OM Group's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: OM Group, (OMG)

OM Group, Inc. (NYSE:OMG)

Q1 2014 Earnings Conference Call

April 30, 2014 10:00 ET

Executives

Joe Scaminace - Chairman and Chief Executive Officer

Chris Hix - Chief Financial Officer

Rob Pierce - Vice President, Finance

Analysts

Ivan Marcuse - KeyBanc Capital Markets

Kevin Hocevar - Northcoast Research

Mike Harrison - First Analysis

Chris Kapsch - Topeka Capital

Alan Mitrani - Sylvan Lake Asset Management

Operator

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Joe Scaminace, Chairman and CEO, you may begin your conference.

Joe Scaminace - Chairman and Chief Executive Officer

Okay, thank you. Good morning, everyone and welcome to our first quarter update call. Today, I am joined by Chris Hix, our CFO and Rob Pierce, Vice President of Finance. We have a rather extensive Safe Harbor disclosure on Slide 2. And I would ask that all of you review our language in the Safe Harbor statement please.

Now, let’s get started on Slide 3. For those of you who were able to attend our Investor Day on March 13 in New York City, you heard a detailed presentation of our growth strategy. In a nutshell, our strategy is to grow through innovation and operational improvements, while adding complementary acquisitions to build out our existing platforms. Today, I will update you on our business performance and strategic progress. We previously communicated a full year 2014 forecast of between $130 million and $140 million of pro forma EBITDA and we are reaffirming this forecast.

Our quarter one achievement of $28 million is right in line with our plans and expectations for the quarter. With this in mind, we expect higher EBITDA in the second quarter, both sequentially and versus last year’s second quarter. This profit growth will be driven by our operational improvements along with ongoing sales efforts and new product innovation.

And speaking of innovation please turn to Slide 4, where I want to provide you with a few examples of innovation going on right now inside our company. And this should give you a view of how we are looking to the future. In the U.S. automotive industry, manufacturers are now required to install a new safety system for airbags. This safety system is essentially a body sensor for airbags in cars and it’s expected that Europe will soon follow the U.S. lead. This system detects the size of a person sitting on the street, whether it’s an adult, a child, or an infancy and adjust the power of the airbag accordingly thus reducing injury.

This technology is made possible by our magnetic technologies business, VAC, where we have developed a common choke mode that is critical to the performance of the body sensing system. Our nanocrystalline materials are a key component in this application, because they are extremely accurate and perform well in all temperatures. Versus other solutions in the marketplace, ours is the most innovative and cost effective.

In our battery technologies business, EaglePicher, we continue to innovate new battery solutions for our medical customers. One example is our battery for medicine delivery systems. This new external design uses a battery chemistry to actuate a piston-like apparatus to deliver large molecule medicine through the skin. It almost acts like a mechanical patch. This solution takes the place of harmful needles. Our EaglePicher business is developing this early stage product as a platform technology and it will be used in several therapy markets.

In another medical example at EaglePicher, we are producing batteries to meet the heavy demand within the leadless pacemaker market. Two years in the making, this design has been validated and FDA cleared and is now being implanted in patients around the world. It’s one-tenth the size of a traditional pacemaker and performed as an outpatient procedure. This new device is made possible by EaglePicher’s novel battery design.

One last example in our battery business is in the defense market. EaglePicher is currently under contract with the U.S. Army to design and build the next generation of primary and rechargeable wearable batteries called the conformal wearable battery, or CWB. These batteries, currently in development, will not only provide longer operational life, they will also optimize weight distribution for improved soldier comfort. EaglePicher was chosen from this product based on its unique ability to design and build these custom cells with its industry leading technology. Upon completion of the program the U.S. Army would be demonstrated this technology in several training scenarios.

In electronic chemicals, we are working on a next generation electroless copper solution. Our new electroless copper is first product to provide a near zero stress deposit with excellent adhesion on difficult to plate substrate materials. Our product enhances long-term liability for printed circuit boards using the electronic devices that everyone uses and must continuously operate without failure. And finally in our advanced organics business, we are currently developing in additives, which when incorporated into coatings formulations allows for easy to clean surfaces. This application targets anti-graffiti coatings and dirt-resistant coatings for rail cars, water tanks and automobiles. So as you can see from these exciting examples innovation continues to drive the growth of our business going forward. And we will continue to develop solutions for the next generation of products for tomorrow.

Moving on, I would like to mention a few first-ever events that we held in the first quarter. In addition to our first-ever Investor Day, we also held an internal leadership conference. This leadership conference gave us the opportunity to bring our top leaders together from around the world and allowed us to further develop these leaders, align them on the initiatives that will drive our growth and develop our culture of excellence across the entire enterprise. In March we also paid our first quarterly dividend since 2002. We are pleased to be able to return capital to shareholders through dividends. This dividend is a tangible benefit of our strategy to move away from commodities to a more sustainable and predictable value added business model. Finally, as you know acquisitions are a key part of our strategy. We continue to evaluate a growing list of opportunities to add to our portfolio and the deals we are looking at will be businesses that fit into our existing platforms and will create value for our shareholders.

So at this time I will turn the call over the Chris to walk us through the details of our fourth quarter – our first quarter financial performance.

Chris Hix - Chief Financial Officer

Thank you, Joe and good morning to our call participants. If you turn to Page 5 you will see the P&Ls for Q1 of 2013 and ‘14 on an adjusted pro forma basis, which excludes the divested advanced materials business and 2013 charges for cost reduction actions as outlined in the appendix. First quarter sales were down 3% year-over-year due primarily the pass through of lower rare earth prices and lower sales volumes in our magnetic technology business. Excluding just the impacts from the pass through, sales were down 1% as favorable FX partially offset the lower volumes.

The lower volumes in magnetic technologies reflect weakness in wind energy and certain industrial applications. Sales volumes were also slightly lower in electronic chemicals as we focused our efforts on higher value products resulting in lower sales, but better mix and margins for that product line. In battery technologies volumes were flat overall as increasing medical sales offset a year-over-year decline for some defense and space applications. Sales for medical applications continue to grow at a robust pace.

From a profit perspective, we achieved EBITDA of $28 million in Q1 which was in line with our expectations and up a bit sequentially from the fourth quarter of 2013. We remain confident in achieving our full year 2014 forecast of $130 million to $140 million of pro forma EBITDA. Other items of note on the income statement are interest expense and FX. Due to the repayment of our debt in 2013 interest expense this year is down significantly and now includes mostly non-cash amortization of deferred financing fees. The FX loss is lower in the current year as the euro dollar rate was fairly stable during the quarter compared to a year ago. Finally, you can see that our income tax expense in Q1 of this year was 21%, well below the full year 2013 rate due to the mix of earnings and our tax efficient financing structure. We expect our effective tax rate to remain in the low-20s this year.

Page 6 includes quarter-over-quarter sales and EBITDA bridges. You may recall from our update last year at this time when we discussed certain one-time benefits in magnetic technologies and favorable shipment timing in both that business and our battery technologies businesses that combined added $5 million of EBITDA to our results factoring out these items from last year’s numbers shows comparatively offset by the favorable impact of 2013 cost reduction actions. As you will see later, we expect to have a favorable quarter-over-quarter comparison in Q2 of this year.

Page 7 shows our cash flow performance on a comparative basis. In the first quarter of this year, we used only $3 million of cash for operating activities as compared with the use of $18 million last year. We continue to expect operating cash flow for the full year to exceed last year’s levels. CapEx was $3 million in the quarter, a fairly low run-rate due mostly to timing. We still expect the full year spending to end up at around 4.5% of sales by year end. Cash flow from financing activities this year includes a $2.4 million quarterly dividend payment, as Joe mentioned our first dividend since 2002 and a really good demonstration of our commitment to creating value for our shareholders.

On Page 8, we show you our balance sheet highlights as of the end of the quarter, where we finished with $110 million of cash and an undrawn $350 million revolver. Our strong balance sheet provides us with the ability to fully execute on our acquisition strategy. Our balance sheet also includes a $64 million holdback liability relating to the 2011 acquisition of VAC, $53 million of which is classified as short-term on the balance sheet. We remained in discussions with the seller of VAC about these amounts. The chart on the right shows our networking capital performance over the past couple of years, including small quarter-over-quarter and sequential improvement so far this year. This area remains a focus in 2014 and we expect to make stronger improvement in this metric throughout the balance of the year with inventories presenting the biggest opportunity for improved efficiency.

