Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

OM Group, Inc. (NYSE:OMG)

Q4 2008 Earnings Call Transcript

February 26, 2009 10:00 am ET

Executives

Troy Dewar – Director, IR

Joe Scaminace – Chairman and CEO

Ken Haber – CFO

Steve Dunmead – VP and General Manager, Specialties Group

Greg Griffith – VP, Strategic Planning, Development and IR

Analysts

Mike Harrison – First Analysis

Saul Ludwig – KeyBanc

Lou Fouts – Water Street Capital

Operator

Good morning, my name is Tasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2008 fourth quarter and full year results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Dewar, you may begin you conference.

Troy Dewar

Thank you, Tasha, and good morning, everyone. Thank you for joining us today for our review of OM Group’s 2008 fourth quarter results. On the call this morning are Joe Scaminace, Chairman and Chief Executive Officer; Ken Haber, Chief Financial Officer; Steve Dunmead, Vice President and General Manager, Specialties; and, Greg Griffith, Vice President, Strategic Planning, Development and Investor Relations.

If you have not seen a copy of the press release we issued earlier this morning, you can find it as well as the presentation materials that accompany our discussion on the OM Group website at www.omgi.com under Investor Relations.

Finally, the comments made this morning by any of the participants on the call may include forward-looking statements based upon specific assumptions and subject to uncertainties and factors, which are difficult to predict. Actual results could differ materially from those expressed or implied. A more complete disclosure regarding forward-looking statements can be found at the bottom of our press release and in our Form 10-K, and applied to this call.

At this time, I will turn the call over to Joe Scaminace.

Joe Scaminace

Thank you, Troy, and good morning, everyone. And thank you for joining us today. You’ve received the news release we issued this morning on our 2008 fourth quarter and full year performance for 2008.

Before I ask Ken Haber to walk you through our financial results, I would like to share a few observations with you. Like many companies, the story of 2008 can be told in two parts.

The first nine months. During this time period, we made significant gains in top line revenue and market penetration. We benefited from increased volume and higher prices. In addition, acquisitions played a key role in our growth. We also demonstrated an ability to bring those gains to the bottom line despite the challenge of falling cobalt prices throughout the second and third quarter.

Through the end of the third quarter, revenue more than doubled, and operating profit climbed 59% compared to the same period in 2007. Our businesses generated strong cash flow from operations, and we used that cash to strengthen our balance sheet.

Against this strong first nine months performance, we began to think that perhaps our volumes would hold up through year-end. We were wrong.

As we entered the fourth quarter, and what has become an all too familiar story, global demand declined dramatically and rapidly. In fact, our customers couldn’t cut orders fast enough. Volume across our various product lines fell sharply on lower end market demand. Lower demand for electronic devices such as laptop customers, portable electronics, and cell phones, along with industrial products such as cutting tools, began to affect our business channels.

For example, in the fourth quarter, sales volume within the Advanced Materials segment were down 4% compared to the fourth quarter of last year. More importantly, down 23% compared to third quarter of 2008. This segment represents close to 70% of our total annual sales.

In addition to volume being down, cobalt prices fell nearly 70% during the fourth quarter and resulted in lower selling prices for our products. Consequently, this had a negative impact on our profitability in the quarter, offsetting some of our positive results from the previous quarters.

Despite the steep decline in demand and a precipitous fall in cobalt prices, there were some positive results from the fourth quarter. Most notably, cash flow from operations increased significantly as net working capital was reduced, further strengthening our balance sheet.

Looking forward, visibility is very poor. And we expect continued weakness on our end market demand with no signs of improvement in the near term. We are running our businesses accordingly. We harbor no illusion that this market demand will suddenly re-appear over night. We are operating our businesses with a clear idea of reality and of the global marketplace in which we compete.

We’ve taken appropriate actions in response to the current economic climate such as eliminating 2009 salary increases where we can, reducing headcount, reprioritizing capital projects, and cutting discretionary spending across the Company. We will continue to closely monitor end market demand, and we stand ready to make additional moves adjusting our expenses to match sales volumes.

Our goal is to emerge from this current period of economic uncertainty stronger and ready to capitalize on the market recovery. I firmly believe our response has been appropriate, and we remain confident in our ability to manage through the challenges ahead.

Before I turn the call over to Ken for a deeper dive into our recent results, let me make one thing very clear. Our focus and resolve to deliver sustainable and profitable volume growth and drive consistent financial performance remains unchanged. As I said earlier, we are well aware of the realities in the near term and the challenges we are facing. I can assure you that we are responding proactively and will continue to do accordingly.

The fact remains that we position this Company to move forward against our transformation strategy. Our strong balance sheet and the financial flexibility it affords us has placed us in a position to do just that. Today’s economic climate does not change our vision – to enhance shareholder value through our strategic objectives.

