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OM Group, Inc. (NYSE:OMG)

Q1 2009 Earnings Call

May 07, 2009 10:00 AM ET

Executives

Troy Dewar - Director, Investor Relations

Joseph M. Scaminace - Chairman and Chief Executive Officer

Kenneth Haber - Chief Financial Officer

Stephen D. Dunmead - Vice President and General Manager, Specialties Group

Analysts

Mike Harrison - First Analysis

Saul Ludwig - KeyBanc Capital

Operator

Good morning, my name is Vanessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2009 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.

I will now turn the call over to Mr. Troy Dewar. Please go ahead, sir.

Troy Dewar

Thank you, Vanessa. And good morning, everyone. Thank you for joining us today for our review of OM Group's 2009 first 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 or in our Form 10-K and applied to this call.

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

Joseph M. Scaminace

Thank you, Troy. And good morning, everyone and thank you for joining us today. By most measures 2009 is off to a very tough start. The global economic crisis has been far reaching and impactful on our customers and our company.

As expected, volumes across our businesses were significantly lower in the first quarter of 2009. In some cases, volumes were down 20 to 50%. This was due to decreased end market demand for our products and customers destocking inventory.

This steep decline in volume has led to a significantly lower revenue and income compared with last year. In addition to lower volume, we've been challenged by lower cobalt prices that have reduced selling prices and compressed margins in Advanced Materials and Advanced Organics.

This not only affected our profit margins on the products we sold in the quarter but also led to additional charges in the quarter to reduce the value of inventory to market. Consequently, net sales fell 60% compared with the same period in 2008, and operating income fell to a loss of $10.9 million for the quarter. We've acted quickly and decisively to enhance our profitability.

At the end of 2008, we began implementing a number of initiatives to reduce costs. These include, eliminating 2009 salary increases, reducing head count, reprioritizing capital projects and cutting discretionary spending across all lines of the company. We've already seen positive results from our actions. As the savings, we've realized have been larger and occurred faster than we originally planned.

These savings are on top of the reductions we had already incorporated into our 2009 operating plans. We've been very pleased with our employees' response in addressing these challenges. However, we also realize that these actions are not enough.

In the current environment of low demand and limited visibility, more is required and we are acting. We've already identified additional cost savings through expanding the initiatives that we've already implemented. And as stated on our previous call, we continue to evaluate all of our options and we'll take action as appropriate.

On a very positive note, so far this year, we've generated positive cash flow from operations. This clearly strengthens us in this environment, and gives us financial flexibility for the future.

Additionally, absent a swift rise in cobalt prices that would require resources to fund working capital. We anticipate future positive cash flow from our operations. We are clearly managing for cash. At the end of the first quarter, we had over $272 million in cash on hand. This is important as we weather the current economic downturn and continue to fund profitable growth opportunities.

As I have discussed in previous calls, we will continue to be active and diligent in exploring opportunities to grow in portable power, electronic chemicals and materials and Advanced Materials to pursue our growth strategy and objectives.

We remain committed to enhancing shareholder value via the strategic path that we've established.

I will now turn the call over to Ken Haber, to walk you through the details of our financial performance. Ken?

Kenneth Haber

Thank you, Joe. And good morning, to everyone listening. My comments will cover the company's first quarter 2009 consolidated results, as they compare to the first quarter and the fourth quarter of last year. As shown on page three and four of the presentation material that appear on our website.

The key drivers for the drop in revenue compared to the first quarter of 2008, were the decrease in pricing impacted by the drop in the cobalt reference price, lower volumes in all end markets due to the weak global economy and a decrease in cobalt metal resale.

The same drivers, both lower pricing and volume totaling $98 million had the biggest impact on the change and operating profit from the first quarter of 2008. The company has started to realize in the first quarter of this year, a portion of the net benefits totaling $7 million from its cost performance initiatives, which include reductions in discretionary spending, head count reductions, and salary and wage freezes.

We expect that all the initiatives started late last year or this year, will gain full traction, no later than the beginning of the third quarter of this year. Three other items that impacted the current quarter operating profit were $6.6 million charge to reduce certain inventory to carrying value of $4.1 million adjustment to the estimated non-cash goodwill impairment charge of $8.8 million taken in the fourth quarter of 2008. And an estimated non-cash goodwill impairment charge of $6.8 million related to the Advanced Organics business.

Income tax expense in this year's first quarter was $2.2 million, which includes $4.7 million of discrete tax items. Of this amount, $2 million is attributable to the company and $2.7 million to the non-controlling interest of the GTL joint venture. Without the discrete items, the estimated effective tax rate for the current quarter would have been 25%.

On page five there is a reconciliation of the company's GAAP reporting of net income and income from continuing operations attributable to the company to non-GAAP results for the period shown. Excluding total income from discontinued operations in the special items as shown, income from continuing operations as adjusted for our special items was a loss of $4 million or $0.13 per diluted share. This compares to a loss of $46 million or $1.51 per diluted share in the fourth quarter of '08 and a profit of $1.90 per diluted share in the first quarter of 2008.

On page seven, and continuing on page eight, are the first quarter 2009 operating results for the Advanced Materials segment. Compared to the first quarter 2008, lower selling prices of $116 million and lower cobalt metal resale of $53 million, accounted for 75% of the negative change and net sales followed by a decrease in volume of $40 million.

Total unit volume was down by 26%, as all end markets were impacted by lower demand and inventory destocking, especially powder metallurgy which was down 63%. It appears that we might be nearing the end of this decline, as total sales volume this current quarter was down only 2% compared to the fourth quarter 2008. In the chemicals and ceramics end markets we saw a unit growth due to catalyst demand remaining positive and less competition in certain regions of the world.

As you can see, from the waterfall on page seven, the key drivers for the drop of $89 million in the first quarter operating profit compared to last year's first quarter is due to the impact that the large drop in the cobalt reference price had on product selling prices totaling $57 million, and the negative volume impact of $20 million.

Although, the first quarter sales were down 44% from the fourth quarter of 2008, total cost of sales were down even more, resulting in a positive impact on margins along with lower SG&A spending. Also, the previously mentioned cost performance initiatives contributed towards minimizing the impact from lower sales.

On page nine and continuing on page ten, are the first quarter 2009 operating results for the Specialty Chemicals segment. A drop in unit sales in all end markets drove the decrease in sales volume of $54 million. This is caused by weak demand and customer destocking as a result of the global economic slowdown.

The largest decreases were in the tire, chemicals, general metal finishing and memory disc end markets. The same conditions that impacted the fourth quarter of last year continued into the first quarter, although at a slower pace for most of the end markets, except for the Ultra Pure Chemicals business, volume being down 26% which was impacted by the weak European markets.

As you can see, from the waterfall on page nine, besides the impact that lower volume had on the operating profit for this first quarter of this year compared to the first quarter of 2008, a 3.3 million charge to reduce certain inventory to carrying value and a net goodwill impairment charge of $2.6 million, which I had mentioned earlier in my comments, negatively impacted the segment's profits.

Lower operating, selling, general and administrative expenses, including favorable foreign currency, helped partially offset the impact of lower volume sales. Even though, first quarter sales were down 19% from the fourth quarter of 2008, operating profit improved, if you exclude the impacts from the inventory charges and the goodwill impairment charges, first quarter operating profit was a loss of $2 million versus a loss of $3 million in the fourth quarter 2008. The profit enhancement initiatives mentioned earlier contributed to this improvement.

On page eleven, is a summary of selected financial data and metrics for the quarter shown. During the first quarter of this year, operating activities provided $37 million of cash. The increase was primarily a result of a reduction in net working capital $26 million from the end of last year.

The majority of this reduction was due to inventories being reduced by $30 million. The majority of which occurred in the Specialty Chemicals segment. Although there was an improvement in working capital, as a percent of net sales in the first quarter compared to the fourth quarter 2008, net working capital days increased by 29 days. Most of this was related to inventory days increasing by 27 days, as a result of significant drop in sales particularly in the Advanced Materials segment.

This completes the review of the first quarter of 2009 results. I will now turn it over to Steve. Thank you.

Stephen D. Dunmead

Thanks, Ken. First, I will make some comments regarding the cobalt market. As a result of the global economic slowdown, overall demand for cobalt was down approximately 20, 25%, year-over-year in the first quarter, due to a combination of weak end use demand and destocking in the supply chain.

First quarter low grade cobalt prices averaged approximately $13.40 a pound down approximately 35% versus Q4. Cobalt prices held steady in January after rebounding from the year-end lows. On very weak demand, prices held throughout February, retesting the Q4 lows. Significant buying from China and the lack of excess material in the supply chain, caused prices to rebound starting in March.

Currently, prices are holding steady in the 15 to $16, western demand remains soft, but there does not appear to be any clear surplus of metal in the market. As we look forward, there is still much uncertainty throughout the cobalt market, most of it associated with the demand side of the equation in the near-term, let's say the next three to six months.

As we said during the Q4 conference call, the supply side reacted very quickly to reductions in demand and lower prices. Although, some of this supply has come back on line, the supply chain from Africa to the end users is fairly long. Overall, near to medium term prices will depend upon the state of the global economy and the associated cobalt demand which today remains unclear.

Before I make any specific remarks about our key end use markets, I want to make a couple of general comments. As Ken previously said, sales in essentially all of our key markets in Q1 were negatively impacted by a combination of reduced demand due to the state of the global economy, and destocking in the supply chain.

The end use demand outlook over the next couple of quarter depends on what happens with the global economy, and as a result is very uncertain. In most of our markets, it appears that destocking was completed in the first quarter and as a result, we should see some modest recovery over the next couple of quarters.

Now, I'd like to cover some of the key end use markets impacting our Advanced Materials segment. Although end use rechargeable battery demand was down approximately 20% compared to the same period of 2008 OMG, sales remained flat due to a combination of share gains, lack of destocking due to contractual commitments and the length of the supply chain.

In the near-term, we expect to see rechargeable battery demand rebound approximately 5 to 10% versus the Q1 levels. We will however see some impact of the annual maintenance shutdown in Copla (ph) and destocking in the supply chain.

We remain optimistic about the longer term impact of new applications from lithium ion batteries, specifically electric vehicles and hybrid electric vehicles. However, we must keep in mind that these vehicles only make up approximately 1 to 2% of the lithium ion battery demand by 2010 while portable electronics, mainly laptops and cellular phones, remain the key drivers.

The economic slowdown resulted in a sharp decline in demand in the automotive, construction and mining sectors throughout the quarter. In addition to significantly decreased end user demand, major destocking is occurring in the supply chain.

As Ken said, this resulted in a 60% drop year-over-year of sales into the powder metallurgy sector. We expect to see a rebound of 10 to 20% in this sector in the near-term as destocking comes to an end with year-over-year demand being down approximately 35%.

In the chemical market, we expect to see steady consumption in the petrochemical related catalyst applications by gas-to-liquid and hydrodesulfurization with continued weakness in non-catalyst applications. This should result in market demand being essentially flat versus Q1 levels.

Now, for a few comments on the key markets impacting our Specialty Chemicals segment. The state of the global economy has had a significant impact on housing, construction, and high end marine applications. In turn, this continues to negatively impact our coatings and chemicals markets of our Advanced Organics business.

Sales into these markets were down approximately 45% year-over-year. End use demand is not clear but is expected to remain flat versus the first quarter. The end of destocking however should result in some modest rebound of approximately 10%.

Global demand for tires has slowed significantly due to decreases in new car sales, fuel consumption and commercial truck traffic. Sales into this market were down approximately 50% year-over-year. North American and European market demand continues to be down significantly while Chinese tire production is approaching first half of 2008 levels.

We expect to see a modest, approximately 10% rebound in this market due to destocking coming to an end but view that this market will be very slow to recover. Demand in this market is driven by combination of global automotive demand and replacement tire sales.

For the electronics related markets, the first quarter picture was not any better but the outlook appears more favorable. The global economy has led to a slowdown in both business and consumer spending. As was the case in the fourth quarter, we saw a significant number of extended shutdowns globally at our customers in the first quarter.

In addition, many of our other customers' idle production lines, decreased the number of shifts that they were operating or went to shorter work weeks. It appears that the electronics markets in Asia hit a bottom in the first quarter. The rebound is believed to be a result of a combination of the Asian stimulus packages and the end of destocking.

Markets in Europe and North America remained soft and very uncertain. The global economic slowdown has resulted in decrease in demand for hard disk drives. HDD demand in the first quarter of 2009 was down approximately 9% from Q4 '08 levels.

OMG sales in the first quarter into the hard disk driver market were down approximately 60% year-over-year but up 8% versus Q4 '08 due to share gains. At this time, market supply and demand appear to be in balance, following the last two quarters of inventory correction. In the near-term, the HDD market is expected to be up approximately 10% versus the Q1 '09 levels.

Printed circuit boards saw the slide in demand that started in the middle of the fourth quarter, continue into the first part of Q1. Overall, volumes were down approximately 12% versus Q4 but down 36% year-over-year.

Industry experts believe that this market hit a bottom in January of '09. We've seen sales volumes and capacity utilization increasing in February and March, especially in Asia. End use demand is expected to increase approximately 10 to 15% versus Q1 '09. The semi conductor market has also been hit very hard by the global economic turmoil which is impacting our Ultra Pure Chemicals and electronic packaging of finishing sectors.

Sales of the global semiconductor industry were down approximately 30% versus Q1 '08. Unit sales were down even more as there was a modest rise in average selling prices globally. Again, visibility in this market remains poor but most market analysts are calling for demand to reach a bottom in the second quarter and a recovery to begin in Q3.

As we've 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 which extended into the first quarter. The overall market experienced extended shutdowns in the first quarter and was down approximately 20%.

Our sales were down approximately 20% year-over-year but up 6% versus Q4. There is a lack of visibility looking forward but market participants expect this market to be in line with the overall semiconductor market, again seeing a bottom in the second quarter and a recovery beginning in Q3.

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

Joseph M. Scaminace

Thank you, Steve for your report. And 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 the line of Mike Harrison from First Analysis.

Mike Harrison - First Analysis

Good morning.

Joseph Scaminace

Good morning, Mike.

Mike Harrison - First Analysis

In terms of your commentary Steve, on the end use markets it looks like in a lot of cases you're seeing that destocking is coming to an end or you saw the worst of the destocking in Q1. What are you seeing in those markets that's giving you confidence that you can say that?

Stephen Dunmead

If we look at sequential demand and we don't have -- it's not like we've got visibility in most of these markets from the order book out six months but for what the near-term that we can see that customer demand is coming back and we do have an outlook from our customers and we've got pretty good information about their current inventory levels.

And again, I want to make it clear that when I was talking about destocking that was versus the Q1 first quarter levels.

Mike Harrison - First Analysis

Do you feel like visibility in general has improved or are there some markets where you still feel like visibility is pretty weak?

Stephen Dunmead

It's a mix bag Mike. Its certainly -- if you look at anything associated with the automotive industry I think the messages are pretty consistent. In electronics, I think that the biggest questions are certainly as I said we've seen this rebound in Asia after about the January-February timeframe which has actually continued and how much of that is simply due to rebound in the economy or the agent stimulus packages. But certainly the stimulus packages in Taiwan and in China had a significant impact, positive impact on those markets.

Joseph Scaminace

Mike, let me also say that the fact of the matter is, we're not getting all of a sudden a huge rush of orders into the company right now. That gives us great confidence that this thing has rebounded. On the other hand, I think the massive amount of inventory reductions that have taken place throughout the channel has lead us to believe, that at some point, with -- as Steve mentioned, the Chinese stimulus package right now, there will be us chasing demand at some point. Because the pipelines are virtually dry.

Stephen Dunmead

And I think the best example of that Mike would be Ken mentioned powder metallurgy and certainly the number of cutting tools globally being used is not down 60 some percent. And so that was massive destocking whether it was from the end user like General Motors clear back up to the cobalt supplier like us, and so certainly that's the kind of thing that -- that kind of destocking just can not continue.

Mike Harrison - First Analysis

All right. And just in terms of what you're seeing and you've talked about the visibility being kind of mixed, do you feel like you're starting to get to a point where you could say for at least some of these markets that had -- you are getting some sense of where the normalized demand is going to be versus what we might call normalized didn't in the '07 in the early part of '08 period or is it still too early for you to say that?

Stephen Dunmead

Certainly, I think it is clear than if we were setting here two months ago but it's still pretty murky. I mean everything is going to depend on the global economy and if this thing keeps improving then I'd say that we've got a pretty good picture, but I wouldn't say that it is clear at this point in time.

Joseph Scaminace

And the other thing, we're up against global infrastructure build too, Mike. I mean, when you look at the space that we're in, with the largest end market being the lithium ion battery market. We have to believe that FNHEV (ph) has really taken off.

There are building infrastructures around the world, in particular China, India, even around the Indonesia area where we're seeing, where this demand will be there in the future. What's normalized right now is anybody's guess.

Kenneth Haber

And this is Ken, and also you have to remember that we operate in globally, so you look at our exposure and what's happening in Asia versus the U.S., North America and then Europe they're on different cycles, are different parts of their cycles. So that's also impacting what we're seeing too.

Mike Harrison - First Analysis

Got it. And then I was just hoping that you could comment a little bit on the lower cost of market inventory charges. I know, those depend a little bit on what commodity markets will do, but at this point, as you anticipate having to take a another one of those charges in the second quarter?

Kenneth Haber

As we've said before Mike, it all depends where the metal prices seem to be trending right now. I would say no, but if you would ask me that in January of this year, I would have said no, and then also when the prices fell back to at the end of February, they touched bottom again where they were in December and then rebound again. So as you know that's how we have the exposure to it, but at this point, where the metal prices are now, I would say no.

Mike Harrison - First Analysis

All right. Thanks very much.

Kenneth Haber

Thanks, Mike.

Operator

(Operator Instructions). Your next question comes from the line of Saul Ludwig from KeyBanc Capital.

Saul Ludwig - KeyBanc Capital

Thanks. Talk a little about the inventory levels and the working capital days. And are there any steps that you plan to take to reduce those inventories, to be more commensurate with normal levels. And if that occurs, would there be any reason to think about some unobserved overhead being a factor in your second quarter?

Kenneth Haber

First, let me say that we have still a lot of work to do, relative to increasing our payable days and reducing our inventory days, and also minimizing our accounts receivable exposure, particularly in Asia, where we have seen some extension.

I think, part of the impact on inventory is related to some of our businesses is holding more inventory going into the fourth quarter and also some sales have continued to fall. So we probably have ample inventory to cover us for the next three to six months in some areas.

Also, with regards to our Advanced Materials, we've been building inventory in anticipation for the plant shutdowns, maintenance shutdowns in Copla and also this year also in conjunction timing wise with our GTL smelter.

Joseph Scaminace

Saul, on the second part to your question on under absorbed overhead. I mean that's a very good question to ask in relation to what looks like that we're over inventory. I think we do have work to do, but on the other side of that equation, I will tell you that our operating people have been working very hard to evaluate all of the cost within our factories, and this includes our workforce reductions that have taken place, also an evaluation of direct versus indirect labor and we continue to look at that. So we are adjusting our cost structure to equal what we need to do on the inventory side.

Saul Ludwig - KeyBanc Capital

Could you talk about the timing of both the COPLA maintenance shut down and the Big Hill shutdown. And how should we think about the financial impacts albeit short-term from both of those turnarounds?

Stephen Dunmead

I'll take it Ken. With respect to COPLA, the timing this year is very early June, should still be about weeks. So no different than what we've done in the past. We tend to build as Joe stated, some inventory so that our customers are protected during that annual maintenance shutdown.

And with respect to the Big Hill, currently we are planning that for mid this year. I have a trip scheduled down to the Congo, with the partners to take a look at how the furnace is currently operating, could that be extended out into the early part of 2010, maybe. But again we time our usage so that there is no impact on from a significant standpoint on the customers and the only financial impact really ends up being the cost while you're not producing for that six to eight weeks.

Saul Ludwig - KeyBanc Capital

And I think the Big Hill would it be a six to eight week shutdown?

Stephen Dunmead

From the time that you turn off the heat, cool the thing down, empty everything out, re-brick and start heating back up, yes, about eight weeks.

Saul Ludwig - KeyBanc Capital

So what do you think the impact is from COPLA and Big hill? The impact -- the financial impact I think we should factor that in so there's no disappointment relative to that component of your results?

Joseph Scaminace

Well first off, its going to stretch over two quarters Saul, number one. Number two, with regards to COPLA it's not much different than it's been in the past which is minimal as an annual event. With the case of the GTL, again we will only share in a portion of that but I will say that couple of million dollars maybe.

Saul Ludwig - KeyBanc Capital

Okay, how much speaking of GTL, looks like there are two different ways, what was just at the GTL level, what was their pre-tax, I guess they must had a have loss, it's confusing with your minority interest but the minority interest had some of that special tax in it. What was the GTL on their books pre-tax?

Joseph Scaminace

Yeah, it was $800,000 of income, and it is a little confusing in this first quarter because of those discrete tax items that I mentioned earlier that was associated with the GTL tax provision.

Saul Ludwig - KeyBanc Capital

Do you really think the 800,000, 42% and then take the special charge?

Joseph Scaminace

Yeah, let me walk you through real quick here okay, and then we certainly can follow up later if need be but if you take the $800,000, okay? And you take the discrete tax items that impacted that. That brought it down to a net loss of 7.9, call it $8 million. And their share of that was -- minority share of that was 45% so that's the $3.5 million, you see on the P&L, on the income statement in the first quarter.

Saul Ludwig - KeyBanc Capital

Got you.

Joseph Scaminace

Okay. Our share of that was the $4.4 million of that so that's what's causing that to -- it's little difficult to do that calculation like we usually talk about.

Saul Ludwig - KeyBanc Capital

And how much, how much profit is the consolidated line from GTL that you take in this quarter?

Joseph Scaminace

We took in -- we recorded a little above another $4 million at the operating profit but tax effective that was about 2 million. I mean let me start again, our share of the partnership loss is at 4 million, 4.5 million and plus the intercompany profit and tax affecting that we ended up reflecting a $2 million loss on our books.

Saul Ludwig - KeyBanc Capital

Great. Next question, did you say you saved the $7 million in the first quarter from your cost savings initiatives?

Joseph Scaminace

Yeah, net $7 million.

Saul Ludwig - KeyBanc Capital

Sounds impressive. That's very good. Was that spread equally between the two segments?

Joseph Scaminace

No.

Saul Ludwig - KeyBanc Capital

How does that gets split?

Joseph Scaminace

We're not going to disclose that at this point but it was, I would say that under 50% prior was in the Advanced Materials and over 50% in Specialty Chemicals segment.

Saul Ludwig - KeyBanc Capital

Okay. And what do you expect that number to be for the subsequent quarters, Ken?

Kenneth Haber

Well, we stated I think in our conference call, in the fourth quarter conference call that we are targeting 24 as Joe said that were low head. So if you annualize the seven of the first quarter, you'd get $28 million number. Okay? Which isn't that far off.

Saul Ludwig - KeyBanc Capital

Right, right.

Kenneth Haber

24 but you will also have to remember, there are a number of initiatives here. There is a number of different ones and each one has their own projected cash savings but they also have separate cost of achieve bill. So in the first quarter, we priced spent about a million dollars to achieve that.

So we expect it's going to cost us more in some of these other items to achieve that. So the ratios are going to be different. But at this point looking at 24 - 28 I feel comfortable and that doesn't include what we are doing with corporate. We are also addressing corporate and looking at our spending. They'll probably come in. Right now we are forecasting or looking at somewhere between 4 to $6 million below what we spent last year in 2008.

Saul Ludwig - KeyBanc Capital

And what do you think cash spending is going to be?

Kenneth Haber

I'm sorry.

Saul Ludwig - KeyBanc Capital

Cash spending?

Kenneth Haber

CapEx?

Saul Ludwig - KeyBanc Capital

Right.

Kenneth Haber

Right now, we're looking at it. We put a wider range on it and so we are talking about looking at 25 to $35 million range for the remainder of the year. You add to your 5 million, little under 6 million we spent in the first quarter that will give you a range for the full year of 30 to 40 million. That goal into that range is equal to what we spent last year which was 31 million. But we put a wide range in it because we sit here and we are monitoring what's happened with our business and lot of the delays that we put under our capital spending right now is tied to expansions.

And so we want to have the flexibility, and certainly we have the cash available to be able to act very quickly. We start to see a strong change in that demand or spike in demand that will give us confidence that we should go ahead and execute on those plans. Else we'll say that when you look at our first quarter spending of CapEx it's 17% below the first quarter of last year and down 25% from the fourth quarter. So we have through our back our spending in that area.

Saul Ludwig - KeyBanc Capital

Great, thank you very much, guys.

Kenneth Haber

Thank you, Saul.

Joseph Scaminace

Thanks Saul.

Operator

(Operator Instructions). Your next question is a follow-up question from the line of Mike Harrison from First Analysis.

Mike Harrison - First Analysis

All right guys, I've got few more -- going back to what Saul was asking about inventory management, you did mention that you want to build ahead of the COPLA shutdown, but is there also an advantage to stock piling, lower cost inventory, while you're seeing cobalt market prices close to historical low levels?

Kenneth Haber

Yeah, I mean, you're always balancing usage of cash and the option for inventory flow through gains if the selling prices go up. And so obviously, we were constantly looking at that both from an operational standpoint and corporate finance standpoint.

Joseph Scaminace

It's also somewhat timing too, receipts and shipments too that has some -- that has a play into this also.

Mike Harrison - First Analysis

Okay. And looking broadly at your electronics related businesses, I was wondering if you could walk through which of those businesses are driven more by the capital and equipment side, of the electronics industry, and which of those are more consumable in nature, and sort of what you're seeing on both sides of that business presumably the equipment related businesses are significantly weaker?

Stephen Dunmead

Yeah, the photo mask business and it is the smallest of the businesses, is tied to capital spending and equipment. That was -- capital spending actually was throttled way back in that sector in very early 2008. And so -- but we continue to see that weakness in the first quarter. The rest of our electronics businesses are typically tied to consumer spending, consumer electronics. Because they are semiconductors, printed circuit boards, the memory disk and those are the big three areas that impact us.

Mike Harrison - First Analysis

Got it. And Steve, can you talk about what you're seeing in the market for mix metal battery precursors and how your sales have been for those products?

Stephen Dunmead

It has picked up somewhat, Mike. Certainly, there is a lot of interest and its more interest now, it's not from a cobalt volatility standpoint, its more from specific needs from a specific application. But we have seen interest and actual purchasing picking up somewhat.

Mike Harrison - First Analysis

The talks of trying to find a substitute for cobalt in battery materials, have those concerns kind of subsided on the part of the battery manufacturers?

Stephen Dunmead

Yeah, I mean certainly, it's application specific. But we aren't concerned, I mean, as we've told you before in conference calls, we are headed down multiple pass whether its mix metal, we have some exploratory things going on in non-cobalt containing materials. And so, we are trying to position ourselves to succeed in this rechargeable battery and portable power space, regardless of which way it goes.

But in the conventional applications, I don't see a big push away from significant amounts of cobalt being used in cell phones and laptops.

Mike Harrison - First Analysis

And then, in Specialty Chemicals, I had a question on pricing. It looks like you are holding the line pretty well. Is there just a lag versus changes in raw material cost that we should expect to see further declines in pricing over the course of the year, or do you feel that you can continue to maintain price and close to current levels and prevent significant pricing erosion?

Stephen Dunmead

This is Steve again, I believe it's going to really depend on what happens with the demand side. And I think it was the last quarter, we talked a little bit about this at the conference call, and certainly we are not out chasing business simply by lowering prices, that's not -- we don't believe that that makes any sense at this point in time. But, it all depends on what happens with the demand side of the equation.

Joseph Scaminace

I think we are certainly being aggressive in supporting our market share where its justified, probably walking away from some business, it doesn't make sense.

Stephen Dunmead

And I think the other part of it is, the guys dealing with those customers and running those businesses have been working hand-in-hand with our key customers, our long-term key customers, because they're hurting just as bad as we are in this. So I think that in most cases, and it hasn't been specific to Specialty Chemicals, but also in Advanced Materials. I think we've walked that tight rope and done that balancing act pretty good, given the dramatic downturns in end use demand.

Mike Harrison - First Analysis

All right. And then, last question is I have is for Joe. We've seen you do a couple of investments into small companies with interesting technologies, so I am thinking of QSI and more recently there is CrystalTech (ph) investment. Can you talk a little bit about the strategy there, and I'm also interested, if those technologies take off a little bit, are you in a position in terms of your investment, where you could easily increase your stake in those companies and potentially control a bigger portion of those companies?

Joseph Scaminace

Mike, that is a fabulous question, and its one that really speaks to the strength of our company, because in the midst of all of what we're doing on the cost side to enhance profitability, I will tell you that one area where we have not skimped is on our innovation and R&D. And we continue to work down those roads.

We continue to grow in our development activities through research partnerships. You mentioned QuantumSphere as one of them, and that continues to prosper. But one that I'd like to mention is a new partnership we have with a European company, we call it a Rahu Catalytics and this is a catalyst that basically is a solution for all good coatings, which is a subject sort of near and dear to my heart, its coming from the same industry.

And historically, we've used cobalt based driers for drying components in all good coatings. And this product here basically is a faster drier and it has drying power greater than cobalt and it creates just attributes that I'm familiar with, such as film hardness, better gloss, things like that.

So the operations continue to focus on that and we'll continue to do that. And so in broachers, where we're not only using our product innovation, but we're using our distribution innovation to launch the European product line through our North American distribution. And we're also on the other side of that, are process innovating, in terms of our operations. Even though our capital spending plans right now are being reprioritized where expansions that were planned are being delayed.

We are not delaying significant capital projects that have a return on investment, and we're holding our people accountable for those returns and continuing to work down that line.

Mike Harrison - First Analysis

All right. Thanks very much.

Joseph Scaminace

Thank you.

Operator

(Operator Instructions).

Joseph Scaminace

Okay. I would like to thank you all again for your time this morning, and your ongoing interest in the OM Group. The economic environment we are operating in today is certainly challenging, and perhaps as challenging as anything that I have seen in my career.

However, I have to tell you that I'm proud of the way our employees are responding. We have a very strong leadership team here. And we have employees who are hardworking and intelligent. I believe that our hard work over the last several years has positioned us for the challenges ahead.

And I remain confident that the OM Group will emerge stronger and healthier when these markets begin to recover, and they will. If you have any questions on today's discussion, please do not hesitate to contact us. In the meantime, let me thank you again for you interest in OMG. And we are looking forward to updating you on our progress, as we move forward.

Operator

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

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