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OM Group, Inc. (NYSE:OMG)

Q4 2013 Earnings Call

February 13, 2014 10:00 AM ET

Executives

Joe Scaminace – Chairman and Chief Executive Officer

Chris Hix – Chief Financial Officer

Rob Pierce – Vice President, Finance

Analysts

Mike Harrison – First Analysis

Ivan Marcuse – KeyBanc Capital Markets

Kevin Hocevar – Northcoast Research

Chris Kapsch – Topeka Capital Markets

Rosemarie Morbelli – Gabelli & Company

Operator

Good morning, and welcome to OM Group’s Fourth 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, on 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 fourth quarter and year-end 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 2. Before we get started, I would like take just a minute to tell you how excited I am, to be part of the new OM Group, as we head into 2014.

We are a totally transformed company. We are the new OM Group and will be reaping many of the benefits that we worked so hard to achieve, just think about what we accomplished last year. We sold the cobalt business; we sold the low growth UPC business. We generated $63 million of operating cash flow; we increased our revolving credit facility to $350 million. We have no debt; we hired a President and Chief Operating Officer. We further strengthened our balance sheet and have the capacity and flexibility to execute our strategy.

We took our $17 million of cost. We strengthened our Board of Directors by adding Carl Christenson, CEO of Altra Industrial Motion Corporation. We created a pipeline of attractive acquisition opportunities for consideration and we became a more predictable company and achieved our guidance.

Nothing was routine about 2013, except our desire to execute and produce results. We are indeed a new company with a new culture. What we accomplished is a culmination of many years of strategic execution. So now let's get started and take a look at Slide 3. As mentioned, OM Group had a breakthrough year in 2013. As we made great process on executing our strategy.

With our divestitures, we transitioned away from commodities and used the proceeds to de-lever the company. We are now a company focused on technology driven growth platforms and higher growth markets around the world.

Our future success will be driven by revenue and margin growth within these platforms. This will be accomplished by developing new technologies, creating new applications and strengthening our reputation as a solutions provider.

The new OM Group is happening right now in our Magnetic Technologies business. Where we've developed a robust pipeline of new products and applications. For example, we worked with our customers to develop new magnet technology for refrigeration, requiring what is called magnetocaloric alloys. This green technology is most certainly disruptive and shows great promise to revolutionize refrigeration around the world.

In addition, we are positioned as a material supplier for these specialty alloys, which has great potential in commercial and household cooling applications as well as automotive. The new OM shows up in battery technologies, where we've made strides in our efforts to develop new applications for our high reliability, specialty batteries and battery systems.

In the fourth quarter, we furthered our progress in the alternative grid energy storage markets selling more pilot systems to various customers. This is just one example of the new markets and applications that we are targeting in our battery technologies and in specialty chemicals. The new OM Group has play stronger focus on our highest performing products and applications.

We will see growth where we provide the most value to our customers through our technology and innovation. Examples of this include our higher [ph] tech plating chemicals called SHADOW along with electroless nickel chemistries for printed circuit boards.

Another major accomplishment for our company was hiring David Knowles as our President and Chief Operating Officer. David brings an experienced and proven approach to improving our businesses with a focus on margins and returns. David is been busy travelling to our locations around the world and is fully engaged in initiating operations and commercial excellence programs across the enterprise.

So along with a very strong Board of Directors, it's worth noting that our entire Executive team has the experience and proven ability to deliver results. We work and mesh as a team and we will work hard to take this company to the next level.

So in addition to organic growth, a key part of our strategy growth is grow through acquisitions. We believe that strong returns could be achieved by adding synergistic businesses to our platforms. We are active on a variety of fronts and evaluating a number of opportunities. We have the capacity and flexibility in place to execute this part of our strategy.

This includes our untapped $350 million revolving credit facility, our cash on hand and our future free cash flows. Our acquisition program employees a rigorous process for surfing, evaluating, negotiating and integrating businesses that leverage the deep experience of our corporate and business leaders.

We intend to pursue acquisitions that fit our core themes and meet our defined acquisitions criteria and including a focus on value and returns. We have return expectations for each of our businesses in the portfolio, both acquired as well as the existing businesses. We've demonstrated our commitment to businesses that meet our return expectations and we have a proven track record of taking actions in businesses that do not achieve satisfactory returns either by restructuring that business or divesting underperforming assets.

Now let's turn to Slide 4, where we discuss some details of our 2013 successes. In 2013, we delivered $121 million of adjusted pro forma EBITDA excluding the divested cobalt and UPC businesses. As a result, we achieved, the EBITDA forecast that we communicated to you at the beginning of 2013, which was $110 million to $130 million excluding the $10 million for the divested UPC business.

We generated $33 million of operating cash flow in the fourth quarter ending the year with $118 million in cash. We continue to have a debt-free balance sheet. Improving net capital efficiency was a key goal for 2013 and we succeeded in bringing our net working capital as a percent of sales down to 33% from 37% over past 12 months.

We were successful in executing our cost-reduction initiatives achieving $17 million of cost savings in 2013. This lower cost structure positions us well from margin expansion as market conditions improve. In summary, we are pretty proud of the results in 2013 and looking forward to continuing this momentum into 2014.

Now let's turn to Slide 5, in 2014 we will build our culture of innovation and excellence to grow organically with particular emphasis again on improving our margins and returns. This begins with the culture of safety. To all of our employees throughout the entire enterprise.

In 2014, we have plans to expand our leadership training and talent development programs. We will start with our most important asset, our people. The talented men and women throughout our company. We will continue to develop and explore potential acquisition targets to strategically grow our platform.

The goal of all of our effort is to improve returns and deliver long-term value to our shareholders. Which leads to me Slide 6? I'm absolutely thrilled to announce the introduction of a quarterly cash dividend of $7.5 per share. The first dividend at OM Group since 2002. With a more predictable and sustainable business profile along with our book plans for 2014 and beyond, we now have the confidence to initiate this dividend.

As discussed a moment ago, we have ample financial resources. We can return this capital to our shareholders while preserving the flexibility and capacity to execute our strategy of organic and exquisite growth. The dividend which will be payable on March 7, 2014 the stockholders record as of February 24, truly underscores our commitment to creating value.

Please turn to Slide 7, we would like to remind and invite all of you to our Investor Day on Thursday, March 13, starting at 9:00 AM at the Grand Hyatt in New York City. We are looking forward to taking a deeper dive into our business units with you and sharing information from our business leaders. More information about the event including registration information can be found in our press release this morning and on our website.

At this time, I will turn the call over to Chris Hix, to walk us through the details of our fourth quarter financial performance.

Chris Hix

Thank you, Joe and good morning to our call participants. Slide 8 includes the P&L for Q4 of 2012 and 2013. We showed the GAAP figures as well as adjusted pro forma figures which exclude divested business, charges for the 2013 cost-reduction and the reduction of an earn-out liability.

The appendix contains detailed reconciliation of these figures Q4 sales were up 2% year-over-year in slide of pass through lower rare earth prices in the Magnetic Technology business excluding the impacts from this pass-through and FX sales increased 4% driven by higher sales volumes in magnetic technologies and battery technologies.

These increases are mostly related to newer products and applications and mass general market growth. One exception is the growth in automotive systems, which is a combination of strong demand for German automobiles and the expanding list of features and technologies these cars [ph] that pull through several of critical components.

Another positive exception is medical devices, a small but quickly growing part of the company. We started 2013 with the belief that we could not rely in the general economic recovery and we were prepared to focus on the leverage we could control.

In addition to developing and commercializing new products and applications. We went to work on the cost structure cutting over $17 million of cost during the year. This included $6 million of savings in the fourth quarter. We entered 2014 with an improved cost structure and a relentless commitment to continuous improvement.

We are into $27 million of EBITDA in the quarter, a solid finish to 2013 helping us to achieve full year pro forma adjusted EBITDA of $121 million. This amount is just above the midpoint of our original EBITDA forecast for 2013 after adjusting for the divested UPC business which is now included in discontinued operations.

There are few items below the operating profit line that are worth mentioning. We have a $3 million FX gain or about $0.08 per share due primarily to the stronger EUR effect on the VAC holdback. You might recall that we held back, $86 million of consideration when we bought the business in August, 2011 and we paid $23 million to this on August, 2013 leaving $63 million on our books.

This is a US Dollar denominated liability on one of our EUR denominated businesses books contributing to the non-cash FX impacts that we've discussed off and on for the past couple of years. Also below the line in Q4, we reduced the earn-out liability for the Rahu business acquired in December of 2011 creating $13 million of other income or $0.41 per diluted share.

We excluded this item from our pro forma adjusted results. The effect income tax rate for Q4 and the full year 2013 excluding special items was about 20% included in this rate is a Q4 one-time benefit from a recently inactive tax rate reduction in Finland and the full year also benefited from a tax rate reduction in the UK earlier in the year.

We expect a normalized rate in the mid-20% in 2014. Overall on a pro forma adjusted basis, which excludes the divested businesses the cost-reduction charges and the earn-out reduction? Our performance in the fourth quarter translated to adjusted pro forma EPS of $0.28 per diluted share.

Turning to Slide 9, you can see that we achieved $33 million of operating cash flow in the quarter including $20 million contribution from net working capital which consists of AR, AP and inventory.

The negative $23 million in other operating cash flows include the amount to offset the $13 million non-cash Rahu earn-out adjustment gain and other outflows such as income tax payments.

Cash flow for investing activities in Q4, 2013 included $25 million for capital expenditures. Primarily in magnetic technologies for various growth initiatives and infrastructure projects. Full year capital expenditures excluding the divested advance materials business, finished at $47 million or 4.7% of sales. We expect to shave a few basis points off of that metric in 2014.

Slide 10, provides a reminder that we are debt-free and have significant cash and borrowing capacity to fund our active strategic growth program, the dividend announced today and any payments related to the VAC acquisition.

We built up this financial strength will also buying back $14 million of our shares in the first half of 2015. We find ourselves in the enviable position because we sold the couple commodity businesses in 2013 and made good progress on working capital efficiency.

We reduced net working capital as percentage of sales from 36.7% a year ago to 33.1%. If you follow OM Group closely, you know we inspire to drive this below 30% in the coming years and we should knock a few more points off in 2014, as we reduce cycle times and pursue other operational excellence initiatives.

Slide 11, lays out the recent performance in our Magnetic Technologies business compared with year ago period. Stripping away the effects of rare earth pricing, which created last year's Q4 operating loss? This is to enjoy higher volumes and profit mostly because of higher demand for automotive applications.

The business experienced some typical structural price downs to customers involved in certain long-term programs. Operating profit benefitted from cost-reduction actions taken throughout 2013.

I mentioned the strength of automotive markets and the table on the slide tells the story for the rest of this business this key end markets. Some were tie to the overall health of the European economy such as industrial automation and electrical installation applications and some were niches that respond to other demand drivers such as renewable energy. We will benefit these market strengthened but remain focused on creating our own future through new products and applications, a couple of which we hope to update you on throughout 2014.

Our Battery Technologies story is on Slide 12, the business reported increased sales and operating profit compared to a year ago due primarily to higher sales for medical applications. Defense and Aerospace sales were fairly flat versus a year ago.

As expected, sales in the first half of 2013 were higher than in the second half following typical order in shipment patterns by our key customers. I hope you will join us for Investor Day next month in New York, we even learn more about the emerging applications in this business.

We expect these newer applications to enjoy faster growth rates in the coming years in our legacy defense and space applications. Just as medical battery sales have nearly doubled since we've acquired the business in 2010.

We will be watching closely in 2014 for changes in US Government spending priorities that could reduce the sales and profitability in this segment. We'll wrap up the business overviews with Specialty Chemicals on Slide 13. Sales were up moderately due to growth in certain business product lines.

In particular, our memory disk product line which is the market leader benefited once again due to the growth in mass data storage needs. In our advanced organics product line, we saw the usual seasonal weakness for coding applications, but overall sales were little better than a year ago.

Operating profit was up compared to a year ago, I want to highlight particularly the improvement and price and mix because our operating plans call for better promotion at higher value at products and services, where we can be better rewarded. We may not post the price mix improvement each quarter but the direction overtime should be favorable.

Four quarter profitability also included a few one-time benefits including insurance proceeds related to a close manufacturing site. Looking forward on Slide 14, we have forecasted higher profitability with EBITDA of $130 million to $140 million included in our plans as a robust list of initiatives to improve profits and returns.

We expect the number of new product and applications wins in 2014 including some of those highlighted today and more to be discussed next month at our Investor Day. Our continuous attention to cost should generate enough saving to offset some of anticipated inflationary pressures.

The primary risks and uncertainties for 2014 include European macroeconomic conditions and US Defense and Space spending, which could add an implications for product mix and related margins.

Our forecast excludes the expected minor impacts from the Advance Materials business, which still appears in our GAAP financial statements due to the supply agreement that is expected to conclude later this year or early next.

We expect to start year with the first quarter EBITDA level sequentially flat to slightly ahead of fourth quarter 2013. We expect higher EBITDA in Battery Technologies driven by favorable shipment timing and typical Q1 strength.

Magnetic technology should be about level and specialty chemicals down a bit due to stronger business performance being more than offset by one-time items not repeating. And direct with my prepared remarks, let me say I look forward to keeping you updated throughout another successful year in 2014. Joe?

Joe Scaminace

Well, thank you Chris for that report. So I'll leave you with these thoughts on Slide 15. We have turn the page from a very successful 2013 and are now clearly and totally focused on performing well in 2014 and beyond and to repeat Chris's words. We are in an enviable position. We worked hard to transform our portfolio and we now have three value added platforms that we are confident that we could grow.

These businesses are more predictable and sustainable, which is reflected in our 2014 EBITDA forecast that shows year-over-year improvement over our 2013 results. Among the benefits from transforming the portfolio, we enjoy a strong balance sheet, with the capacity and flexibility to support the three facets of our strategy. Our organic growth plans, our synergistic acquisition plans and our return of capital initiatives including the quarterly cash dividend announced today.

The future is very bright for the new OM Group and I appreciate your interest in the company and your confidence in this management team and all of the employees of OM Group, to deliver on this strategy. We look forward to keeping you updated and as 2014 progresses and seeing all of you at our Investor Day next month.

That concludes our prepared remarks and at this time operator. Please open up the call for questions.

Question-and-Answer Session

Operator

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

Mike Harrison – First Analysis

Couple of questions for you around the batteries business. You noted some uncertainty around US Government spending or keeping the close eye on some of your legacy programs. I think in the task though, you said that most of your battery programs that you're involved are a little bit more immune to spending cuts.

Can you talk a little bit about what's changed there and what's creating concern for you?

Chris Hix

Yes, sure Mike its Chris. I think in the past, what we've communicated to investors is that the programs we've been on have up to this point in time then fairly immune. However, you'll recall that the company since acquiring the business in 2010 has anticipated that at some point there would be a slowdown in the Defense spending and that's why I was excited about some of the emerging applications that were in the business, which should more than compensate overtime for any downturns that we would have.

I think we are just watching the situation carefully and we want to make sure that we are prepared in the event that, funding priorities do change and we will keep investors apprised accordingly.

Mike Harrison – First Analysis

Can you talk a little bit about where we are in terms of mix of revenue related to Defense applications versus medical and some other emerging applications? Talk about where that mix is now versus when you first bought EaglePicher and then what is the ultimate long-term goal for mix, is it Defense the half of sales, less than half of sales?

Chris Hix

Right, so what I would say on that is the mix of revenue moving first about the business. I said the legacy programs that the business has built its success upon, we're probably 90% to 95% of the revenue. Today I would say that's changed now to where it's probably 85% to 90% and the primary growth is been in the medical applications but now we are starting to introduce additional applications that, we think we'll have similar growth profiles.

I couldn't say that we have a particular goal in mind to reduce Defense or Space to a certain percentage, we want everything to grow and I think it really comes down what ultimately grows a little faster.

Joe Scaminace

Yes, I think what we said Mike. At the time, of evening acquiring EaglePicher, was that if it was purely a defense business, it would not be part of our portfolio. The attraction of the EaglePicher business and the Battery Technology business was clearly what we saw is opportunities in grid energy storage and also in medical batteries and those were the two areas that show the fastest growth and we always talk about growing markets and clearly we've seen the fastest growth in medical.

Chris Hix

And I would just add that add that at the Investor Day, we will talk about some other emerging applications as well.

Mike Harrison – First Analysis

And are you actually seeing getting some work or getting involved in new Defense applications and sort of next-generation battery technologies for Defense or is it sort of staying at and you're just concerned that you're going to be losing without adding additional new applications there?

Joe Scaminace

Absolutely Mike I could, I can absolutely tell you that we are working on new technologies, new applications. We will probably share more of this with you as time goes on, but some of the chemistries are changing, there is application for lithium-ion technology on the battlefield, there is application for energy storage within the military and we are apprised and certainly participating at the front end of all of those program.

So we are not standing still and just relying on legacy programs to carry us there.

Mike Harrison – First Analysis

All right and then last one I have for now is, just on the specialty chemicals business looking at Slide 13, you did call out some one-time items including some insurance proceeds. Are the one-times basically all of the $4.5 million increase you know there under the other component of operating profit?

Chris Hix

Yes Mike it is most of that and as you know, we get puts and takes on our businesses every quarter. Sometimes they help us, sometimes they're headwinds for us but in this particular quarter we had a number of items that added up to the benefit that we are highlighting and it is primarily, one timers.

Mike Harrison – First Analysis

All right, thanks very much.

Operator

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

Kevin Hocevar – Northcoast Research

I was wondering, if you could in terms of the cost savings. It seems like you've been under $6 million run rate the past two quarters. So wondering, what we can expect in 2014 should we assume kind of is the run rate going forward or any reason that it will be up a little bit or down a little bit from that run rate?

Chris Hix

Yes, what I would say is the cost reduction program has come to an end. So we announced the program for 2013, we finished the program at 2013, level of savings that we achieved is relatively flat between Q3 and Q4 suggesting we are existing a year at a run rate that would carry us into the next year.

Kevin Hocevar – Northcoast Research

And I was wondering to in terms of sequential guidance for the magnetic tech business calls for relatively flat sequential EBITDA, which would imply then down quite a bit from year-over-year in the first quarter. So I guess I'm just wondering why that is it specially given sounds like volumes have been improving. You've been with new products and automotive in particular improving and some of the cost savings that haven't yet anniversary benefitting that quarter.

I guess, I'm just wondering what the puts and takes are there, in terms of year-over-year performance.

Chris Hix

Kevin, you might recall that when we talked about the business in the first quarter of 2013 that we highlighted there were number of one-time benefits in terms of shipment timing and other items that, so we called that the profitability in Q1 was of 2013, was unusually high and so I think from a year-over-year comparisons standpoint. We're thinking that 2014 in Q1 will be a more normalized level.

So that might give the appearance of the year-over-year decline but again Q1 benefitted last year from some unusual timing and what not.

Kevin Hocevar – Northcoast Research

Okay and then just final question. In terms of the EBITDA guidance to $130 million to $140 million. How should we think of kind of the top line performance to get you from to the low end to the high end, how should we kind of think of top line growth, you know as kind of the swing factor, to get to know those numbers?

Chris Hix

As you can appreciate Kevin, as we are pulling together the guidance in our internal plans for 2014. There's significant number of variables and one of those is the revenue growth. We do expect to post organic growth during the year. I say that the biggest factors, governing that will be whether or not Europe recovers to some further degree and also as we mentioned looking at the US Government spending pattern for some of the Defense and Space applications in which we participate.

So I would expect to see organic revenue growth throughout, to support that range at the lower level and the higher level just to mention some of those key factors.

Kevin Hocevar – Northcoast Research

Okay, great. Thank you guys very much.

Operator

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

Ivan Marcuse – KeyBanc Capital Markets

Thanks for taking my questions. If you look at your cost savings in your slide on the magnet materials, the others, is that all cost savings that helped out the EBIT?

Chris Hix

That's almost all cost savings, you know there's a little bit of other noise in there, but for the most part its cost savings.

Ivan Marcuse – KeyBanc Capital Markets

Great, how much were the insurance gained in the specialty chemicals business?

Chris Hix

And I don't have the exact figure here in front of me, Ivan. I know it's a good portion of that, the number we've got in specialty chemical.

Ivan Marcuse – KeyBanc Capital Markets

Okay and then if you look at your in terms of your 2014 outlook. How much just to make sure, we are on same page you're looking for an incremental cost savings, that you did not receive, that you didn't get in 2013 you may have mentioned in your thing [ph] and then what is also your sort of your corporate expense, your tax rate and your cap-ex expectation for 2014.

Chris Hix

Okay, give us a shopping list there, so let me try to get through it Ivan. Let me know, if I miss anything, I think the question you asked about was incremental cost savings and my recollection is that we had couple of millions in savings in Q1, $3 million in Q2 and then, I think it stabilized at around $6 million or so for the each of the quarter in the back half of the year.

So that would imply that there is some additional incremental savings that would flow into 2014. So if do the math and I got Rob here kicking me end of the table, but I say it's probably about $5 million to $7 million or so.

Ivan Marcuse – KeyBanc Capital Markets

Okay.

Chris Hix

I think you also asked about tax rate in my prepared remarks. I commented, that we expect I think mid 20% rate and then cap-ex, I commented that as a percent of sales. It was 4.7% in 2013, we expect shave a few basis points after that in 2014.

Ivan Marcuse – KeyBanc Capital Markets

I had one other question. In the corporate expense line, is this $9 million sort of a normalized run rate, to think about.

Chris Hix

Yes, I would expect corporate expenses to be relatively on par with in 2014 with 2013 levels subject only to transaction levels. If we are pursuing a number of acquisitions, we may add up this in fluctuation in cost there, but I think we are at fairly normalized level there.

Ivan Marcuse – KeyBanc Capital Markets

You know the one thing, it's been fairly impressive is, in your specialty chemicals business. Is your ability to keep the electronics business fairly stable through the year, while every other kind of company it's related electronics, chemicals saw pretty tough headwind. How much of the stability is due to I guess the servers and would you expect that to maintain through 2014, 2015, 2016 how much run rate do you think there is to this business?

Joe Scaminace

Yes, Ivan the electronic chemical business has this memory disk plating chemical that we have two things going for us. Number one, leading market share position and number two leading technology. You know we don't stand still on that technology, we develop improved versions of that and if you just think about the whole idea of data storage and mass data storage, that's occurring not just in The United States but all over world, that are using 3.5-inch aluminum disks.

Our expectations are that this has legs and so we think that, the electronic chemical business continue its growth in not only that field but also as what I mentioned in my remarks, was that we've got some really interesting technology out there that is creating great value for our customers.

Ivan Marcuse – KeyBanc Capital Markets

Okay, great and then last two quick questions on VAC. When do you expect that final payment is it certain, its' in the balance sheet it's about $52 million, do you expect that to come out in the first half or how do you think about that cash outflow?

Chris Hix

We are in discussions the sellers of the business and it's difficult for us predict the timing of when any payments would be made and so that's something that we'll just have to update you on as developed.

Ivan Marcuse – KeyBanc Capital Markets

And then the last question, the Rahu. I know this is of one-time non-cash nature, but could you explain, so is this business making or this technology earning less than you're expecting or contributing less or how to think about Rahu and sort of its potential in future going forward and thanks for taking my questions.

Chris Hix

The Rahu acquisition was made to procure the particular Borchi OXY Technology that we think will be helpful and has been helpful and will continue to grow in meeting new regulations, where you've got a phase out of cobalt uses a dryer and certain coding applications in some parts of the world, initially Europe and North America.

The deal is negotiated in such a way that, the cash consideration date was in line with the baseline expectations for the business and I'd say that there is a good match up there between our performance expectations and where the business is heading.

There was an earn-out component built in though that we capture additional compensation or consideration for the seller. If in fact this thing had even bigger and faster growth rates. So we are delighted with the amount of consideration we paid for that business relative to the technology, the sales that we are experiencing the business and expect to continue.

We just adjusted the projections to reflect what we think will be growth rates in line with our base projections and really not so much in line with the earn-out expectations.

Ivan Marcuse – KeyBanc Capital Markets

Great, thanks for taking my question.

Operator

Your next question comes from the line of Mike Harrison from First Analysis. Your line is open.

Mike Harrison – First Analysis

Just a few more for you. I wanted to say congratulations in achieving the dividend and the question on that is, should we assume that we've seen repurchase activity for now and will probably take a pause on that for quite a while, while you establish a dividend or do you still expect to be out there buyback stock in addition to the dividend?

Chris Hix

We were delighted to initiate the share repurchases last year, we thought it made a lot of sense and I think looking back folks who have shared that return of capital, but we are even more delighted engaged in more regular return of capital to shareholders and as Joe mentioned in his comments, it really can be attributed to the change in the portfolio, the transformation of getting out of commodity businesses where we've had little control and getting into businesses with lots of levers of control that we have and much more technology-oriented, much more sustainable and predictable earnings and cash flow patterns.

So I think you're going to see have a bias in the near-term toward the regular return of capital, the dividend program over a share repurchase purchase program that's a lever that remains available to us, if we think it makes sense.

Mike Harrison – First Analysis

Thanks. And then I wanted to ask you about the automotive market, is there an area when you point some macro uncertainty and particularly concerns about Europe, is automotive a market, that you're concerned about or uncertain about or do you feel like visibility there is okay, you're seeing increased number of applications per car etc., talk about what you're seeing there?

Joe Scaminace

Yes Mike actually Europe. You know the German economy grew at four tenths of a percent in the last quarter and the expectations are for 2%, at least that's the what the economist are saying right now. Our view within those growth factor is automotive that we participate in and we are seeing real good strength and real good application technology there and we play a role in that, there is new programs that are being launched.

There's new capital that we are looking at to capitalize on that and we feel very good about automotive. I mean there's nothing there that doesn't bode well for the VAC business, but in addition to just Europe. I would encourage you not to just look at the European automotive industry. Typically, European technology finds its way globally.

A lot of the tier suppliers that are customers of ours are following this technology globally. Its technology, its applications, its new electronic devices, new ways of assisting the driver and having electronics in those cars that we're capitalizing on.

Mike Harrison – First Analysis

Great and then the last one I have for now is, you mentioned the potential for magnetic refrigeration. How many competitors do you have in that alloy material and can you give us any kind of ballpark potential market relative to your existing magnetic technologies business? Is this something that could double it over the course of 10 years or 15 years or is it smaller than that, how should we think about it?

Chris Hix

Yes, this is an emerging application and there's only a couple of companies out there that are really getting into the space. We happen to be aligned with one of those companies, which quite honestly was a start off in 2004, 2005 somewhere around there and has really taken time to develop and advance the technology.

We've been with them every step of the way supply a critical component to that, as you can appreciate. So we've really got a great position with one of the early players in this market. We think it could develop very nicely for the business, but this is, the size of this application is unlikely to exceed 20% to 30% of the total revenue of the company of the business, but it is still a very exciting application for us and we are delighted to participate.

Mike Harrison – First Analysis

All right, thanks very much.

Operator

Your next question comes from the line of Chris Kapsch. Your line is open.

Chris Kapsch – Topeka Capital Markets

Hi, Chris Kapsch with Topeka Capital Markets. Just wanted to follow-up on some of the commentary about establishing a dividend and they must be very gratifying to have that sort of visibility and confidence in the new portfolio and the question is, with another quarter of having the benefit of the developing your acquisition pipeline and then considering the Boards endorsements and the establishment of the dividend. I'm just wondering, if there's any revised thinking of what the optimal capital structure is for this new company, new portfolio and what sort of metrics are you thinking in terms of capital structure at this point?

Joe Scaminace

Okay, Chris. Great question and thanks for that comment. Clearly, there's no doubt in our mind is that, we are able to do both of these things. We are able to absolutely feel confident about paying a dividend, returning those capital to our shareholders and at the same time, executing against our strategic initiatives, which we've talked a lot about.

So we've got the balance sheet flexibility to do that and I'll ask Chris to talk a little bit more about the most efficient capital structure but, we've got the ability, the balance sheet, the flexibility to do a lot here.

Chris Hix

So longer term, as we execute the strategy and acquired business that are, synergistic to our platforms and generate good returns and so forth. I think what you'll see is that we won't be a company sitting on a lot of cash, we'll become a company has minimal flow cash and really and takes on some amount of debt.

We think, the prudent amount of debt that we would take on and maintain on a normalized basis is probably one to two times EBITDA, what you're going to see is fluctuate around that from time-to-time lower than that, in a position like we are today, where we are really just getting this engine going and if sometimes you might exceed that, but only if we've got high degree of confidence on how we can quickly reduce that leverage back into the sweet spot at one to two times.

Chris Kapsch – Topeka Capital Markets

Okay, I appreciate those comments and then I had some follow-ups on magnetic technologies. So the boom and bust cycle and rare earth, that sort of concluded at the beginning of 2013, prices have sort of normalized but you're still seeing distortive effect on the top line in the fourth quarter, just wondering when that distortive effect sort of washes through, would that be sort of now looking in the first quarter.

Chris Hix

Yes, you will notice Chris that we've talked less and less about rare earth throughout 2013 expect from when we are comparing to 2012 results, where we have that high degree of volatility. So we would expect that 2014, with a type of pricing of rare earth's and a more limited volatility that, we're just really not going to have a lot to say about that in 2014.

And we will continue to monitor the situation carefully like suppliers and others, but we just think that it's more and more in the rear view mirror.

Chris Kapsch – Topeka Capital Markets

Right, but just a follow-up on that. Given you know the spike in mineral prices, there was across the industry not just the VAC but more broadly there was a lot of activity that sort of, I guess displaced traditional rare earth content and I'm just wondering, you know to the extent that does that happen, in your business have you been able to take advantage of that in terms of commercializing lower rare earth containing products and what's the visibility on the commercialization of those sorts of products going forward?

Joe Scaminace

Yes Chris clearly we've got the process technology within VAC to take some of the highest or let's just say the rarest and scarcest form of rare earth and maintain or improve the performance characteristics of those products, while reducing the rare earth content. So absolutely, we've been able to do that, we have done that for our customers, but you know what's happening now is that, you know there does seem to be increased competition in the rare earth supply channel and we are operating as we normally would here, but those substitutions do not take rare earth totally out of those applications.

Chris Kapsch – Topeka Capital Markets

Okay and then just finally you talk about transforming the business and going forward, the key will be driving growth and enhancing margins and you highlight a couple specific growth opportunism, just wondering is there any way dimensionalizing [ph] the market opportunities associated with the magnetic core technology and also the grid storage technology in terms of the available market, that those applications represent.

Chris Hix

I think we'll talk more about that at our Investor Day. What I would say is a lot of these are, these are new applications and as such there's a high degree of uncertainty in terms of how they'll go. We do believe, there's a tremendous market opportunity for some of these including the energy storage applications, but it's going to be a very broad market and we are going to pick our spaces very carefully.

We've already begun to segment that market place into market into segment that we think will be highly attractive, that will value our critical technology and will not be quickly commoditized and other sections that will tend to stay away from.

Chris Kapsch – Topeka Capital Markets

Okay fair enough. Thanks.

Operator

Your next question comes from the line of Rosemarie Morbelli from Gabelli & Company. Your line is open.

Rosemarie Morbelli – Gabelli & Company

Thank you. Good morning, all. When you talked about magnetic technology and the impact of timing of some benefits in last year, first quarter. So this is going to negatively affect the comparison in Q1, 2014 but really to help in Q2 in other words, did you get into Q1, 2013 some orders that you would have normally gone into Q2 and therefore you will benefit on a comparison basis in Q2.

Chris Hix

Yes, I think that's probably a fair statement. If you go back and look at, the second quarter of last year, we had unusually lower margin. So we did have these unusually high margins in Q1, 2013 and unusually low in second quarter, 2013 and so I think that is a reasonable expectation for year-over-year comps.

Rosemarie Morbelli – Gabelli & Company

Okay, so it is mostly a question of comps. It is not some question of any market demands, product lines deteriorating.

Joe Scaminace

No.

Rosemarie Morbelli – Gabelli & Company

Okay, thanks and then on the regarding the automotive market that is mostly in Germany, if I'm not mistaken and you talked about those new technologies in Europe moving globally. So do you already have business or do business with non-European, German automotive companies and therefore as technology moves outside of Europe, you could benefit immediately as supposed to having to build relationship with new customers.

Joe Scaminace

The answer to that question, Rosemarie is yes and we've got two ways of basically having that business outside of Europe. One is through, companies that we supply that are actually peer suppliers in the channels for the global automotive industry and the other way is through direct sales contacts that we have throughout the world and in particular here in North America, we have a field sales organization that is active in calling on customers and we will continue this effort as time goes on.

Rosemarie Morbelli – Gabelli & Company

Okay, thanks and when you look at the new OM Group, what are you worried about? What do you think would not come through as anticipated next year?

Joe Scaminace

Well you know, I think Chris and I've both said in our remarks that the thing that concerns us most Rosemarie would be, just the macroeconomic environment. For example, the numbers I quoted before with German auto [ph] economic growing at four tenths of a percent in the fourth quarter, will the forecast commend at the anticipated rate, will there be stability out there.

As far as, what's within our control. We have really gained a lot of leverage here to go out and develop technology to innovate our product line to incent our people for the proper activities that will create higher margins for our businesses, develop these technologies. So within our control, quite frankly we feel like we will be able to execute.

We worry about what's not in our control and that clearly happens to be global economic activity and alike, so that's what worries us.

Rosemarie Morbelli – Gabelli & Company

Okay, thank you very much.

Operator

Your final question comes from the line of Kevin Hocevar from Northcoast Research. Your line is open.

Kevin Hocevar – Northcoast Research

Guys, just another just real quick one. In terms of, what type of growth, do you see in order of medical markets in battery tech because mine are saying, that's a low small part of that business, but if it's the main driver to growing better tech sales 11% for the quarter, just curious, is that significant new business wins that you're getting and kind of how should we expect that market to grow going forward?

Joe Scaminace

Yes, great question Kevin and let me just point out within the medical battery market that we supply, it would be a misnomer to look at just the big three, if you look at the sales of medical equipment from St. Jude or Medtronic's or Boston Scientific. A lot of the medical batteries are filled or many of them are filled through startups.

Even though we do supply the major companies out there. There are lot of startup medical device companies that are looking for power supply companies to give them the ability to power those devices. Typically then, those companies if they have disruptive medical technology they would then be acquired by a larger company and typically then the FDA approval would already be in place and then we would be grow with that product line, as it became commercialized.

So there is really not a good data point out there, other than the fact that there are a lot of startups that are out there and successful.

Chris Hix

Although, I might say that our businesses were mentioned as doubled since from 2010 to 2013, so that we are nearly doubled. So that suggestive for strategy going after these startups, it means we can grow faster than the market.

Joe Scaminace

Exactly.

Kevin Hocevar – Northcoast Research

Great and I guess just one quick follow-up. Interest expense, should we think of it as a $1 million per quarter going forward as well.

Chris Hix

Yes, that's safe. It's called non-cash stuff at this point time. It's just amortizing the bank fees and recruiting other interest expense related to some of the liabilities.

Kevin Hocevar – Northcoast Research

Okay, great. Thank you very much.

Joe Scaminace

Okay. Well listen, I just want to thank everyone for their interest and just the final comment is that. we are geared up for 2014, we are real excited about having control over our destiny and thank you all for you interest and hopefully, we will all get together and get to see you in New York, have a great day.

Operator

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

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