Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

OM Group Inc. (NYSE:OMG)

Q2 2010 Earnings Call

August 5, 2010 10:00 am ET

Executives

Troy Dewar - Director of IR

Ken Haber - CFO

Steve Dunmead - VP and GM, Specialties Group

Greg Griffith - VP, Strategic Planning, Development and IR

Analysts

Mike Harrison - First Analysis

Rosemarie Morbelli - Ingalls & Snyder

Saul Ludwig - Northcoast Research

Douglas Chudy - KeyBanc Capital Markets

Chris Kapsch - BDR Research

Operator

Good morning. My name is Felicia and I will be your conference operator today. At this time, I would like to welcome everyone to the OM Group’s second quarter 2010 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Dewar, you may begin your conference.

Troy Dewar

Thank you, Felicia. Good morning everyone and welcome to our review of OM Group’s 2010 second quarter results. Joining me this morning are Ken Haber, Chief Financial Officer, Steve Dunmead, Vice President and General Manager, Specialties; and Greg Griffith, Vice President of Strategic Planning, Development and Investor Relations.

Joe Scaminace, OM Group’s Chairman and CEO, is unable to be with us today due to a death in his family. He asked that we continue the call as originally planned. We will return to our normal line-up in the third quarter. I should remind everyone that a copy of the press release we issued earlier this morning as well as the presentation materials that accompany our discussion can be found on the Investor Relations portion of our website at investor.omgi.com.

One other reminder, comments made this morning by any of the participants on the call may include forward-looking statements based upon specific assumptions and subject to uncertainties and factors which are difficult to predict. Actual results could differ materially from those expressed or implied. A more complete disclosure regarding the forward-looking statements can be found at the bottom of our press release or in our Form 10-K and applied to this call.

At this time, I will turn the call over to Ken Haber.

Ken Haber

Thank you Troy and good morning everyone. Second quarter revenue increased $100 million or 49%, compared with the same period last year. $28 million of the increase was attributable to the acquisition of EaglePicher Technologies which was completed in January of this year. Excluding this acquisition, revenue increased 35% through higher pricing and increased volumes as global demand improved in most end markets.

Growth in metal resale and by-product sales also lifted year-over-year revenue. Operating profit in the second quarter was $30 million compared with a loss of $29 million last year. The 2009 period included a $35 million goodwill impairment and a $1.2 million intangible asset impairment charge. Excluding these special items, year-over-year improvement was driven by higher revenue and a lower cost structure due to the actions taken last year to protect operating margins.

Interest expense rose to $1.6 million due to the outstanding balance of our new secured credit facility, which was primarily used to fund the EaglePicher acquisition. Foreign exchange loss of $4.2 million reflects the impact or stronger US dollar hedge for the most part on the revaluation of non-functional currency cash balances held by specific foreign entities.

Tax expense in the quarter was $18.3 million, which includes a net $10.4 million in discreet tax expense items, mostly related to $11.5 million allowance against prepaid tax assets in the DRC. The allowance was required because of two changes that are occurred during the quarter: First, the DRC government is no longer granting requests to utilize prepaid tax assets to offset more than 20% of current taxes payable; second, we will not be subject to certain import taxes. We were previously planning to utilize our prepaid tax assets to offset certain import taxes. Based on these changes, we recorded an allowance to update our estimate of prepaid tax assets that will realize in the future. Excluding all the discreet items in the second quarter, our tax rate would have done 32.5%.

Income from continuing operations was $21 million or $0.67 per diluted share, excluding purchase accounting adjustments related to EaglePicher Technologies, restructuring charges in Advanced Organics and the discrete tax items. This compares with a loss of $3.5 million or $0.11 per diluted share in the second quarter 2009, excluding the special items for that period as shown on slide 4.

Moving on to slide 5. Advanced Materials revenue climbed 44% compared with last year as prices rose with cobalt reference price, and end market demand for cobalt based products grew. Increases in metal prices also led to higher revenue from metal resale and by-product sales. Our cobalt volumes improved compared with last year. Total product sales volumes were lower due to a reduction in by-product volumes. Excluding metal resale and by-product sales, total product volumes increased 9% as strong growth in powder metallurgy and ceramics were partially offset by slight decreases in battery materials and chemicals.

