioned on the call that you had a $1.7 million gain I believe it was from FX hedging. But there was also a positive legal settlement. Can you quantify what that dollar amount was.

Yes, that was approximately $1 million but let me talk about the FX gain, when you look at that line the prior year, we had an FX gain at 1.7 the prior year we had an FX loss of approximately a $100,000 on that line. Again that's where we record the gains and losses on our FX hedges that we enter into to offset or to protect ourselves against the FX movements, on the foreign currency denominated exposures.

Gotcha. In that FX hedge gain here that seems a little out of the norm for your normal hedging, is that a fair statement?

Yes, that is a direct reflection of the fact that the currency has moved greater than 20% so we actively hedges going out approximately 18 months so that by the time we enter in any fiscal year were about 80% hedged of our forecasted foreign currency exposure. And so that 1.7 benefit is reflective of the fact that we entered into hedges approximately 12 months ago about a book 30 they were unwinding compared to the book 10.

Gotcha. And then lastly I was just hoping you might be able to talk a little bit more about your expectations on cash flows and free cash flow for the remainder of the fiscal year and if you could also talk a little bit about your capital allocations throughout that period? Thank you.

Okay, the cash flow as we anticipated cash flow from operations was positive for the first half about $21 million. As we look to that the back half of the year I would anticipate us to generate free cash flow from operating activities in excess of $50 million given the continued liquidation we are going to see on some of the inventory and working capital. From a capital allocation standpoint, we continue to share buybacks we spent in the first half of the year $2.7 million repurchasing company stock that this dramatic program to offset the dilution impact and then we also maintained actually as last quarter increased our dividend and so that should remain about the same as well on a full-year basis about $7 million. And so beyond that that come from a capital allocation strategy. We have come out publicly and so that we are going to focus on acquisitions. Do you want to add something?

That’s it. We have a – we spent probably the last six to nine months in developing that pipeline and again we’re aggressively pursuing that to see if something make strategic sense to us and obviously we also have a share buyback in place opportunistic that we also have the ability to reach out for that. So our first priority is to grow this company and we've got some great opportunities both organically and hopefully on the inorganic side that we’ll be looking at.

Gotcha. Thanks a lot guys. Appreciate it.

Thank you.

Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question.

Good morning. So the question on the value-added sales, do you have a growth target in minus your new target embedded in that guidance and if you do want could that number be impacted by in terms of currency?

Well, Phil I guess when I’d say the forecasted currency to stay about where it is today, the impact from FX year-to-date is at about a 2% reduction in our value-added sales. So the currency is going to stay when it is let’s be approximately 2% year-over-year in the second half as well. So excluding FX we have been very successful I think in growing the business in the first half of the year. When you go to the second half as you recall, our second half was strong last year so the benchmark is higher, but so that will challenge the year-over-year growth, but I do anticipate for the full-year still delivering value-added sales growth.

And then in terms of the guidance that you had provided on – I thought it was free cash, but I just want to clarify if it was free cash flow or operating cash flow because I know that there is going to be a reduction in the networking capital in the second half. So just want some clarity on that?

The operating cash flow greater than $15 million on a free cash flow, when you look at our cash from investing activities which we will continue to invest in the opening of the new pit or the mine associated with forecasted hydroxide and beryllium demand so that's consistent with our prior guidance.

Okay, any major cash pension payments in the second half?

In the second half we will have approximately $12 million of pension - funding of our pension plan,

Okay. Terrific, and then just lastly on the defense side. Maybe Dick if you could elaborate a little bit more on the F-35 as far as the moment there in your participation. And then what you are seeing in your core defense businesses, relative to what we see in the last year and half? Thanks

So, what's interesting is that the F-35, you know we’re very excited about the development of the new product and those shipments are begin to happen, how should we've been planning on that. So that's really another surprise and it's actually not an uplift for what's going on, we’re seeing an uplift in any particularly in the other areas of our business, which is in the optic side. And that's getting into higher devices for missile defense systems and UAV systems have really picked up much higher than our forecast for what it was this year. So we’re I would say the F-35 is on plan and growing, so that you know obviously the shipments will be growing in that. But the upside surprise for us gets back to the missile defense systems and it's what's interesting about it is we’re participating it, it’s beyond the U.S. So these are expanding international sales for defense for us.

Thank you.

Our next question comes from Edward Marshall with Sidoti & Company. Please proceed with your question.

Good morning, Dick, Joe and Mike. How are you guys this morning?

Good morning, well.

