OM Group Inc. Q2 2009 Earnings Call Transcript

Aug. 6.09 | About: OM Group, (OMG)

OM Group Inc. (NYSE:OMG)

Q2 2009 Earnings Call

August 6, 2009; 10:00 am ET

Executives

Joe Scaminace - Chairman, Chief Executive Officer & President

Ken Haber - Chief Financial Officer

Steve Dunmead - Vice President & General Manager of Specialties

Greg Griffith - Vice President of Strategic Planning Development & Investor Relations

Troy Dewar - Director of Investor Relations

Analysts

Mike Harrison - First Analysis

Rosemarie Morbelli - Ingalls & Snyder

Saul Ludwig - Keybanc

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 second quarter 2009 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)

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

Troy Dewar

Thank you, Vanessa. Good morning everyone and welcome to our review of OM Group’s 2009 second quarter results. Joining me this morning are Joe Scaminace, Chairman and Chief Executive Officer; Ken Haber, Chief Financial Officer; Steve Dunmead, Vice President and General Manager of Specialties; and Greg Griffith, Vice President and Strategic Planning Development and Investor Relations.

A copy of the press release we issued earlier this morning, as well as the presentation materials that accompany our discussion can be found on the Investor Relations portion of our website at www.investor.omgi.com.

As a reminder comments made this morning by any of the participants on the call may include forward-looking statements based on 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 applies to this call.

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

Joe Scaminace

Thank you, Troy. Good morning everyone and thank you for joining us today. Most of you know the difficult story of the first half. There is no doubt that this year has been tough for us, as well as our customers and our suppliers. The significant downturn in global business activity, coupled with the stress in the financial markets, has sent shock waves throughout every business sector of our company.

As we enter the second half of 2009, most of these challenges still remain. It is true that we are seeing some improvement in a few areas, but the improvement is measured against the stuck conditions of the first quarter. Certain end markets appear to be bottoming out and demand trends are stabilizing or in fact improving.

The destocking that reduced volume levels earlier of this year has subsided. Consequently we’ve seen improvement in sales volumes across some of our end markets, most notably printed circuit board and semiconductor. For example, the top 20 semiconductor suppliers saw a 21% sequential sales increase in the second quarter. They reported that the sales surge was due to the inventory replenishment after severe cutbacks in the fourth quarter of 2008 and the first quarter of 2009.

While we were encouraged by the positive volume trends we’ve seen over the last several months, we do not yet see evidence that we are entering a period of sustained growth in end market demand. We’ve seen some growth that has resulted from stimulus spending, especially in the electronics sector. We’ve also seen stronger demand for commodities coming out of China, which some have speculated is not actually tied to market demand.

The issue for the balance of this year is that these volume increases may not have a lasting impact. The fact remains that the global economic outlook remains very cloudy, and we expect demand to remain unpredictable. Like most companies, it was our belief that entering the second half of 2009, we would have a better read on the longer term growth trends in our end markets; at this point we don’t.

Consistent with this new reality, we’ve reported impairment charges that reflect lower expected cash flows from two of our businesses. These charges also reflect greater uncertainty regarding the realization of those cash flows. Taking these charges was appropriate and necessary. We remain flexible and have reduced costs in response to lower levels of sales volume.

Our actions due to the first half of the year to enhance profitability include headcount reductions, salary freezes, spending cuts and capital project delays. These moves are already benefiting our bottom line and we have contingency plans in place, should market conditions warrant.

From a cash flow perspective, we were once again successful this quarter in generating strong cash flow from our operations. We used our cash to reduce our debt to virtually zero. The financial strength we built, allows us to grow this company profitably and execute our strategy to transform our business model. The end result will be a larger, more profitable company, that will be less dependent on commodity prices and be characterized by a more sustainable and predictable earnings profile.

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

Ken Haber

Thank you, Joe. Good morning to everyone listening. My comments will cover the company’s second quarter 2009 consolidated results, as they compare to the first quarter of 2009 and the second quarter of last year; as shown on page three and page four of the presentation materials that appear on our website.

