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OM Group, Inc. (NYSE:OMG)

Q2 2013 Earnings Call

August 1, 2013 10:00 AM ET

Executives

Joe Scaminace – Chairman and CEO

Chris Hix – VP and CFO

Analysts

Mike Harrison – First Analysis

Ivan Marcuse – KeyBanc Capital Markets

Chris Kapsch – Topeka Capital Markets

Kevin Hocevar – Northcoast Research

Alan Mitrani – Sylvan Lake Asset Management

Operator

Good morning, and welcome to OM Group’s Second Quarter 2013 Financial Results Conference Call. Information presented on the call may include forward-looking statements that are subject to uncertainties, risks, and factors which are difficult to predict. Actual results could differ materially from those expressed or implied. A more complete disclosure regarding forward-looking statements can be found at the bottom of OM Group’s press release or in their Form 10-K and applies to this call.

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

Joe Scaminace

Good morning, everyone, and welcome to our second quarter update call. Today, I am joined by Chris Hix, our CFO, and Rob Pierce, Vice President of Finance.

You can see our standard Safe Harbor disclosure on slide two. Let’s now turn to slide three as I am excited to talk about our progress on our strategic and operating objectives. Slide three reflects the steps in our strategy to create long-term shareholder value. We have made great progress in creating a technology based industrial growth company. The divestitures of our cobalt and Ultra-Pure Chemicals businesses are now behind us. And as we have said, over and over again, we want to be a company focused on value-added businesses in which we are rewarded for our innovation and technology. We are now at this point.

OM Group serves attractive global end markets and we are looking to complement our existing businesses with synergistic acquisitions that will add new technologies, products, customers, and geographies. Our acquisition program is very disciplined. We use a rigorous process for sourcing, evaluating, negotiating, and integrating businesses that leveraged the deep experience of our business teams. We always work on opportunities that will be a smart use of capital to create value for our shareholders. We are also working diligently to cut costs, improve working capital efficiency and rationalize capital expenditures. We are clearly focused on managing the things within our control. All of these actions contributed to a successful first half of 2013.

Now let’s turn the slide four where we present more details of our operating progress in executing our strategy. The first six months of 2013 have been successful from both a strategic and operating perspective. With the divestitures of both our cobalt business in the first quarter and our UPC business in the second quarter, we’ve made great strides towards optimizing our current portfolio. After the end of the second quarter, we’ve received another $27 million from Cobalt divestiture resulting in a grand total of almost $400 million during the year in divestiture proceeds.

Also in the second quarter we used these proceeds from the sale of UPC along with cash on hand to repay the last of our debt leaving us debt free at June 30th along with the cash balance of $81 million. The strength of this balance sheet is supporting our operating improvements organic growth, synergetic acquisitions and returns of capital to our shareholders. We continue to make progress on our cost reduction initiative for 2013 and we’ve achieved $5 million of cost savings year-to-date. We are on track for full year savings between $10 million and $20 million as we’ve originally communicated to you earlier this year. The cost reduction initiatives are structural changes that are sustainable over the longer term.

Continuing on slide five, we’ve had a strong first half delivering adjusted pro forma EBITDA of $62 million. We continue to strive for operational excellence, growth and innovation and we are relentlessly pursuing organic growth through new applications, new geographies and new customers with the goal of higher sales, higher margins and higher returns. We believe we can leverage our technical expertise knowhow and excellent service capabilities to grow our existing businesses and we’re aggressively evaluating our businesses on many fronts to identify opportunities for improvement.

Finally and most importantly shareholders have already been rewarded by our actions. I expect the disciplined execution of our strategy will create additional significant value in the coming years. At this time I will turn the call over to Chris Hix to walk you through the details of our second quarter financial performance.

Chris Hix

Well, thank you Joe and good morning everyone. Take a look at the top of slide six. You may recall that in Q1 we reported adjusted pro forma EBITDA of $35 million including $2 million of EBITDA from UPC. Now that UPC is treated as a discontinued operation retroactive to beginning of the year, its results are excluded from our results and the first quarter EBITDA gets reset to $33 million. Year-to-date we are at $62 million.

At the bottom of this slide is reconciliation of our reported EBITDA and diluted EPS. Our adjustments consist of the divested Advanced Materials and UPC businesses, $2 million of charges for cost reduction initiatives and $0.5 million for accelerated amortization of deferred financing fees in connection with the debt repayment. The Advanced Materials business posted an expected small loss in the quarter as we fulfill our supply distribution obligations related to divestiture. You can see that we achieved adjusted pro forma EBITDA of $29 million for the quarter which translated to an adjusted pro forma EPS of $0.36 per diluted share.

Slide seven provides a more complete picture of second quarter P&L performance showing GAAP amounts as well as adjusted pro forma amounts for our continuing operations excluding the cost reduction charges and the Advanced Materials business. Excluding the impact of higher rare-earth prices in 2012, organic sales declined 2% compared to a year ago driven by weaker economic conditions in Europe impacting volumes in our magnetic technologies business. This was partially offset by higher volumes for defense applications and our battery technologies business which achieved another strong quarter of performance.

Customer demand in the quarter was mixed across our various end markets compared with the year ago. Defense remained strong, automotive was stable overall, industrial automation was down and other industrial applications were mixed and coatings were up. Electronics applications were down year-over-year but improving sequentially and poised for what we believe will be better comparables in the second half of the year. Below the operating profit line, we recorded second quarter interest expense of $1.8 million. This amount includes interest expense on our debt prior to final repayment in Q2 as well as accelerated amortization of the deferred financing fees. Also we recorded a $3 million FX gain in the quarter which works out to about $0.07 per diluted share due primarily to the effect of a stronger euro on the VAC acquisition hold back. This gain in Q2 offset the $3 million FX loss in Q1. The effective income tax rate for the period excluding special and discrete items was about 17%, (below) our expectations and going forward we now expect a rate in the mid-20s range for the year.

Let’s move to slide eight to discuss cash flow from a moment. We generated $11 million of cash operations in the second quarter of the year reflecting improved financial disciplines and working capital management. The company’s Q2 cash flow also reflects $21 million of income tax payments including payments relating to VAC for period stretching back before the acquisition.

Cash flow from operations in the prior year reflects the benefit of falling commodity prices in the Advanced Materials business that we divested in March of this year. Cash flow from investing activities is comprised of capital expenditures and the cash proceeds from the UP divestiture. CapEx is expected to be sequentially higher in the second half of this year as we advance and complete projects started in the first half.

Q2 cash flow used in financing activities includes $93 million of debt repayments and $9 million for share repurchases. Including repurchases of 5 million in Q1 we’ve repurchased 14 million of our shares this year, $14 million worth that is. And we have $36 million of capacity remaining under the program’s authorization. The chart on the left side on slide nine more clearly shows you what we did with the cash we’ve received from the UPC sale along with other cash we accrued from our global operations. In short, we are debt free at the end of the quarter and had $81 million of cash. After the end of the quarter as Joe still mentioned we’ve received the final $27 million from Advanced Materials divestiture. So, we are well positioned with cash and bank revolver capacity to make the August hold back payment related to the VAC acquisition. And we’ve got about $75 million recorded as a current liability on our balance sheet for that.

The chart on the right updates our working capital efficiency. In the second quarter of 2013, we have reduced net working capital as percent of sales to 31.7%. This contributed to the cash flows discussed a moment ago. In particular we improved inventory efficiency in the second quarter primarily at VAC which has been a focus over the last few quarters.

The next few slides provide an overview of our business results beginning with Magnetic Technologies on slide 10. Excluding the word pricing benefits and LCM charge in the prior year quarter, weakness in certain European end markets resulted in lower year-over-year sales levels and profitability. Sales for industrial automation applications and energy conversion and distribution were both down slightly compared to a year ago partially offset by improved conditions in some of the other end markets.