Our metallurgy markets continue to recover with a rebound on automotive and industrial production, while customer restocking drove significant year-over-year volume increases. Ceramics volumes which are closely tied to construction grew as we are able to capture market share. Shipments of battery materials to the rechargeable battery market were down slightly from what was a relatively strong second quarter in 2009.

Chemical volumes were lower due to timing of shipments to certain large catalyst customers. Operating profit more than tripled from last year due to the impact from changes in the cobalt reference price, higher cobalt volume and lower cost from process-based raw materials. This was partially offset by higher operating expenses for the extended maintenance shutdown of our smelter joint venture in the DRC.

Moving on to the slide 7. Net sales grew 24% in the specialty chemicals segment with growth in most end markets. Volumes were stronger across the businesses with favorable pricing and Advanced Organics and Electronic Chemicals. Within Advanced Organics, the chemicals end market achieved volume growth, as demand for catalysts strengthen, and the tire end market benefited from improved pricing. Shipments to the tire market were flat as the decline in China was offset by growth in North America and Europe as our customers purchased additional inventory ahead of the plan June closure of our Clayton facility in UK as part of the announced restructuring actions for this business. The restructuring is unplanned and will continue through the rest of this year and will likely enter the first half of 2011.

Electronic related markets continue to expand as global demand for PCs, notebooks, netbooks, smartphones and other electronic devices grows, which is driving demand for our products into the semiconductor, memory disk, and printed circuit board sectors. We saw demand strengthen globally especially in Asia where our customers continue to increase production levels.

Operating profit at $20 million is the highest profit ever for this segment and significantly better than last year loss of $32 million. Even excluding the goodwill in intangible asset impairments from the year ago period, operating margins improved on higher volumes, increased pricing and a lower cost structure.

This is the third quarter in a row where operating margins have exceeded 10%, and if you exclude special items such as restructuring charges, this segment has achieved operating margins exceeding 13% over the last 12 months. While favorable pricing may begin to ease in the coming quarters, and we remain focused on controlling operating expenses as volumes continue to grow, we believe that this segment is beginning to demonstrate the long-term potential of sustainable earnings growth that it is capable of delivering.

Moving on to slide 9. Battery Technologies segment revenue of $28 million was slightly ahead of the first quarter run rate with strong sales occurring towards the end of the second quarter. Defense had a good quarter as missile demand remains steady. Aerospace was soft as budget issues delay the start of some satellite projects and commercial aircraft customers are moving more slowly to lithium-ion technology. Medical had an improved quarter and the outlook was bolstered as new product development projects gained momentum. Overall, this segment has seen a pickup in both sales and bookings which should position it for improved performance in the second half.

Operating profit of $0.4 million includes $1.6 million of charges for purchase accounting adjustments related to inventory and deferred revenue. I’ll still blow what we believe the business is capable of. This is an improvement from the first quarter performance. At the end of the second quarter our cash balance was $401 million, with $46 million provided by operating activities. Net working capital fell to $285 million, while net working capital days fell to 85. Inventories were the biggest factor in the reduction, mostly due to the maintenance shutdown of our Smelter joint venture.

Accounts receivable rose slightly with sales as expected. Accounts payable increased mostly due to the increase in payables at GTL as the result of the current court order prohibiting GTL from making raw material payments. Without this injunction, our payables and cash balance at the end of the second quarter would have been reduced by $58 million, while net working capital would have increased by the same amount. Finally, consolidated EBITDA from continuing operations was $179 million for the last 12 months, which is within our required debt under the new $250 million revolver.

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

Steve Dunmead

Thanks Ken. First for some comments regarding the cobalt market. During the second quarter, due to normal seasonality the cobalt markets softened somewhat with overall demand estimated to be down 7% versus the first quarter, but up 16% versus the prior year. Due in part to the economic uncertainty in Europe, cobalt prices drifted from about $20 at the beginning of the quarter to about $17.50 throughout the quarter, averaging $19.36 down approximately $1 versus the prior quarter. Cobalt prices remain relatively stable since the end of the second quarter.

On the LME, cobalt future’s trading has continued to be significant. As of yet however, there has been very limited volume of cash trading for prompt delivery. Supply from new projects in the DRC continues to be pushed back but the market still anticipates additional supply in the second half of 2010. There is still a great deal of uncertainty within the cobalt market associated with DRC’s supply as a result of the ongoing discussions on export bans, additional taxes, political stability and completion of remaining revisitation issues. Market participants currently anticipate that an increasing demand is likely to lead to higher prices after the summer slowdown.