So, the rig count, bounced I guess a bit in July, not by March. But some companies starting stabilization. It doesn’t seem like, you have been [indiscernible] the bottom yet. And I wanted to get maybe your perspective. I think a lot of the material you sell into the market is ToughMet. And I'm wondering if that’s used in maybe deeper holes and hard-to-reach areas. And even they were offshore and that's particularly why you're not seeing rebound?

Well, actually first you have to realize where we are in the supply chain. So just because we are taken certain actions, somewhere we may see it for to five months after that because of the inventories and distributors and things like that. So you have to be a little careful about where we are in a supply chain and how fast things react. But our biggest area is in the - would be affected by drilling and we were in the directional drilling area. So, certainly all the shale developments throughout the domestic United States or overseas and then also our materials are used in the deep drilling a very deep completion activities in deep water. So that's where you generally find us. And obviously those are the key drilling activities have been slowed up the capital and also the rigs here in the United States. As you point out it did stabilize, here very, very recently. So we have some optimism, if it does stabilize, that you will start to have the inventories adjust and you can start to pick up the oil and gas market again. And that would probably something would – you could start to see an impact on that in the - maybe in the fourth quarter, because they also do the drilling activities up north, during the wintertime when the ground is firm. So we do expected to have this the market stabilize for us and start to pick back up. But at the extent that it went down was farther than we had forecast. So I think you know probably coming into the year we had forecasted may being down by 30% or so, which was up I have the assumption and it turns out to be greater than 50% and the drilling activities. So you can see that mismatch, but I had mentioned in the call here earlier, where we're trying to shift to be a broader supplier outside of just the drilling activities whether it's deep-sea or whether it's directional drilling, is we’re shifting some of our focus where our materials can be used in the actual production side. So some of the – the articulating lift wells that was actually the application I talked about we’re typically not on the production side on oil and gas and we have a very large opportunity here to be in the production side. So that was the joint program that I talked about that were causing the some very difficult applications to have double the life and what they have today, so the tremendous amount of savings for the oil and gas producer. So that is being established right now with – it’s been two years of trials and we’re coming through the other end of that so we’re able to start to market that product on the production side. So that’s why we said – don’t excited about it if we can increase our portfolio to be on just the drilling side that we can do something on the upside even if the drilling remains flat.

Gotcha. You brought us a good point you produce consumables to the consumable market when it comes to energy and I’m curious generally those inventories gets soaked in the channel and [indiscernible] you haven’t sense where the inventories are today and how long that might take to at the current demand level were kind of work off?

I would say that when you have a severe moves in the marketplace. What I've seen in the past it’s probably about a six-month flush out and it takes about six months to get the inventories out. So this is a really an interesting point for us. We had record shipments in the oil and gas market in the fourth quarter of 2014. Now that was at the time the market was coming down. Yes, we had record shipments so obviously the record shipments that we shipped in the fourth quarter is sitting in warehouses for a while, okay. So that's why for us you have to be a little careful that inventory is got to wash itself out. It'll take six months, but there's been six months of the year recurred and things flattened out so by the end of the year hopefully we’ll see it turn. I will say that we have although we didn't talk about this on the call it's an interesting point that in Joe's comments he mentioned that our ToughMet sales I think were flat year-to-year and we've always talked about those growing at a very high rate year-to-year. Now the ToughMet sales being flat from year-to-year is really driven by the downturn in the oil and gas market which is a big consumer of our ToughMet. However, for Froghead Wings and you took the oil and gas sector out of the ToughMet or actually ToughMet sales ex- oil and gas were up 23% year-to-year so that still shows you to drive and increasing participation of our ToughMet across other markets. So we’re still very, very excited about the growth within ToughMet although at a high level it does look like its growing.

All right. If I look at the performance alloys business which I believe is where the ToughMet is sold, it looks like the quarter, the margins looks like held up on a sequential basis and I’m just curious if I get your sense. You doubled your capacity for ToughMet as it relates to I guess Mitsubishi and I'm just kind of curious in context, where are you from a capacity utilization perspective as it related to ToughMet and is there any drag that you measure on a marginal perspective within the Performance Alloys that may affect is that capacity comes on mind?

I’m not sure because we are talking about two different things. We had the foresight it was about – but loosing the track of the exact timing, but we doubled our capacity for ToughMet at our plant and anticipation of ongoing growth about – we brought around probably about a year and a half ago. So we are well positioned for the growth that we have in the doubling of capacity that we recently have done is really not on a primary end or the melting end, its doubling a capacity on the finishing or making strip product for electronics. So it's a downstream finishing capacity the bottleneck that we had and we've increased that.

Gotcha. So at the front end the ToughMet is not…

We have the capacity in the front-end, we are in good shape.

Yes, okay. And on what utilization rate are you running at right now with ToughMet roughly?

