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Executives

Troy Dewar - Director, IR

Jose Scaminace - Chairman and CEO

Ken Haber - CFO

Steve Dunmead - VP and GM, Specialties

Greg Griffith - VP, Strategic Planning, Development and IR

Analysts

Mike Harrison - First Analysis

Douglas Chudy - KeyBanc Capital Markets

Saul Ludwig - Northcoast Research

Jeffrey Gendell - Tontine Associates

Chris Kapsch - BDR Research

Mike Harrison - First Analysis

OM Group Inc. (OMG) Q3 2010 Earnings Call November 4, 2010 10:00 AM ET

Operator

Good morning. My name is Jeree and I will be your conference operator today. At this time, I would like to welcome everyone to the third 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. At this time I would like to turn the call over to Mr. Troy Dewar. Sir, you may begin.

Troy Dewar

Welcome everyone to our review of OM Group’s 2010 third quarter results. Joining me this morning are Jose Scaminace, Chairman and Chief Executive Officer, 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.

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. During the course of this call, we will be discussing certain non-GAAP financial measures; I refer you to the company presentation materials for the reconciliation of those measures to GAAP financial measures.

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 Jose Scaminace.

Jose Scaminace

I am pleased to report this morning that OMG had another solid quarter marked by continued organic growth, improved acquisition performance and strong cash flow generation.

Third quarter revenue climbed 26% as we continue to successfully harness the steady recovery in most of our end-markets. Higher pricing and acquisitions also contributed to our top line.

End market recovery drove volume across many of our end markets, including Powder Metallurgy, Memory Disk, Printed Circuit Board, Semiconductor and other Chemical applications. While growth rates have returned to more moderate levels, we still see many positive signs for growth in both the near and longer term and we have gained market share with many of our customers, which is the true testament of the quality and reliability of our products.

Favorable pricing also contributed to our revenue growth, primarily in Advanced Materials. This is due to favorable supply and demand fundamental in the cobalt market. Finally, our acquisition of EaglePicher Technologies added $36 million to our top line. This is the 26% better performance than in the second quarter of 2010.

We saw sequential growth across all of its end markets, which further excites us about the long-term growth potential of EaglePicher Technologies. The addition of this company allows us to participate in the battery space more directly. We know that there will be ups and downs in the space, but I am very confident in its long-term potential and once again we were successful in growing earnings as we continue to reap the benefits of the profit enhancement actions we implemented last year.

We were successful in lowering our cost structure during the downturn and as our volume grows we want to expand the benefit for those tough decisions that we made. Cash flow was also strong in the quarter. We not only improved our cash balance through outstanding cash flow from operations but we also lowered our debt. We have now posted 10 consecutive quarters of positive cash flow from operations, a period that includes the recent downturn. Producing strong free cash flow is a priority as we continue to reshape OMG.

Our goal, as we have talked about, is to produce predictable and profitable results by providing higher value products and services to our markets. While I acknowledge that one of our challenges is how to effectively deploy this cash for optimal value creation.

I must admit that this is not a bad problem to have in today's economic environment that still contains some degree of uncertainty. Realize, however, and this is important, that we are continually evaluating every potential use of cash as we balance funding our long term growth objectives against more immediate means available of creating value for our shareholders.

We have emerged stronger from the recent economic downturn with an efficient cost structure positioned to benefit from growth in end market demand. We have demonstrated the resiliency of our business model despite fluctuations in cobalt price consistently generating cash from operations, and we have grown the non-cobalt parts of our business to lessen the impact of metal prices.

Our results through the first nine months of 2010 demonstrate that we are continuing to make meaningful progress. Where do we go from here? How do we continue to generate long term sustainable growth and profitability?

One avenue we have used and will continue to use is acquisitions. Over the last three years we have completed three acquisitions including two in our growth platforms of portable power and electronic chemicals. We are actively pursing additional opportunities.

Our growth is not just about acquisitions. We also have tremendous organic growth opportunities. I would like to take a few minutes to share some of these with you. Our Advanced Organics business manufactures and sells products to the coatings industry. It has a strong position within this industry as a leader in the supply of cobalt-based driers and other additives that are used for alkyd coatings.

Regulatory activity associated with lowering VOCs and the potential illumination of cobalt in these applications is pushing the industry to find alternative solutions. Through product innovation, we have launched Borchi OXY-Coat. This was a derivative of our Borchi’s acquisition.

This new technology enabled our customers to improve the performance of many low VOC resins without the use of cobalt, while ensuring compliance with anticipated regulatory activity.

Another example, the LED market is providing growth opportunities within entrepreneur chemical’s business. As cost to manufacture and operate LEDs, they have fallen. The demand for this technology is rising at the same time, not only in consumer electronics, but also in various automotive and industrial applications. Growth in this sector, which we are supplying, is expected to be above 20% over the next several years.

The global trend in alternative energy sources provides additional opportunities for organic growth. Today we are selling products in to the photovoltaic market from both our electronic chemicals and Ultra Pure Chemicals business.