Now I would like to cover some of the key end used markets impacting our advance materials segment. As discussed during the first quarter conference call, advanced materials volumes in the second quarter are typically impacted by the annual maintenance shutdown in Kokkola and normal seasonality in battery materials. As expected, cobalt sales volumes were down 10% sequentially, but up 14% versus the second quarter of 2009.

Overall, rechargeable battery self shipments were reported to up approximately 20% year-over-year, driven by notebook and netbook computers, tablet devices like the iPad and smartphones. This growth was partially offset by the usage of lower cobalt containing chemistries in some new with lithium ion battery applications, resulting in an increase of approximately 5% in cobalt consumption. Our growth in cathode precursors remains focused on the strong demand for nickel, cobalt and manganese based cathode materials.

Looking forward, cobalt volumes are expected to increase sequentially for the balance of the year and to end up the year with a modest increase of approximately 5% versus 2009 inline with the market.

Demand for our powder metallurgy products remained strong in the second quarter with volumes essentially flat versus the first quarter and up more than 200% versus a very weak first or second quarter of 2009. For the balance of the year we expect sales to taper off somewhat with restocking activities slowing and annual summer slowdowns in Europe resulting in annual increase of approximately 120%.

The chemical market was a bit softer in the second quarter and cobalt volume down 8% sequentially and flat versus 2009. Demand for cobalt and petrochemical catalyst applications weakened as key operators trended toward higher nickel content. This trend will reverse itself as the year progresses. Thanks to a combination of increased global construction activity, share gains and cobalt volumes into the ceramic and pigment markets remained strong in the second quarter with volumes up greater than 60% versus 2009.

On a combined basis, we expect the chemicals and ceramics markets to be up approximately 5% to 7% year-over-year with OMG coming in at the high end of this range. Now for a few comments on the key markets impacting our specialty chemicals segment. All of our key specialty chemicals markets experienced a significant recovery in the first half of 2010. A portion of that recovery was a result of grossly depleted supply chain and as such may not be repeatable.

In the first quarter we started to see some pickup in housing and construction markets, but now we have also seen a pickup in non-residential construction sequentially. In the second quarter volumes of our coatings and chemicals product serving these markets were up approximately 22% sequentially and up 7% versus the prior year. For 2010 we expect to see overall volumes up a modest 3% to 5% with growth in our additive product lines more than offsetting the sluggish commodity carboxyl market. The global tire market continues to recover slowly but is still down from 2007 levels. Sales volumes into this market were essentially flat versus the prior year and down 18% sequentially due to timing.

The industry outlook for 2010 calls for a modest 3% to 5% growth over 2009 driven by growth in China and India. For the full year due to the combination of the market recovery and the shutdown of the Clayton facility that occurred in June, we expect year-over-year volumes to be down 8% to 10%. Recovering in the semiconductor market which began for us in mid-2009 continued in the second quarter with sales up 17% year-over-year and up 6% versus the first quarter of 2010.

Industry analysts have increased the revenue projections to chip level for 2010 and are now calling for approximately a 28% increase over 2009. For the balance of 2010, we are expecting our chemical sales into this industry to remain at or near first half levels. Overall, we are expecting the increase in sales of 10% to 12% for the full year because of our relatively strong comparables for the second half of 2009.

For the electronic chemicals related markets, second quarter held on to the momentum that has been building since mid-2009. Overall volumes of electronic plating chemicals were up 44% versus the prior year and up 6% sequentially.

Hard disk drive shipments were reported to be down 4% versus the first quarter while desktop units which typically use aluminum disk media were down 20%. Our sales into this market were up 44% year-over-year, and down approximately 5% sequentially. For the full year hard disk drive and aluminum media shipments are projected to grow at 15% to 20% and 4% respectively. We expect key customers who have been running at very high rates for the past nine months to 12 months to focus on inventory levels over the next couple of quarters.

Based upon this our current outlook calls for full year volumes to increase by approximately 20% due to a combination of market growth and share gains. The printed circuit board market also continued to perform well. Overall volumes were up 21% year-over-year and up 13% versus the first quarter. Our strength in this market is coming from LCD, Notebook PC and smartphone manufacturers.

Our key customers in China and Taiwan ran at very high rates in the second quarter and consequently we expect a modest slowdown from the third quarter of approximately 5%. The overall market is expected to be up 12% to 15% for 2010 but due to share gains and mix we are expecting growth of 20% to 25%.

At this point I would like to turn the call back over to Troy.

Troy Dewar

Thank you Steve. At this time I will turn the call over to operator to take the questions.

Question-and-Answer Session

Operator

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

Mike Harrison - First Analysis

Ken, I was hoping really quickly that you could help me understand how to put the $10.4 million tax item into the adjusted P&L, that gets split between your taxes and the minority interest?

Ken Haber

Correct. That $11.5 million ours is 55% of that, which is $6.3 million, which I think about $0.20 per earnings impact and then the difference to the rest of it is in the minority partners.

Mike Harrison - First Analysis

So within the minority interest number on sort of on adjusted basis was more like $2 million add back.

Ken Haber

No. Again, we booked $11.5 million all in taxes on the P&L, so if you look at that tax line that has in there the $11.5 million, the whole amount of that $11.5 million is in the tax line that you see on the P&L for the second quarter and our share of that -- actually the minority partner share that gets taken out down below in the minority line. And then that gets net in with their share of the net losses of the operation for the quarter.

Mike Harrison - First Analysis

Well, maybe we can follow up offline.

Ken Haber

I will be happy to walk you through more of the details of that Mike.

Mike Harrison - First Analysis

I appreciate that. Steve, in terms of the cobalt market right now, it sounds like you feel like its flattening out at the $17 to $18 level. Its probably just typical summer trading slowdown. Can you talk a little about -- a little bit more I guess about your expectations for the second half? You’re suggesting that market expectations are that more supply is going to be coming on stream. It seems like as usual you guys see a lot potential head winds or pitfalls to those projects coming on stream. And maybe get out your crystal ball and give us a sense of where you see the cobalt price during the second half?

Steve Dunmead

Obviously, I'm not going to sit here and predict cobalt prices but if we look at general trends, I think anyone who has followed the cobalt market or followed us for a period of time as you have, some of these projects have been talked about for years. And then when you’ve got the mess associated with the Kolwezi Tailings project in First Quantum which we’re supposed to be online in the second half of 2010 which is not going to happen. And then, other things being pushed out there's not a glut of material in the market today. And so, our view as I said and I think the view of many of the participants in the industry is that once Europe starts coming back to start looking for material after the summer holidays that there’s a pretty good chance that the supply demand balance is going to tighten.

Mike Harrison - First Analysis

I don’t know if this is a better question for Ken or for Steve, but I was wondering if you could walk through the restructuring benefits in the specialty chemicals business. What kind of restructuring savings did you see in the second quarter and what would be a reasonable number to assume in the third and fourth quarters?

Ken Haber

There is no benefits yet, because we haven't completed the restructuring and that won't take place until near the end of this year. But in the second quarter, if you look at the P&L, I think we booked about the $700,000 to $800,000 of restructuring charges. We anticipate that that number in the second half will probably be in that $2 million to $3 million range. We have completed the closure of the facility and what's left now is primarily the demolition of the facility with Clayton.

Steve Dunmead

So, Mike, just to be clear, the changes that we had in the Franklin, Pennsylvania facility at the end of 2009 and the shutdown of the advanced organics manufacturing in Kokkola at the end of the first quarter were relatively minor compared to the shutdown completely of the facility in Clayton which didn’t happen until June. And then there is still dismantling and that kind of stuff to go on.

Mike Harrison - First Analysis

Right, but we said shutdown in June, aren’t you guys realizing lower costs or are you expecting to realize lower cost in third and fourth quarters?

Ken Haber

Yeah, in the third and fourth quarter we'll start to realize that, but that will be nicer there. Most of that will at least be offset by the ongoing increase in the restructuring costs as I said before that $2 million to $3 million.

Mike Harrison - First Analysis

So $2 million to $3 million in charges or may be $2 million to $3 million a quarter in benefits then?

Ken Haber

The restructuring is going to be somewhere between $2 million to $3 million with the second half of the year.

Mike Harrison - First Analysis

And then, the last question I had is, I heard you guys mention a couple of times smartphones and as we start to look at some of the growth in smartphones, iPads, other gadgets that have touchscreen capability. I was wondering if you can talk about how big of a market that is for OM group and specifically what types of products you sell into those applications.

Steve Dunmead

Anything that they are trying to put more applications, more capabilities and put it into a smaller space into it and run the power longer impacts a bunch of our businesses. And so whether it’s the chemicals that we were selling into semi conductor market through the ultra-peer chemicals business or the advanced circuit boards through the electronic chemicals market with the batteries. And so, it’s a wide range of applications that as those things like the iPad, like plastic logics new flexible logics new flexible reader or additional Blackberries or iPhones or things like that. That’s nothing but good for us.

Operator

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

Rosemarie Morbelli - Ingalls & Snyder

You’ve talked about market share gain. Could you give us more details as to the magnitude of those gains and in which specific areas they were?

Steve Dunmead

We talked about market share gains in memory disk. We talked about market share gains…

Ken Haber

In ceramics too.

Steve Dunmead

In ceramics and also in the printed circuit board area.

Rosemarie Morbelli - Ingalls & Snyder

So what are they triggered by? Is it new product? Is it you being more aggressive going after customers or could you give us feel to what is behind that?

Steve Dunmead

I think it various by each one of those. If we look at the ceramics market quite honestly, that the cheap sellers that we are coming out of Asia or China specifically, have really left the European market alone. So, are we going to take a lot of credit for that? No, probably not. If you look at share gains in memory disk and printed circuit board, a lot of it’s associated with new products. In some cases also focus on geographical expansion beyond where we were conventionally playing.

Rosemarie Morbelli - Ingalls & Snyder

What do you see on the demand side? You kind of talked about it generally speaking in terms of the demand side. But if you could give us the better of feel for your markets in the second half sequentially, not compared to last year?

Steve Dunmead

I don’t really have it all sitting in front of me that way. I’m sure that we can back that out and you can have a separate conversation with Troy to back that out. As I said though, if you look at advanced materials because of the shut down in Kokkola that we saw in the typical seasonality that we see in battery materials, we would expect volumes to increase as we go through the balance of the year. If you look at more of the specialty chemicals markets, you’ve got some market recovery continuing in things like advance organics and that’s going to be partially offset I believe by the fact that there was some inventory correction rebuilding the supply chains that happened in the first half of 2010 that will not likely repeat in the second half, but I think that part of that is going to be offset by increased growth in the markets and continued recovery in the markets.

Rosemarie Morbelli - Ingalls & Snyder

And talking about inventories, what do you see as your customers? Have they built up inventories and do you think at some point, we are going to not fall off the pace but have a decent decline or do you feel that their inventories are really still in line with the market demand?

Steve Dunmead

I think certainly at our, we’ve got the most visibility directly with our customers and I do not believe that there is gross amounts of excess inventory at our customer levels. When you get more toward the device level, I believe that they are in some specific niches, there maybe some inventory. We talked just about the hard drive area and that typically goes up and down with surges in demand and there’s a seasonality to that inventory but do I think inventories are way out of that. No, but certainly there is the inventory builds that were necessary to build that depleted supply chain across the board will not likely repeat in the second half.

Operator

Your next question comes from the line of Saul Ludwig with Northcoast Research.

Saul Ludwig - Northcoast Research

Can we go back to slide six and can you explain again the volume decrease both sequentially and year-over-year for the product volume I mean was that all metal resale on copper or versus your special products?

Steve Dunmead

Saul, this is Steve. And I think in Ken's remarks he makes reference to the fact that if you exclude the byproducts that our product volume was actually up.

Saul Ludwig - Northcoast Research

And why was the byproduct volume so weak?

Steve Dunmead

Its mix, its timing, mix of raw materials.

Saul Ludwig - Northcoast Research

Like by what percentage was your product volume up?

Steve Dunmead

Ken, do you have that number? It was in your remarks.

Ken Haber

I think it was 9%.

Saul Ludwig - Northcoast Research

Okay. Next question, how much of retails earnings, how much operating income did you have in your segment earnings that related to GTL?

Steve Dunmead

Second quarter on a consolidated basis we recorded a $3.8 million loss.

Ken Haber

Or just the shutdown?

Steve Dunmead

Because of the shutdown. If you exclude, and again we have talked about this in the past with regards to deferring income as product, as that material flows through the Kokkola and eventually into our ultimately our external sales. We added back about $4.5 million of profit so on a standalone basis GTL itself lost $8.2 million in the quarter and a good portion of that is related to realigning and the fact that we weren't producing and therefore not absorbing fixed cost.

Saul Ludwig - Northcoast Research

Let me get this clear. GTL by itself, its pre-tax earnings were what?

Steve Dunmead

$8.6 million.

Saul Ludwig - Northcoast Research

A gain or loss?

Steve Dunmead

Loss. $8.6 million loss

Saul Ludwig - Northcoast Research

Okay. And then they will have both a regular tax credit and then the special tax, its how you get to the GTL’s bottom line.

Steve Dunmead

Correct.

Saul Ludwig - Northcoast Research

Then in your operating income, in your consolidated statement you have in there GTL's earnings that relate product that you had received that inventory previously but ultimately shipped out the door. And you said that was a $3.8 million loss?

Steve Dunmead

No. That was, we added back $4.4 million related to that which brought the $8.2 million loss down to $3.8 million loss on the consolidated charges.

Saul Ludwig - Northcoast Research

Okay and is Big Hill now up running and should they be profitable.

Ken Haber

I will let Steve speak specifically but I guess smelter came back online early in June and we expect it to be profitable in the second half of the year.

Steve Dunmead

We started up, the furnace was turned on in May and the first metal came out of it either very, very late May or early June and everything is filling up the supply chain again.

Saul Ludwig - Northcoast Research

I think we once asked at the back of the first quarter was there going to be much financial impact from shutting down a GTL for this furnace turnaround and I guess I didn't hear it right, but yes I'm surprised that the loss was this big. Was that expected or was that a normal that you would get during a shutdown or was that something more than expected?

Steve Dunmead

Saul this is Steve. Ken can chime in on the details of the financials but I think the difference in what you've heard us talking about the first quarter versus where we actually ended up was that our expectations when we started this that we were only going to be doing the sidewalls of the furnace. And when we got into the furnace we found that there were circumferential cracks in the bottom of the furnace and I made the decision that we were going to go ahead and reline the entire thing. We were down an extra month and had extra cost above and beyond what we had originally anticipated. So, yes, there was a change in thought process there but we believe that it was too big of a risk to take to simply do the relining of the sidewalls, knowing there were cracks in the bottom and then be sitting here a year from now and have the whole thing go down again.

Saul Ludwig - KeyBanc Capital Markets

And then finally Ken, how much was the delta in copper profits of second quarter versus second quarter a year ago?

Ken Haber

The operating profit in the quarter was actually a loss of $1.4 million and that was driven by lower volumes. Again, that was a part of, we were talking earlier about the drop in product volumes. So on the quarter-over-quarter the operating profit was down $1.4 million due to volume.

Saul Ludwig - KeyBanc Capital Markets

Or in other words it didn’t loose $1.4 million. It was just $1.4 million less than the second quarter?

Ken Haber

Yes, that's the Delta. I am sorry I thought that you were asking about the delta. That is the delta.

Saul Ludwig - KeyBanc Capital Markets

It was negative $1.4 million?

Ken Haber

Yeah, it dropped. Quarter-over-quarter it was down. The impact on operating profit was down $1.4 million.

Saul Ludwig - KeyBanc Capital Markets

And how much was the volume down percentage wise?

Ken Haber

I don’t have a number but we will let Troy get back to you.

Operator

(Operator Instructions) your next question comes from the line of Douglas Chudy with KeyBanc Capital Markets

Douglas Chudy - KeyBanc Capital Markets

I guess first question here you have seen nice profitability improvement in the specialty chemicals business over the past couple of quarters. But I think you mentioned around a 13% margin here looking back over the last few quarters. You think this margin level is sustainable going forward or are there other things we should take into your account?

Ken Haber

I think that if you look at the last 12 months trailing on average you take out the one time charges that would be reasonable to expect I think. Certainly it’s going to impact. We will have to qualify it and it will impact (inaudible) on volumes by each of these end markets from that perspective. So again, I will caution you that in the second half of the year our advanced organic business will be taking an additional $2 million to $3 million hit in that regard. And then, also pricing at times will, some customer pricing will change. So there could be some downward movement on that.

But over the long term, I will say that that’s a reasonable number to use in that range.

Douglas Chudy - KeyBanc Capital Markets

Then you mentioned you have some restructuring efforts still in the back half of the year. So I mean, it sounds to me like we’ve kind of seen a new level of margin going forward and some potential upside movement overtime, I mean outside of that you know the various factors.

Ken Haber

Yeah, some noise.

Steve Dunmead

Yes there will be some noise and rattling up and down a little bit. I would say the over the long term trend, yes.

Douglas Chudy - KeyBanc Capital Markets

Secondly, I guess following up on a prior inventory question, do you have any sense of the volume benefit that I guess you would attribute to restocking versus sustainable demand?

Steve Dunmead

Nothing that I'd be willing to point out there and talk about. We certainly have estimates but they are just simply estimates. I think overall that the customer basis as we have talked about past couple of quarters, is being extremely cautious with really at least at our customer level being extremely cautious up to this point of really filling up a supply chain, but if you take things like powder metallurgy would be the best example, where going from a cobalt fine powder all the way to all the steps to having General Motors sitting there with cutting tools in front of them, they had really depleted that supply chain. And so, yeah we saw some benefit, do I have an exact number, not that I’d be warned to hang my head off.

Greg Griffith

Hey Doug, this is Greg. I also think there is a risk to sort of lump OM Groups customers into one big bucket. To have any sort of relevant look at that, you'd have to look at it on a business-by-business standpoint, because the dynamics that Steve’s referring to, he is trying to give you a composite and yet it wouldn’t apply what you see in ultra-pure chemicals wouldn’t apply to powder metallurgy, for your question and the answer would be relevant. You’d have to almost look at it on a business-by-business standpoint.

Douglas Chudy - KeyBanc Capital Markets

And then I guess just finally here on, you saw some high foreign exchange law suits, it was a bit of a headwind here in the quarter and how should we think about this that are in the back half of the year?

Ken Haber

If you give me a forecast, I could answer that more specifically.

Steve Dunmead

And we’ve been basic on it, if rates stay consistent with what we are seeing there. Well, if you look at what just happened just in the month of July with the movement of the dollar given, weaker against the euro, just that alone I would expect to see that we would up-look in a gain at least against the euro and a positive impact to the P&L.

Operator

Your next question comes from the line of Chris Kapsch with BDR Research Group.

Chris Kapsch - BDR Research

I had a follow-up question on the GTL Smelter. When you shut that down, in this case I guess for a somewhat extended period relative to initial expectations. How does that affect the operation in Finland in terms of either the fee that you have to use there, we have to shift more towards (inaudible) spot material and also has it affect operations there, given the different materials and what would you be getting from the each DRC.

Steve Dunmead

Chris, this is Steve. We had put in enough buffer into both inventory on hand in Kokkola plus what was in the supply chain from Africa to Kokkola. And we knew that the range we were planning on X amount of downtime, but we knew that if the worst case happened, we’d be another month and so it had no impact on Kokkola.

Chris Kapsch - BDR Research

Okay. So more generally, are you (inaudible) in terms of the most optimal feed for the refinery in Kokkola or do you prefer the material from GTL.

Steve Dunmead

If you are asking me or if you ask the operating guy in Kokkola. He certainly has a view of what the proper mix is to get the highest yields in those kinds of things. From my standpoint, certainly because we have a share in that joint venture we want to run as much of that material as we possibly can, and we are. I mean we consume every bit of it. But in order to opt properly as the guys Finland would tell you in order to properly operate the refinery, you do need a mix and right now we have a very good mix between the two different kinds of material coming from (inaudible) and a little bit of spot material that we are buying plus the GTL and some recycle that goes on.

Chris Kapsch - BDR Research

And then the question about, I mean, I know overtime you want to diversify your customer mix away from the model where your pricing is based on just the referenced price in the metal bolt-on reference price I believe of (1993) cobalt but I’m just wondering that is it today, is that pricing dynamics based on sort of the quarterly average or the monthly average or how does that work out in the case where we could have an inter quarter swing in pricing? Is it a monthly reference price.

Ken Haber

Most of the contracts and this has changed from, I mean, you have followed the company long enough that this has changed over time that most of it is monthly. So it would be prior month average. If you go back five, six, seven years ago it took us a long time to undo some things especially in Advanced Organics as an example that may have been prior six month average and you would see wild swings in the profitability out of that business simply because of tying to fix those prices and so we've made a concerted effort to move, wherever possible to a prior month average.

Operator

There are no further questions at this time. Mr. Dewar are there any closing remarks.

Troy Dewar

Yes. Felicia, thank you. On behalf of Joe Scaminace and the rest of the OM Group management team, I would like to thank you for your continued interest in OM Group and I will be available today to answer any follow-up questions you may have.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: OM Group Inc. Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts