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OM Group, Inc. (NYSE:OMG)

Q4 2012 Earnings Call

February 19, 2013, 10:00 am ET

Executives

Joe Scaminace - Chairman & CEO

Chris Hix - VP & CFO

Rob Pierce - VP, Finance

Analysts

Ivan Marcuse - KeyBanc Capital Markets

Steve Schwartz - First Analysis

Chris - Kapsch Topeka Capital Markets

Rosemarie Morbelli - Gabelli & Company

Kevin Hocevar - Northcoast Research

Alan Mitrani - Sylvan Lake Asset & Market

Operator

Good morning and welcome to the OM Group’s Fourth Quarter 2012 Financial Results Conference Call. Information presented on the call may include forward-looking statements that are subject to uncertainties, risks, and factors which are difficult to predict. Actual results could differ materially from those expressed and implied. A more complete disclosure regarding the forward-looking statements can be found at the bottom of OM Group’s press release or their Form 10-K and applies to this call.

I will now turn the call over to Mr. Joe Scaminace, Chairman and Chief Executive Officer of the OM Group.

Joe Scaminace

Good morning, everyone, and welcome to our fourth quarter earnings call. Today, I am joined by Chris Hix, our CFO, and Rob Pierce, VP of Finance, whose responsibilities include investor relations.

You can see our standard Safe Harbor disclosure on slide two. Take a look at the new OMG on slide three. We stand poised today to create our new and exciting future. Upon completion of the sale of our cobalt business, we will have completely repositioned our company and our business model. Our transformation from a commodity-based company defined by volatility to a technology based industrial growth company is now a reality.

The new OM Group is defined by the following traits: technology and innovation. Technology and innovation drive our business. We work closely with our customers to develop solutions to meet their complex and demanding requirements. A majority of our products are specifically tailored to an individual customer specification and we’re rewarded for innovation and know-how.

Attractive end-markets; we’re well positioned in attractive global markets with secular drivers that are expected to outperform GDP over the course of a business cycle. Some of our fastest growing end-markets include automotive systems, electronics, aerospace, general industrial and medical. The diversity and strength of our end-market portfolio will be a key to our success.

We are targeting the right acquisitions. Our strategy also includes building out our existing platforms through synergistic acquisitions. We are targeting opportunities that fit with our existing portfolio of businesses. This strategy will be a great value creator for our shareholders.

We are defined by an intense focus on financial discipline. Throughout 2012, I've talked about heightened financial discipline throughout our organization. Specifically, we've increased our focus on working capital efficiency, capital spending optimization and reductions in discretionary spending. We’ve also created a corporate function to increase financial analysis and strategic planning capabilities across the enterprise. Such discipline has helped us deliver the highest operating cash flow number in the history of the OM Group, $208 million.

Lastly, operational excellence; we will continue our passion for operational excellence and this includes the safety of all of our employees, productivity and efficiency and continuous improvement. I am very proud of our track record in these critical areas because we've demonstrated that we are in fact outstanding operators. Together, these key traits define the new OM Group and lead us down the path of growing our business and creating shareholder value.

On slide four, we outlined the targeted outcomes of this strategy. Growing sales 5% plus annually over the course of a normal business cycle. Through our operating leverage, we expect this growth to translate into profit increases at a faster rate than the sales growth. Higher profitability along with our financial discipline that I discussed earlier, will lead to consistent, positive cash flow generation. Higher profitability and financial discipline will also lead to higher returns as we work hard to increase profits and optimize our net asset base. And finally, our plan to add synergistic acquisitions will accelerate our growth and deliver long-term shareholder value.

Slide five highlights our key objectives for 2013; completing the sale of the Advanced Materials cobalt business is the primary focus for us right now. We currently have a rock solid balance sheet, which will become even stronger with the cash proceeds from the sale of our Advanced Materials business. We plan to use these proceeds along with our existing cash to repay a substantial portion of our debt. Our balance sheet provides us with the capacity and flexibility to execute our strategy of growing organically and strategically.

Each of our businesses continue to invest and develop innovative technologies and know-how. To spur organic growth, we’re focused market share gains in our end-markets by adding new customers, introducing new products and expanding into new geographic regions. For example, in Specialty Chemicals, we are in fact expanding into new areas in Asia. In the Magnetic Technologies, there are great opportunities for significant growth in North America and Asia.

Another key objective is to successfully execute the cost reduction plans that we have developed. These are enterprise-wide and will enhance our short-term and longer term profitability without sacrificing our long-term potential or strategic objectives. And the actions we are taking now are permanent cost reductions and will reduce our cost structure not in the short-term, but in long-term spending.

Finally, we have a disciplined M&A process in place to identify deals that will be accretive to earnings, provide good returns, create synergies in our existing businesses and ultimately increase value for our shareholders.

Slide six highlights our key accomplishments in 2012. In spite of challenging macro economic conditions that impacted profitability, we achieved a number of successes during the year. We generated operating cash flows of $208 million and as I mentioned earlier and is worth repeating this is the highest total in the history of our company and we utilized this cash flow to reinvest in our businesses and repay $214 million of our outstanding debt. We identified and began to implement cost reduction plans to improve 2013 profitability and position the company for long-term success.