At this point, I will turn the call over to Ken Haber to walk you through the details of our financial performance. Ken.

Ken Haber

Thank you, Joe, and good morning to everyone. I will begin with a review of the Company’s fourth quarter 2008 results followed by a review of the full year results. Please refer to the presentation materials from our website and turn to Page Three.

Incremental revenue growth from the 2007 acquisitions and favorable pricing in the Advanced Organics business were offset by lower metal resale revenues of $19 million, and revenue declines in Advanced Materials’ end markets of $13 million, and in Specialty Chemicals’ end markets of $35 million.

As a reminder, the fourth quarter 2007 results include the operation of Borchers, which was acquired from Lanxess on October 1st, 2007, but doesn’t include any operational results of the electronic businesses acquired from Rockwood Specialties Group on December 31st, 2007.

The major reasons for the drop in the consolidated operating profit of $102 million from the prior year quarter was due to the decline in the Advanced Materials operating profit of $81 million related to the impact that a rapidly declining cobalt reference price had on gross margins; an inventory charge of $27 million; and a non-cash goodwill impairment charge of $9 million taken in the Specialty Chemicals segment.

The loss from continuing operations of $33 million includes an additional tax benefit of $22 million related to the Company making the election in the third quarter of 2008 to take foreign tax credits on prior year U.S. tax returns. As originally filed, such returns claim these amounts as deductions rather than foreign tax credits because of this net operating loss carryforward position during those years.

Income tax expense in this year’s fourth quarter was a net benefit of $19 million, which included the $22 million foreign tax benefit just mentioned and income tax expense of $22 million related to the fourth quarter true-up of the effect of the effective tax rate to 36% for the full year 2008.

The loss of $1.09 per diluted share from continuing operations includes the tax benefit of $0.71 per share, the inventory charge of $0.63 per share, and the goodwill impairment charge of $0.29 per share.

Please turn to Page Five, which is a reconciliation of the Company’s GAAP reporting of net income, and income from continuing operations to non-GAAP results for the period shown. Excluding total income from discontinued operations and the special items as shown, income from continuing operations, as adjusted for special items was a loss of $46 million or $1.51 per diluted share. This compares to a profit of $51 million or $1.66 per diluted share in the fourth quarter of 2007.

On Page Six is the fourth quarter 2008 operating results for the Advanced Materials Segment. The fourth quarter results were impacted by lower cobalt and copper reference prices and the sudden decline in end market demand. Compared to last year, sales declined on decreases in metal resale volume and price totaling $19 million, and lower volumes totaling $9 million.

The key drivers for the drop of $81 million in the fourth quarter profit compared to last year is the impact from the difference in the cobalt reference price on product selling prices totaling $48 million and inventory charge of $20 million to reduce the carrying value of certain inventory to market value.

On Page Seven is the fourth quarter 2008 operating results for the Specialty Chemicals segment. Excluding the impact of the 2007 acquisitions on net sales of $48 million, increased selling prices in Advanced Organics totaling $5 million were offset by lower sales volume in the Advanced Organics and Electronic Chemicals end markets totaling $23 million and $12 million, respectively.

In the fourth quarter of this year customers reacted quickly to the global economic crisis by slowing purchases, resulting in a year-over-year volume decline of 41% for the combined Advanced Organics end markets. Tire volume was down 61% over last year, reflecting the significant slowdown in auto sales and miles driven. Coating and chemicals volumes were down 40% and 38%, respectively, due to a continued slowdown as customers suspended production and/or reduced inventories.

The key factor for the $15 million volume decline in Electronic Chemicals was driven by memory disk volumes being down 62% from last year along with declines in chemical products sold to the semiconductor and printed circuit board markets. The swing from operating profit in the fourth quarter 2007 to a loss of $19 million this year is due for the most part to the impact of lower sales volumes totaling $12 million, a $7 million inventory charge, and the $9 million goodwill impairment charge mentioned earlier.

On Page Eight is a summary of selected financial data and metrics for the quarter shown. During the fourth quarter of this year operating activities provided $120 million of cash. The increase was a result of the reduction in net working capital of $159 million from the end of the third quarter 2008. The majority of this reduction was due to inventories being reduced by $147 million as a result of lower cobalt prices and the $27 million non-cash inventory charge.

Although there was an improvement in working capital as a percentage of net sales in the fourth quarter compared to the previous quarter, net working capital days increased by 12 days. Increases in receivable and inventory days in the Specialty Chemicals segment and lower payable days in the Advanced Materials segment contributed to this increase.