In order for this technology to become more mainstream solar cell manufacturers are looking for ways to reduce the cost of producing solar cells, while at the same time enhancing the efficiency of the cell. With these two objectives in mind, our research engineers are working to develop plating chemicals that are targeted to be used in these next-generation devices.

Within the battery technology segment, which is comprised of the acquired EaglePicher Technologies business, we are position to benefit from several technology inflection points across its end-markets.

One such trend is the increase in applications for lithium ion batteries. This is happening in defense, aerospace and medical and we have the product to serve each of those end-markets. In addition, we are benefiting from the fact, that aircraft OEMs are using lithium ion batteries in our next-generation aircraft models.

As you can see OMG has ample opportunity to grow organically by taking advantage of long-term macro trends and some dynamic end and growing markets and our presence are ability to grow in these markets is independent of fluctuations in metal prices.

We performed well thus far in 2010 and we are optimistic about our future growth opportunities both organic and through acquisitions.

At this time, I would like Ken Haber, to walk us through the details of our financial performance. Ken?

Ken Haber

Starting on Slide 3 of our presentation, revenue in the third quarter grew $62 million, or 26% compared with last year. Our Battery Technologies acquisition accounted for $36 million of the increase.

Favorable price mix, were primarily attributable to higher cobalt referenced prices. Volumes improved as the economy recovered drilled demand growth across most end-markets.

Operating profit improved $25 million driven in part by lower restructuring expense of $11 million. Higher selling prices, better volumes and the acquisition also added to the improvement. Excluding restructuring charges gross margin improved to 25% of sales due to the benefit of higher prices and volumes.

SG&A increased $7.4 million due to the acquisition, hiring employee incentive compensation expense and some growth in volume driven activity. As a percent of sales, SG&A fell to 13.3% as we were able to limit spending as volumes increase.

Operating margin for the quarter was 11.7% well ahead of last year and slightly better than the second quarter.

Net income in this quarter was more than double last year’s due to the higher operating profit. Higher expenses below the operating lines such as interest expense, income tax expense and income due to our joint venture partners partially offset the operating results.

Income from continuing operations was $24 million or $0.79 per diluted share excluding purchase accounting adjustments related to EaglePicher Technologies, restructuring charges in Advanced Organics and the discreet tax items. This compares $17.8 million or $0.58 per diluted share in the third quarter 2009, excluding the special items for that period.

Before discussing our Advanced Materials results I want to bring to your attention and the change and how we are reporting the volumes. In the past, we have reported product volume including metal resale and by-product sales. Beginning this quarter, we excluding in to product volume and other volume and this new format, product volume excludes metal resale and by-product material, which is now recorded this other volume.

We believe product volume is better indication of the performance of this segment, since it represents the value-add portion of our product offerings, excluding resale and by-product, which tends to be more commodity price base. We have always reported the change in this number, we are now given you the number. Is I hope that this added disclosure will provide greater clarity in to our business.

Revenue within Advanced Materials rose 17% due primarily to higher cobalt price. Product line was flat as increases in Powder Metallurgy and Ceramics were offset by decreases in Battery Materials. Other volume fell with the drop I by-product sales primarily copper.

Powder Metallurgy, which had the best quarter ever in terms of volumes improved with the recovery in end-markets and some customer restocking, which now appears to be nearing an end.

Manufacturing for automotive and industrial applications has recovered from a very depressed 2009, and we are gaining share with our customers. Ceramics volumes continue to benefit from end market demands and share gains.

Shipments of Battery Materials to the rechargeable battery market improved 12% from the second quarter that were below strong deliveries during the third quarter of 2009. Chemical volumes were inline with last year.

Looking forward, we expect end market demand in the fourth quarter to be on par with the third quarter as steady demand for rechargeable batteries is offset by seasonal softness in the other markets.

Operating margins improved 650 basis points, as cobalt price and volume rose partially offset by lower by-product profit. Manufacturing and distribution expenses were up on higher volume in our joint venture operations.

Specialty Chemicals revenue rose 4% as volumes improved across our Electronic Technologies businesses offset by lower Advanced Organics revenue due to the plant closure of the Manchester England manufacturing facility as announced in our restructuring activity.

The impact from pricing and mix was positive as favorable pricing in Advanced Organics was partially offset by lower price and mix from the Electronic Technologies end market. Advanced Organics volumes were 10% as we completed the restructuring activity announced last year.

Operating expenses declined during the quarter due to the shutdown, but we encouraged some restructuring expenses related to the demolition work at the site. We anticipated approximately $1 million of restructuring expense in the fourth quarter similar to what we spent in the third quarter.

In our electronic related businesses, we continue to benefit from global growth and demand for electronic products such as PCs, notebooks, netbooks, smartphones and other electronic devices. Revenue in these end markets grew compared with last year’s strong volume growth was partially offset by unfavorable price and mix.