Page 9 presents the performance of our magnetic technologies business in the first quarter. As shown in the table on the left, reduced rare-earth pass-throughs and lower volumes contributed to quarter-over-quarter sales decline. VAC’s end markets were mixed in the first quarter of ‘14 as weakness in renewable energy and other end markets more than offset continued strength in automotive systems. Net sales in this business has been trending sideways for the past four quarters around $128 million to $129 million highlighting consistent if sluggish European demand patterns. However, recent order levels show continued strengthening at automotive and we continue to win business for new applications like electronic shielding.

Overall, we expect higher sales levels in this business in the second quarter. The quarter-by-quarter EBITDA comparison includes $3 million of one-time benefits highlighted in last year’s results as well as the more sustainable $2 million of benefits this year from last year’s cost reduction actions. The slide also shows a little headwind from rare earth pricing as lower cost of this input are more quickly reflected in customer pricing than our inventory flows. Our magnetic technology team remains focused on improving their result regardless of market conditions. They continue to develop new products and applications to drive growth and are executing their continuous improvement program to reduce costs and working capital.

Page 10 summarizes the first quarter performance of our battery technologies business. Sales were relatively flat year-over-year as higher medical sales offset lower volumes in certain legacy defense and space programs as we expected. From a mix standpoint, profit was negatively impacted by unfavorable mix in defense, which more than offset the impact from higher medical sales. For the remainder of 2014, our outlook calls for less of a drag from mix. We also expect continued strength in medical and higher sales volumes in other non-legacy applications such as grid energy storage, where we are making good progress on behind-the-meter applications.

On the defense side, there are several variables in play. Some programs we serve are under pressure, while others continue to be well-supported. U.S. demand for some programs is declining, while international demand continues to grow in response to global conflicts. Net-net, we expect defense sales to be a bit lower this year. Adding all this up, we believe the business will post higher sales in EBITDA in 2014 than in prior years and our typical second half seasonal weakness will be lessened a bit as non-legacy applications grow.

Page 11 shows the performance of our specialty chemicals business, which experienced relatively flat sales and EBITDA compared to a year ago. Last quarter, we talked about the strategic shift in our electronic chemicals product line, where we are aligning our activities and support for higher margin opportunities, including those customer relationships, where we are better compensated for our technology. As a result, we have traded some volume for a better mix as demonstrated by an EBITDA margin increase. In our advanced organics product line, higher technology products continue to get traction with customers in Europe and North America and contributed the quarter-over-quarter for this product line despite negative weather impact on the North American coatings market.

I will finish my prepared remarks on Page 12, which summarizes our outlook for the remainder of the year. We still have more work to do this year, but Q1 got us off to a good start toward meeting our full year pro forma EBITDA forecast of $130 million to $140 million. Overall, we expect higher profit throughout the remaining quarters of the year due to increasing growth in several of our key end markets, such as electronics and medical and contributions from growth in operations initiatives. Many of these initiatives are in the early stages and will take time to make a meaningful impact, but overall, they help us to achieve our 2014 forecast.

Focusing on the second quarter, magnetic technologies is expected to have sequentially higher sales volumes and EBITDA based on recent order trends and new application wins. Battery technologies should also have sequentially higher sales volumes less of a mixed drag and higher EBITDA. Specialty chemicals should benefit from typical seasonal strengthening. And finally, we expect corporate expenses to be a bit lower in the second quarter than we saw in Q1.

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

Joe Scaminace - Chairman and Chief Executive Officer

Okay, thanks Chris. Well, as you can see, we have worked hard over the last few years to build an attractive portfolio of businesses and strong and flexible balance sheet to execute our strategy. And I am very confident that we are well-positioned to not only deliver on our forecast for 2014, but also continue to grow our business beyond. Many of our excellence initiatives are currently in the early stages of identification and implementation. And while we expect some benefit later in 2014 to help us meet our current year forecast, a lot of these will also occur in 2015 and beyond. So, I am very excited about our future. I look forward to keeping you updated throughout the 2014 on our accomplishments and that concludes now our remarks operator.

Operator, please open up the call for questions?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Ivan Marcuse from KeyBanc Capital Markets. Your line is open.

Ivan Marcuse - KeyBanc Capital Markets

Thanks for taking my questions. The first one I have is Europe for many companies seems to in the first quarter has driven some upside results for a lot of companies, yet your results seem like Europe is staying fairly stable. What do you think explains that versus other competitors in the industry and how would you sort of gauge a stable to improving, somewhat improving European economy? When do you think that would show up in your results and where do you think you will first see that or what’s lagging I guess relative to everything else?

Joe Scaminace

Yes, Ivan. Clearly, there are packets of strength in Europe. We are not really seeing a broad-based recovery. We certainly didn’t see it in the first quarter. However, there are certain sectors that we participated in that remained flattish. Renewable energy was not as strong as we would have liked certain industrial applications were lagging a bit, but notably for us, the automotive business continues to be strong and is showing signs of ramping up. As you know, we participate in the electronic power steering area for European automotive, our double-clutch gearbox and we are seeing industrial business now starting to show some signs of strength in the form of our current sensor business, where we play with current transformers. So, it’s – I would absolutely say it’s not broad-based, but clearly, we are starting to see pockets of strength.

Ivan Marcuse - KeyBanc Capital Markets

Okay. And then if you look at your – in your battery business, your aerospace business looked like it was or you said it was down. Aerospace has been a pocket of strength for a lot of different companies. What do you explain – I understand defense been going through a bit of a tough way right now, but how would you explain the difference between you and aerospace versus everyone else?

Joe Scaminace

I would just say that the aerospace order time is just a little longer than most other times, where you get qualified to be on a piece of equipment. The lead time seemed to be a little bit longer there, but we do see applications for aerospace that we feel we will be benefiting from in the future.

Ivan Marcuse - KeyBanc Capital Markets

Okay. And then if you would – I guess switching over to more the finance side, cost savings was that the $3 million that was in your EBITDA bridge for magnetic technology, the other is that all cost savings or is that something else the $2.8 million?

Chris Hix

It’s mostly the sustainable cost savings, I think I referred to a couple of million in there. And then there are some other miscellaneous items that contributed.

Ivan Marcuse - KeyBanc Capital Markets

Got it. And then if you look at the rare earth pricing effects I through we were sort of past this now, so is this $2 million headwind on EBITDA, is this going to be, is this something that reverses out next quarter or how do you think about this accounting or how to sort of model it I guess looking forward in terms of rare earth?

Chris Hix

As we look at the rare earth impact, we are following the current pricing which typically has about a quarter lag before it shows up in the pricing with our customers. And then we look at the inventory lag which for this business is tended to be a bit longer 6 to 9 in the past as much as 12 months. And so it’s really looking at those two variables, so you have got rare earth pricing that has come down consistently if at a much less rapid pace in over the last four quarters. And there is just a little bit of lag between the inventory and the pricing there. So I would expect that there will be a little bit more pressure as we go throughout the first half of the year and then depending on what rare earth pricing does we will determine if there is any second half impact.

Ivan Marcuse - KeyBanc Capital Markets

Okay. And then really quick on your CapEx, it was pretty low in the first quarter, what are you sort of – now that advanced materials is out of this business and you have switched everything out, what do you look at for CapEx for the year and how do you sort of see that flowing through the cash flow statement?

Chris Hix

Right. So I think with our commentary there is that we expect to – CapEx to be about 4.5% of sales and you will see that ramping up in – a bit in the second quarter and then end of the third and fourth quarter as well.

Ivan Marcuse - KeyBanc Capital Markets

Okay, thanks.

Chris Hix

Thanks Ivan.

Operator

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

Kevin Hocevar - Northcoast Research

Hey, good morning, everybody.

Joe Scaminace

Hello Kevin.

Kevin Hocevar - Northcoast Research

I want – I guess I wanted to get a little clarification and in the press release, you mentioned your expectation to increase profitability sequentially throughout the remaining quarters of the year, so does that imply the EBITDA in the second quarter higher than the first, third quarter higher than the second, fourth higher than the third, is that how to think about that?

Chris Hix

I think the primary message is the second quarter we expect to be higher than the first quarter and then we would – I think and then we shift the dialogue to think about the second half of this year being stronger than the second half of last year. So I guess there is two different concepts that I would like to highlight there.

Kevin Hocevar - Northcoast Research

Okay. And you also mentioned few – an expectation that the fourth quarter you are going to have a stronger performance than historically in terms of seasonality, is that mainly – is there any one-time benefits in there or is that mainly you mentioned that you are in the early stages still of a lot of these initiatives and they start to materialize in the fourth quarter and then those would then spill over and 2015?

Chris Hix

The improvement in the seasonality impact and expect there will still be some seasonality impact, but lessening of that impact comes from a couple of factors. Number one, you have got the battery technology business migrating into more commercial applications that are a little bit less subject to some of the typical second half or Q4 seasonality that we have seen in some of the legacy programs that certainly is an impact for us. I would say another thing as you have got the new products and other innovative technologies that we bring to the market, we think that gives us a little bit of a growth path that helps to dampen some of that seasonality impact. I would say really those are the two principal factors

Joe Scaminace

Along with our cost reductions that will be impacting in the fourth quarter.

Chris Hix

Good point Joe.

Kevin Hocevar - Northcoast Research

Okay. And then as I think of the guidance $130 million to $140 million in EBITDA, what are the bigger swing factors to get you to the bottom or the top end of that range and within that how much is outside your control, so macro forces versus within your control, so the initiatives that you are embarking upon?

Chris Hix

As we talked about in our call couple of months ago, the biggest swing factors for us are the European economy and defense spending which I would say are largely outside of our control. Within our control we have a lot of initiatives that Joe highlighted some of the growth initiatives. We have other cost reduction initiatives that are underway and all of that we think gives us a little more control over our destiny. But I would say the biggest swing factor is going to be those two elements I highlighted.

Kevin Hocevar - Northcoast Research

Okay, okay, thank you very much.

Joe Scaminace

Thanks Kevin.

Operator

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

Mike Harrison - First Analysis

Hi, good morning, everyone.

Joe Scaminace

Good morning Mike.

Chris Hix

Good morning, Mike.

Mike Harrison - First Analysis

And you mentioned that European automotive was a pocket of strength for the VAC business, where are we on the efforts to get better penetration into the North American automotive market with VAC, are we seeing some growth there or still kind in the process of trying to win that business?

Joe Scaminace

We have been very active in that business and we continue to gain some ground in that. And I think we have a lot more opportunities to penetrate that market a little bit deeper. The U.S. car industry operates at a lower price point and but we are showing efficiencies to our tier suppliers that are going that market at this point.

Mike Harrison - First Analysis

When you say they operated at lower price points are they just kind of more commodity, what you would characterize as commodity or less attractive applications for magnetic materials?

Joe Scaminace

No, not at all Mike, what I meant was that if you would compare the high end, luxury U.S. car to a high and luxury European German car, they operate at two different price points. But however, what we are seeing is the greater adaption of the technology coming into the United States. And we are calling on some of those people as we go and so really it’s innovation on both sides and it’s occurring in the U.S. as we speak.

Mike Harrison - First Analysis

Okay. And just looking at kind of where were for the SG&A number for the quarter and your comments on the outlook that corporate expenses should come down quarter-on-quarter, were there unusual items or kind of catch ups in the quarter and I guess maybe just for our modeling purposes where could SG&A shake out as we look out the rest of the year?

Chris Hix

Corporate expenses in the first quarter and I think we have seen us in the past years as well. There are certain expenses that just show up in the first quarter, some of that is compensation related and some of that is the timing of just some of the activities that were underway at – in the corporate offices. So we would expect to see that trend down in Q2 and I think that’s representing a more normalize level which you would expect to see then in Q3 and Q4.

Mike Harrison - First Analysis

Okay and I was hoping you could talk in a little more detail on the wearable batteries application for defense that you mentioned you won but how lively does the DoD deploy wearable batteries currently, is that something in addition to all infantry troops, just trying to get a sense of the size of the opportunity there?

Joe Scaminace

I would tell you Mike, it’s hard to say at this point. We just were authorized by the U.S. government for this contract and we have got the technology to do it. And we feel that there will be a fairly broad market and assuming that and we do believe this will happen that with further comfort given the longer life of these batteries we do feel that you can have infantry wide application.

Mike Harrison - First Analysis

And in terms of the timing of that application getting into wider adoption is that something that’s couple of years away more like five years away?

Joe Scaminace

It’s basically rolling out and ongoing. We think we will see – potentially see something towards the second half of the year, but we do think it will be a longer term roll out. And as I indicated these will be shown in training videos in the near-term. But we think it will be rolling out over time.

Mike Harrison - First Analysis

Alright. Last question I have is on VAC hold back the $53 ish million, you mentioned you are in discussions with the seller, what I guess I don’t really understand what there is to discuss, wasn’t there a contract on how much and when that would be paid?

Chris Hix

The hold back also offered certain protection to the company on indemnification issues and that’s what we are in discussion with the sellers over those certain identification issues and then how the funds might be distributed in relation to those?

Mike Harrison - First Analysis

Alright, thanks very much.

Joe Scaminace

Thank you, Mike.

Operator

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

Chris Kapsch - Topeka Capital

Good morning. I had some follow-up questions about the performance of VAC and just as you look at the end market performance and you called out automotive continuing to show some signs of picking up perhaps sequentially and then calling out both industrial and wind as being soft, I am just wondering if that particular mix of end market strength and weakness also comes along with it some adverse mix where the adverse mix that you saw in the quarter was it just more about the overall business being soft and therefore having some variant – absorption variance issues?

Chris Hix

So I know in our comments we highlighted mix in particular on the battery side as it related to defense, as it relates to the VAC business we didn’t really highlight mix in particular at least in my commentary. There was a little bit of price mix impact, but I can’t say it relates necessarily to specific end markets, I think it’s just nature of some of the contracts that came through in the quarter versus the quarters.

Chris Kapsch - Topeka Capital

Okay, I mean I am just following up on the question about there is some broad signs of some strengthening in Europe and looking at your volume for VAC, it would suggest you haven’t been a participant in that and you call that a couple of the end markets, but wind in particular is an interesting one, because if you look at some of the bellwethers there, seem to be doing pretty well at least as evidenced by their equity price, I mean the bellwether I guess is more somewhat of a turnaround story as well, but I am just wondering if there is any sense that as – if wind is recovering and you are not seeing any strength has there been a migration to products that don’t contain rare earth materials that somehow is adversely affecting VAC’s business?

Joe Scaminace

Yes, let me just say that it really depends on the technology that’s growing up there Chris. For example we play a very heavy role in the offshore direct drive type wind energy and a lesser role in the gear box side driven wind that goes out there. However, now if we see any increase in the direct drive which there is potential evidence that that could be occurring we will be absolutely a player in that.

Chris Kapsch - Topeka Capital

Okay, so maybe it’s some nuances within the broader wind market may affect your business more?

Joe Scaminace

Yes.

Chris Kapsch - Topeka Capital

Okay.

Joe Scaminace

Yes, we play in the higher tech, more sustainable, less repair work required offshore direct drive.

Chris Kapsch - Topeka Capital

Got it. And then I guess just following up on my other question just more directly is that your automotive products, are they lower margin or higher margin than the overall VAC segment margins because that’s really the business that’s growing the strongest?

Joe Scaminace

They are about average with the VAC margin they are – and the reason for that is don’t look at our automotive business as just a run of the mill commodity type product. When we are talking about a double clutch gear box and electronic powers assist. They are basically within the VAC average.

Chris Kapsch - Topeka Capital

Okay. And then I appreciate your slide on Page #4 talking about innovation examples and obviously wanting to demonstrate that there is some nice innovation taking place and you are getting some traction with new applications, I am just wondering if there is anyway to quantify what some of the market opportunities are in terms of addressable market size across that mix of new products. And notably probably on purpose there wasn’t a follow-up on discussion on the energy storage application, the Power Cube in the battery tech segment, just wondering if you can also update us on the progress – the commercial progress in that product in particular?

Joe Scaminace

Yes, we are on test in a major U.S. city right now. We feel pretty confident. We have already talked about that, so it wasn’t by design that we didn’t have it on this slide. These happen to be fairly new and upcoming applications on the innovation examples. Chris can you comment on the progress?

Chris Hix

We have talked a lot about that and I think the key is not to get ahead of ourselves. We think it’s a significant market opportunity. There are a lot of people that are circling this market and starting to get into it as well. The key for us is to leverage the niche parts of the market where our technology has the greatest value. And so some of the initial applications we found are these behind the meter applications where we can be connected to a particular building itself rather than overall for the grid and that offers some advantages to the building owners in terms of continued supply. I know there has been some examples in certain markets where there has been weather impacts and that’s made it impossible for people to do simple things like the elevator to exit a building. And so we are finding a lot of things, a lot of features that speak to our advantages that we can address.

There is going to be some segments of the market that will be very broadly served and we will probably be more commodity like and those parts of the market I think you are going to see us shying away from. So we are excited about this opportunity. And we would like to take it from what it is today which is single-digit millions type of business, get it into the double-digits and then see where it goes from there.

Joe Scaminace

And then also Chris to answer the question on the innovation examples, one more of that I am personally and we are all pretty excited about is medical side. As I indicated in these examples where we have got these enabling batteries for delivery systems and leadless pacemakers, I mean if any of you have followed the news with some of the medical device players that have had trouble with leads going directly into the heart and shorting out and the like. I will tell you that clearly a leadless pacemaker being enabled by our EaglePicher battery is really exciting for us. And we are seeing a lot of innovation taking place on the part of the big medical device manufactures. We are – we have a desire to become the go to brand for the battery. We are already demonstrating that we have been successful in a lot of these applications. So we feel that there is going to be pretty good growth and it happens to be one of the fastest growing parts of our battery business.

Chris Kapsch - Topeka Capital

Got it. Just to follow-up Joe on that one, the one example it sounds like in calling out the medical opportunities that’s maybe bigger application opportunity than some of these others, but are any of your products in that leadless pacemaker space with companies that have FDA approved product at this juncture or is it still in various stages of…?

Joe Scaminace

Yes, great question Chris. Right now, its FDA cleared which absolutely is the step prior to the FDA approval. So what it is, it’s a clearance to allow for testing on those, the early testing is showing promise. So we have seen these before. We are playing about where we are a player in this field. And we think that this has a great market potential.

Chris Kapsch - Topeka Capital

Thank you, guys.

Joe Scaminace

Thank you.

Operator

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

Ivan Marcuse - KeyBanc Capital Markets

Thanks guys. I have a quick follow – a couple of quick follow ups. On your networking percentage of sales your working capital percentage of sales, what’s sort of your short-term goal for this and meaning for 2014, where do you think you could get this to. And then if you look out at ‘15, ‘16 where do you ultimately think that the opportunity here is to get networking capital as percentage of sales?

Chris Hix

Our goal is I think we are pretty consistent in this. We said that we would shape another point or two off of that percentage this year. And then our goal over the next couple of years is to get it under 30%.

Ivan Marcuse - KeyBanc Capital Markets

And most of that can be driven by just reducing your inventory this year?

Chris Hix

Right. Yes, that’s right, it’s mostly inventory driven which is connected to cycle times and so forth.

Ivan Marcuse - KeyBanc Capital Markets

Great. And then on your share repurchase program you announced last year you really haven’t done – you haven’t done any in the last three quarters and I understand it’s on opportunistic basis, but at what point if - do you loot at your stock and feel that it’s a good opportunity or is this more a function that you are looking at deals and so you are sort of restrained on how much or what you can do in the share repurchase program or how exactly does that work?

Chris Hix

You raised a couple of questions there and as we talked about in our Investor Day our primary focus for capital deployment beyond supporting our businesses is on the acquisition program. But I would like to highlight also that rather than focusing only on a periodic return of capital through share repurchases, we did implement a dividend program as well. So we have now got a regular return of capital that we will have throughout the year. So it is something that we will continue to look at and continue to think about and make sure that we are allocating the capital dynamically to the best places.

Ivan Marcuse - KeyBanc Capital Markets

Is your program kind of – do you have any constraints versus if you are looking at a deal or not like if you are fairly down the road are you not, do you prefer not to buy shares, you can’t buy shares depending on whatever you program is or is that not a constraint?

Chris Hix

The only constraint that we have is I think is meaningful is around the level that’s authorized by the Board and we still have – we saw some good runway there. As we think about capital deployment we are not balancing it necessary on a week-to-week or quarter-to-quarter basis, but we are thinking about it over a little bit of a longer term basis. The other idea, the other point Ivan is that we are pretty active in the – with our deal flow right now. And there are deals coming to the table right now which we are being very prudent in how we are looking at these valuations which as all of you know is common knowledge that valuations are not cheap today. And we are looking and scrubbing the opportunities pretty dramatically. So our first order of business on capital deployment is to grow the company and provide great earnings power going forward.

Ivan Marcuse - KeyBanc Capital Markets

Okay, thanks.

Operator

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

Alan Mitrani - Sylvan Lake Asset Management

Hi, thank you. Maybe I missed it, but are you still expecting sales to be up for the full year on a pro forma basis?

Chris Hix

Yes. We didn’t really speak to that Alan, but I would expect sales to be up on a pro forma basis.

Alan Mitrani - Sylvan Lake Asset Management

Okay. And then just following up on that you guys have had sales up assuming ‘14 ends up a little bit I guess sales having budgeted that much for the last few years. I know you had a lot going on in the cost cutting side, but EBITDA has jumped, let’s call it $9 million, $10 million a year assuming you hit the end of this year from 1.12 to 1.21 up to whatever 1.30 to 1.40 will be mostly through cost cuttings or some simplification and divestiture. At some point obviously you need to get the sales line moving up to be able to that incremental flow through, when can we see that payoff and some of the – for some of those projects that you talked about, is this something that comes in towards the back half of the year is it more of 2015 event?

Joe Scaminace

Great question. We are – I just want you to know we are all about growth, we are all about growing our business through operational initiatives and these innovation examples. And that’s why I felt it’s important to really demonstrate the innovation that’s going on inside of our company which is a lot different from where OM was a few years ago. So some of the variability that you have seen really we are looking to be a lot more consistent driven by the growth of our top line, driven by higher margins, driven by ideas that we have in our operational excellence initiatives, which are going to capture true value for what we are innovating and getting rewarded for the technology that we are delivering to the marketplace. So I can tell you that one of the reasons why we are confident and the back half of the year and the second half being a little bit better than what we have seen in the past is the idea that some of these will start paying off, but will be sustainable programs that we will not only see some gains this year but also in ‘15 and beyond.

Alan Mitrani - Sylvan Lake Asset Management

Okay, that’s helpful. I appreciated that and also just a follow-up for the previous question on VAC hold back, when do you expect to be able to settle this issue in terms of the money that you have settled for – set aside for payment and when is that required to be paid?

Joe Scaminace

It’s difficult to say when it will actually be paid Alan only because we are in discussions with those sellers and it’s a dynamic process. We have reflected our expectation that it will be sometime within the next 12 months by classifying the biggest chunk of it in as a short-term liability.

Alan Mitrani - Sylvan Lake Asset Management

Okay, great. Thanks.

Joe Scaminace - Chairman and Chief Executive Officer

Okay. I will leave you with one final thought as you are thinking about growth prospects for the future. This is a leadership team that made some really hard calls on shifting the whole portfolio from a commodity orientation where today at the end of the first quarter we are talking about technology as of reducing injury by having safety body sensing systems, playing a role and enabling leadless pacemaker technology and pleading printed circuit boards. So the thought I would like to leave with you is that this is a leadership team capable of doing the right things and I can assure you that we are capable of strong growth going into the future. So thank you for your participation today and thank you for your questions and interest and have a great day.

Operator

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

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