The overall negative impact of lower volumes was partially offset by lower operating expenses including the benefits of costs reduction initiatives. Overall adjusted EBITDA in this segment the margins were about 10% for the quarter, a bit lower than expected due to lower volumes unfavorable mix and adverse timing of some shipments. We expect improved profitability in the third quarter as cost cutting benefits expand mix improves and shipment timing pivots to become an advantage. In addition to cost reduction initiatives our Magnetic Technologies platform continues to work with customers to identify and execute new programs that support our long-term growth expectations.

Slide 11 summarizes the second quarter performance of our battery technologies business. Sales and operating profit both increased compared to a year ago primarily due to higher volumes in defense applications and continued growth in medical application as well as favorable mix and I got to say really outstanding customer project execution. Overall the first half of 2013 was very strong in this business with record sales for our six month period.

As you can see from the chart in the upper right, this business continues to grow at an impressive pace. But it can be lumpy quarter-to-quarter with generally softer sales in the second half of the year. We expect the second half of 2013 to be lower due to the timing of shipments and regular seasonality. In our specialty chemicals business on slide 12 sales and profits were nearly flat to a year ago. Sequentially compared to the first quarter of this year, sales were up 8% and profits up 31% due to seasonal growth in coatings and improved demand for electronic chemicals. The chart on the right shows the volume performance of our Advanced Organics and Electronic Chemicals product lines since the second quarter of last year and demonstrates the upward trends that I just described. We expect sequentially higher sales in the third quarter because of seasonal benefits, and continue strengthening demand for data storage devices. Just as with our other businesses, we’ve been adjusting the cost structure of our specialty chemicals business to improve profitability in the second half of the year.

I’m going to wrap up on slide 13. We started the year with EBITDA guidance of $120 million to $140 million. Our first guidance in many years and indicative of the more predictable business we created with our portfolio moves over the past six years. We talked throughout this year about our forecast reflecting uncertainty over Europe and commented that a lack of improvement in the second half of the year would pressure us below the midpoint of the range. Because Europe does not appear to be improving and due to $10 million of planned EBITDA that was divested with our UPC business, we now see the enterprise trending towards the lower end of our forecast range.

We continue to expect to achieve our targeted $10 million to $20 million of cost reduction benefits this year. For our sequential third quarter outlook, we expect slightly higher EBITDA due to increased volumes, cost cutting benefits, and mix in magnetic technologies, increased volumes seasonably higher sales and cost reductions in specialty chemicals as well. We expect that improved result in these two businesses will be partially offset by lower EBITDA in battery technologies due to shipment timing and some seasonality as we discussed. We remained focused on working capital efficiency and interest expense will be significantly reduced based on substantially lower debt levels as well as – yeah, substantially lower.

Now, I’d like to turn the call back over to Joe for some closing remarks before we move to the Q&A. Joe?

Joe Scaminace

Well, thank you, Chris for that report. And I will leave you with the thoughts that are on slide 14. We’re really proud of the accomplishments in the first half of 2013 and really excited about the prospects that lies ahead as we continue to execute our strategy. With our strong balance sheet, we have the capacity and flexibility to support our organic and strategic growth plans including actively pursuing synergistic acquisitions. We are working to improve our operating capabilities, which we expect to yield higher sales, margins and returns.

Vision for the future is clear and attainable as we remained as committed as ever to creating long-term value for our shareholders. That concludes our prepared remarks. And at this time, I would like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Mike Harrison with First Analysis. Your line is now open.

Mike Harrison – First Analysis

Hi, good morning.

Joe Scaminace

Good morning, Mike.

Chris Hix

Hi, Mike.

Mike Harrison – First Analysis

Maybe just kind of starting out with what are you seeing in the M&A environment. It really sounds like that the acquisition strategy is moving a little bit to the forefront right now. So, can you may be update us on what the pipeline looks like and maybe what your criteria are as you look at acquisitions particularly in terms of size I guess?

Joe Scaminace

Yeah, Mike, really good question and clearly you’re right on regarding our desire to grow our portfolio through synergistic acquisitions. As we said over and over again, we’ve made the enabling platform acquisitions. And from here on now, we’ll not be doing more of those. And so clearly our criteria just from a fitness standpoint has to be businesses that have market adjacencies, customer adjacencies or geographic expansions and of course meet profitability hurdles that we’ve set for our strategy here. And we are using a combination of our business leaders along with our M&A team to identify this. The pipeline I can tell you is not without opportunities at this point. We have opportunities with each ones of our businesses.

And regarding your question and size, Mike, clearly size is a relevant factor if it’s beyond our reach, but it’s really not about size and it’s all really about value creation. And the value that we would create by our acquisitions is really what will be able to drive us in terms of the deals that we are looking to do.

Mike Harrison – First Analysis

Alright, now switching over to the magnetic technologies business, it did looks like rare-earth had a negative impact on the margins in the quarter, what’s – can you just kind of talk a little bit about what think the impact is going to be going forward. I know rare-earth prices continue to kind of come down at something you manage, but you’d probably rather be in an inclining – increasing rare-earth price environment?

Chris Hix

Yeah, Mike, its Chris, what we’ve seen in rare-earths most recently is some stabilization there and so I know that we’ve seen the rapid increase that occurred throughout 2010 and 2011 and the subsequent decline in 2012 and a bit into ‘13 here, but most recently it appears to stabilize. In the second quarter, we did not necessarily see rare-earth pressure on the profitability or nothing of any significance. In the prior year quarter, I think we commented about the – we saw some significant benefits, but also a big LCM charge, so net-net, I think the impact was a negative $5 million or $6 million on the profitability in Q2 of last year, but for this year, nothing significant impact.

Joe Scaminace

And let me also add to that, Mike, about our view of the anomaly that the huge spike is rare-earth prices really was. And I think we are seeing more stabilization. And generally speaking, I think as a lot of these commodity prices copper, nickel, and the like are related to Chinese activity and demand. We are starting to see some potential firming in those commodity prices rare-earth being part of that.

Mike Harrison – First Analysis

That actually gets to another question I had for you which is I don’t know to what extend you guys are playing in China right now, since you’re no longer in the cobalt business, but can you talk a little bit about what you are seeing in terms of the Chinese demand and how do you think things are going to play out over the next several quarters?

Joe Scaminace

Yeah, I think that the general thought by most of the experts out there (inaudible) China’s slowdown really goes from what was the high-double digit to 12% down to 7%, 7.5%. And we are seeing Chinese demand still above the norm of the other global demand and we are seeing activity there in portable electronics and demand for our products, so we do see the possible stabilization coming above.

Mike Harrison – First Analysis

Alright and then last question I had for now is on the specialty chemicals business, we are just hoping you could talk about what did underlying operating margin looks like if we try to look year-over-year excluding the impact of the UPC business?

Joe Scaminace

Yeah, so margins I think we’ve got the results that we published in our materials exclude UPC, so everything you are seeing in the materials is going to be consistent year-over-year. And so my recollection of the margins is that they are pretty similar to what we had last year, they might be up 20, 30 bps year-over-year.

Mike Harrison – First Analysis

Alright, thank you very much.

Joe Scaminace

Thank you.

Operator

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

Ivan Marcuse – KeyBanc Capital Markets

Thanks for taking my questions. If you look at your EBITDA guidance, you’re looking for I guess the sequential increase in the third quarter from the second quarter, but you are looking for the low end, so if you normalize the first half at $250 million, you get sort of the $124 million, $125 million, what – did you expect to have as seasonal impact in the businesses now or going to the December quarter, that would have the first half equal to the second half or do you expect the second half to be mildly better than the first half in terms of EBITDA?

Joe Scaminace

I guess what I would speak to is just generally the seasonality we have in the fourth quarter, we would expect to have those usual seasonal effects in both our battery technologies business as well as the Advanced Organics product line within our specialty chemicals business. So, we would expect the fourth quarter to be typically our weakest quarter there. So, we would expect to see sequential growth in Q3 and some weakening in Q4.

Ivan Marcuse – KeyBanc Capital Markets

Great. And then if you look at your cash flow, is this – would you expect working capital or net working capital I guess it was used in the first quarter it looks like it was a source and the source of cash and in the second quarter would you expect it to continue to be a source or how does working capital from where you could look at now with the business that you have today, how is that going to still work out and how is that going to impact your cash flow as we go forward?

Joe Scaminace

Yeah, I have to say I am really delighted with the progress that we have made with our working capital efficiency. And we have signaled the people that we hope to get into the lower 30s this year and we achieved that by the end of the second quarter. That’s been very helpful to the results and shown up in the cash flow. For the second half of the year, partly that depends on the growth that we see and we don’t expect to lose any ground on working capital efficiency, but as the business grows that may end up consuming some cash for working capital support. But as we have commented the we are working for getting down to 31% or so percent of working capital is figuring out a way to get it even lower.

Ivan Marcuse – KeyBanc Capital Markets

Great, and then looking at specialty chemicals business, the business that you divested I always understood or understand that was a lower margin business, so I would have expected your profitability is sort of I guess rise just although is equal are you seeing pressure in your other businesses in terms of profitability or is it just more a seasonal effect?

Joe Scaminace

So, just to be clear on my comment earlier about specialty chemical margins were a year-over-year comment with UPC excluded from both sets of results.

Ivan Marcuse – KeyBanc Capital Markets

Got you. Alright.

Joe Scaminace

Yeah and so if you were just to do the calculation with or without UPC arithmetically the margins are a bit higher without UPC.

Ivan Marcuse – KeyBanc Capital Markets

Great. Thanks. I will get back in the queue.

Joe Scaminace

Thanks Ivan.

Operator

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

Chris Kapsch – Topeka Capital Markets

Yeah. Good morning. I wanted to dig into the magnetic technologies results a little bit. And so it looks like the EBITDA margins below 10% you sort of called out that business being sort of low-mid teens, sort of EBITDA margin expectations, so it looks as though the effect of both volume and mix is what’s dragging on the EBITDA margin. So, I am just wondering like you think based on your commentary about the end markets that the weakest were industrial automation and energy conversion. So, I am wondering it’s the mix of products into those end markets is richer therefore weakness, volume weakness there is sort of accentuating the depressed EBITDA margins or is it really just very weak volumes in Europe in those end markets?

Joe Scaminace

Yeah, so the – we are seeing a combination of volume activity as you mentioned mix and even timing of shipments. So, part of what we are trying to distinguish as we go into Q3 is the fact that the shipment timing works to our benefit in Q3 as opposed to being some headwinds in Q2. And to your point about mix, some of the end markets that are suffering or at least suffered in Q2, we do have some good margin opportunity in those end markets. But the biggest factor for this business is getting – having volumes increase, the benefit of our cost reduction actions and as we mentioned continue to invest in the growth of the business there is some really exciting applications that are coming on-stream and will continue to come on-stream in this business in the future quarters too.

Chris Kapsch – Topeka Capital Markets

Have you spoken about the mix of your business like in terms of like materials, parts versus core components versus magnets, I am just wondering is it – where is the greatest beneficial mix opportunity, and are those kind of product development applications that you are talking about in terms of really focusing on growth going forward?

Chris Hix

The growth growing forward really mirrors the strategy that Joe talked about earlier. The company has made of commitment to investing in technology and businesses with a real technology component to them to drive competitive advantage and advantage for our customer base. So, I mean that is an area of focus for the business.

Joe Scaminace

Clearly, Chris you know the permanent magnet business continues to be a high technology business for our intellectual property our process knowhow gives us competitive advantage out there. We have great confidence in that business continuing to grow. But I will tell you that with our leadership teams now with David Knowles on Board, we are taking a deep dive into every single one of the product lines, product line margins, customer margins. So, along with the cost reduction opportunities, we remain very confident that this business is going to perform well in the future.

Chris Kapsch – Topeka Capital Markets

Okay. And then just continuing on that just in wake off like the sort of the boom-bust cycle on rare-earths and it sounds like looking at rare-earth prices they have mostly normalized and who knows where they go going forward I suppose, but it’s just because of that spike in rare-earth costs there have been a lot of activity of customers trying to de-content their products or their components with them rare earth content. So, I’m wondering if that’s affecting your business at all either conversely are provided opportunities for you to help you customers sort of shift away from rare-earth content and how that’s playing out in your business if at all?

Joe Scaminace

Yeah, that’s a really insightful question Chris and I will tell you that clearly it’s given us an advantage. We’ve got tremendous intellectual processing capabilities that have in fact allowed us with the big customers we have out there to in fact reduce some of the content and in particular some dysprosium in some cases. But also provide performance characteristics that are equal to or better than the original content of rare-earth in those products. So, with our German technology and great engineering capabilities, we have been able to capitalize on that.

Chris Kapsch – Topeka Capital Markets

Okay and then just one quick follow-up on the commentary about working capital. I think you had said the getting down to the sort of low 30s gives you a line of sight to doing better than that. Can you – is there any sort of new metric that you’re thinking about Chris in terms of the working capital as a percentage of sales any – now that you have been able to make some progress there?

Chris Hix

Yeah, we will continue to refine our thinking but at this point in time we’d like to be in the low 30s for 2013.

Joe Scaminace

Let me add to that though Chris just to let you know we are so focused on operating improvements in every area of our business that it becomes quarter-over-quarter, year-over-year improvements that we now have laid out for all of our business leaders. So, as we look to reduce our working capital which we have been able to do up to this point, other faces of that of those actions will include delving deeply into the lead times with our suppliers to shorten those lines of raw materials coming into the factories, vendor managed inventories where we are appropriate, consigned raw material. I mean we are not leaving a stone unturned in operating efficiencies wherever we can.

Chris Kapsch – Topeka Capital Markets

Great. And then just one follow-up on the M&A discussion now that you’ve had another quarter behind you on the transformation, another quarter to have – to look at the pipeline, the deal pipeline. I’m just wondering understand where you’re focused in terms of common I think in the business just wondering which segment you feel could really use a strategic bolt-on to augment its competitive positioning as you want to grow this business going forward?

Joe Scaminace

Yeah. I would not single out one Chris because I think we have opportunities in all three of our segments. Clearly I could take each one and give you a case for why it makes more sense, like for example in the battery technology space. We clearly speed, speared clear of the commodity space. I mean when all the capacity was being built for automotive batteries. We want to know part of that because we felt that it would be quickly commoditized. So, our whole effort on battery technologies has been to be a specialized player into niche markets which are fairly fragmented out there where we could get advantage of our technology, we got pricing power, we’ve got technology leadership there. So, clearly there is opportunities opening up in the battery space. We see great opportunities on the box space with globalization of that business. I mean we have a lot of operating levers to pull right now.

If you look at we are just newly out of cobalt. I mean it’s only been three months right now and – or four months. And I will tell you that the operating levers that we pulled up to this point to get the value improved to our shareholders have been M&A activities platforms coming in. Now, the operating levers are before us in terms of operating efficiencies and synergistic acquisitions across all three of our business platforms.

Chris Kapsch – Topeka Capital Markets

Okay. Thanks for the color. I appreciate it.

Joe Scaminace

You’re welcome.

Operator

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

Ivan Marcuse – KeyBanc Capital Markets

A couple of more quick questions, if you look at your cash flow what sort of this is how much cash do you have – you have $80 million on here in the balance sheet now and I think you said you are doing $20 million, $25 million from the divesture that you made. So, how much cash do you need on the balance sheet to run the business going forward?

Chris Hix

So, we are continuing to look at the amount of flow cash we have in the company. I can tell you that we’ve been reducing the expectations on that as we’ve taken cash from around the enterprise and centralized and used it for debt pay down and for other applications like share repurchases. At this point in time that we think the answer is somewhere between $25 million and $50 million of cash but we will be working to continue to reduce that every quarter.

Ivan Marcuse – KeyBanc Capital Markets

Do you plan on putting the entire 75 million from the VAC on the revolver or do you think they will be a mix use of cash and revolver?

Joe Scaminace

It will be a mix only because some of the cash we have a still working to get home or to centralize on a tax efficient basis. So, we’ve got some timing issues that mean that will be doing some borrowing against the revolver for some short period of time.

Ivan Marcuse – KeyBanc Capital Markets

Great, what do you expect cap once we get in 2014 I guess resource start and you have what do you expect capital expenditures sort of tracking that and where now that we have divestitures out, is depreciation on a quarterly basis or annual basis how do you feel that will also shake out?

Joe Scaminace

It’s a little early for us to I think jump into the 2014 conversation or as you can tell from Joe’s comments and in line we are very focused on executing a quarter-to-quarter and we are not quite into our 2014 planning process. So, I think we need a little bit more time to go through that before we make some comments about 2014.

Ivan Marcuse – KeyBanc Capital Markets

So you would expect I mean you would except capital expenditures to come down on an annual basis correct?

Joe Scaminace

It’s an area of emphasis for the companies we’ve talked about being more efficient in capital allocation, driving better returns and so on. And I think there is an opportunity to reduce capital expenditures levels for next year, but we’ve really got to validate that in our vigorous annual financial planning process.

Ivan Marcuse – KeyBanc Capital Markets

Okay, thanks.

Joe Scaminace

Thank you, Ivan.

Operator

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

Kevin Hocevar – Northcoast Research

Hi good morning guys.

Joe Scaminace

Good morning, Kevin.

Chris Hix

Hi Kevin.

Kevin Hocevar – Northcoast Research

I was wondering if you could give us kind of it looks like Europe was a bit of headwind during the quarter in particularly in magnetic tech. I’m wondering if based on the new guidance if you’re seeing things starting to nothing stabilizing there are things softening, what’s kind of in the guidance of the low end range, should I assume you’ll remain relatively stable from the current level?

Joe Scaminace

We are not really seeing the improvement in Europe that we had hoped to see in the back half of this year. So, the expectations that we have based on current expectations is really more of the same. Europe, the macroeconomic additions in Europe, we think will continue to remain at current levels. That doesn’t mean there are specific customer another application opportunities that we can deliver on, but in general we are not expecting a lot of help from the macroeconomic environment.

Kevin Hocevar – Northcoast Research

And in terms of that the timing of shipments, is there it sounds like last two quarters have been impacted positive or negative in terms of timing of shipments. As we look to the third quarter it sounds like battery tech might be a bit of headwind in terms of timing for Magnetic Tech it might be a bit of I think that there was a positive there. Is there business for magnetic tech is that because there was business pulled forward into the first quarter and so we’re not facing that headwind that the second quarter faced or was product delayed from the second quarter into the third quarter that should benefit that. And similarly, in battery tech could you kind of give the dynamics that work therefore the timing of shipments?

Joe Scaminace

Sure, let me start with the battery technologies business that’s a business that we’ve consistently talked about shipment timing and seasonality on and a lot of their work is done on a project basis. So, it’s not anyway, so we end up taking a lot about the shipment timing there. And in the case of Magnetic Technologies business that’s not something we generally talked about. We just had in the second quarter some things that we had expected to ship that we now expect to see in the third quarter. So, it becomes a positive in the third quarter a little bit of a headwind in the second quarter.

Kevin Hocevar – Northcoast Research

Okay. And then final question in battery tech you mentioned defense application spending picking up. Just wondering if that – is that a more domestic demand that you’re seeing pick up and I know international I don’t think you sell directly but through the third parties, is that from international customers, is that from domestic, I was wondering if you could elaborate a little bit on where the defense spending is picking up.

Joe Scaminace

Yeah, Kevin, it’s coming from both areas, these – our programs thankfully our needed legacy programs that are not necessarily out of the leading edge of the latest military technology that right now in some cases are greater scrutiny than ours, but I would tell you that it’s clearly coming from both areas.

Kevin Hocevar – Northcoast Research

Okay, great, thanks guys, very much.

Joe Scaminace

Thank you.

Operator

Your next question comes from the line of Alan Mitrani with Sylvan Lake Asset Management. Your line is now open.

Alan Mitrani – Sylvan Lake Asset Management

Hi, thank you. There has been a lot of changes in the company last few years. If you guys put any sorts of may be doing some sort of analyst day at some point and may be just to be able to crystallize for the investors, what it is we own at this point and where the growth has been come from.

Joe Scaminace

Yeah, thank you for that question, and clearly we are looking to do that and some matter of basically getting the cobalt UPC divestures behind us now that we’ve got greater focus on the businesses. I think that you would look out into the future here more than likely in the spring of next year that we would looking to put something together.

Chris Hix

But line – related lines that we just comment that the company has really stepped up its interaction with the investment community that makes sure we explained that investment pieces and we are going to very much looking for the more opportunities, investor conferences, one-on-one meetings and investor day.

Alan Mitrani – Sylvan Lake Asset Management

Great and then can you remind us since cobalt is already been my past on this and you guys get – what is the payout remind us how you are valuating that potential payout that you can get think there were some sort of earn out at some point and what that is just remind us, Chris.

Chris Hix

So the earn out is based on the business achieving certain revenue levels which will be dependent on volumes, pricing, margins and a number of factors there. We put in an initial evaluation on that it zero given the expectations for pricing and volumes in the near-term and we don’t really have an update to that position at this time. The earn out is contingent on annual and aggregate three-year performance and good total as much as $110 million, but again at this point we view that is having no value.

Alan Mitrani – Sylvan Lake Asset Management

Okay. And then lastly may be you could just sum it up because you are like a bit of despaired businesses. What do you think the overall total available market sizes in terms of how big the current businesses that you have could be your running notes is uses roughly a $1 billion in sales on top-line, but a less I mean did you think you are going after a $10 billion market –$20 billion market small pieces of it. How do you look at it when you look at the spectrum of where you can play?

Chris Hix

Alan, the advantages of the businesses that we have is they operate in niches where they can drive a lot of customer value and get paid for that so, the strategy and I think Joe touch on his comment is to largely avoid large commodity markets and focus on the niches. Having said that as we are going through our internal reviews we discovered additional adjacencies and other niches that we think are highly complementary in where we are today so, to defined the market is always some hard in that and we don’t want to define him so broadly that you would have strategic confusion and you don’t want to define him so narrowly that you don’t take the action to drive shareholder value. All of our businesses we think are exciting platforms that deserved to be in the portfolio and we can continue to grow to be meaningful parts of the company.

Joe Scaminace

And furthermore on that a lot of these markets that we play in right now are continuing to emerge so, to look at a static number could be somewhat misleading because in many cases, we are now seeing somewhat of a (diminishing) in the solar and alternative energy space. We do think that will cycle around and come right back in the stronger way. So, we do think we have exposure to greater global markets that we currently are not in with battery in particular and we think it’s a very large space force.

Alan Mitrani – Sylvan Lake Asset Management

Great, thank you.

Joe Scaminace

Thank you.

Operator

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

Ivan Marcuse – KeyBanc Capital Markets

First one, real quick on the cost savings, if you get $5 million here what – $5 million in the first half so that leads I guess roughly $10 million either you get or you don’t get it, when is happen for you to get the maximum $20 million cost savings for the year or to the minimum, like already it seems like a pretty wide gap, so you never already passed halfway?

Chris Hix

Sure. And I am sure you will recall that these are cost actions that we initiated in some cases late in the fourth quarter of last year and in some cases late in the second quarter of this year. So, we expect the number to continue to grow. I think it was $2 million in the first quarter, $3 million in the second quarter, and we would expect the third and fourth quarters to be sequentially higher each quarter. So, we will continue to grow that. The actions are ongoing. And just about every day, we have got something new that we have been implementing. So, I would expect to see that number grow.

Ivan Marcuse – KeyBanc Capital Markets

Great, thanks.

Joe Scaminace

Okay, I believe that concludes the questions. I just want to thank all of you for being on the call and for your interest in OM. We are really excited about the levers that we had before us both on the M&A front and on the organic levers to improve our company. So, thank you very much. Have a great day and we appreciate it.

Operator

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

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Source: OM Group's CEO Discusses Q2 2013 Results - Earnings Call Transcript

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