Our Electronic Technologies end markets grew compared with last year. We anticipate these markets will be down slightly in the fourth quarter following normal seasonal demand trends.

Operating profit improved from last year primarily due to the restructuring expense incurred in 2009. Excluding these expenses margins fell slightly as volume growth was offset by unfavorable price and mix. Sequentially margins were pressured by lower volumes in Advanced Organics related to the soft construction market and the plant closure.

Additionally prices and volumes are lower in Electronic Chemicals as favorable prices we experienced in the first half of 2010 has ended and some of our customers reduced purchases to work off short-term inventory build. The stable prices and seasonally lower volumes expected for Specialty Chemicals in the fourth quarter, we do not expect margins to improve until 2011.

Battery Technologies revenue improved 26% sequentially with strong growth from all end markets. Defense improved 9% sequentially with demand from missile applications. Aerospace grew 52% with overall pickup and demand in satellite and aircraft aided by the early completions of some orders that result in deliveries made in the third quarter, that were originally scheduled for the fourth quarter.

Medical report and increase in shipments resulting in 31% revenue growth compared with the second quarter. Operating profit improved 55% sequentially, excluding purchase accounting adjustments from the second quarter. The benefit from higher deliveries was partially offset by higher raw material cost.

Our balance sheet was further strengthened during the quarter as cash balance grew $45 million, while debt was reduced by $20 million. Cash flow from operations was $66 million driven by higher earnings and reduction in networking capital.

During the quarter, networking capital fell $17 million to $268 million, while networking capital days fell to 83. Inventories were higher primarily due to higher cobalt inventory in Advanced Materials.

Accounts receivable dropped due to our facility closure in Advanced Organics and the associated drop in revenue. Accounts payable increase mostly due to the increase in payables at GTL as a result of the current court order prohibiting GTL from making raw material payments. Without this in junction, our payables and cash balance at the end of the third quarter would have been reduced by $64 million.

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

Steve Dunmead

The cobalt market strengthened in the third quarter with demand in powders and chemicals up approximately 10% versus the second quarter and up 12% versus Q3 ‘09. Cobalt prices were relatively flat for the first part of the quarter and then began to strengthen at the end of August as we had anticipated.

For the quarter, low grade traded in the range of $17 to $21.50 a pound and averaged $18.10 a pound for the quarter. Currently, demand in the cobalt market remains mixed. The strength in the low grade market was relatively short-lived with increased selling pressure on low grade cathodes since the end of Q3. Low grade prices now stand at approximately $17.50 a pound.

However, super alloy grades such as (inaudible) and Russian K1AY remain very tight especially in the USA. As we have said previously, supply from new projects in the DRC continues to be pushed back resulting in ongoing uncertainty regarding supply. The recent announcement of the settlement of the Tenke Fungurume re-visitation issue, however, helps to clarify one of the major outstanding obstacles.

Now I would like to cover some of the key end-use markets impacting our Advanced Materials segment. During Q3, the market for cobalt-based inorganic products was strong with cobalt sales volume up 12% sequentially and up 8% versus the prior year. We anticipate overall cobalt sales volumes to be flat during Q4, as an increase in battery demand will largely be offset by the fact that some customers are looking to potential holiday shutdown.

Cobalt volumes in the battery market were up 14% sequentially as rechargeable batteries sell shipments ramped up for the holiday season, but down 7% versus the prior year. The sequential increase in demand was especially strong and tablet devices like the iPad and the next-generation smartphones like the iPhone and Android.

The year-over-year decline in sales was mainly due to lower precursor sales into China. Strong portable electronic device growth in the emerging and advanced automotive battery market, continue to drive growth in cobalt consumption. This growth has been partially offset by the adoption of new lower cobalt containing cathode chemistries. Looking forward, we expect to see a 5% to 6% increase in volume during the fourth quarter.

Our sales in the Powder Metallurgy market were significantly stronger than expected. As Ken mentioned, Q3 saw record sales up 14% sequentially and up a 146% versus a very weak Q3 ’09. Our strong sales with the result of a combination of continued restocking, solid demand from global end markets such as energy, mining and construction, and share gains. For Q4, we expect sales to be down approximately 10% versus Q3, as restocking activities come to an end and seasonal softening at yearend.

The chemical market was essentially flat both sequentially and versus the prior year. Demand for cobalt and petrochemical catalyst applications has been somewhat sluggish. Sales into this market are expect to remain at these levels until after of the first of the year.

Thanks to a combination of increased global construction activity and share gains, cobalt volume into the ceramics and pigment markets were again strong in Q3, with volumes up 8% sequentially and up approximately 50% versus the prior year. On a combined basis, we expect the chemicals and ceramics market to decrease by approximately 10% in the fourth quarter.

Now for few comments on the key markets impacting our Specialty Chemicals segment, as expected our sales into our key Specialty Chemicals markets were up significantly year-over-year were down sequentially. As was noted during the second quarter conference call, sequential decrease was due to the fact that a portion of the strength that we saw on our Specialty Chemicals markets during the first half of 2010 was due to restocking of the depleted supply chain.

During third quarter, our sales into the coatings and chemical markets were negatively impacted by a combination of normal seasonality and the shutdown of our Advanced Organics facilities in Kokkola and Clayton.

In Q3, volumes of our products serving these markets were down 17% sequentially and down 6% versus the prior year. Overall, we continue to see declines in the traditional (inaudible) dryer market that has been partially offset by increased sales of higher margin additive.

Based upon our normal seasonality, we expect to see approximately 8 to 10% decrease in volume in Q4. The global tire market continues to recover slowly. The outlook for the full year shows sequential growth from 2009, but it is still down from 2007 levels. Our sales volumes into this market were down 25% sequentially and down 17% year over year. Our decreased sales were due to a combination of timing and the shutdown of our facility in Clayton. For the fourth quarter, sales are expected to be flat to a modest 3% increase.

Turning to the electronics markets, despite warnings throughout the third quarter a penny dip in global semiconductor sales, we continue to see strong demand to sales essentially flat versus Q2 and up 13% year over year. The most recent reports from industry analysts are now calling for any dip in sales to be pushed out into the first half of 2011 and Q4 sales in line with Q3. We expect to be in line with the market. For the electronic chemicals related markets we saw a modest sequential softening as restocking activities ended. Overall volumes of electronic plating chemicals were down 6% sequentially and up 10% versus the prior year.

Hard disk drives shipments were reported to be up 5% versus the second quarter while desktop units which typically use aluminum disc media were reported to be up 3%. Our sales into this market were down 13% sequentially and up 10% year over year, due to customers working off inventory that was produced earlier in the year.

Industry analysts are expecting the market to remain relatively flat in the fourth quarter. For the full year the aluminum substrate market is expected to be up approximately 4% while our sales are expected to be up 20% due to a combination of market growth and share gains.

The printed circuit board market also continued to perform well. Overall volumes were flat versus the second quarter and up approximately 10% year over year. During the quarter, we saw decreased sales in to the LCD sector that were offset by continued strength in smartphones.

Due to normal seasonality, industrial analysts are expecting a sequential sales decline of approximately 5% in the fourth quarter. For the full year, analysts are projecting a market increase of approximately 4% while due to a combination of market growth and share gains our sales are expected to be up 20%. At this point I would like to turn the call back over to Joe Scaminace.

Joe Scaminace

Thank you, Steve for your comments. At this time let me turn the call over to the operator to take question.

Question-and-Answer Session

Operator

Thank you. (Operator instructions)

Your first question comes from the line of Mike Harrison with First Analysis.

Mike Harrison - First Analysis

Looking at the profitability in the advanced materials business, it seems like that was about the best margin you have shown since the fourth quarter of ’09, you can look back from Q4 of 2009 and see that there was a clear increase in the cobalt price that was giving you some tailwind there.

In this quarter it is not quite so clear to me that you should have been getting a tailwind from cobalt pricing. Can you just help me understand what was driving the big improvement you saw in operating margin there and is there a component related to the Q2 smelter outage that was pressuring margins last quarter and then benefited this quarter?

Ken Haber

Yeah, this is Ken. I think a couple of answers to the question there, Mike. First we did get a benefit in the quarter with mix. There is a better mix of sales particularly in powder metallurgy as we said we had record volumes historically and that comes with a very high value added product for us.

That contributed to the mix and the expansion in the margins as well.

Then your second point with regard to smelter, certainly on a sequential basis certainly that contributed and I do not have the exact numbers in front of me from what the smelter did a year ago in the fourth quarter, but we did have good sales coming out of that smelter operations in this current quarter.

Mike Harrison - First Analysis

Given where you have seen cobalt prices so far in Q4 would you expect that Q3 margin level in advanced materials is sustainable or should we expect to see a reversion maybe closer to the 15% level?

Ken Haber

Yeah, not to quote, not to talk to a specific number, but if you look at the current trends that were seen in the cobalt reference price just since the end of September it’s down like somewhere between $2.50, or $3. If that continues all the way through this quarter, I do, we would expect to see some contraction in the margins in advanced materials.

Stephen Dunmead

Mike this is Steve Dunmead the, you have been following the cobalt market for long enough that you also know that on a relative basis if you look at the past 18 to 24 months, the cobalt price has been relatively stable and so whatever fluctuations were seen are fairly minor compared to what we saw in the past.

Ken Haber

One last point back to the mix comment, certainly it did help us as I said in the third quarter, it will probably not, it will go against us a little in the fourth quarter too.

Mike Harrison - First Analysis

Steve you, interesting point you bring out that you have seen relatively stable pricing, I mean do you see it like you guys have also gotten better at managing the fluctuations that you see in pricing from both the cost standpoint and in terms of your ability to price that stuff to your customers?

Stephen Dunmead

Yeah, Mike and I think that we have done a better job going clear back to the Norilsk contract, we have done a better job with whatever spot purchases we have done and I think we are doing a better job over time as contracts come up for renewal trying to match those things better. Yes, but it is a gradual thing that it does, with the supply chains as long as they are and as big as they are, it just doesn’t happen overnight.

Joseph Scaminace

I would add to that Mike about some of the, what Ken mentioned about, what we have seen in power metallurgy, what we are seeing there is that a resurgence of that cutting tool market globally in addition to some share gains that we have been able to attain there which I think is, to answer your question Steve clearly has done a good job, he and his people on the supply side, but on the sales and marketing effort side we have also done pretty darn good.

Mike Harrison - First Analysis

With respect to those share gains you have seen, I mean you talked about powder metallurgy right now being in, having a record quarter and obviously you have been benefiting from some restocking from your customers, do you believe that those share gains are sustainable even if the, maybe the revenues aren’t sustainable at these levels?

Ken Haber

I will take that Joe, certainly we have been investing in this business both from a resource standpoint but also from a CapEx standpoint and we plan to continue to do that. Yes, we certainly believe that the share gains and the growth that we are seeing are sustainable.

Joseph Scaminace

As importantly Mike, the end market growth rates given global infrastructure build from everything we are seeing, in terms of industrial output not just in North America but globally you know, China is still buying a lot of cutting tools today and we are the recipients of that on the supply channel.

Mike Harrison - First Analysis

Last question I had is just on the battery front, Steve I think you mentioned that that market was down 7% and then in the presentation advanced materials it list battery materials volume has been down 17%.

Stephen Dunmead

Yeah, one of those Mike is product volume and the other is cobalt volume. The number that I quoted was cobalt volume.

Mike Harrison - First Analysis

Your number is-

Stephen Dunmead

That is the difference between the mix of the amount of precursors, the amount of sulfate versus engineer powders, so it’s a mix issue.

Mike Harrison - First Analysis

Understood and can you maybe comment just a little bit on the pressure that you are seeing in terms of the share of cobalt based cathode materials relative to mix metal cathode materials. Thanks.

Stephen Dunmead

Yeah, and I wouldn’t call it pressure because I think it’s pretty good for us. We have been investing -- if you look at the areas that we have been investing in from a resource standpoint and CapEx in advanced materials, it’s been in battery and battery precursors which include mix metals, it’s been in fine powders for powder metallurgy and it has been in catalyst and catalyst precursors. Those are our higher margin areas and those are what we have been focused.

Operator

Your next question comes from line of Douglas Chudy with KeyBanc Capital Markets.

Douglas Chudy - KeyBanc Capital Markets

Hi, good morning and nice quarter. First you did mention you’ve seen some pricing pressure in the specialty chemical business, I imagine this is leading to some of the sequential margin pressure you have seen on it, since the third quarter. Can you give us a sense of how you see pricing trending in this market.

Stephen Dunmead

Yes, this is Steve Dunmead, certainly we are seeing some pressure and its in different areas. It is certainly not the one of the pressures that we started to see as say in the beginning or in the middle of ’08 as raw material prices were increasing and there was pricing pressure. That we saw some pricing pressure throughout the third quarter, but at least as we look into the fourth quarter sort of stabilize.

Ken Haber

We see a flattening.

Douglas Chudy - KeyBanc Capital Markets

Okay, and then I think you mentioned you didn’t expect to see that the margins in the specialty chemical group improved to 2011, I mean, should we think something similar to what you saw in the third quarter, how fourth quarter turns out or you know I know there could be some seasonal slowdown there as well.

Steve Dunmead

It is going to probably ease a little, but I’d say maybe little below that. Again you have to take into consideration that our AO business is going to, their volumes are going to be down even some more sequentially. We do have, we do see some volume decline seasonally again in UPC business, so that is going to impact the margin. It will be a little compression in the fourth quarter that we believe at this point.

Douglas Chudy - KeyBanc Capital Markets

Okay, and then just final on that for your expectation that they rebound in 2011, I mean is that mostly volume driven that is going to drive the rebound next year?

Steve Dunmead

Yes. I think it’s hard to look at these things, specialty chemicals even from one quarter-to-quarter, you have to look at we manage it on more on a cycle basis. Again as you look at this business from a year to date basis or annual basis, the margins will tend to run around that 13%, 14%.

Douglas Chudy - KeyBanc Capital Markets

Finally, you guys have to continue to throw off a lot of cash flow here, built up quite a bit of cash balance, I know you mentioned you are evaluating all options here. Can you just quickly remind us here of what the priorities are as you look to deploy that cash?

Jose Scaminace

Yeah, I’ll answer that Doug. I just want to remind everybody that a large portion of our cash is outside the United States. I think all of you know that. That really, it doesn’t limit us, but it certainly limits some of the actions for bringing that stock back for more immediate uses.

The fact of the matter is that we have been very, very clear about the studies that we have done on value and mitigating the volatility that provides uncertainty and potentially a gap in our valuation that we have a deal pipeline right now that we feel pretty good about and we are positioned in many growth markets and we have many opportunities.

While I, the comments that I made in my opening, I talked about the fact that we are not going to rule out any options whether they are shorter term options, near term, or longer term options, the priority is really right now for us to take advantage of the fact that there seems to be an increasing pipeline of potential deals out there and that is where we are headed.

Operator

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

Saul Ludwig - Northcoast Research

Hi, good morning guys. Ken, I wonder if you could give us a little more color on GTL. If you look at their results independently what was their sort of pre tax, tax items? Secondarily how much of GTL earnings were included in the operating profits of your consolidated segment?

Ken Haber

Yeah, the operating profits for GTL standalone was about $3.5 million. There was no inter-company profits included in this quarter’s numbers.

Saul Ludwig - Northcoast Research

Their pre tax was $3.5 million.

Ken Haber

Yes $3.2 million, there were some other expense. Their pre tax income was $3.2 million. Other tax expense at the rate of 46%, 47% makes their net income about $1.7 million and the majority shareholders 45% of that is $800,000. That’s what you see in the P&L.

Saul Ludwig - Northcoast Research

Back in the second quarter, is it the $8 million hit that basically goes to zero looking at the sequential change?

Ken Haber

Yes, $8 million was the operating loss for the operations in total. Included in that $8 million was about $4.5 million or $5 million of relining expense that (inaudible). Also was in that second quarter was a $11 million tax allowance that we took, that we explained in the last conference call, and the impact of that income.

Saul Ludwig - Northcoast Research

When we look at this, back to earlier question, this $28 million that you earned in this quarter is sort of a more unusual combination of events that probably takes that tops to be going forward. As you look at the fourth quarter its not like that you would make $28 million in that segment particularly with cobalt prices having come down since the third quarter?

Ken Haber

I don’t want to call it unusual because, from quarter-to-quarter, as we talked before Steve related that there is always these ups and downs. Again, it's basically you know so that what your projection of cobalt prices are or what you assumptions of cobalt prices are in that regard.

Steve Dunmead

Assume they stay where they are now.

Ken Haber

They are not, they are moving down so, I suspect that we won't be earning as much, but (inaudible) over the price and the moving of that prices, as you know.

Saul Ludwig - Northcoast Research

You made $0.79 in a quarter (inaudible) it's the normal seasonal, if you go back is there normally a dip in the earnings in the fourth quarter versus your third quarter irrespective of the cobalt prices were the same in the third and fourth quarter?

Steve Dunmead

We have mentioned that before. We talked about you know that usually that you see a pull back relative to seasonality in the advanced materials. We have talked before in previous calls that second and third quarters tend to be the stronger ones.

Ken Haber

No, I won't call it unusual.

Saul Ludwig - Northcoast Research

Finally, just remind us when does your contract with Norilsk expire.

Ken Haber

At the end of the first quarter of 2012.

Saul Ludwig - Northcoast Research

Given that that’s within shouting distance, when would you either have to renew that or be able to tell us what you are going to be doing as a follow on to the one side contract that is culminated?

Steve Dunmead

There are two issues there, Saul, this is Steve. First of all, there are multiple contracts that cover everything from nickel raw materials going into our electronic chemicals business to feed to metal resale.

We are in discussions with them as you would expect, but relative to cobalt feed we are in discussion with almost every cobalt supplier because we are trying to do what we think best from both a pricing standpoint and a cobalt price volatility standpoint. I do think that it’s a bit early to be press to be talking publicly about that, we are in discussions with them.

Jose Scaminace

Don’t forget, from the day that we negotiated this contract it was our desire to have a more limited term on this contract to give us the ability to sort of look out at the market and have the flexibility that we are right now and engaged in.

Saul Ludwig - Northcoast Research

Do you think that by the end of this first half of 2011 let us just when you're having your second quarter conference call, would be your goal by that time you would have whatever it is you decided and be able to discuss it or you think it might take longer that? What’s your goal from a timeline to be able to finalize whatever it is that you are going to do next?

Steve Dunmead

Saul, we would never publicly talk about what our goal is from a timing standpoint because it would put us into disadvantage with everybody that we are talking to.

Jose Scaminace

It’s a fluid negotiation, Saul. When Steve mentioned when we were in discussion right now, there is wide ranging discussions going on with many parties including Norilsk.

Saul Ludwig - Northcoast Research

One final thing its which was really impressive is the profitability on the powder metallurgy, does that profitability level on those sales dramatically different than that on other end market segments that would bring Advance Materials Group, Joe?

Joe Scaminace

Yes, it is a it’s a higher profit margin for us, Saul. When we sell into those markets, it's a more specialized product technology. These are incredibly discerning customers that are using our processed cobalt to link up with tungsten carbide to make a cutting tool that the technology has come a long way from the days when our fathers used to be in job shops and grinding all these tools.

I have been couple of these factories and is fascinating to see the technology that’s involved here. Where Steve mentioned that we provided higher return capital projects to address this market we are reaping some of the benefits of that.

Operator

Your next question comes from the line Jeffrey Gendell with Tontine Associates.

Jeffrey Gendell - Tontine Associates

You’re sitting on your biggest asset $440 million in cash. I hear you guys bandy about this whole tax laws, offshore cash, but there is no acquisition on earth that’s cheaper than your own stock and even if you pay the 35% tax its still cheaper than any acquisition you would make that’s a, I just wanted you to comment on this?

B, if there is a window here where they dropped the tax would you kind of commit to all of your shareholders. As I look at your balance sheets it's by far your biggest asset you really don’t pay attention to it, its dragging down your return. If you fought back 10% , 20% of your stock the rest of it discussions pretty superfluous?

Third, the thing we kind of, I’m going to now use the word tick me off a little bit, we have known each other for a while, is that you sit around here and say your deal flow picks up well when the business gets good everybody feels a little ticked up because everybody wants to sell.

You basically bought, you made a huge bet two years ago at the top of the market that didn’t work out so well. Long term of my work out but rate of return feels certainly aren’t what you wanted at that time.

It just makes little sense to me when 40% of your market cap as of this morning I’m sitting upon my machine right now, but 40% of your market cap this morning was cash, and you’re sitting here trying to tell us that you can but something cheaper than your own stock, makes absolutely no mathematical sense?

Joe Scaminace

Jeff, I’m going to answer that, I’m like Greg is basically with us this morning and is involved at a lot of our strategic planning for acquisitions here and I’m going to let him start the answer, and I will certainly add to it as he moves along.

Greg Griffith

Jeff, I want to make sure I heard the right question out of what you just went through, was your question you guys got to buy back (inaudible)

Jeffrey Gendell - Tontine Associates

Here’s the question, two years ago you’re sitting on $250 million in cash you want us to keep money. You basically wanted to keep money because time’s up time’s down now are sitting on $440 million in cash.

Look your stock sit 4 times cash flow. There is no deal you’re going to do out there, better than 4 times cash flow, when you have already done the due diligence. (Inaudible) ever doing a deal better than buying back your own stock?

Greg Griffith

Your question is how can we do a deal better than buying back our stock?

Jeffrey Gendell - Tontine Associates

Right. Because you have never done one before better buying back your stock, what makes you think now that the chemical business around the world doing better?

Greg Griffith

The deal flow that we’re looking at has do with our strategy on a go forward basis. While we measure the impact of the near time impact from stock buyback and other balance sheet maneuvers. For us it is a constant and evolving process that we evaluate our options and so I wouldn’t as quick to dismiss the financial impact to repatriating the cash.

It is a significant loss and so while we look at that and we hear you we heard this case presented by you and other shareholders it's our obligation to continue to evaluate the merits of the pipeline of our organic growth, the numbers investment opportunities.

Jeffrey Gendell - Tontine Associates

Greg, it's our cash, your shareholders own the stock. When you have $250 million cash on the balance sheet I can understand being worried, but now it's 400 and there are ways of borrowing a 100 domestically borrowing at our offshore money and using to buybacks, issuing debt just like Microsoft did, and if you buyback a $100 million in stock that’s 10% of your company right there. That’s a 4 times cash flow, so maneuver this, maneuver that I have a word for it accepted its on our conference call and I can’t say it. That that just doesn’t sell anymore.

You did a deal earlier this year Battery Technologies, you look at the returns and so, of course it’s accretive because your alternative was earning a half of one percent on cash of a world's accretive that way. Right, but now (inaudible) says, there is nothing we can do about buy right stock, that’s at ten times earnings. You're right again I’m saying shareholders are getting pretty impatient you’re running out of excuses?

Greg Griffith

Got it. Understood.

Operator

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

Chris Kapsch - BDR Research

I just want to follow up on the nature of this good problem to have, has anything changed in the acquisition pipeline with respect to what's available or the time line or may be even the magnitude what you are interested in doing that would effect your choices of pursuing acquisition versus buybacks or giving dividends as a way to return cash to shareholders?

Joe Scaminace

Yes, absolutely Chris. As I indicated all options are on the table and contrary to the initial assumption that business is good acquisitions are abounding there is another dynamic that’s out in the market right now that we are starting to see and that’s where a lot of private equity right now, that’s been holding on to organizations that may be synergistic to us or have adjacencies that could create great value is a little bit of a change given that they are potentially becoming available and our deal pipeline right now is becoming pretty robust in terms of what we see. That’s probably the biggest change.

Chris Kapsch - BDR Research

Given the more robustness of the deal pipeline are you saying that right now you and the board are not considering buybacks or dividends?

Joe Scaminace

We're not saying that at all, because what we’re saying, Chris, is that start buybacks are on the table, they are always on the table and I even said in my opening comment that we are looking at our cash position, we are claming it's a good problem to have in an uncertain environment and all options are on the table, including buyback, including acquisitions.

Chris Kapsch - BDR Research

I just had a follow up on one of the nuances in the comps on the cobalt business. Steve you said that the demand out of China for precursors was down contributing to the variance in that segment. I’m just wondering if that’s just a function of the typical lumpiness in Chinese importing and exporting or are they sourcing more directly from the DRC in terms of their precursor needs? Is that primarily for the battery end market as well for cobalt oxide in another words?

Steve Dunmead

Yes, Chris, I will do this in reverse mode. Yes, it's all batteries. There are no battery precursor providers out of the DRC. That’s all the raw materials in metal. The lumpiness really isn’t associated with importing into China, it's really associated with the lumpiness associated with spot pricing in China. In some cases, we've just made decisions that based upon whatever the local domestic spot pricing is that we were going to go there.

Operator

Your last question is a follow up from of Mike Harrison with First Analysis.

Mike Harrison - First Analysis

Couple of more questions, if I could. Steve you mentioned about the Tenke settlement, but didn’t really give any comments on how that changes your outlook on cobalt supply coming from the DRC. Could we get some of your thoughts there?

Steve Dunmead

I’m sure it changes our outlook on supply out of the DRC at all. Tenke publicly been going out and saying that they were planning to move ahead with their investments no matter what, but I do think that given what had just happened with First Quantum and getting assets seized that a different set of circumstance with Tenke that being settled is sort of a positive message to the investors in the company.

Mike Harrison - First Analysis

Then I was also hoping we could get a little bit more detail on the coatings front. It sounds to me as if what is going on is the carboxylate market is shrinking along with just the overall market in outer coatings as you are seeing a shift toward water-based coating. I just wanted to get a better sense of is cobalt losing share within solvent-based coatings overall, or is it more of a shift from solvent to water-based?

The deeper part of the question that I am trying to get to is how is this net affecting OM Group's coatings business? From a volume sales and an earnings standpoint, are you guys breaking about even or is this an area where you are seeing declines, or are you able to see a longer term growth?

Joe Scaminace

Mike, let me take a stab at the macro answer to that and then Steve can answer the detail. In my former life I probably know more about paint than I ever wanted to know and I will tell you that alkyd coatings has always represented roughly 15% of the total volume of total coatings.

Alkyd or oil based paint you know it is typically used in industrial applications. If you think about painting water towers and tanks and outdoor applications those tented to be alkyd based coatings. Over the years, the percentage of alkyd versus water has been going down and just as a bit dynamic of that it was always a cobalt based drier that we were providing in our carboxylate business.

What we have done here is we have not lost any share at all, but we have been seeing declining volumes of alkyd coatings. What has happened on the other front though, is that, with potential VOC regulations we have address the problem of cobalt based dryers with this Borhci Oxy product line and what we are finding is that the additive nature of that and the benefits have greater application in all coatings not just alkyd coatings. We are reaping the benefits of that.

Steve Dunmead

I will try and fill a couple of details. Yes, Joe does know a lot more about paint than I ever will. There is two separate things going on there, you have got the market pressure on lowering the amount of VOCs which is decreasing the alkyd based paints. In addition, you have got some potential regulatory activities associated with cobalt carboxylate going into those applications.

Those two things put together are decreasing in the amount of carboxylates being sold especially cobalt carboxylates into that market. That was part of the rational that plus the commoditization of the rubber adhesion promoters over the course of the past few years. That was part of the reason that we right sized our asset base in Advanced Organics and shut down the Clayton facility and shut down the facility in Kokkola.

With that being said, you got to the heart of it, Mike, if you looked at overall volume trans our overall volume is probably going to go down, but our margins probably going to go up, because we are selling more of those additives going into water based paints including the new Borchi OXY material that we are very, very excited about.

Mike Harrison - First Analysis

Last question is for Ken. I was just hoping to get some clarity on the $20 million of debt pay down this quarter. Was that a requirement of paint that ahead of schedule? I have in my notes that you guys were suppose to be paying 7.5 million a quarter or maybe that is just an assumption I baked in but how does your pay down this quarter change any requirements for pay down on that debt in the future?

Ken Haber

Mike, there is no requirement, there is no payment, preset payments schedule associated with the revolver. We make a conscious decision periodically as to how cash becomes available to make that pay down.

As we have borrowed the money we put up tranches that make up the total amount outstanding. Again, to manage our anticipated cash flows and also to minimize our interest expense. Again, there is no terms in the revolver. If we wanted to we could leave the whole amount outstanding until till it matures 2.5 years from now.

Operator

There are no further questions at this time. I would now like to turn the call over back to Mr. Jose Scaminace for any closing remarks.

Jose Scaminace

We would like to thank you again for joining us and your ongoing interest in OMG. We are pleased with the strong showing that we made in 2010 and are enthusiastic about our value creating potential going forward. As we close the year, its imperative that we remain diligently focused not only on executing our growth but on maintaining our cost levels and generating cash. I’m confident that 2010 would be a great year for OMG. Once again thank you for your time this morning and good day.

Operator

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

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