Well, it depends where you are obviously we’re at a 100% on the finishing for the strip product probably in the primary end now with the downturn in the oil and gas is probably about 60% in the melting facility.

Okay, what kind of drive on the margin, should I expect?

I think you see that in Q2 margins and your point about the improvement in the margins. As I said I think in my comments but it was mix. And so I guess to give you a little more granular information. We had nice growth at our technical materials product line within that segment And so that is the higher margin product there and so that helps improve the mix also we had a significant growth in hydroxide shipments - about doubled. So that also improves the margin. So that helped the mix as well as voice coil motors growth that’s a high margin product as well.

Got it. So if you look at FX I guess switching over, switching gears a second. So point out the foreign currency and I'm curious when you, when you look at your business from what you sell internationally, how much do you produce domestically and sell internationally and have you been able to gauge decline in demand from the lower price competition and kind of exit out from just the translation impact?

The translation impact we do as what we carve out in our comments. So that is simply the foreign currency denominated transactions translated at prior year rates, what express does not express itself in that number and we do not carve out, and it’s so much. I guess combination of volume and some pricing is the impact that the foreign competition has on our U.S. dollar denominated sales in the international markets. So when you look at our sales in Japan and in Europe primarily or in Asia a lot of those are U.S. dollar denominated.

Right. So as we look at Q2 I mean you are bringing that up at the end of Q2 here and it doesn’t look like it impacts the quarter much. Is it something that as it time for the competition to kind of step in to cut size to kind of offset maybe to master a lower cost or is that something that has been kind of ongoing and we have been dealing with it sometime.

Well, I think the exchange rate itself is a very current movement. I mean we’ve seen a change in currency just within the last six months both in the euro and in the Yen by a factor, it’s probably roughly about 25% move.

But we’re seeing it worse, I mean it didn’t creep into the conversation, when you talked about guidance in 2Q after 1Q going into 2Q. I am wondering why its coming out now despite the fact that currency was down 17% and I guess 19% in the last two quarters. I mean you didn’t seen the impact 2Q either so I just curious that, is this a new development which was pricing?

Yes, let me answer that question. I mean customer aren’t going to switch sourcing between in a week and so it wasn't as significant and if you view depending on your view of where the currencies are going and how volatile they are going to be. You don't switch it in a quarter either were for six months. So I would tell you I think it's an increase the reason it’s coming up in our revised guidance is because it’s increasing in pressure. And to your point it wasn't as reflected in our Q2 results as much as it was in the future and I think that’s because we now have been sitting at 110 to on the euro to the dollar rate for about six months?

Okay, and so how does that effect any contract business that you might have I mean is there any loss of contract or ships in the contract basis or is this more of the spot market business that you sell on a commodity type levels?

This one will track the kind of spot market basis

Okay. And what’s important is that current today implied in your guidance on a go forward basis so its 110 and I guess 124 on the…

Yes.

Okay. And then just last question I guess when you look at the 2017 goals I mean your revised guidance today, is there any shift in that thought process I guess its 750 VAR and 265 and then EPS organically, is there any shift in that number based on kind of the timing, based on what we are seeing in the back half of 2015?

What we see in the back of 2015 is largely depressed oil and gas, we also see a temporary pullback here in the 4G buildout, we are seeing in our results and whether it’s the main driver in our guidance, long-term guidance is new product growth. And so in the first half of the year our new product sales grew 36%, we have a lot of new products that Dick talked about that are still in the early stages of launch and on top of that you have the forecast and changing demand dynamics in the beryllium business. And so those all remain intact and we view a lot of this as temporary pullback particularly when you are looking at China in oil and gas.

Okay. Great, thanks guys. Appreciate it.

Our next question is from Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question.

Thanks. I just had a follow-up here on Precious Metals in general, gold and silver have come down. How does that impact customer purchasing behavior and/or your margins with the Precious Metals of incumbent?

Yes, Phil as you recall most of the vast majority of our Precious Metal are pass through and so the drop in price will impact our top line sales, but will have no impact on our VA. There is a small portion of our business in the refining where part of the price is based on retention, retention of Precious Metal and so for that small portion the drop in the gold price will have an impact on our pricing if we do not do anything to offset that which is still that would have an impact on pricing. But that’s a small portion of the Advanced Material segment.

And the Q4 expected pick-up in the defense orders where is that going through play out or is that in the Performance Alloys business?

It’s actually in a Precision Coating Group.

Yes, actually it’s both Precision Coatings Group and look the performance of the alloy…

In terms of optics.

Optical Coating is correct and there is some in the beryllium business within Performance Alloys.

Okay, thanks so much. End of Q&A

There are no further questions. At this time I’d like to turn the call back over to management for closing comments.