So looking at last year, there are many success stories. Besides laying the groundwork for our January 2013 announcement of the sale of our cobalt business and the share repurchase program, I want to highlight two other achievements. In our Specialty Chemical business, we entered into a good partnership with AkzoNobel for the distribution of our Borchi Oxy Cure product line into the composite market. And in Battery Technologies we launched our Power-Pyramid grid for alternative energy storage, with a successful public demonstration in Joplin, Missouri last summer. We did receive our first order in the fourth quarter of 2012.

We also enhanced our governance in 2012 with the appointment of Hans-Georg Betz to our Board of Directors. Hans provides us with a global perspective and has a wealth of experience as a global business leader. Later on in the presentation, we will provide specific EBITDA guidance for the full year of 2013. And I can tell you now based on our January results of this year, we are off to a very good start to the year.

At this time, I’ll turn the call over to Chris Hix to walk us through the details of our fourth quarter performance.

Chris Hix

Well, thank you, Joe and good morning everyone. Slide seven summarizes the key highlights of our fourth quarter. We achieved strong operating cash flows allowing us to make accelerated debt repayments of a $125 million which will lower our future interest cost. We ended the quarter and the year with a strong balance sheet including net debt of only $219 million.

Our Battery Technologies business had a solid quarter completing a record year. This strong performance was more than offset by low cobalt prices and volumes as well as continued weakness in Europe and other global end-markets. We are responding the current market conditions by reducing our costs. Our actions are wide ranging and will strengthen our long-term competitive position; more on this in a moment.

Slide eight provides a reconciliation of our EBITDA. Excluding the performance of the Advanced Materials business we are selling, an LCM charge in our Magnetic Technologies business and the last of the Magnetic Technologies step-up charges, we had about $19 million of EBITDA in the fourth quarter of 2012. The inventory step-up from the acquisition has been completely amortized and will no longer impact results as we start 2013. GAAP reconciliations are in the appendix of this presentation.

Slide nine provides a more complete picture of fourth quarter P&L performance. Current quarter net sales declined from the prior year mostly due to lower cobalt volumes and prices, lower rare earth prices and decreased volumes in magnetic technologies caused by a weaker European economy. These factors contributed to the adjusted operating loss in the fourth quarter as did an $18 million LCM charge at Magnetic Technologies due to falling rare earth prices.

We are implementing plans to reduce our exposure to future rare earth price changes. Below the operating line, we had two largely offsetting items. The $5 million of deferred financing fees from accelerated debt repayment which is included in interest expense and $6 million of income from an EPT acquisition escrow settlement which is included in other income.

Interest costs were lower than the prior year’s fourth quarter because of debt repayments in 2012. The Q4 tax provision includes an $11 million expense for GTL special tax items which nets to $6 million given our 55% ownership to this joint venture. You will recall that GTL is part of the Advanced Materials divestiture we announced in January of this year.

Excluding the Magnetic Technologies PPA charges and the GTL tax items, the adjusted tax rate is 30% for the quarter. Combining all of these factors, our adjusted EPS was lower than last year driven primarily by lower profitability.

Slide 10 shows an overview of our cash flow. As Joe mentioned, 2012 cash flow was the best performance in OMG’s history with $208 million being generated from operating activities. Some of which we used to accelerate our debt repayments. In Q4, we had $51 million of operating cash flow including a tax refund of $38 million that we noted in our call last November.

As you turn to slide 11, you can see from the chart on the left that debt levels took another step down as we again deployed some of our cash to repay debt. Even though debt levels are nearly $200 million less than at the start of 2012 we still finished the year with over $200 million of cash. We expect to pay down a substantial portion of our remaining debt in 2013 following the close of the sale of our Advanced Materials business.

The chart on the right updates our working capital efficiency. We drove improvements through the first three quarters of 2012 as we better matched our supply chains with business conditions but in the fourth quarter our working capital percentage increased. This occurred mostly because of the slowdown in the Advanced Materials business.

Excluding this business which we are selling, working capital efficiency deteriorated slightly to 34.9% as a result of the timing of inventory purchases at Magnetic Technologies. We will improve on this performance in 2013.

The next few slides provide an overview of our business results beginning with Magnetic Technologies on slide 12. Demand continued to be strong from our automotive customers in this business due to favorable electrification trends in passenger cars. Other markets remain soft including general, industrial and construction due to the overall weak European economy.

The year-over-year decline in profitability is tied a bit to lower volumes but mostly because of falling rare earth prices. As we signaled to you in November, we did not realize any rare earth pricing benefits in the fourth quarter of this year and we do not expect any further rare earth price benefits because of our expectations of stable rare earth prices.

The decline in rare earth prices in the fourth quarter also triggered an $18 million LCM charge. In spite of current business levels, our Magnetic Technologies platform continues to find new applications for products and to develop new products to expand its business. In 2013, these growth initiatives are being complimented with cost reduction programs to improve profitability and improve the businesses long-term competitive position.

Slide 13 summarizes the fourth quarter performance of our Battery Technologies business. Sales and operating profit both increased primarily due to higher volumes across all major product lines. The business continues to enjoy healthy sales into the defense and aerospace sectors with defense being bolstered by sales to US defense contractors for foreign delivery.

We also have a small but growing range of products for medical applications, which is benefiting from new device adoptions. At the end of the fourth quarter of 2012, order backlog in this business was 128 million, as compared with 123 million at the end of the prior year helping the business to get off to a good start in 2013.

In our Specialty Chemicals business on slide 14, sales and profits were seasonally low and about flat with the prior year. The chart on the right shows the volume performance of our advanced organics and electronics chemicals product lines since the first quarter of 2011.

In our Electronic Chemicals product lines, we expected to see a recovery at some point in 2012 from the Thailand flooding that occurred in 2011. Instead, lower than expected demand for consumer electronic devices and PCs generally reduced our sales. We continue to innovate and then use our technology to capture new customers and drive market share gains.

Our Advanced Organics product line sales were higher than the fourth quarter of last year because of higher demand for coatings and tire adhesion promoters, partially offset by lower demand for additives. Products with Borchi Oxy continue to gain traction in the market. Just as with our businesses, we are adjusting the cost structure of our Specialty Chemicals business to improve profitability in 2013.

Turning to slide 15, you can see the update of our Advanced Materials business. We announced last month that we are divesting this business and we still expect to close the transactions by the end of April.

Slide 16 highlights our cost reduction actions. These initiatives are being taken across the enterprise including in the corporate offices and include headcount adjustments, limited facility consolidations and supply chain optimization. We will update you on our progress throughout the year.

Depending on how quickly we complete our various initiatives while also limiting the disruption to our businesses, we could save $10 million to $20 million in 2013 and more in 2014 when we get the full-year benefit of these actions. These changes come with restructuring charges especially in Europe. These cost reductions are sustainable cost structure improvements and not simply for short-term gains. Of course, we are also carefully controlling other costs and capital spending to protect near-term financial results as you would expect.

Please turn to slide 17. Depending exit from our Advanced Materials business improves the predictability of our company and it also significantly changes the profile of OM Group. Because of these factors, we are providing a 2013 adjusted EBITDA forecast of $120 million to $140 million. The largest swing factor within this range is the pace and scope of macroeconomic recovery in Europe which we expect to be stronger during the second half of the year.

Other important factors include improvements in consumer electronic markets, US government spending and our cost reduction activities. This forecast excludes results from the Advanced Materials business and any divestiture impacts related accelerated amortization of deferred financing fees and restructuring cost associated with our cost reduction plans. We expect EBITDA to be higher in the first quarter of 2013 than in the fourth quarter of 2012 and our January results give us a nice start toward our achieving our full-year forecast.

Before I turn the call back over to Joe to wrap on slide 18, let me point out that in addition to releasing our fourth quarter results this morning, we also filed an 8-K describing our reclassification in our previously reported cost to consoled and SG&A dating back to the third quarter of 2011. This reclassification stems from an incorrect conversion from IFRS to US GAAP following the acquisition of VAC in August 2011.

The change does not impact previously reported sales, operating profit, EBITDA, net income, EPS, cash flow or the balance sheet and it's strictly limited to the cost-of-goods sold and SG&A at VAC. We also filed amended 10-Qs for each of the first three quarters of 2012 that reflect this reclassification.

The 2011 reclassifications were not material so we will not amend any of the 11 filings. The appendix of this presentation includes the summary of the previously reported figures and the amended figures.

And with that, I'll turn the call back over to Joe.

Joe Scaminace

Thanks, Chris for that report. And now I'll leave with you with our final prepared thoughts on slide 18, because we are really excited about the company's new profile and great prospects. The core of our success is the ability to work closely with our customers and to develop specialized solutions and get rewarded for that.

There is a new clarity in all of our businesses right now. Our emphasis on technology and innovation supports our organic growth focus, helping us builds our platforms, build them out and better aligned with diversified attractive end markets. As a new OMG, we have improved our earnings predictability and strengthened our balance sheet, opening up more opportunities to execute our strategy for organic growth and synergistic acquisitions ultimately creating great value for our shareholders.

That concludes our prepared remarks and I would like to now ask the operator to open up the calls for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ivan Marcuse from KeyBanc Capital Markets.

Ivan Marcuse - KeyBanc Capital Markets

On the Magnetic business are you so going forward just to make sure I'm clear and I guess everyone else? So is the rare earths’ the negative drag from it or the benefit is everything sort of fixed now and going forward we will start to see a normalized profitability in this business and then on top of that what are you doing sort of to fix that. You mentioned you are fixing the rare earth pricing issue. How fast will that take effect and how do you look at this business on a profitability level going forward excluding the rare-earths.

Chris Hix

So by way of background the business as we have described has gone through a fairly unusual and dramatic ramp up in the price of the rare-earths. That occurred back largely in 2011 really the back half of 2011, and then we've been on the down slope of that throughout 2012. The business really did a very terrific job in managing the cost price relationship there between customers and suppliers to make sure net-net the company, the company wasn't exposed over the long term.

On a quarter-to-quarter basis it introduced a little bit more chop than what we would like to have seen and really we've got that largely behind us now. The price dynamics are all worked out; we are seeing stabilized rare-earth prices; and more importantly to your question about how this is being managed going forward, it’s really a question of how we manage the supply chain both in terms of the amount of inventory that we choose to hold as well as the length of the supply chain.

So that's really where the focus of our improvements are going forward. Our expectation for 2013 is fairly stable rare-earth prices. We are certainly seeing some of those signals in the marketplace, but in addition to that we are just working on reducing our exposure. Joe?

Joe Scaminace

Let me add to that too because we've really done a lot of work on this and a lot of research, and there is no doubt in our minds that this run up in the rare-earth prices was in fact an extraordinary event that none of the experts globally would have ever been able to predict.

As Chris mentioned in looking ahead, we are hearing that after the Chinese New Year now that there will be an increased stabilization. But on the other side of that, there is an encouraging factor for not just our reduction in inventory and reduction of the lead time that Chris talked about on the supply chain.

Rare-earths are used in a family of material usage and industries, and it’s a very important ingredient. It’s not just in permanent magnets, but rare-earth components are used all over the place. They are used in automotive windshields, they are used in color, they are used in televisions, they are used in lighting. So any type of a ramp up and any kind of global demand for any of these products will again help the demand side.

Ivan Marcuse - KeyBanc Capital Markets

So without the rare-earth sort of being a drag on sales, do you just expect a sequential increase in sales and maintenance technologies going in the first quarter with automotive production sourced or ramping up?

Chris Hix

Yes, I think as we look at that business going from the fourth quarter of 2012 to the first quarter of 2013, we do see some encouraging signs and those are reflected in the January results that we've seen. So we're certainly optimistic as we start the new year that number one, the rare-earth issue should not be a factor in the first quarter and that we do see encouraging signs both in the market place and with the profitability of the business.

Ivan Marcuse - KeyBanc Capital Markets

So, bottom line, I know you can’t predict the future but if you look at (inaudible) technologies fourth quarter, sort of is looking like this is sort of a trough level type for this business if you throw everything the whole bucket of charges in.

Chris Hix

Yeah, that would appear to be the case.

Ivan Marcuse - KeyBanc Capital Markets

You mentioned that you’re seeing strength in January. Is there any particular area where you are seeing the strength of region and/or is it sort of spread across all the businesses? Could you just talk a little bit more about that?

Chris Hix

With our business we’ve got a lot of markers down in a lot of different places, both growth initiatives, products, regions that we're expanding in to, market share gains. I think the key really for us is execution across that very broad front. So what I would point to is improved operating execution as a key ingredient to that, and also just getting past some of the seasonality in our fourth quarter that’s pretty common especially with respect to the Chemicals businesses.

Joe Scaminace

In addition to that Ivan, the second half of January traditionally signals the start of a build up for the coding season. We’ve got new products on the Borchi Oxy product line. We're starting to see some firming in the semiconductor industry. Even though the tire industry is predicted to be flat this year and there are other public statements, we did have some sales coming out of that.

On the back side, as we've indicated in the past, we're continuing to play a key role in the electrification of these vehicles, with the (inaudible) antennas, the brazing foils, the common choke modes, rare-earth magnet used for power steering. So we continue to ride that wave.

Ivan Marcuse - KeyBanc Capital Markets

Just a couple of quick questions. Will you continue pay down debt in the first quarter or you are going to wait till a deal is done. And then when you say largely all of your debt, how much debt would you expect to be left in the balance sheet once that is completed?

Chris Hix

Yes when we say largely paying down the debt, our intention is to repay all of it with the exception of maintaining enough flow cash in the company to support operations and to ensure that the timing of repatriating the cash is such that that we do it in a smart tax way. So what you will see is virtually all of the debt being repaid, the conclusion of the sale of our advanced materials business, and if there is a couple of bits that are left that’s something we will be taking care throughout the year.

Ivan Marcuse - KeyBanc Capital Markets

Okay so by time we get to this time next year debt should be assuming no acquisitions whatever should be zero?

Chris Hix

I think that’s yeah that’s a reasonable expectation.

Ivan Marcuse - KeyBanc Capital Markets

And then for the regular business to go forward is there going to be and these are my last questions so I will get back in the queue. What’s the tax rate would you expect for the go forward business and is there any NOLs that you are having in Europe they are going to help you out in tax rate or cash flow is going forward?

Chris Hix

So what I would say about out tax rate is, it’s been fairly stable throughout the year if you factor some of these puts and takes. We’ve been communicating the tax rate that’s been in the high 20s and in the most recent quarter about 30%. I think that’s a reasonable expectation rolling forward. And at this point I don’t have a separate set of projections for the cash taxes, but I would expect that to be roughly approximate to the P&L impact.

Operator

Your next question comes from the line of Mike Harrison from First Analysis. Your line is open.

Steve Schwartz - First Analysis

With respect to the guidance for 2013, can you give us a little bit of a flavor for how you are breaking that down among the remaining businesses; you’ve already talked a little bit with about Magnetic Technologies but also for specialty chemicals and battery?

Chris Hix

I think in all cases we have got the opportunity for the businesses to improve results especially in the second half of the year, some of the organic growth initiatives kick in and cost reductions and some macroeconomic improvements. So I’d say it’s a actually a fairly consistent story across all three businesses, all of them are focused on growth, all of them have cost reduction targets and programs that they are working on, and all that to contribute to improve performance as we go throughout the year.

Steve Schwartz - First Analysis

Okay, so consistent across all three. You did mentioned with respect to the restructuring, so maybe $10 million to $20 million in ‘13 of savings, and you did reference to the fact that it might take a little longer in Europe. Can you talk a little bit about how much of the restructuring is in Europe?

Chris Hix

Right, so just a clarify, I don't we said it will take necessarily longer in Europe, I just think we said restructuring cost would be especially incurred in Europe, and you will expect given the natural things in that regions. But make no bones about it, we’ve got cost reduction elements across the company and European VAC in particular certainly an important part of that for 2013.

Steve Schwartz - First Analysis

I think Joe you just mentioned in response to Ivan that you are seeing a firming in the semiconductor industry. Can you go into little more detail and what the order patterns look like there?

Joe Scaminace

Yeah, you know when I mention about firming, last year of semi was down and what we’re seeing just in the early going here is just some recovery there, it’s not anything that may look imminently sustainable, but we just are seeing some firming.

Chris Hix

And I should mention forecast is well that show improvements in that industry as we go through 2013 which would help us.

Joe Scaminace

Yeah, like for example in December you know global sales were down 3% and you know there hopefully isn't going to be a firming and we are starting to see just a little bit of that in January.

Steve Schwartz - First Analysis

And then just my last one with respect to the Dreamliner issues and lithium-ion batteries, you know, we know you guys have more of a niche focus, but are you at all concerned, do you expect that might have a negative impact on the business?

Joe Scaminace

You know it’s a good question, you know we play a role in aerospace, not a big role on the commercial airlines, its very, very small and we don't anticipate that to have any impact on our Battery Technology business. We do make lithium-ion batteries for telecommunications, for medical devices. We make thermal batteries for defense. So we don't anticipate any negative impact on ourselves and I do think that from what everything we are hearing in the press, they are trying to get beyond that problem right now. And I think it’s a great opportunity for the future because, as I indicated in the last call, if you remember, we have in fact passed some very, very stringent tests on the FAA more stringent tests, on flammability with our lithium-ion battery.

Operator

Your next question comes from the line of Chris Kapsch from Topeka Capital Markets. Your line is open.

Chris - Kapsch Topeka Capital Markets

I wanted to follow-up on the sort of the guide for 2013 by segment and more specifically focused on VAC. You know doing sort of back of the envelope math, I sort of see it looks like your guidance might imply VAC could deliver sort of $60 million to $70 million in adjusted EBITDA which might imply like an EBITDA margin in the low teens. And in the past you guys have talked about this business having a more normalized EBITDA margin in sort of the low to mid teens, so that might suggest that current run rate obviously is below what's a more normalized.

And then if you go back and look at your 8-K disclosure about this business when you did the acquisition, it looks like prior to the whole Rare Earth boom and bust cycle this business looks like it delivered sort of mid to high teens EBITDA margin on a run rate basis. So I am wondering like do you expect that we might be able to get to sort of mid teens sort of run rate basis in the second half of this year and what sort of conditions might we need on a macro basis or what sort of internal drivers could you do to sort of drive this business back in that direction, assuming my assumptions and back of the math assumptions are in the ballpark?

Chris Hix

Yeah, just a couple of points to help clarify some of that; I think that the previously reported numbers before the company was acquired by OM Group were largely based around IFRS and when you convert to US GAAP that does change the margin profile. We've been pretty consistently talking about this business being a low to mid-teens performer on an EBITDA margin basis. I know it got to be higher than that as we went through this Rare Earth activity in times of lower than that for the same reason; but we still believe this is a low to mid-teens business in terms of EBITDA margins and we would expect to see that performance in 2013.

Chris - Kapsch Topeka Capital Markets

And I guess your comments about second half of ’13 being stronger, I assume that means weighted towards back as well like could you be approaching a run rate EBITDA margin sort of mid-teens towards the end of 2013 for VAC; is it 2013 or is it just too early to tell really?

Chris Hix

Yeah, I think we're comfortable with our forecast for the business being in the low to mid-teens for the full-year and it would imply stronger performance in the back half for margins since we're forecasting stronger profitability in the second half as well.

Chris - Kapsch Topeka Capital Markets

Okay. And then just in your presentation, you called out on that business, you called out sort of weak EAS sales in that business, which Electrical Article Surveillance goes into the retail apparel industry and you know, my understanding being familiar with a couple sort of downstream players in that space is that typically seasonally the second quarter’s and fourth quarter’s are tend to be stronger in that business. So to call out the weakness there for a business it's only I think 10% of overall VAC; a little surprising; so I am just wondering if there is anything more dramatic than just overall weak European apparel market, end-market conditions that could be causing weakness in that particular product line?

Chris Hix

We believe that market share and all that is holding up nicely. You know, this traditionally has had some stocking and de-stocking bubbles that would have affected it, but in general you got a weaker retail environment and we think that’s really what's been holding that part of VAC back in more recent performance.

Chris - Kapsch Topeka Capital Markets

And is that EAS weakness is skewed towards Europe specifically?

Chris Hix

I would say it's skewed mostly towards Europe, but I think that there has been impact in U.S. retailing as well.

Operator

Your next question comes from the line of Rosemarie Morbelli from Gabelli & Company. Your line is open.

Rosemarie Morbelli - Gabelli & Company

Would you mind us giving us a better feel as to where are your expectations of sales growth of 5% is coming from; is it volume, is it price, is it a potential acquisition that you kind of have already in the bag; could you give us a feel as to where that is coming from?

Chris Hix

And so just to clarify the 5% that we talked about is over the course of the business cycle; might be stronger as you are coming out of weaker performance or a lesser number is as you are entering a downturn, but over the course of time a 5% growth number, that’s an organic growth number, so that’s without the benefit of acquisitions and that would largely be driven by volume, the company here before has said mostly in a pass-through strategy with respect to pricing and that is certainly is an opportunity for us that could deliver even better performance overtime, but that’s really an organic volume growth driven figure.

Joe Scaminace

And let me add Rosemarie, as part of the comments that I made before, we have organic growth opportunities by expanding the product line into new geographies particularly VAC product line being distributed more in North America and we have opportunities in Asia, so in addition to the volume growth being driven by geographic sales and also new product sales.

Rosemarie Morbelli - Gabelli & Company

Okay. And so based on your comments regarding the pricing in Rare Earths stabilizing, can we generalize that vis-à-vis all of your raw materials or do you see some inflation in some of them?

Chris Hix

You know outside of Rare Earths in 2012 the material cost inflation was not really a significant issue for the company. There is always going to be puts and takes you know, caustic soda might be up in one area but stainless steel down in other areas, so we have not identified material cost inflation outside of whereas as being a substantial issue for the company.

Rosemarie Morbelli - Gabelli & Company

And if I may, you are talking about [Europe] performing better in the second half, is that mostly related to your previous comments on VAC, or do you see something else improving in terms of your markets in Europe?

Chris Hix

So the exposure of the company as to Europe is primarily with the VAC business but also our Advanced Organics business into a lesser degree Electronic Chemicals. So an improvement in Europe would benefit the company across a couple of areas. I would also like to just remind folks that our second quarter 2012 performance included was a little bit weaker than what we had anticipated because of the weather patterns in Europe affecting our architectural coatings activity, and so we would expect a different weather pattern to improve the performance of the company in the second quarter and perhaps third quarter as well. So there is a number of contributing factors but it largely comes down to VAC.

Rosemarie Morbelli - Gabelli & Company

If you eliminate the impact all the benefit that you will have on the coatings comparison, are you seeing generally speaking an improvement there in housing in Europe, whether it is second on your construction because they have build up to the tilt but in terms of remodeling that you would see an improvement architectural coatings?

Joe Scaminace

Let me point out, in our coatings business, we primarily are largest suppliers on the (inaudible) side, the industrial coating side which tends to really follow general, industrial, these are coatings that are used in storage tanks and alike, and our exposure to architectural coatings per se is not as bright. So, but we do have access to the data there and so we are not seeing the same kind of housing recovery in Europe that we are seeing in the US.

Rosemarie Morbelli - Gabelli & Company

But are you seeing anything generally speaking?

Joe Scaminace

Generally at this point no, pretty flat.

Rosemarie Morbelli - Gabelli & Company

And Chris, how much cash do you need to manage the company so that would be maintenance CapEx I suppose? You know you made the comments regarding paying down debt but keeping enough to for your internal needs.

Chris Hix

Yes, so one of the advantages of divesting the Advanced Materials business is it enables us to really pull down the requirement for cash that we need to manage what we have in the past the cobalt cycles. With that out of the company, we are still fine-tuning this but somewhere I'd guess between $25 million and $50 million of cash is required from a flow cash perspective.

Operator

Your next question comes from the line of Ivan Marcuse from KeyBanc Capital Markets. Your line is open.

Ivan Marcuse – KeyBanc Capital Markets

Just a quick follow-up, you talked about a couple of times in your prepared remarks that you are looking to build the business through acquisitions, bolt-on acquisitions. This is something you’ve been talking about for a while now so how would, now that you have Advanced Materials done when you look at ’13, how would you sort of gauge the likelihood of acquisition and where do you see the biggest opportunity for acquisitions out of the Magnet or especially chemicals or even the battery business?

Joe Scaminace

Yeah, Ivan thanks for that question. It’s really a great question and I will tell you that clearly we've been focused on the sale of our cobalt business and in fact the proceeds aren't here yet as Chris mentioned. You know, we expect to close this near the end of April but the deal flow right now, there's an increased clarity right now across all of our businesses, and all the way up and down the organization and its going to be a challenge for us to find the right values, the right fit because in fact I think its no secret the market is starting to make a move out there.

Now I can't go as far as to say that it’s heating up but it certainly is getting more active. So we continue to look at opportunities both large and small. We are being very disciplined in our approach and we will continue to look at our acquisition route as being one where we are looking for businesses that fit with the existing platforms of our business, are accretive and fit and the business leaders themselves right now are playing a very active role in helping us on that deal flow.

Operator

Your next question comes from the line of Kevin Hocevar from Northcoast Research. Your line is open.

Kevin Hocevar - Northcoast Research

In terms of the battery tech business I mean it had a great year here in 2012, what I think part of that was you made reference to benefits from foreign military spending. So just wondering for 2013, I know that business can be lumpy. So do you expect that to continue and can this business improve from the 2012 results or do you think that that might not continue into next year and maybe flat type earnings for battery technology?

Joe Scaminace

Yeah, Kevin let me just say that you know, we are in a part of the defense business right now which is really working in our favor. We are not out there at the leading edge of any items that might get, that were high tax spending, where we make thermal batteries for defense which are going on missiles and you know, we anticipate that that business will starting off fairly strong and we think that we can continue that strength and maybe even get a steady ramp up barring some unforeseen defense cut that might eventually impact us but we are in that business. It's growing and it continues to contribute to Battery Technologies.

And you know, the new applications though, when you look at Eagle Picher, we're really excited about the growth in medical devices, the power storage grid, what's happening in oil and gas and quite frankly, in commercial aerospace. So we're sitting on our laurels, on a defense business only. We got Eagle Picher, one that only really firing on all cylinders here with the battery business.

Kevin Hocevar - Northcoast Research

Okay, and looking at the cash flow from operation, I mean, really did a great job managing working capital this year, you know, $208 million is a real good number. So just wondering, as we look at 2013, what's kind of the outlook there? Can it repeat at these high levels or what's the outlook for that?

Chris Hix

Yeah, so if we look at 2013 with the expectation that we can have the business growing especially in the second half for the year, that could produce a little bit of a headwind with respect to working capital. At the same time, we're looking to reduce the working capital as a percentage of sales. So make it improve the working capital efficiency a bit. So I think it's going to be a number of factors to look at. I would say net-net, we would have the expectation of lower cash flow in 2013 and in addition to that, we don’t have the Advanced Materials business which contributed some of the cash flows well. So I think we have lower cash flow but still a great cash generating business going forward.

Kevin Hocevar - Northcoast Research

Okay and then final question in terms of the VAC business or I mean Magnetic Technologies has been, you have been working on penetrating the US auto market, so just wondering if you could update us on that and how that’s going?

Joe Scaminace

Yeah, we clearly are active. We have a sales organization here in the United States with sales people in the Detroit area and we are approaching it from two standpoints, calling directly on the automotive industry, but we also have European transplants in particular German suppliers that are basically setting up shop here with that type of technology. So what we are doing is we are starting to gain some traction here in the United States but we continue to work harder on that and we feel that there is great opportunities in North America and right now even in South America but North America in particular.

Operator

Your next question comes from the line of Alan Mitrani from Sylvan Lake Asset & Market. Your line is open.

Alan Mitrani - Sylvan Lake Asset & Market

I appreciate some of the clarity around the expectation in terms of an EBITDA forecast and at least giving us a sense of sale, so thank you for that. Can you just give us a little more granularity as it relates to the different businesses you have and may be a sales expectations across those businesses across cycle instead of the overall company, which of the businesses do you view as faster growing and can we expect faster growing sales may be in 2013 versus the others, just give us a little bit more detail?

Chris Hix

Yeah, Alan I think we want to keep our discussion largely at the enterprise level, but I would say that all of our businesses have good growth prospects in front of them, in terms of either new growth, new territories, new product development and the potential for market improvements as well. So I am not sure we can really pass it that way, I think we are excited about all three businesses.

Joe Scaminace

Yeah, what we can say, without really translate in this, what we will be having faster sales growth, you we can’t say that the VAC business and the Eagle Picture business are participating in global markets, where we feel that the growth of those global markets hopefully will help propel us.

Now that's not to minimize, all the activities that are going on in our advanced materials, where this deal we have with AkzoNobel, clearly has a great potential for the company, and any improvement in the printed circuit board, if these mobile devices through Apple continue to grow and those products get introduced, we will reap great benefits from printed circuit board plating chemistry, and any improvement in semiconductor. So I think Chris is right, I think we are looking for growth across the board, but we are very actively looking at new geographic penetration and we have new product technology in the pipeline that we will be looking to increase sales with.

Alan Mitrani - Sylvan Lake Asset & Market

You came out with the announcement, it was on the 22nd around there when you had the conference call about the sales of the other business, and you guided to a weak start in the beginning of the year and then better at the end, and yet now you are saying January. It sounded like it was much better than expectation. What improved in the last week of January, was it really just the last week of January, it came in a lot better that gives you little more comfort as to 2013 first quarter being better than the fourth quarter?

Chris Hix

Yeah, I think what we’d say there Alan is that the results that we start for January, we just did not have in hand in our last call to fully support the forecast and projections that we've got going into 2013. So we don't want to get ahead of ourselves here. It just gives us a comfort that our forecast is at least well supported as we start off January.

Alan Mitrani - Sylvan Lake Asset & Market

Can you give us a sense of what DNA is going to be this year, just for the businesses that are continuing businesses. Is it just the run rate of where you'd been .

Chris Hix

Yeah, I think its probably going to be somewhere around 70ish million.

Alan Mitrani - Sylvan Lake Asset & Market

Let me ask you this, it feels like we are almost getting the kitchen sink time in terms of your businesses. You seem to be trying to get rid of the other business, trying to put in any cost cuts you have. Is the first quarter the kitchen sink quarter and then from there on we could look at up in to the rate as it relates to easier comparisons and maybe the economy giving you a tailwind rather than a headwind, is that the way actually to look at it.

Chris Hix

Yeah, it’s hard for us to concur with the kitchen sink assessment there. We are obviously playing it straight up here Alan and the fourth quarter was a little choppy. There were a number of issues that we got behind us, and now we've got the announcement of our advanced materials business sales, so that's getting behind us. This rare-earth issue seems to be getting behind us. We've got a great course going forward in terms of cost reductions. So we would expect to see improvement increasing and improving as we go throughout the course of the year, and then as we get into the back half of the year that sets us up for some nice comparisons against the back half of 2012.

Alan Mitrani - Sylvan Lake Asset & Market

So those $15 million or $20 million restructuring charges how much of that is the first quarter?

Chris Hix

Here’s what I'd say there Alan, we will update you as we incur the costs and not to try to project those costs quarter by quarter.

Operator

Your next question comes from the line of Rosemarie Morbelli from Gabelli & Company

Rosemarie Morbelli - Gabelli & Company

Just briefly Joe you mentioned being very different regarding your M&A activity. What is the highest multiple that you are willing to pay for any acquisition.

Joe Scaminace

It’s really difficult to answer a question like that, because I think that right now the market is pretty challenging, and what we are looking to do is really depending on the deal that we have Rosemarie and looking at the growth and the potential synergies that that deal could bring. So it will be absolutely irresponsible to say we are willing to pay eight times whatever or six times or four times or nine times.

You can't go there right now, and what I can say though with great clarity is that we are absolutely being disciplined in our approach and we are looking at returns. We are looking at our cost of capital. We are looking at returns to our shareholders and we are as I indicated in the financial discipline comments that I made earlier that's what we are all about right now. So can't answer a multiple question.

Rosemarie Morbelli - Gabelli & Company

So you are not willing to say we will not pay more than…

Chris Hix

I think, what's important again is looking at the value that a deal brings to us and that could be a combination of growth, the synergies that we provide, ability to improve the cash flow, working capital performance of the business, etcetera, etcetera. So I think that there's, what we are focused on is ensuring that within three to five years of an acquisition we can generate returns that equal or exceed our cost to capital.

Rosemarie Morbelli - Gabelli & Company

And what about dilution, I know Joe said you wanted it to be accretive but accretive in year one of the acquisition?

Joe Scaminace

Yes.

Operator

Your next question comes from Chris Kapsch from Topeka Capital Market. Your line is open.

Chris Kapsch - Topeka Capital Market

A follow up on the VAC business. The rare-earth price is really starting declining from that bubble peak and sort of late 2011, throughout 2012. I am just wondering if you have any sense that because of the down trend in prices and I know we sort of hope that they are more stable now going forward.

But was there any sense that your customers were sort of in de-stock mode recognizing that the prices were coming off so sharply for rare-earths. So any customers in de-stock move which would have maybe served us sort of understate demand trends for VAC during the course of 2012 or even the fourth quarter?

Chris Hix

Yeah, I am not sure we would point to necessarily a stocking or de-stocking with respect to the rare-earth prices. It obviously caused a sharper, probably the sharpest reduction in demand we saw was on the alternative energy side but that wasn’t really a question of stocking. It was really just a question of the overall market dynamics.

Chris Kapsch - Topeka Capital Market

That was more a seller specific issue I am sure, right?

Chris Hix

And when to actually to sell.

Chris Kapsch - Topeka Capital Market

Okay, and I hate to do this because I am sure you are looking forward to having a conference call where cobalt prices didn’t come up. So I am going to do it anyway, but the cobalt prices have snapped back a little bit and they are currently in the low grade, 12.30 per pound.

I am just wondering like if the cobalt prices were to stay here indefinitely, which, of course they won't. But just looking at that potential earn out of as much as 110 million for the asset sale. If this were sort of the new normal work where that business might perform and based on current cobalt prices, where would you expect to be on that earn out three years from now is it on the low end, mid-point or is it just really too early to tell?

Chris Hix

Yeah it’s probably little too early to tell. As you can imagine the earn outs going to be conditioned not just on the published cobalt prices but on margins and spreads and volumes and that’s across a couple of different product line. So little too early to tell at that, but we will update as we get further into the sync and provide some sort of meaningful update.

Joe Scaminace

That concludes our conference call and I would just like to thank everybody for your great questions, for all your support, and I would just like to conclude with just a final comment to thank not just all of you who are interested in our company, but all the great employees of this company the outgoing cobalt team that’s going to be joining a great other company in America.

Just to tell you that the facts and comments that you heard today really reflect a new found clarity in our company, where our business leaders are absolutely focused on growth, financial discipline, and I am just personally looking forward to updating you on our progress as this year progresses and thanks again bye, bye.

Operator

This concludes today’s conference call. You may now disconnect.

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