The cash balance at the end of the fourth quarter was $245 million, an increase of $100 million from the third quarter of this year and an increase of $145 million from the year-end 2007. With a quarter billion dollars of cash, a low level of debt and available credit, we are in a good position to deal with the economic uncertainty ahead although in this current environment you can never have enough liquidity.

This completes the review of the fourth quarter 2008 results.

On pages 10 and 11 are the consolidated financial highlights for 2008 and 2007. The incremental revenue growth from the 2007 acquisitions of $264 million and the increase in Advanced Materials segment of $470 million contributed to the majority of the year-over-year sales increase of $715 million.

Consolidated operating profit in 2008 was impacted by lower margins in both the Advanced Materials and the Specialty Chemicals segment, $28 million inventory charge to reduce the carrying value of certain inventory to market value and a goodwill impairment charge of $9 million. This was offset in part from profits from the 2007 acquisitions and volume growth in the Advanced Materials segment totaling $26 million.

The single biggest item impacting income from continuing operations below the operating profit line for both years is income tax expense. Income tax expense in 2008 was $16 million for a 9% effective tax rate compared to $76 million tax expense for a 38% effective tax rate in 2007.

Excluding the tax benefit related to foreign tax credits recorded in the second half of 2008, the effective tax rate would have been 36% for 2008 compared to the 2007 rate of 17%, excluding the discrete items that occurred in that year. There are two main reasons for this year-over-year change. The first is the shift in the mix of foreign income sources that increased the rate by approximately five percentage points. The second reason is related primarily to a number of fourth quarter items that increased the rate by another 14 percentage points.

The list of items include higher U.S. losses with no tax benefit, additional deemed dividend with a negative tax impact, the goodwill impairment charge that is not deductible, an increase to the FIN 48 tax reserve, and the impact of non-taxable foreign exchange losses and gains.

To better understand the various items impacting net income and income from continuing operations, please turn to Page 12, which is the reconciliation of the Company’s GAAP reporting to non-GAAP results for the period shown. As you can see, the two most significant special items in 2008 were the tax benefit of $47 million and the goodwill impairment charge of $9 million compared to the two largest special items in 2007, the tax expense related to the repatriation of foreign cash of $46 million, and the loss on the redemption of notes.

Income from continuing operations as adjusted for special items for 2008 was $99 million or $3.26 per diluted share versus $172 million or $5.68 per share in 2007.

On Page 13 is the 2008 operating results for the Advanced Materials segment. Major contributors to the $471 million increase in sales in 2008 were higher product selling prices totaling $264 million, a $149 million increase from the resale of cobalt metal, and increased volumes of $60 million.

The decline in operating profit compared to 2007 was due to an inventory charge of $21 million, unfavorable currency impact of $14 million, and increased manufacturing, process chemicals, and non-cobalt raw material cost totaling $12 million. These were partially offset by improved volume of $26 million in favorable pricing.

On Page 14 is the 2008 operating results for the Specialty Chemicals segment. Excluding the impact of the 2007 acquisition net sales of $264 million, improved pricing in both Advanced Organics and Electronic Chemicals totaling $41 million was offset by lower sales volume in Advanced Organics’ end markets totaling $39 million, primarily in tires, chemicals, and coatings, and in Electronic Chemicals totaling $18 million, primarily in memory disks and printed circuit boards.

The decline in operating profit was driven by lower pre-acquisition volumes in both Advanced Organics and Electronic Chemicals totaling $19 million, an inventory charge of $7 million, and a $9 million goodwill impairment charge related to the Ultra Pure Chemicals business.

These were offset in part by operating profits of $17 million related to the 2007 acquisitions and favorable pricing of $10 million.

Turning to Page 17, consolidated EBITDA from continuing operations was $209 million for 2008 compared to $229 million in 2007. At this current level of EBITDA, the Company is within its required debt covenants under the current $100 million revolver.

This completes my review of the Company’s 2008 results. I will now turn it over to Steve. Thank you.

Steve Dunmead

Thanks, Ken. First, I will make some comments regarding the cobalt market. In Q4 low grade cobalt prices averaged approximately $20.80 a pound, down approximately 35% versus Q3. During the quarter, the price dropped approximately 70% from the beginning to the end of the quarter. Cobalt prices fell steadily from the Q3 peak of approximately $35 a pound until the market rebounded slightly in the second half of December. This rebound appeared to be due to short covering before year-end.

Cobalt prices fell in line with end market demand. Overall demand is down 20% to 25% with almost all key markets being impacted by the global economy and inventory reduction programs. Currently, cobalt prices are in the $11 to $12 range. There is currently no clear surplus of metal in the market, but very little spot demand. The current decline appears to be driven by speculative trading rather than a real disconnect between supply and availability.

The supply side has reacted very quickly with a (inaudible) reported that more than 50% of the DRC production is currently shutdown.

In addition, several of the copper projects in which cobalt comes as a by-product have announced cancellations and/or delays. Recent DRC export and Chinese import statistics were in line with these reductions.

As we look forward, there is much uncertainty throughout the cobalt market. Most of it is associated with the demand side of the equation in the near term. Decrease in supply has more than offset the reduction in demand. However, the supply chain from Africa to the end users is fairly long, and changes in supply take a number of months to work their way through the system. When demand returns, however, there could be real tightness in the market as the supply side will not be able to react very quickly.

Before I make specific comments about our key end use markets, I should note that across the board there is a general lack of visibility regarding – beyond the end of the first quarter and certainly no clear picture for the second half of 2008.

Now, I would like to cover some of the key end use markets impacting our Advanced Materials segment. In the rechargeable battery market, our sales into this market were solid in the fourth quarter, mostly due to the length of the supply chain from Finland to Asia. However, the market took a significant downturn in December. This downturn was precipitated by a marked decrease in demand for consumer portable electronics, most notably mobile phones.

For the first half, we expect to see demand decrease by approximately 15% to 20% compared to the same period of 2008. After approximately two years of strong growth, demand for fine powders and powder metallurgy applications has weakened significantly. The economic slowdown has resulted in sharply declining demand in the automotive, construction, and mining sectors.

In addition to the decreased end user demand, a significant of de-stocking is occurring at every step in the supply chain. Given this, for the first half, we expect to see demand decrease by approximately 35% to 40% versus a very strong first half of 2008.

In the chemical market, we expect to see steady consumption in the petrochemical related catalyst applications like gas to liquid and hydrodesulfurization with some weakness in non-catalyst application. This should result in a demand decrease in the first half of 2009 of approximately 10% versus the prior year.

Ceramic and pigment markets are being hurt by the overall economy also. However, the comparative prior year periods were also impacted by decreased demand as a reaction to high cobalt prices. The net impact should be a modest decrease of approximately 5%.

Now, for a few comments on the key markets impacting our Specialty Chemicals segment. The current state of the global economy has had a significant impact on the housing, construction, and high-end marine applications. In turn, this continues to negatively impact our coatings and chemicals markets. Several of our customers had extended shutdowns over the Christmas-New Year’s holiday period, and many were slow to start back up after the beginning of the year. Our current expectations are for decreased demand of approximately 20% in the first half of 2009 versus the prior year.

Global demand for tires has slowed significantly due to decreases in new car sales, fuel consumption, and commercial truck traffic. Additionally, the average tires size has decreased due to more concern over fuel economy and decreased large tire volume due to less mining and construction activities, globally. Overall, we expect demand in this sector to be down approximately 20% to 25% in the first half of 2009.

From a positive standpoint, in the tire, coatings, and chemicals markets, our customer base reacted quickly to the economic downturn, and as a result, it is believed that there is not a large amount of material in the supply chain between us and the end user. As a result, when the economy finally turns around, the impact should be very rapid.

For the electronics related markets, the picture is not any better. The deterioration in the global economy has lead to a slowdown in both business and consumer spending. We saw a significant number of extended shutdowns over the Christmas and Chinese New Year periods. In addition, many of our customers have idle production lines, decreased the number of shifts that they are operating or gone to shorter work weeks.

For the hard disk drive market, there are two items that are impacting demand for OMG’s products in this market. First, the global economic slowdown has resulted in a decrease in demand for hard disk drive of approximately 30%. Secondly, there has been a mix shift for smaller form factor hard disks to a higher percentage of glass substrates. This has an impact on OMG because glass substrates do not require a nickel inter-layer between the substrate and the media. Consequently, we expect to see a substantial decrease in demand of approximately 40% versus a strong first half of 2008, but a modest improvement of approximately 10% versus Q4 ’08.

Printed circuit boards saw a reduction in volume during the fourth quarter. The decrease started in November and accelerated in December. As with most of the other electronic markets, there is limited visibility beyond approximately four to six weeks. We have, however, seen some spotty increases in demand due to the very low inventory levels at our key customers. At this time, we expect that demand will remain depressed throughout the first half of 2009 with the market being down approximately 20% to 25%.

The semiconductor market has also been hit very hard by the global economic situation, which is impacting our ultra pure chemicals and electronic packaging and finishing sectors. Industry experts are projecting a wide range of decreases in the semiconductor market from minus 5% to minus 20% for 2009. Most analysts, however, are calling for a very weak first half followed by some recovery in the second. We expect first half demand to be down approximately 20%.

As we have mentioned previously, the photo mask market is tied to capital spending and new product introductions in the semiconductor industry. We saw a very depressed market throughout 2008. A competitor closed its Manchester, U.K. site, which contributed to a reduction in some of the excess capacity in the European market. Due to a combination of the weak market share gains and pressure on pricing, we expect to see sales in this market in the first half of 2009 to be essentially flat versus the prior year.

At this point, I would like to turn the call back over to Joe Scaminace.

Joe Scaminace

Thank you, Steve, for your report. At this time, let me turn the call over to you for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Mike Harrison, First Analysis.

Joe Scaminace

Hello, Mike.

Mike Harrison – First Analysis

Can you hear me?

Joe Scaminace

Yes.

Mike Harrison – First Analysis

Alright, great. Your plans to reduce costs, you mentioned salary freezes, looking at discretionary spending as well as headcount reduction. At this point, can you quantify the expected amount of annual savings from those actions?

Ken Haber

Yes. Those are totaling – our estimates are totaling about $23 million, $24 million.

Mike Harrison – First Analysis

And do you expect to be at that run rate during the first quarter or reach it maybe some time during the second quarter?

Ken Haber

It would be in the – more likely in the second half, starting in the second half of the year.

Mike Harrison – First Analysis

Okay. And then if end market weakness continues, are there more dramatic actions that you might be taking to reduce your manufacturing footprint or any idling of facilities that we might expect in the next several months?

Steve Dunmead

Mike, this is Steve Dunmead. Certainly, the differences in what we are looking at is all of the contingency plans that we have put together are on a business-by-business basis. And so certainly those are things that we are considering if the market either deteriorates further or the recovery does not begin to emerge. And so, yes, we have contingency plans in place that would look at a variety of cost reduction and cash preservation activities.

Mike Harrison – First Analysis

And, Steve, appreciate all the commentary on your expectations for the different markets. I was wondering if you could give maybe some more details on your expectations in the battery market as you look at hybrid vehicles, and I know you guys have done some work in the mix metal battery precursors, but maybe as you look out beyond 2009, do you continue to expect that to be a growth market?

Steve Dunmead

Absolutely, Mike. That is – we are certainly seeing some softness and some inventory reduction across the board in the battery sector. Truthfully, with the economy where it is and oil prices having come back down, there is a little pressure today on – and a little less activity on hybrid electric vehicles, but with what’s going on Washington I would expect to see that accelerated if we look forward. But certainly, we see no reason to go away from the kinds of cell unit volume growth that we had been seeing, historically, after this – the economy turns back around, which, as you know, has been in the 12% to 15% cell volume growth rate for at least the past five years.

Mike Harrison – First Analysis

Alright. Then in terms of cobalt supply, overall, you mentioned that more than 50% of production in the DRC is shutdown. Where are you guys operating in your smelter in the DRC right now?

Steve Dunmead

We are still operating at full capacity. The – we are preparing for – I believe it’s in our 10-K, that we are preparing for our regular maintenance shutdown to re-brick the furnace, which should be about mid-year. So, we are still operating at full capacity in the (inaudible).

Mike Harrison – First Analysis

Alright. Thanks very much. I will get back in queue.

Steve Dunmead

Thanks, Mike.

Operator

The next question comes from Saul Ludwig with KeyBanc.

Saul Ludwig – KeyBanc

Good morning. Thanks, Steve, for that good color on the markets. Ken, back on the $23 million to $24 million savings, that’s annual rate beginning in the second half of the year or is that savings expected to be achieved in 2009?

Ken Haber

No, your first observation is correct.

Saul Ludwig – KeyBanc

And is that savings real overhead type of expenses that go away or is that include reductions in staffing at factories which aren’t exactly a cost reduction, much like overhead cost reductions?

Ken Haber

That encompasses both, Saul. We are looking at all of our expense lines, at all of our operations, including our SG&A, which would include our overhead cost.

Saul Ludwig – KeyBanc

So this is coming out of SG&A.

Ken Haber

Not all of it, some –

Joe Scaminace

But a lot of it, Saul.

Ken Haber

Some of it is, and some is coming out of manufacturing operations.

Saul Ludwig – KeyBanc

Okay.

Ken Haber

We are looking at all lines of spending.

Saul Ludwig – KeyBanc

Okay. In the fourth quarter, two questions, what was the pre-tax earnings of the Big Hill operations by itself, and, two, what was the pre-tax contribution to your operating income from the Big Hill product that you used during the quarter?

Ken Haber

You are asking about the quarter or for the full year?

Saul Ludwig – KeyBanc

For the quarter, Ken.

Ken Haber

Yes, the pre-tax income for GTL was actually a loss.

Saul Ludwig – KeyBanc

Okay. Of how much?

Ken Haber

About $6 million.

Saul Ludwig – KeyBanc

$6 million, okay. And then how about the profits booked through your operating income?

Ken Haber

Through our operating income, was about $86 million – oh no, I am sorry, $16 million.

Saul Ludwig – KeyBanc

$16 million. And as we look forward to the first half of the year, does the pre-tax loss at the Big Hill, even though you are operating at full speed out that had to do because of lower cobalt prices?

Ken Haber

Yes. That is primarily the pricing and also the timing of the receipts.

Saul Ludwig – KeyBanc

Right. And then so we are going to see weak numbers in the first half of the year I assume because of – let’s just assume recurring cobalt price stays in effect for this year and let’s work on that assumption. That will continue to be losses?

Ken Haber

(inaudible).

Saul Ludwig – KeyBanc

What was that?

Ken Haber

Again, it’s hard to say. It depends on the volumes and then what we do with our own cost controls there, but as we all know, metal prices never stayed constant, it’s always volatile as we all know, and so it is difficult to try to answer your question, the hypothetical question like that –

Saul Ludwig – KeyBanc

And how about the Big Hill operating income that goes through your P&L, will that decline versus the $16 million do you think going forward?

Ken Haber

Sure, absolutely.

Saul Ludwig – KeyBanc

Then what’s the – you took this mark-to-market inventory, which means you charge fourth quarter with maybe expenses that would have occurred in the first half of ’09. How should we think about the taking of the mark-to-market hit in the fourth quarter and its implications for first half of the year?

Ken Haber

Well, quick lesson on the lower cost of market, which is really as you are just comparing, we compare our costs of our inventories to the current replacement cost or net realizable value in the market. And so what we are doing is that without taking that loss now and reflecting the current situation, the current market situation, we would have been recording losses in the future. Or in other words our margins would have been depressed significantly – or depressed. So, all we are doing is recognizing the future losses that we would have recurred, reflecting the current pricing in the market.

Saul Ludwig – KeyBanc

And do you expect to have a working capital generation? How much do you expect to generate from working capital in 2009?

Ken Haber

It should be – we are – again, it depends on the movement of the metal prices and –

Saul Ludwig – KeyBanc

Let’s assume the prices where it is.

Ken Haber

I can't do that, I am sorry, but – I would say that we should, in general, we are looking at being positive in cash flow for the year–

Saul Ludwig – KeyBanc

From working capital?

Ken Haber

Total, including working capital.

Saul Ludwig – KeyBanc

But would working capital be a positive contribution so to speak?

Ken Haber

Yes, it should – it would contribute some.

Saul Ludwig – KeyBanc

And what was the impact of copper earnings versus a year ago in the fourth quarter?

Ken Haber

Well I think it probably was down, and I think because our volumes were down and our pricing – reference prices down significantly, Saul–

Saul Ludwig – KeyBanc

Was it down $2 million-$3 million, you usually give us those number?

Ken Haber

Yes, I don’t think – I think it’s disclosed in the 10-K, I think – but I think it is in that $3 million-$4 million–

Saul Ludwig – KeyBanc

And then finally given the weak demand that Steve outlines and the fact that cobalt prices are now – would it be reasonable to expect that certainly in the early quarters of the year you’d probably be in a loss position?

Ken Haber

Listen, look at the fourth quarter results, $46 million of operating loss. Back out the two items that we talked about, which was the inventory adjustment and the goodwill impairment charge, we lost $10 million. Given the levels [ph] that we’ve given you it’s unlikely that we wouldn’t be making a profit at least certainly in the first quarter. and I think our visibility gets clouded beyond that. That’s why we are putting contingency plans and we are being very cautious and aggressive with our actions relative to spending and cash control.

Saul Ludwig – KeyBanc

And then finally for Joe, thinking of your broader strategic vision of trying to diversify the Company away from cobalt and making acquisitions in either battery materials or electronic chemicals, it would seem like, A) you got a great financial position, and B) with the disarray in the markets there would be some great acquisitions opportunities. Where is your head now with regard to pursuing these diversification moves versus keeping the powder dry?

Joe Scaminace

Well, Saul, I will tell you that it’s interesting last year there were at least two deals that we walked away from that – some it’s what the deals you don’t that work out better for you given what the pricing scenarios look like and what the distress in the market look like. And what we are seeing right now, what’s coming to market is a lot of over-levered companies. I mean just look around at what the sub-debt [ph] of a lot of these private equity companies are trading at, look at what the leverage ratios of the public companies that are under incredible stress right now. And I will tell you, Saul, that we are very, very vigilant in terms of these properties that could come to market are rumored to come to market, and in some cases are out there even exploring with phone calls right now to Greg and I. So, I will tell you that our view is, as I indicated in my comments, that our transformation strategy to have more consistent earnings, is clearly at hand. We are still looking at that, but we are very vigilant on the fact that we do think that there is – are companies that are having crises of their own. And I think the thing that makes us feel good right now is the fact that we’ve got a balance sheet that gives us the flexibility to capitalize on that. So, if you look at the spectrum of what we’ve talked about being bolt-on acquisitions versus strategic acquisitions, I would say that right now there is probably more of a tendency for us to look at the smaller bolt-ons right now that could add efficiency and synergy to the Company.

But on the other hand, I will tell you that if an opportunity comes along that we covet, on a bigger basis that would provide the transformation that we are talking about, we would clearly look at it.

Saul Ludwig – KeyBanc

Okay, great. Thank you very much guys.

Joe Scaminace

Thank you.

Operator

You have a follow-up question from Mike Harrison with First Analysis.

Mike Harrison – First Analysis

Hi, Joe, just to kind of continue on what Saul was asking about, the – looking at your CapEx for this year, you finished with expenditures of about $31 million. That number is significantly lower than what you were guiding at the beginning of the year, something more in the $50 million range. Given your strategy to diversify the Company, transform the Company, and grow the Earnings streams through acquisitions as well as organic growth projects, it would stand to reason that because we haven’t seen the kind of M&A activity since the Rockwood acquisition that we might see stronger spending through CapEx on these organic growth projects. Is – can you just help us understand why we haven’t seen that kind of spending. Is it that the pipeline of projects isn’t as robust as you might have thought or have you changed the way you are valuing those projects?

Joe Scaminace

Well, I will tell you, Mike, it – we are being very prudent in terms of some of the capital that we were looking at as expansion and basically keeping our capital in line with what we view as the business condition right now. So I will tell you that it’s not for lack of project work that we looked at expanding on, but it’s basically us being pretty prudent and making sure that we are spending our cash very wisely in this environment that we are in.

Ken Haber

I think the $30 million is actually a high watermark for us for the last – over the last three or four year. So, we’ve been continuing, as Joe said, cautiously increasing that as projects and the business dictates that. I think in your – in the 10-K you are going to see that we disclosed that we budget $49 million for this year and that’s based on a couple significant expansions. But, given the current environment, we are going to probably delay some of those until we get clear visibility of what the second half looks like and beyond.

Mike Harrison – First Analysis

Okay. And then you’ve had the Rockwood acquisition in the fold for a little over a year now. In the context of the current market obviously electronics probably wasn’t the best area for you to increase your exposure to. But in general, how satisfied have you been with the performance of that acquisition within OM Group – from the acquisition itself as well as any kind of synergies that you’ve seen over the past 12 months?

Joe Scaminace

Well, Mike, I will answer that and tell you that, yes, we are very satisfied with the (inaudible) businesses. We clearly did not anticipate the downturn in semiconductors. We did not anticipate the downturn in printed circuit board. But on the other hand, our people have responded very, very well to trying to gain market share in a pretty tumultuous environment out there. Our Ultra Pure Chemical business, for example, has been doing pretty well in the environment. We are starting to see a resurgence in the Compugraphics part of our business, the photo mask piece. And I think what we are really looking at is not so much, as I indicated before, the fact that we are dealing with adversity right now. I mean we could deal with this. We are responding to it. But I think that we are basically banking on the fact that we are going to be the guys that could be the recipients when the recovery does occur on all phases of our business, even on the cobalt side.

So, to answer your question, I would tell you that you are right. There is no doubt that the Electronic Chemical business and the timing of that acquisition perhaps was not the best, but on the other hand, we talked a lot about transformation. It’s important to us. It gave us a leg down. It gave us an enabling platform from which to grow. And these other issues I mentioned before about these highly levered companies, and let’s just talk about the fact of what’s out there right now. There is a lot of interesting potentials out there that could happen. I am going to let Greg also expand on this.

Greg Griffith

Mike, I would also say to you that we are measuring the progress of our transformation strategy beyond the first quarter of 2009 and that the platform that we’ve established affords us the opportunity to continue to grow and some of the opportunities that we are seeing are in that space and so that our view of Electronic Chemicals as a long term growth platform has not diminished. And we have a much longer view than just the unforeseen downturn that we’ve seen in this market. And I dare say anybody in that market didn’t anticipate the severity of the downturn and the speed of the downturn in Electronic Chemicals or a number of other chemical markets.

Steve Dunmead

I think in one – in a single sentence, we don’t regret making the acquisition.

Joe Scaminace

Correct. And just, Mike, the other thing to look at is just ask yourself the question if a recovery occurs are people going to be buying portable electronics, will Apple iPod still be important, will printed circuit boards be produces, will the fabs go back to work? The answer that we see is, absolutely.

Mike Harrison – First Analysis

Alright. Thanks guys for the additional color there. Had a couple of more questions on pricing. In terms of the Advanced Materials business, obviously there is a significant market based component to pricing, but when you are seeing cobalt prices, the market price of cobalt coming lower, are there ways that you can lag that pricing declines, sort of dig in your heels a little bit so that you are not getting hit as hard? Or is it really just a function of contracts that you have to honor with pricing on the way up and on the way down?

Ken Haber

It’s a mix, Mike. Certainly there are – significant component of our business is contractual and certainly it – the metal based part of it fluctuates with the prevailing cobalt prices. However, what we have seen in many of our markets is that as we enter 2009 our premiums have actually expanded. And so I think it’s sort of a mixed bag. Certainly wherever we can, whether it’s our spot sales or where we have – don’t have firm contracts, do we lag the price on the way down? Absolutely.

Mike Harrison – First Analysis

Were you able to lock any of your customers into longer term contracts when supply and demand were a lot tighter and the market price of cobalt was much higher, earlier this year?

Ken Haber

Yes, I am thinking about whether or not I want to answer that.

Mike Harrison – First Analysis

I will take that answer then. Maybe switching over to the Specialty Chemicals side, you’ve had to work over the course of 2008 the pricing higher particularly on the Advanced Organics side in order to offset higher raw material cost. Can you talk about what has happened with pricing for those products in the fourth quarter and what your expectations might be for pricing as you look out into 2009?

Steve Dunmead

Well – what we have not done – there was a change – a significant change in strategy about 18 months ago regarding our Advanced Organics business and we were not going to chase volume just simply based upon price. And especially in the paint driers going into alcohol [ph] based paint applications. That is clearly a declining part of the business. That’s why we bought the Borchers business because it gave us access to water based paint additives, which we are very pleased with that part of the business. It exceeded our expectations greatly. Have we seen pricing come down? Yes. But actually we did more than just increase prices to offset increased raw materials cost last year, we expanded our premiums.

Mike Harrison – First Analysis

Alright. Thanks a lot, Steve.

Steve Dunmead

You bet.

Operator

(Operator instructions) Your next question comes from Lou Fouts with Water Street Capital.

Lou Fouts – Water Street Capital

Hey guys, how are you doing?

Joe Scaminace

Hi Lou.

Ken Haber

Good morning.

Lou Fouts – Water Street Capital

Hey, wanted to touch base on this inventory number and is that pretty much reflective of cobalt at today’s prices or are we using some kind of a fourth quarter average where we might have to take that inventory number down a little bit more?

Steve Dunmead

Well, the – our methodology that we follow is that we look at basically our finished goods and we look at the current market pricing at the end of the year. And then with regards to our metal resale, we actually look at the last quoted price of the period ending. That’s our methodology that we use.

Lou Fouts – Water Street Capital

Got it. I think that that’s pretty much all my question other than I commented and I know you’ve heard me say it before is, be real careful with what you do with that cash in the balance sheet because those opportunities out there, they will be there later, and these guys could get into real trouble, and you might even get a chance to buy a bunch of stuff out of bankruptcy. So you’ve got – you got the (inaudible) right now which is $640 million of working capital and practically no debt. So, don’t get into a hurry to do anything. You are going to be able to buy some things out of bankruptcy and for pennies on the dollar and I think that’s what you are going to want to do.

Joe Scaminace

Well, Lou, thanks for that comment and I will tell you, you’ve just echoed the sentiment of myself and the entire management team. We’ve operated pretty conservatively in – over the time period here and we basically – when Ken made the statement that you can't have enough liquidity, I will tell you that right now we are absolutely looking at that war chest, if you want to call it that, to capitalize on a lot of distress that we know may not even be as distressed as it’s going to get.

Lou Fouts – Water Street Capital

I think you are right. I mean, obviously I am just repeating myself, but I think you’ve done a great job at reacting to the circumstances that you have been dealt [ph] cutting cost as fast as you can, cutting CapEx, and we’ll let somebody else sit there and get all excited about a second half recovery. We are just going to survive to play another day and then capitalize on the distress that is coming down the line. But I think you are – I agree with everything you do, and a nice job.

Joe Scaminace

Thanks, Lou. Okay, I think that concludes the Q&A and I just like to thank you all again for your time this morning and your ongoing interest in our Company. While we are proud of the progress we made in ’08, there is much more we feel like we could achieve. And for us satisfaction comes from growing our sales and profits and increasing value for our shareholders. If you have any follow-up on today’s discussion please do not hesitate to contact us. in the mean time, let me thank you again for your interest in our Company and I look forward to updating you on our progress as we move forward.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: OM Group, Inc. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts