OM Group's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 1.13 | About: OM Group, (OMG)

OM Group Inc. (NYSE:OMG)

Q3 2013 Earnings Conference Call

November 1, 2013 10:00 AM ET

Executives

Joe Scaminace - Chairman and CEO

Chris Hix - Chief Financial Officer

Rob Pierce - Vice President, Finance

Analysts

Mike Harrison - First Analysis

Ivan Marcuse - KeyBanc Capital Markets

Chris Kapsch - Topeka Capital Markets

Kevin Hocevar - Northcoast Research

Operator

Good morning, and welcome to OM Group’s Third 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, 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 OM Group.

Joe Scaminace

Well good morning everyone and welcome to our third quarter 2013 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. So let’s turn to slide three for our update. Those of you who have followed us for sometime are familiar with the consistent message of transitioning this company from commodity businesses to value added businesses. We started this transformation with the sale of our nickel business in 2007 and completed it with the sale of cobalt business earlier this year.

In between we acquired three business platforms, specialty chemical, battery technologies and magnetic technologies, all attractive platforms for creating long-term value for our shareholders. Our businesses are now more predictable. They participate in attractive end markets. They use technology and innovation to make our customers successful and all of them are now well positioned to be rewarded for the value we deliver. We have created a company where everyone wins, our customers, our investors and our associates.

In addition to selling the cobalt business earlier this year we also finetuned the portfolio by divesting the Ultra Pure Chemicals product lines in the second quarter. This move continues our drive to build the highest value creating company for our shareholders. We use the proceeds from our divestitures along with cash on hand to repay all of our debt.

We now have a clean slate to pursue the next phase of our strategic development. First and foremost, we are an operating company. And we are ramping up our capabilities for organic growth while improving our margins and returns. And these include first, utilizing our strong R&D resources and capabilities to develop new products and applications and presuming new customers. And the second one is important, better matching the value we create for our customers with the value we receive. Third, expanding in the new geographic regions to capture new customers. And fourth quarter, improving the cost position of our businesses through lean initiatives and other actions.

As you can see, we have many levers to pull to increase profits and cash flows, independent of changing economic conditions. I am confident that these initiatives will translate in the higher organic growth along with increased margins and returns. At the same time, as we are improving our businesses, we remain focused on acquiring synergistic businesses to further build out our strategic platforms.

The M&A pipeline is solid right now, and we continue to evaluate and pursue opportunities impacting each of our platforms. Potential deals vary widely in terms of size, but all meet our criteria of being synergistic, value creating, and able to generate an annual return in excess of our long-term cost of capital within three to five years. We have no intention to relax or deviate from our disciplined M&A approach as we pursue multiple opportunities to grow our business.

During the third quarter, we announced a new $350 million revolving credit agreement with a broader and global group of banks. We believe that this agreement, which provides us with more capacity and flexibility and better borrowing terms demonstrates their global support of our company, our strategy, and our future.

Turning to slide four, I would like to make a few more specific remarks about our performance so far in 2013. This maybe repetitive to most of you, but as you know I have been speaking to investors all year about our focus on operational excellence and financial discipline. This year, that discipline has translated into a strong balance sheet with $116 million of cash and no debt.

In the third quarter of 2013 alone, we generated $36 million of operating cash flows, including contributions from better working capital efficiency. We also made substantial progress towards our goal of cutting $10 million to $20 million of costs across the enterprise.

During this past quarter, we achieved savings of $6 million, and year-to-date savings are $11 million. We now expect full-year savings of between $15 million and $20 million. Also in the third quarter, we delivered adjusted pro forma EBITDA of $32 million resulting in year-to-date performance of $94 million. We’re on track to hit the forecast we communicated at the beginning of the year, again demonstrating the much improved predictability of our model, one of the many benefits of our portfolio transformation.

Before I turn the call over to Chris to walk us through the details of our third quarter financial performance, let me say that we have spent a lot of time with investors over the past several months to introduce them to the new OM Group. Many of you have suggested that we hold an Investor Day to give you the opportunity to better understand our businesses and their potential. I am pleased to announce that we have scheduled such a day, our first one ever for Thursday, March 13, 2014. Please mark your calendars and we’ll come back to you with more information as we approach that date.

And now, I’ll turn the call over to Chris Hix.

Chris Hix

Well, thank you Joe and good morning everyone. We’ll start on slide six with comparative P&Ls for the quarter. We show the GAAP figures and we include adjusted pro forma figures reflecting divested businesses and charges for our cost reduction program and charges for the accelerated amortization of financing fees.

The appendix contains reconciliations of these figures. Let’s focus on the adjusted numbers for a moment, and you’ll see that Q3 sales were down year-over-year, but that’s due to the pass-through of lower rare earth prices. Isolating this impact, sales increased 2% driven by higher sales volumes in magnetic technologies and specialty chemicals and reflecting the favorable impact of a stronger euro against the U.S. dollar. These positive factors were partially offset by lower sales volumes in battery technologies due to timing as discussed in last quarter’s call.

Customer demand in the third quarter was mixed across our various end markets compared with a year ago. Automotive continued to be strong, electronic applications were up, medical was up, defense was weaker but only due to timing, industrial applications were mixed, additives were up, and other advanced organic product lines were down.

European macroeconomic data and forecasts are trending in a positive direction, but we’re waiting for consistent patterns in our businesses for validation. You can see that we achieved adjusted pro forma EBITDA of $32 million for the quarter. Solid performance, but about $4 million lower compared to a year ago because of rare earth pricing effects that were positive in 2012, but negative in 2013. We offset much of this $16 million year-over-year headwind with improved volumes, cost reduction initiatives, and other business improvements. Specifically, cost reduction programs contributed $6 million of operating profit in Q3 and were up to $11 million of benefits year-to-date. Charges relating to these actions totaled $2 million in the quarter and $8 million year-to-date.

Interest expense fell to just under $2 million in the quarter. We incurred a little expense related to borrowings on the revolver to make the VAC holdback payment, which was repaid before the end of the quarter. And most of our interest expenses for amortization of credit agreement fees and accretion expense associated with the earn-out for the 2011 Rahu acquisition, so you should expect to see about $1 million of base quarterly interest expense before we do any borrowings, and of course most of this is non-cash expense.

The strength in euro I mentioned a moment ago also had the effect of generating a $5 million FX gain this quarter, about $0.12 per diluted share mostly due to a revaluation of the VAC holdback. The effective income tax rate for the period, excluding special items was 13% below our expectations due to geographic mix of income, but mostly because of a one-time benefit from the recently enacted UK tax rate reduction. We expect to finish the year with an adjusted rate in the low-to-mid 20’s percent range. Our performance in the third quarter translated to adjusted pro forma EPS of $0.47 per diluted share or $0.35 if you exclude the FX gain.

Our cash flow discussion starts on slide seven. You can see from the table that we had a strong quarter of cash flow generating $36 million of cash from operations in the third quarter of this year. That performance includes the positive contribution from working capital where our financial disciplines and business practices are leading to improved efficiencies and higher cash flows. Last year’s Q3 cash flow from operations included $28 million from the divested cobalt business.

Cash flow for investing activities is primarily capital expenditures, and this quarter included $7 million for a range of projects around the enterprise. We expect to see this ramp up a bit in the final quarter, and we’ll finish the full year, we think, at about $40 million to $45 million of total capital expenditure spending. Also included in this section of the cash flow statement are two items that net to $3.6 million of inflows. First, the cash proceeds of about $27 million from the cobalt divestiture, and that’s just getting the working capital mechanism adjusted and so forth and a payment of about $23 million for a portion of the VAC holdback that we referenced earlier. We are in discussions with the sellers of VAC regarding the reaming $52 million of the holdback which appears in our short-term liabilities on our balance sheet.

If you turn to slide eight, you can see that we are debt free at the end of September and have a $160 million of cash. As Joe mentioned, during the quarter we entered into a new $350 million revolving credit facility which gives us more capacity and flexibility and more favorable borrowing terms. We are well positioned with cash and bank revolver capacity to address near-term operating requirements and to support our growth strategy. Part of our operating success this year has been with working capital and the chart shows that our net working capital as a percentage of annualized sales was 32.4% at the end of the third quarter, down nicely from our performance at the beginning of the year and last year. We expect to finish the year at or below this level.

On slide nine, our magnetic technologies business reported lower year-over-year sales in operating profit, but this was distorted by rare-earth and underlying performance showed improvement. The table on the slide reconciles the year-over-year performance which includes $26 million sales headwind from the timing of rare-earth price past years. Sales excluding the rare-earth affect were higher in the 2013 period due to higher sales volumes and favorable FX. The increase in demand was driven by automotive which continuous to be the strongest end market in this business. The remainder of the VAC end markets were mixed, some showing signs of firming and flat or slightly down signals than others.

The VAC team has been addressing its cost structure throughout the year to improve profits and productivity during this period of slower customer demand. The table on the slide highlights the key year-over-year changes in adjusted operating profit and this includes $3 million of permitted benefit from our cost actions, additional savings from other timing related benefits and profit contributions from higher sales volumes. The table also highlights the profit swing from rare-earth pricing effects which was a $16 million year-over-year headwind.

Overall this business’ adjusted EBITDA margins were a robust 17% for the quarter as virtually all key drivers were favorable including volumes, mix, cost reductions, other timing of cost and some beneficial timing of shipments that fell out of Q2 and into Q3 as we expected and talked about in last quarter’s call.

Smoothing out the quarter-to-quarter timing differences, year-to-date margins were 14% or 13% if we exclude one-time benefits that we highlighted for you in the first quarter. This level of normalized margins is the better indicator of the current profitability of the business in today’s lower demand environment.

Looking ahead while we see some signals of progress in certain European markets, the picture remains cloudy. Accordingly we continue to focus on cost reduction actions and operational efficiencies to boost profitability in the short-term and longer term opportunities to grow the business through innovation, technology and applications expertise.

Please turn to slide 10. Our Battery Technologies business reported lower sales and operating profit compared to a year ago as expected primarily due to timing of shipments for defense applications. As discussed in previous calls, we expected a very strong first half of the year with sales trending lower in the second half. Order backlog for defense applications remain solid and we have not seen any meaningful signals from our defense customers for reductions in spending.

Away from the defense side of the business we achieved another quarter of healthy growth in medical applications. However segment operating profit was down this quarter because of overall revenue, expense timing and some one-time production related cost.

On a strategic note, we continue to make headwind in new markets and applications. And beyond the medical that we referenced earlier, another example is alternative grid energy storage where we won two additional small projects in the third quarter and continue to prove our capabilities for this demanding application.

In our Specialty Chemicals business on slide 11, sales were up approximately 2%, due primarily to increased volumes in Electronic Chemicals. Sales volumes in advanced organics were essentially flat versus a year ago as higher sales for additives applications were offset by a weaker carboxylic in chemicals principally in Europe. Higher electronic chemical volumes translated into higher operating profit in the quarter. And in addition we benefited from favorable mix.

Looking ahead demand for aluminum storage media continues to grow for mass storage applications, offsetting the declines in PCs and Notebooks. Sales for this application are growing and forecast called for continued multiyear growth. We're well positioned to benefit from this market dynamic.

I'll finish my prepared remarks on slide 12 as we look at our full year expectations. We started the year with original EBITDA guidance of $120 million to $140 million. With the sale of UPC which was expected to contribute approximately $10 million of EBITDA, we guided towards the lower-end of our range. We earned $94 million of adjusted EBITDA through September 30th and reiterate our forecast to be at or near the low-end of the original guidance range. Another way to look at this is that we expect to be around the midpoint of $110 million to $130 million guidance excluding the UPC business.

For our sequential Q4 outlook, we expect lower EBITDA in Q4 than in Q3 due primarily to typical fourth quarter seasonality in batteries and specialty chem. And we expect magnetic technology margins to settle back in the more normalized levels. We also expect another quarter of strong cost reduction savings and we’ll remain focused on working capital efficiency which should continue to contribute to our positive operating cash flows.

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

Joe Scaminace

Okay. Thank you, Chris for that report. And before I turn the call over to Q&A, I just want to share with you two thoughts on why I am so confident in our ability to successfully execute the strategy. First of all, I am very proud and confident of the management team that I’ve assembled here at OM Group. We have experienced leaders with proven track records of success. We all know how to drive profitability and growth and we've built talented teams to accomplish our objectives and we're all fully engaged in delivering on our commitments.

Secondly, we're in amiable position today with the strong balance sheet, a clear vision for our future and value-added platforms that have a multiple of opportunities to grow both organically and strategically. We have the ability to execute to the next steps of our strategy and we look forward to keeping you updated on our progress.

So at this point, that concludes our prepared remarks. And operator, I would like to open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Mike Harrison, First Analysis.

Mike Harrison - First Analysis

Joe, we've heard from a number of companies that Europe appears to be bottoming, it sounds like you guys have also at least seen some indications or seen some reports that things are trending higher in Europe or seem to hit a bottom, but you do have exposure in a number of different manufacturing and industrial markets there, so you probably have pretty good insight, and it sounds to me like you are not completely convinced. Can you talk in a little more detail about what you’re seeing there and maybe which pieces of VAC do you think of is leading indicators and maybe what they are saying right now?

Joe Scaminace

Yeah, Mike, clearly Europe has been bouncing along the bottom, and we’re getting a multitude of reports as you are from the investment community when we’re out talking to people and when we talk to our own people like obviously we’re are starting to see some pockets of strength moving off that is bouncing along the bottom.

The reason why we are not overjoyed by this is the fact that we just don’t know how sustainable it is Mike. So we are staying as cautious as we as can. However, to answer your question, we are seeing automotive as we indicated somewhat coming off the bottom. We’re seeing some movements on the alternative energy side and on the industrial production side which are helping VAC in terms of some of their volume movements, but we are just not ready right now to declare victory. We are staying as vigilant as we can on all these markets and keeping on our cost reduction plans and making sure that we are enduring ourselves to all these customers.

Mike Harrison - First Analysis

And then in terms of the profitability of the VAC business this quarter, it sounds like the 17% margin you are trying to indicate that that’s not a sustainable run rate, but I guess I just don’t fully understand exactly what kind of one-time or unusual benefits you got in the quarter. Can you give us a little bit more detail on that?

Chris Hix

Yeah, Mike, it’s Chris. I will give you a little bit of perspective on that. We talked last quarter about the margins being a bit lower than what we had expected. Some of that timing was due to shipments, and we indicated that would fall positively into Q3 and certainly we saw a bit of that. In addition to that, there were just some general expense timing that worked out favorably for us and some overhead absorption as production levels in certain areas were ramping up.

So again you put all that together, and it ended up with a very good level of performance in Q3. That’s why I think we want to make sure that we steer people towards that full year of activity trying to smooth over some of that quarter-to-quarter timing and give people an indication of what the profit performance of that business is at these lower levels.

As Joe indicated, we remain focused on cost reduction. And as we take the cost structure down over time that gives us the ability to increase margins even at lower levels, but the biggest ramp for us will be as market conditions improve and some of the newer revenue initiatives come online.

Mike Harrison - First Analysis

Okay. And as the guidance for that businesses, I know you have kind of indicated 13% or 14% margin. What kind of variability should we expect going forward around that range, is it kind of an 11% to 17% range or is it more like 9% to 19%, or could we even see wider swings than that?

Chris Hix

Yeah, we’ve previously communicated with investors that the EBITDA margin range of this business, we see it is as fluctuating from the kind of 12%, 13% at the lower end -- at the lower demand levels and ramping up into the sort of mid-to-high teens with today’s cost structure. And again as that changes over time and as we are successful in matching value with pricing and other efforts, we see that we can take those, we can have a margin shift in that, but with the existing business structure and cost structure today, we think of it as sort of 12% to 13% up to 16% to 18% at the higher end.

Mike Harrison - First Analysis

Okay. Last one for now, Joe you had your COO on Board for a little while now, just hoping to get an update on what kind of opportunities you are seeing, are they about in line with what you initially thought or are there more opportunities? And can you maybe give us an example or two of some areas that you’ve identified where you are going to be making some operational changes?

Joe Scaminace

Yeah, Mike, I would say that as I indicated in my prepared remarks, we have a veteran leadership team here that across the board I think were really focused as a team effort, better than I have seen in the past when we had commodities in the portfolio where we mentioned these levers, and we’ve got more levers now than we have ever had. I’d like to say that transitioning away from where we were to where we are today, do we have margin improvement opportunities? Absolutely. Do we have cost reduction opportunities? Absolutely. And so does everyone else, either our competitors or any business operating today.

So when you look at the recruitments that we have made in particular with David Knowles coming on Board, we are engaged in an effort across the Board. And examples I could give you is that we’ve started this year with a goal of achieving $10 million to $20 million of cost reduction. We are absolutely tracking to be within $15 million to $20 million of that cost reduction activity.

I had mentioned in my comments about matching the value we create for our customers with the value we received. Those efforts are underway across the board. We've got technologies out there and components that we are in fact selling. We're now talking about selling more solutions and creating value for that.

So, Mike, it's not one specific area that's going to cause our value to improve over time, but a multitude of areas, and I could tell you that in all of my years in business with various companies, I would tell you that this leadership team is absolutely engaged, committed, and ready for improvements across the board.

Mike Harrison - First Analysis

All right. Thanks very much.

Operator

Your next question comes from Ivan Marcuse of KeyBanc Capital.

Ivan Marcuse - KeyBanc Capital Markets

First one is more on the guidance, your cost savings were quite coming in a little bit better than you expected at least a quarter ago with the range being narrowed up. And your guidance, I understand you are sourcing the midrange, but why not tightening up, why you not keep -- why you are keeping such a wide gap, what do you see in the fourth quarter that gives you some sort of caution that, there could be a little bit more variability?

Joe Scaminace

Yeah, that’s a good point. We had a discussion internally about the guidance range that we'd established and I think the key objective we're trying to establish with the guidance is to help investors understand the earnings possibilities and potential that we see in the current year and rather than try to modify the guidance range we went out of our way to steer people specifically towards the lower end of the range there. And as we look at estimates that are out in the marketplace that they seemed to be matching up with our own expectations pretty clearly, so we think we've accomplished through the course of the discussion about guidance and our performance what our key objective in this area.

Ivan Marcuse - KeyBanc Capital Markets

Great. And then there is a lot of companies that I cover that selling to electronics market there that saw demand sort of flat on a sequential basis and you actually saw consumer electronics strengthen. What do you think drove that and is there more of a seasonality effect and how did that demand going to consumer electronics really to versus on a year-over-year basis?

Joe Scaminace

Yeah. Ivan, Chris and I both take this, but I would tell one area where we've seen some strengthening is in the aluminum disk area where this mass data storage that’s occurring out there is consuming our electroless nickel product line that formally a lot of the strength was in the set of notebooks and small devices. Today we're seeing enormously large applications going out there for the cloud applications and alike. So we've seen some strengthening there and some of our print circuit board, but I'll ask Chris to fill in to.

Chris Hix

Yeah. I guess the only other comment I might make is that the line between consumer electronics and business application is tending to blur a little bit for some of the mass storage devices. The key is just that there is incredible demand for storage and we have to be positioned in a really good place for that, whether it’s for business enterprise applications or to support consumer applications.

Ivan Marcuse - KeyBanc Capital Markets

Could you remind me here what percentage of your sales goes into the electrolytes nickel or the mass storage market?

Chris Hix

It’s about 5%, perhaps a little bit less of the total enterprise.

Ivan Marcuse - KeyBanc Capital Markets

Total sales?

Joe Scaminace

Of total enterprise. Are you asking on total electronics?

Ivan Marcuse - KeyBanc Capital Markets

Yeah. I could back again, but total enterprise is 5%?

Chris Hix

Yeah, above 5% maybe a little less.

Ivan Marcuse - KeyBanc Capital Markets

Got you. And if you look and you mentioned also in your battery business, the commercial, the alternative grid opportunity, you are starting to see some commercialization and how big an opportunity to that be for this business? And where would you imagine that ramp up looking like over the next one, two, three years?

Chris Hix

Well, we do know that it’s a substantial market opportunity. At the same time, we are trying not to get over the tips of our [skews] on this one and be careful about going after the sweet spot of the market that is the most critical applications, places where we can demonstrate our key technology advantages and be rewarded for that. But there is predictions of this market being in the hundreds of millions or higher, but we’ll take this step at a time and earn our spurs in the market place here and see how that develops.

Ivan Marcuse - KeyBanc Capital Markets

Got you. And then just a couple of quick modeling questions. I know you mentioned it, in your comments but I missed it. You are dealing with that, so why is there interest expense?

Chris Hix

It’s principally two things. One is the cost related to putting credit facilities in place remains on the balance sheet and you have to amortize those costs and so it’s a non-cash charge. But that contributes to it. And at the same time when we did the 2011 acquisition of Rahu there is an earn out component of that that we have to value and then discount and then accrete that discount back into our interest expense overtime and that flows through and it’s also another non-cash charge.

Ivan Marcuse - KeyBanc Capital Markets

Got you.

Chris Hix

So those are principally. And then there is going to be a small cash component of that for the credit agreement itself.

Ivan Marcuse - KeyBanc Capital Markets

And then the VAC payment, will that be done this quarter or is that something that could be ongoing for a little bit? And what size do you image that will be at?

Chris Hix

At this point in time we’ve got the residual 52 million remaining on our balance sheet and we are in detailed discussion with the sellers of VAC on the points related to that and it’s difficult to predict whether it would be this quarter or another quarter but we’ll update as we learn things.

Ivan Marcuse - KeyBanc Capital Markets

And then last question. Why not buyback any shares this quarter, as you have the cash?

Chris Hix

Yeah. So I think we’ve talked with investors about first of all our ability to engage in share repurchases for the first time in company’s history and reflecting the more predictable portfolio we have. At the same time that’s not our primary strategy, we are an operating company first and foremost. We want to make sure we support our businesses. Secondarily we have got a synergistic acquisition component to our strategy here that we want to make that we continue to support. I think Joe mentioned we’ve got a pretty full pipeline of activity that we are pursuing. And so we’ve got to make sure that we manage the flow of capital and consider our key priorities here. Our program as I think we mentioned is opportunistic in nature, our share repurchase program and it’s going to continue to be in front of us here in the coming quarters.

Ivan Marcuse - KeyBanc Capital Markets

Great thanks.

Joe Scaminace

Thank you.

Operator

Your next question comes from Chris Kapsch, Topeka Capital Markets.

Chris Kapsch - Topeka Capital Markets

Good morning, guys.

Chris Hix

Hello, Chris.

Chris Kapsch - Topeka Capital Markets

So I had a follow up Joe, on one of your prepared remarks about some of the leverage that you see in your business and specifically about the ability to create value, the value that your customers receive from your products. And I think that’s sort of arranged for price increases, value base price increasing. And so when we travel with you guys visiting investors, this was an opportunity that you identified with improving the overall profitability of VAC, but it was going to be a methodic effort to, first really try to understand where you are delivering the value to your customers based on the technology in your products and so forth.

And so I am just wondering if you can get a little bit more granular in terms of how that’s progressing, how you are going about trying to get these price increases as a recall, the historic, the legacy model or sort of more of a cost plus pricing model? And just sort of if there is anyway to put a order of magnitude on what sort of improved value base pricing, you might be able to derive?

Joe Scaminace

Chris, let me just read at the outside clarify that, there is absolutely no intension for us to go out with mass price increases here and that would be solely on our part, we are not going to do that. But what the statement and what our drive really is, is also a question of how we are allocating resources with inside of our company and how we are going to market. One way to look at this whole idea as an opportunity is to just consider the fact of the markets that we participate in, when you look at aerospace and medical and alternative energy and automotive. And you then begin to consider the fact that our technologies are also providing solutions. And we are clearly on a drive to use our patent technology, our PHDs that we have in house to go out there and really create value for our customers.

So, if you are mislead by that, I want to clarify that and tell you that we do have opportunities to look at matching that value, but you have to realize that it’s also a matching of our internal resources.

Chris Kapsch - Topeka Capital Markets

Okay. So, it’s more of sort of a process of positioning your products with your customers and overtime that will sort of express itself and just better margins it sounds like, is that fair?

Joe Scaminace

Yeah, yes. But also realize that we have a [stopgate] pipeline of new products and technologies that are also coming to market, which are creating new solutions for customers and not just existing customers, but new customers. So consider the fact that we are expanding our businesses not just within our customer base, but also on a geographic basis. So this matching will occur at a let’s just say heightened level, to make sure that we are capturing value.

Chris Kapsch - Topeka Capital Markets

Okay. And then I had a follow up on the cost reduction efforts and the $15 million to $20 million that you identified. I’m assuming that’s sort of a run rate savings by the end of the year. So I’m just wondering how much incremental benefit in 2014 you might expect from that year-end run rate. And then as these sort of things become sort of the process oriented focus on continuous improvement in terms of driving cost take outs, become more of a cultural thing, I assume that, you are uncovering additional opportunities, I am just wondering sort of looking to 2014 if there is, if you’re at any point with it or you’re at a point where you might be able to identify or quantify what sort of opportunities there might be along those lines?

Chris Hix

So there is really I think two elements to your question, I guess let me tackle the second one first and that is our ability through continuous improvement to generate additional savings. I would really point to Joe’s comments earlier about having a lot of levers to control, there are like a lot of businesses and one of them is certainly going to be continuous improvement, productivity improvements, cost reductions and that’s just going to be built into our D&A going forward here.

Then I would contrast that with the first part of your question which is about more of the enterprise driven initiative this year to reduce cost by $10 million to $20 million which is now becoming $15 million to $20 million. In that case you’re absolutely right that we exit the year with a run rate. If we assume that the Q4 is as same as Q3, you get about $6 million of savings, you annualized that and subtract what we get this year that gives you a little bit of an indication what that benefit could be year-over-year. So there is definitely going to be some year-over-year improvement just based on this year’s actions. Anyway so let me…

Joe Scaminace

Yeah. Chris, the other idea I’d like to put on top of that is the fact that we've got, when we use the term levers for the first time in OM Group’s let’s just say history by not being behold into these commodity prices and the LME and the Metal Bulletin and having to worry about the effective of metal prices on our profitability. We are now dealing with the real world manageable issues. So when we use the term levers, we're basically like every other business right now in control of our destiny, trying to seek out ways to continuously improve in every single area of our business, whether it be manufacturing cost reduction, whether it be in product technology and new markets and making sure that we’re not just looking at ourselves as a component supplier, but as a solution provider.

Chris Kapsch - Topeka Capital Markets

Great. Thanks for the color.

Joe Scaminace

You’re welcome.

Chris Hix

Thanks, Chris.

Operator

Your next question comes from Mike Harrison, First Analysis.

Mike Harrison - First Analysis

Hey just a couple of more. In the battery business, the medical piece, it sounds like you are continuing to get some traction there, but does the medical device tax that’s out there, does that hurt you or your customers as you are looking to see wider adoption or is it kind of a non-issue?

Joe Scaminace

Mike, I would say it’s a non-issue, and listen I’ve got great familiarity with this just given my background with the Cleveland Clinic and the like. I will tell you that more than likely, that's a question to ask a Medtronic, St. Jude and Boston Scientific. Where we’re seeing a lot of our opportunities in medical are in new technologies, new devices out there where we get specked in, we are the go to guy for start-up medical devices where we've got multiple technologies to get specked in there, get FDA approval and then it’s got long legs into the future for us. And typically these are our new devices, new technologies that are great, coming to the marketplace. So I would say, never say tax is a non-issue, but for us, we’re not worried about it.

Mike Harrison - First Analysis

All right. And then just looking at the Electroless Nickel business and the shifts that you’ve called out from laptops and notebooks to mass storage applications is there a mix benefit there? In other words, is it a more specialized product that you are supplying for those mass storage application and you are getting higher dollars per unit of storage or is it really just a volume benefit that you are seeing there?

Joe Scaminace

No, there is no mix benefit from that. The benefit however though just of Electroless Nickel Technology is what it does for us just from a technical standpoint in our other markets like general metal finishing and the like where we could take the technology and use it for other applications. But within the memory disk market itself, there is no mix benefit. It’s still 3.5 inch aluminum disk.

Mike Harrison - First Analysis

Right, okay. And then maybe a question for Chris, the big FX gain, I understand that was mostly related to the VAC holdback payment. Is that something that was just being recognized this quarter or have you been recognizing the FX gain and loss associated with that payment all along?

Chris Hix

Yeah. We’ve been recognizing that all along since the date of the acquisition. You will notice the FX generally moves in different directions almost every quarter and the magnitude of it can be as high as what we experienced this quarter or lower in some quarters, but it’s nothing new for us.

Mike Harrison - First Analysis

Okay. I guess I just didn’t really, because that’s a euro-based payment, I guess I didn’t really see the euro swing is being that dramatic this quarter that it would drive such a big swing?

Chris Hix

It’s actually, just to clarify it’s actually just a USD obligation sitting on a euro entities books and that’s what causes the revaluation every quarter.

Mike Harrison - First Analysis

Alright. Maybe I will follow-up offline on that. Thanks very much.

Chris Hix

You bet.

Operator

Your next question comes from Kevin Hocevar with Northcoast Research.

Kevin Hocevar - Northcoast Research

I had a question on magnetic technology, is there any seasonality in this business, I know rare earth and kind of timing of shipment is kind of maybe the distorted sales since you wound it. So just kind of wonder as we go into the fourth quarter, is there any seasonality that will drive sales up or down sequentially or is there no way of seasonality factor in that business?

Joe Scaminace

We haven’t really seen the seasonal practice in the business since really more related to business cycles than seasonality.

Kevin Hocevar - Northcoast Research

Okay. And in terms of rare earth I think you mentioned that on a year-over-year basis, you had the rare earth benefit for year and you mentioned there was a headwind this year. Was that solely just because the nonrepeated or rate earth benefits that you had last year or was is something that sequentially second to third quarter price was changed due to rate earth as well over the just nonrepeat?

Joe Scaminace

It’s a little bit about, little bit of fact that we had the benefit last year and rare earth prices is as you have seen have bottomed out and we actually start moving in the other direction. And as that moves forward, we will expect to see a better matching between price and cost. The business sort of the tail end of that drop, it’s been occurring for the last, I don’t know six or seven quarters, and so that do create a little bit of headwind for us in the quarter.

Kevin Hocevar - Northcoast Research

Okay. And then just final question on Specialty Chemicals, it sounds like the guidance sequentially just called for slightly lower EBITDA offset whether a cost savings and continued firming in Electronics Chemicals demand which implies fairly strong year-over-year improvements from last year. So just wondering, are you seeing an acceleration I guess in demand for Electronic Chemicals, that's kind of as you exit the quarter, that's driving that or is it more on the cost savings side or kind of ramping up cost savings in that business. Or what the combination of that is?

Chris Hix

Yeah. I'd say if the question is year-over-year performance that is going to have a little bit of cost reduction backed into it that we have achieved so far this year. In addition to that we have had a better environment for the Electronic Chemicals side. And even on the Advanced Organic side, where we talked about flat year-over-year performance, we have had some nice improvement in the Borchi OXY side and some other products that we talked about as well. So I think you are going to see a combination of improved year-over-year sales and certainly profitability.

Kevin Hocevar - Northcoast Research

Okay, great. Thanks very much.

Joe Scaminace

Okay. That concludes our Q&A. And I just want to thank everyone for being on the call and just please realize that we are really confident and where we are at right now and we'll keep pulling all these levers. So have a great day and thanks again.

Operator

Thank you for joining. This concludes today's conference call. You may now disconnect.

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