Revenue fell 60% to $203 million in the second quarter, compared with $511 million last year. The same drivers that impacted the severe drop in revenue in the first quarter, continued into the second quarter as compared to last year. Relative to current quarter, these are the decrease in advanced materials pricing, impacted by the drop in the cobalt reference price, lower volumes in nearly all end markets due to the global economic slowdown and a decrease in cobalt metal resale.

Both, lower pricing and volume totaling $101 million had the biggest impact on the change in operating profit from the second quarter 2008. Two other items that impacted this current quarter operating profit were $35 million estimated non-cash goodwill impairment charge, and a $4.7 million non-cash gain from the termination of the company’s post retirement medical plan. $14 million of the estimated goodwill impairment was related to the Photomask business unit, and the remaining $21 million was related to the UPC business unit.

The cost reforms initiatives that were started either at the end of last year or earlier this year have gained full traction by the end of the current quarter, and are progressing better than we had predicted. The company realized in the first half of this year net benefits, totaling about $17 million from these initiatives. This excludes the gain from the termination of the company’s post retirement medical plan and lower corporate administrative spending.

Income tax expense in this year’s second quarter was $3.5 million, and a pretax loss of $30 million for a negative effective tax rate. This is due primarily to the fact that the goodwill impairment charge is not deductible for tax purposes. Based upon the company’s projected full year pretax earnings by each tax jurisdiction, the estimated effective income tax rate for the year is now 10%.

Now page five is a reconciliation of the company’s GAAP recording of net income and income from continuing operations, attributable to the company to non-GAAP results for the period shown. Excluding the loss from discontinued operations, the impairment charges and the gain on the termination of the retiree medical plan, income from continuing operations as adjusted for special items was a loss of $3 million or $0.11 per diluted share. This compares to a loss of $4 million or $0.13 per diluted share in the first quarter 2009.

On page seven and continuing on page eight, are second quarter 2009 operating results for the advanced materials segment. Compared to the second quarter of 2008, lower selling prices of $126 million and lower cobalt metal resale of $79 million accounted for 80% of the decrease in net sales, followed by a decrease in volume of $38 million.

Total unit volumes were down by 12%, as all end markets were impacted by lower demand and inventory destocking, especially powder metallurgy which was down 72%. Compared to the first quarter of this year, total volume is up 10%, primarily due to higher metal resale and copper by-product sales, as volumes and nearly all of the end markets were essentially flat in the quarter.

As you can see from the water fall on page seven, the key drivers for the drop of $75 million in the second quarter operating profit, compared to last year’s second quarter is due to the impact that the large drop in the cobalt reference price had on product selling prices totaling $59 million, and a negative volume impact of $26 million. Second quarter sales were down slightly from the first quarter, due to the annual plant maintenance shut down or the refinery, offset partially by an increase in metal resale.

On page nine, and continuing on page ten are the second quarter 2009 operating results for the specialty chemicals segment. Lower unit sales in nearly all end markets were the primary reason for the decrease in net sales of $52 million, compared to the prior year quarter. The largest sales decreases incurred in the Advanced Organics and Electronic Chemicals business, related to weak demand in the tire, coatings, chemicals, printed circuit board and memory disk end markets.

As you can see from the waterfall on page nine, besides the impact that lower volume had on the second quarter operating profit compared to the prior year quarter, an estimated non-cash goodwill impairment charge of $39 million, which I mentioned earlier in my comments, negatively impacted the segment’s profits.

Lower operating, selling, general and administrative expenses due to lower volumes and profit enhancement initiatives, helped partially offset the impact of lower volume sales. Second quarter sales were up from the first quarter in 2009 by 21%, due to stronger volume demand in all four reporting units led by Electronic Chemicals up 32%, Ultra Pure Chemicals up 25% and Advanced Organics up 22%.

We certainly saw the start-up of possible turnaround in the various end markets, given the improvement in volumes in the second quarter compared to the first quarter of this year. A significant portion of this volume growth occurred in Asia, relative to the various economic stimulus programs that a number of countries in that region have funded.

If you exclude impact of the estimated goodwill impairment charges from the first and second quarters of this year, the improvement in operating profit is due in part to the profit enhancement initiatives mentioned earlier along with increased volumes.

On page 11 is the summary of selected financial data and metrics for the quarter shown. The company finished the quarter with $268 million of cash on hand. This is after the company repaid all of its debt of $26 million, including the outstanding balance of $25 million under its revolving credit agreement. The company is within the required covenants under its current $100 million revolver.

During the second quarter of this year, operating activities provided $31 million of cash, bringing the year-to-date total to $68 million. The increase in the current quarter was primarily a result of the reduction in net working capital of $23 million from the end of the first quarter and from EBITDA excluding the non-cash goodwill impairment charge, and non-cash gain from the termination of the retiree medical plan.

Majority of the working capital reduction was due to an increase in payables of $22 million. The seasonal maintenance shutdown of the refinery and a mix of product sales and advanced materials segment, contributed to the increase in working capital as a percentage of net sales in the second quarter, compared to the first quarter of 2009.

Net working capital days decreased by 11 days; most of this was related to an increase in payable days of 12 days and a decrease in receivable days of two days. The combined impact of lower cobalt metal prices and reduced sales volume on the advanced materials working capital levels was primary reason for the increase of 39 days and net working capital days over the prior year quarter.

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

Steve Dunmead

Thanks Ken. First I’ll make some comments regarding the cobalt market. During the second quarter, the cobalt market recovered slightly with overall demand up modestly versus the first quarter, but still down approximately 15% to 20% versus the prior year. Cobalt prices moved in a fairly narrow range throughout the second quarter, with the average up approximately $1 per pound versus the first quarter.

Spot buying during the quarter was mostly associated with Chinese consumer demand or inter-trade business meant to fill contractual commitments to consumers. Since the end of the quarter, cobalt prices affirmed as increased demand from China and Japan has met a tight metal supply, especially in high grade cathode. Current metal prices are in the $17.50 to $19 range.

It is beginning to sound like a broken record, but as we look forward, there is still much uncertainty throughout the cobalt market, most of it associated with the demand side of the equation for the balance of the year. In the west, although overall demand is down only approximately 15% to 20%, the spot demand which controls current pricing has been very weak. Any return of western spot demand could result in additional upward pressure on the market.

Before I make any specific remarks about our key end use markets, I want to make a couple of general comments. Volumes in our markets were down significantly, 15% to 30% versus the prior year. As expected, we saw sequential improvements in most of our specialty chemicals markets. The end use demand outlook for the balance of the year still depends on what happens with the global economy, and as a result still has a significant amount of uncertainty.

Now I’d like to cover some the key end use markets impacting our advanced materials segment. Although end use rechargeable battery demand was down 15% compared to the same period of 2008, OMG sales volumes remained flat, due to share gains in battery precursors and a geographical shift of our sales offsetting decreased market demand. Market analysts are expecting demand to improve further throughout the balance of the year.

Market demand for cutting tools, wear parts and diamond tools weakened further during the quarter, due to poor demand in automotive construction and mining sectors. The large tooling producers are seeing their orders down by 40% to 50% compared to 2008. In addition, the supply chain de-stocking continues. Any real increase in demand is not expected until the end of the third quarter, following summer holidays and extended plant shut downs.

In the overall chemical market, business was essentially flat versus the first quarter. We did however see some strengthening in petrochemical catalyst applications, which were up approximately 6% versus the first quarter. Looking forward, we expect to see steady demand throughout the balance of the year, at levels 10% to 15% below 2008.

Now for a few comments on the key markets impacting our specialty chemical segment; the state of the global economy has had a significant impact on housing and construction applications. In turn, this continues to negatively impact our coatings and chemicals markets. Volumes in these markets were down approximately 23% year-over-year, but as expected, up 21% versus the first quarter.

Overall expectations are for demand to remain relatively flat for the balance of the year. We will however see some normal seasonality. Global demand for tires has slowed significantly due to the decreases of new car sales, miles driven and commercial truck traffic. Sales volumes into this market were down approximately 19% year-over-year, but were up 35% versus the prior quarter.

Global OEM tire sales are expected to be down 25% to 35% versus 2008. This will be offset somewhat by the replacement tire market, which is now expected to be flat in the second half. From a geographical standpoint, Europe is the weakest market with North America improving slightly and Asia being the strongest.

The electronics related markets, the second quarter picture improved versus the first, but we’re still well below the levels seen in 2008. For our electronic plating chemicals, overall volumes are down 35% versus the prior year, but up 32% sequentially. The number of extended shut downs at our key customers dropped dramatically during the second quarter. It appears that the electronics market in Asia hit a bottom during the first quarter.

Hard disk drive shipments were reported to be up 17% versus the first quarter, with 27% growth in glass substrates and 5% growth in aluminum. The industry is expecting a further increase of approximately 5% for the balance of the year. The printed circuit board market continued its recovery that began in February, especially in Asia. Overall volumes were down 31% year-over-year, but up 26% versus the first quarter. We expect to see further improvement in the market, with sales projected to be up 5% to 10% for the balance of the year.

The semiconductor market has also been hit very hard by the global economic turmoil, which is impacting our Ultra Pure Chemicals sector. Recovery in this market began in the second quarter, with Asia leading the way, followed by the U.S., and Europe lagging. Our sales into this sector were up 25% sequentially, but down 19% year-over-year.

Industry experts are calling for semiconductor sales to be down 21% in 2009 versus 2008, with an 18% improvement in the second half of 2009 versus the first half. This improvement is expected to be driven by PC and cell phone demand, which now accounts for approximately 60% of overall semiconductor demand. These markets are expected to be up 15% and 18% respectively in the second half versus the first.

As we have mentioned previously, the photomask market is tied to capital spending and new device introductions in the semiconductor industry. The depressed market that began in early 2008 continued throughout the second quarter, with overall sales down approximately 20% versus 2008.

Our sales were down approximately 15% versus the prior year and essentially flat versus the prior quarter. The market is expected to see a modest improvement in second half of 2009 and won’t fully recover until the semiconductor industry has sufficient confidence to restart capital in engineering spending on new devices.

At this point I’d like to turn the call back over to Joe Scaminace.

Joe Scaminace

Thank you, Steve for your comments. At this time, let me turn the call back to the operator to take 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

Hi, good morning, everyone.

Joe Scaminace

Good morning Mike.

Mike Harrison – First Analysis

I was wondering; I had a question around advanced materials operating profit. You provide the bridge from the second quarter last year into this year, but I was wondering, as I look at Q2 compared to Q1, I guess I was surprised to see the margin decline, given what has been going on in cobalt prices and presumably a sequential improvement in volumes.

I was wondering if maybe you could give us sort of an informal bridge between the first quarter and second quarter, to give us a sense of sequentially what was going on with operating profit, and maybe specifically talk about the impact on operating profit of the refinery downtime.

Joe Scaminace

I’ll be happy to do that, and maybe Steve might want to fill in some things. I think when you look at quarter-over-quarter as we indicated; volumes are fairly flat in our basic end market, so the improvement you saw on revenue was really driven by bi-product copper and the resale which has minimal margin impact on that.

Second is, certainly the plant shutdown always has an impact on a quarter-to-quarter sequential basis from that regard. Also, certainly as you know, we always pull in on a delayed basis the impact of the smelter process, so we’re pulling some of that. Some of that has declined also on a quarter-to-quarter basis.

Steve Dunmead

Mike, this is Steve. Relative to the price moment, most of the price moment actually happened during the second half of the quarter, and so in the grand scheme of things, it didn’t have a significant impact on second quarter versus first.

Joe Scaminace

I think if you look at average for the first quarter to the average of the second, the average sub maybe a dollar.

Steve Dunmead

Most of it was in the second part.

Joe Scaminace

Most in the second part and again, there is a one month lag and you seen that pricing impacting our product selling prices.

Mike Harrison – First Analysis

In terms of the specific magnitude of the operating profit hit from the plant shutdown, is it a couple million?

Joe Scaminace

I don’t have that specific number to give you.

Mike Harrison – First Analysis

Okay. Maybe a question for Steve; looking for some more details on the powder metallurgy market, it sound as like you guys had been expecting that the destocking would run its course and you’d start to see improvement there. That hasn’t materialized and I’m just wondering if you could give some more details there.

Steve Dunmead

Yes Mike, you’re exactly right. That is, if you look at all the markets that we participate in, that’s the one that we really thought the destocking, because things were so bad in the first quarter that we thought that the destocking was coming to an end. I think as the economy did not start to recover as quickly and especially in Europe and automotive applications, it has really hurt those guys badly.

So when you’ve got the big tooling guys down 40% to 50% and they’re still sequencing things out of there supply chain, all indications that we’ve had is that any improvement that we may see will not start until at least the end of the third quarter.

Joe Scaminace

Mike, when you think about powdered metallurgy, you really have to look at a global industrial production as it relates to grinding of metal. You’ve got mining, and as Steve mentioned, you’ve got automotive in that. With out any significant recovery in automotive manufacturing, it’s very difficult to see how powdered metallurgy can get any volume traction at all out there, and it’s been very, very soft.

Mike Harrison – First Analysis

Got it. Maybe another question for Steve; regarding the cobalt market overall, you commented that most of the uncertainty right now revolves around the demand side. I was wondering if you could talk about what you are seeing or expecting in terms of the supply side of cobalt.

Particularly as we see copper prices improve a little bit I would thing that you might start to see some additional cobalt by-product, as some of those mining operations maybe started up?

Joe Scaminace

Yes, I think you’re right Mike. The run-up in copper prices, in a sense that if you compare to say the first quarter, and definitely since the end of the year, certainly makes the longer term prospects of the copper projects and DRC more positive. I think that the issue is going to end up being that right now you’ve also got the negative impact of a bunch of the nickel projects that have shutdown like Raven Store; the strike with Dae Linco [Ph] up in Canada, and so you’ve got that balancing.

In addition if you look at the DRC, I won’t talk about specific projects, but in the grand scheme of things there are a significant number of those projects that were running in say the first three quarters of 2008, that still aren’t running either at all or at the rates that they were running at in 2008.

So from the supply side, I think that the reaction, and I guess why I made the comment the way I did about any increase in spot demand or the uncertainty associated with demand is probably more important, because the changes in supply will have them a little bit more in a predictable manner, based upon the fact that if you mark back a plant, you don’t just turn it back on over the course of a month.

Mike Harrison - First Analysis

Then last question I had is for Ken. Your comment on the cost savings in the first half was around $17 million. I was wondering, what we should be modeling for the second half? Is something around $20 million for the half a good number to use?

Ken Haber

I think, certainly you can double that number and you’d be safe with that. I think there’s a few other things that were working on, that will add to that number in the second half.

Steve Dunmead

This is Steve. I think that the other thing is Ken is giving you a net number, and some of the other things that maybe coming, there’s going to be some cost to get there and so, I think from a net standpoint Ken’s doubling a pretty good number.

Mike Harrison - First Analysis

Okay, thanks very much guys.

Joe Scaminace

You’re welcome.

Ken Haber

Thanks Mike.

Operator

Your next question comes from the line of Rosemarie Morbelli from Ingalls & Snyder.

Rosemarie Morbelli - Ingalls & Snyder

Good morning, all.

Joe Scaminace

Good morning.

Rosemarie Morbelli - Ingalls & Snyder

You talked about the electronics market and the fact that you are seeing some sequential trend and then, you touched on the powder metallurgy, which is not showing any improvement. Could you touch in a little bit more detail than you did in your prepared remarks on the additional markets that you serve?

Joe Scaminace

You mean outside of semiconductor and powdered metallurgy?

Rosemarie Morbelli - Ingalls & Snyder

Yes.

Joe Scaminace

Sure. We can go through our advanced materials and memory disk. As we indicated in the comments, the battery market themselves are Rosemarie, sequentially or fairly flat in the second quarter. When you look at our memory disk business, we did see some up tick in memory disk. As you know, we make electroless nickel plating for the memory disk market and that business was up slightly in the second quarter.

Then the other market that hurt us was Advanced Organics. I think Steve talked a little bit about these numbers. Where we touch markets that are under a lot of stress right now; for example, the coatings market, where we supply the architectural coatings and industrial coatings, they were down significantly in the quarter, along with the tire industry as being down. So the bright spots were semiconductor and printed circuit board and then the low spots were powdered metallurgy and advanced organics.

Steve Dunmead

If you look at it Rosemarie, from a sequential standpoint the numbers, and I think when you see the transcript of the prepared remarks, from a tire standpoint, sequentially we were up 35%, coatings and chemicals even though it’s down significantly versus 2008 was up 21%, and so I think those are probably a couple of the markets you were looking at.

Rosemarie Morbelli - Ingalls & Snyder

As you are looking at the sequential numbers, I am assuming that throughout the second quarter you showed some improvement month-to-month. Is that continuing in July or do you see July more or less at the June level?

Steve Dunmead

I think it various by which one of the markets. In the electronics markets, I would say that you’re correct that we saw improvements as we moved through the quarter. In the advanced organics related markets, I wouldn’t necessarily say that it was sequentially improving month-over-month.

Rosemarie Morbelli - Ingalls & Snyder

July versus the end of the second quarter?

Steve Dunmead

I don’t think we’re going to comment on July yet.

Rosemarie Morbelli - Ingalls & Snyder

Alright, thank you.

Steve Dunmead

Thanks.

Ken Haber

Thank you.

Operator

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

Saul Ludwig - Keybanc

Good morning guys. Joe, the government this week gave away billions of dollars to a number of different companies to do work on batteries. I was just wondering where you guys are in that cycle and is there a potential for you to at least indirectly get some of that money and which of these companies who are controls or A123 or BISF or the multitude of those that are working on these batteries; where do you fit into this cycle?

Joe Scaminace

Absolutely. Saul, it’s a great question and we absolutely had been abreast of all these developments. All the way, even before there was even talk of stimulus money, we were working with a very large company at Minneapolis that I think you may be aware of. That was involved in the production of cathode material.

As we’ve indicated in past discussions Saul, we’ve manufactured not just refined cobalt for the lithium iron battery market, but we’ve been moving up that channel with battery precursors, which actually further move us up that channel and we play a role. I’ll let Steve go into a little bit more detail, but we know exactly what companies applied for this money; we know what companies were awarded this money and we are working currently with a very significant percentage of the companies that have gotten this money.

I guess one of the things; I’ll let Steve talk a little bit more about it, that we’ve got to be a little careful here; because this is really about what platform is going to produce EBITDA in the next three to five years and there is a lot of speculation. It’s almost like a scatter shoot, in terms of all the companies that have been given this money.

If I have to give you an analogy, it may affect the format of VHS, if you remember that. We don’t know exactly what format’s going to be out there yet, but we are participating in numerous companies. So I’ll let Steve go into a little bit more detail, because I think your question is a very good one.

Steve Dunmead

Yes Saul. We were certainly approached and had discussions with multiple of the people who were awarded money, about whether or not we wanted to lock up with one of them individually and go for the money.

Our strategy has been to continue to participate with multiple of the companies who ultimately were awarded money to do cathode work and that is tact that we are taking right now, really because we aren’t going to see this market fully emerge for at least five years. So I think that we are well positioned with the people that are making mixed metals and other lithium ion cathode materials.

Saul Ludwig - Keybanc

Great, thank you for answering that. Ken a couple of questions; how much was the Big Hill contribution to the operating income in the second quarter? I think it was $4.4 million back in the first quarter.

Ken Haber

So the first, second quarter, the operating profit is $1 million.

Saul Ludwig - Keybanc

It was $1 million, and that was $4.4 million in the first quarter, on apples-on-apples here.

Ken Haber

Yes, including the impact of the deferred profit.

Saul Ludwig - Keybanc

What do you mean? I don’t understand.

Ken Haber

As we said before, we have to recognize our share of that profit once the [Multiple Speakers]. So that explains probably why you see a drop in the operating profit on the advanced material segment down quarter-to-quarter. But in the current quarter, GTLs generated approximately $1 million.

Saul Ludwig - Keybanc

What was their own pretax, GTLs pretax profit?

Ken Haber

The pretax profit was about $800,000.

Saul Ludwig - Keybanc

Okay, and the minority interest came out to that number.

Ken Haber

Right. Clearly the minority interests are, there is the minority interest share of the discrete items that were recorded in the second quarter, which in total were $2.9 million. So their share of it was $1.3 million. So if you look at the minority interest line of $1.7 million and you back out those discrete items, tax items. You get their shares point or $400,000, and you take 45% of that, you get $800,000 of pretax.

Saul Ludwig - Keybanc

Okay, what was the change year-over-year in your copper profits? You give us that every quarter.

Joe Scaminace

I don’t have that in front of me, I’ll have to follow-up with you. I don’t have that specifically in front me.

Saul Ludwig - Keybanc

Okay, and this intangible write-off of $1.2 million, which segment got that?

Joe Scaminace

That had to do with the specialty chemicals group segment.

Saul Ludwig - Keybanc

And that was similar to the write-off of the goodwill?

Joe Scaminace

Yes, exactly.

Saul Ludwig - Keybanc

Okay. When you shutdown the smelter in DRC next year in the first quarter, how should we think about the financial impact of that in the first quarter, or will you be boosting production happily, that would boost fourth quarter this year, in anticipation of that shutdown. How should we be thinking about that event, so that we are on top of its financial impact?

Steve Dunmead

Saul, this is Steve. From a supply chain standpoint, because there is such a long supply chain there, there will be no impact from the amount of material that we’re consuming in cocolla [ph]. The only small impact will be the actual cost that we incurred during the shutdown, and it’s only going to be six weeks. So it’s not going to be a large dollar.

Saul Ludwig - Keybanc

Okay and then, Joe I was wondering if you could talk about acquisition pipeline prices. We’ve seen this big surge in equity prices in general. I wonder if that’s manifesting itself in higher demands for selling assets. What do you see as the opportunity, because I know guys have been trying for long time to build out your non-cobalt business, and we haven’t seen anything in the last year and a half, so what do things look like now?

Joe Scaminace

We Saul, I’ll tell you, the pipeline is substantial out there. We have a lot of opportunities that we’ve looked at it and I think what we’ve said on prior calls is that, even though we were in a great position financially with our cash balance, and we’re getting a lot of phone calls for people who want to do deals, banks etc, we’ve walked away from a couple, because the value models, some of the sellers were living in the 18 month ago past, now realizing the reality of the world the way it’s changed.

What’s really interesting now, what we’re seeing is that we’re almost on the other side of that. Because in the last month or two, as markets have begun to improve, especially in electronic chemicals, we’re seeing that it almost compounds it on the other side now. Because people, they’re feeling their roads and saying “Well the values are back up again.”

So what we’re seeing is a lot of opportunities out there, and our discipline has remained a resolute in terms of how we want to look at this, with respect to attaining synergies and cost reduction possibilities, but I would tell you that we are very active; that’s probably the best way I could describe it.

The management team, myself and my executive team have been active in looking at properties out there. We feel that the targets that we’ve identified in terms of the markets, electronic chemicals and batter materials are still very much in our sites. So it’s going to be a matter of the deals that we have on the table and what we feel would be right to do.

Saul Ludwig - Keybanc

Okay, and then if think about directionally, you think we should think that you should have flat numbers in the back half of the year, because let’s assume that the cobalt price stays at $17.50, lets take that as a given, that cobalt price and with this improving demand, should you get back into profitable numbers?

Ken Haber

Yes, we expect a slight profit in the third quarter, and hopefully we’re anticipating maybe a gradual improvement over that in the fourth quarter, but I have to be cautious here because again, you have to look at our businesses between those two segments.

Advance materials, again had flat volumes first quarter, second quarter and that’s likely going to probably continue in the quarter. Certainly we’ve seen some increases in volumes in the other segments and markets that we just talked about, but again, there is not certainly as that’s really gaining traction and so the bottom line is, we still have very limited visibility into this thing.

Also I would say that, so to that second half, I think the second is, I would like to just maybe with regards to the second quarter, actually we were slightly profitable if you back out these one time charges that we incurred with regards to the impairment charges in that. Even if you reverse out the one time benefit that we received in the termination, we still are slightly profitable. So we were in the black from that perspective.

Saul Ludwig - Keybanc

You lost $0.11 a share after you back out all those items; how do you reconcile that with being profitable?

Ken Haber

I’m talking about the second quarter operating profit.

Saul Ludwig - Keybanc

Operating profit, not the online profit.

Ken Haber

No, operating profit. I was speaking to the operating profit.

Saul Ludwig - Keybanc

And then just finally Joe, I’ve got a longer term questions. You’re coming up with three years I guess into the real contract. It was a five year deal. A lot of things are happening as other cobalt concentrate, that’s going to need to be processed in a refinery some place. When would you want to have sort of the next phase of your raw material supply nailed down; and how do you see that evolving over the next year, year and a half?

Joe Scaminace

Well Saul, another really good question, because in terms of our vertical supply into these refineries, we are in discussions with other parties and we are very cognizant of the potential cobalt sources that are out there, primarily in the form of by product cobalt. I would say that question by saying we are keeping all of our options open.

Of course in the real contract itself, we’ve got a built-in concentrate coming out of the Harjavalta refinery, which we expect to continue on with that contract. On the other hand, there’s a lot of dynamics that are out there on the marketplace right now. With the 10-K project coming on-stream, as Steve mentioned, some of these projects, even [Inaudible] is not operating right now, even today as we speak. So, I would say that it’s very fluid and we’re trying to keep all of our options opened.

Saul Ludwig - Keybanc

Would you help to buy, let’s say at the end of next year, end of 2010, you’d be in a position to clarify your raw material sourcing going forward?

Joe Scaminace

It’s very difficult to say it Saul. It’s very difficult to answer that by some kind of a timeline.

Saul Ludwig - Keybanc

Okay, great. Thank you very much guys.

Joe Scaminace

Thank you.

Operator

Your next question is a follow-up question from the line of Rosemarie Morbelli from Ingalls & Snyder.

Rosemarie Morbelli, - Ingalls & Snyder

Looking at your inventory sale down, let’s call it $40 million versus the end of the year, was that mostly price of cobalt coming down; was it volume; and are you satisfied with this level or should we expect the inventories to come down further in the next couple of quarters?

Ken Haber

This is Ken. Speaking to the two segments separately; in advance materials, I think that the impact on the dollar is somewhat influenced by the moving pricing, because their volumes are relatively level on a unit basis.

Certainly we’ve seen good improvement in our inventory management and our specialty chemicals segment in most of the business units. I think that we’re probably getting near the bottom. We’ve got to be cautious now again because of this lack of visibility, but certainly as we’ve talked about it, some of these end markets are starting to pick up and so its important for us to balance our cost, our working capital, but also be prepared to service our customers and hopefully be in a position where other competitors may not be, and may be even gain some market share from that. So, we are balancing all those factors as we sit here today.

Rosemarie Morbelli, - Ingalls & Snyder

As you see the demand in volume sequentially, do you change in the way the orders are being placed? In other words, are you getting smaller and more numerous orders than you did in the past?

Steve Dunmead

Rosemarie, this is Steve. Certainly at the first part of the second quarter, that was exactly what we saw. Even in electronics, in the first quarter we started to see urgent demand, that all the sudden someone had taken their inventory basically down to nothing and then they had some order to fill.

I think that it stabilized out a bit, at least in the specialty chemical sectors, as the overall demand in the markets has improved. So, I think things are looking a little bit more study as we move into the third quarter, then what we saw, certainly in the first and even more so than we did in the second.

Rosemarie Morbelli - Ingalls & Snyder

If that particular pattern were to continue, are you set up to supply customers, many times small amounts in an efficient manner or do you have to make additional changes to the operations in order to do that.

Steve Dunmead

No, we are all set up to do that.

Rosemarie Morbelli - Ingalls & Snyder

Okay, great thanks.

Joe Scaminace

Okay, thank you again everybody. I’d just say that, I’d like to conclude by saying that the economic challenge that we face today are still taunting. While we are experiencing some short term positive trends early, we know that the uncertainty regarding end market demand will continue to dominate our outlook.

Our strong financial position and flexibility will be the keys to managing through this economic turmoil and emerging stronger and healthier on the other side, when markets begin to recover. I’m very confident that the team we have in place at OM Group, will be successful in meeting all these challenges.

I would again like to thank all of you for your time this morning, and your ongoing interest in the OM Group.

Operator

This concludes today’s conference call. Thank you for your participation. You may now disconnect.

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