OM Group's (OMG) CEO Joe Scaminace on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: OM Group, (OMG)

Start Time: 10:00

End Time: 10:44

OM Group, Inc. (NYSE:OMG)

Q2 2014 Earnings Conference Call

August 01, 2014, 10:00 AM ET

Executives

Joe Scaminace - Chairman and CEO

Chris Hix - CFO

Rob Pierce - VP, Finance

Analysts

Kevin Hocevar - Northcoast Research

Eugene Fedotoff - KeyBanc Capital Markets

Chris Kapsch - Topeka Capital Markets

Daniel Walker - Heartland Advisors

Mike Harrison - First Analysis

Operator

Good morning. Welcome to OM Group’s Second Quarter 2014 Financial Results Conference Call. Information presented in this call may include forward-looking statements that are subject to uncertainties, risk and factors which are difficult to predict. Actual results could differ materially from those expressed or implied. A more complete disclosure regarding forward-looking statements can be found at the bottom of OM Group’s press release or in their Form 10-K and applies to this call.

I will now turn the call over to Mr. Joe Scaminace, Chairman and Chief Executive Officer of OM Group.

Joe Scaminace

Thank you, Earl. Good morning, everyone, and welcome to our second quarter update call. Today, I’m joined by Chris Hix, our CFO; and Rob Pierce, Vice President of Finance. You can see our standard Safe Harbor disclosure on Slide 2.

Looking at the second quarter results, we delivered EBITDA growth relative to last year’s second quarter and a sequential growth over the first quarter of this year. We generated significant operating cash flow and we’re very excited about placing new business leaders in several of our units to strengthen our operating team.

We’ve initiated actions to reduce costs and improve performance. We’re controlling the things we can control and taking aggressive steps to lessen the impact of conditions outside of our control. My confidence in the potential of this company remains as solid as ever. We are, however, facing changing and challenging business and economic conditions that are impacting each of our businesses.

Turning to Slide 3 and looking at second quarter developments. Adjusted pro forma EBITDA finished at $31 million which is in fact below our expectations. We delivered an impressive $24 million of operating cash flow during the quarter and we returned $12 million to our shareholders in the form of $10 million of share repurchases and $2 million for our quarterly cash dividend.

But, as a result of challenging business conditions, we’ve lowered our full year 2014 adjusted pro forma to EBITDA forecast to approximately $120 million. Later in my remarks, I will cover some of the more specific reasons for this forecast change and the actions that we’re taking in response.

Turning now to Slide 4. You can see our disciplined capital management. This is very important to us and we plan to use our strong balance sheet and our cash flow generation to create value for our shareholders. Our M&A pipeline is full and we’re actively prioritizing our opportunities.

We fully expect to add to our portfolio this year. But as you know it takes time to identify and execute deals that is a right business fit and also meet our financial criteria. Until we utilize capital for M&A, we plan to continue to evaluate the most efficient and value-creating use of our excess capital. We view our strong balance sheet with $114 million of cash and no debt and our unused revolver of $350 million as critical enablers of our strategy.

Turning to Slide 5. As I mentioned earlier, we’re adjusting our full year guidance. Here is our reasoning. First, business conditions in Europe are not developing as we expected. Although the German automotive sector remains strong, economic growth remains weak throughout much of the region. For example, renewable energy investments have slowed in Europe as governments pull back on subsidies and other support for these projects.

Additionally, certain markets such as the construction sector of the European economy remain weak impacting sales volumes. So, in total, our Magnetic Technologies business is growing more slowly than we planned. In Specialty Chemicals, we’re seeing delays in the timing for planned new product introductions.

The global demand for printed circuit boards has also been weaker than expected impacting our sales. However, global semiconductor unit shipments have been trending favorably which is typically a reliable leading indicator for printed circuit board demand. Our customers continue to add capacity and we’re optimistic about the second half of this year. So we are seeing signs of improvements but not at the levels that we planned.

In our Battery business, we’re facing a loss of a key medical customer in the second half of this year as they transition their device to the next generation and take their battery production in-house. Also, last quarter we signaled that many of our enterprise-wide initiatives were in the early stages of implementation. As the year is playing out, some of these initiatives are taking a little longer to contribute to our results. So taken altogether, all of these factors many of which are market driven and out of our control results in the updated forecast for 2014.

Please turn to Slide 6 where I want to tell you more about the changes that we’ve made in leadership in our company. These actions can be traced back to 2013 when I added the final piece to our senior leadership team with the hiring of David Knowles as OM Group’s President and Chief Operating Officer. With my senior executive team complete and with the heightened focus on talent and experience, these leadership changes within our business units are a natural progression in the strengthening of our operating capabilities.

As a result, I’m pleased to announce brand new leaders for our Magnetic Technologies business, our Electronic Chemicals business and our Advanced Organics business. Two of these leaders have strong experience and proven track records of building businesses and being part of large successful global companies while the other has been instrumental in building the higher value additives products line within our Specialty Chemicals business. They are the right leaders to improve our operating execution and expand the long-term performance potential of these businesses.

So what else are we doing? In addition to the leadership changes, we are not standing still. We know what we have to do. We’ve been awarded, for example, a Title III contract with the U.S. government in our Battery Technologies business. This contract supports the expansion of our lithium ion domestic supply capabilities and favorably positions us with regard to future, military battery requirements. We expect to see growth in programs such as potable power for the solider, unmanned vehicles and military aircraft. We’re very proud of the great work being done in our Battery business and this contract award is yet another affirmation of our technology leadership and close customer relationships.

Today, we’re also announcing initial steps that we’re taking to reduce costs. In addition to deferring certain costs, we’re reducing employments levels to better match operating capacity to demand. Our business improvement initiatives will expand at a moderate pace throughout the back half of this year and into next year as our new business leaders come up to speed. Slide 7 shows the anticipated costs and savings associated with this first set of actions, including the leadership changes and we’ll keep you updated as we go with respect to future cost reduction and performance improvement actions.

The one key message that I want to leave you with today is that our strategy remains intact. Our strategy remains intact. Our business leaders remain market and innovation leaders providing technology-based solutions for our customers that are differentiated from our competitors. Our recent Title III award is ample proof of this. We’re committed to growing our strategic business platforms, expanding margins and increasing returns. The work we’re doing today to improve our operating capabilities will reward us with better results in the future especially as our markets improve.

We have a strong balance sheet to acquire complementary businesses in an active pipeline of opportunities. We’ve demonstrated our disciplined approach to capital allocation by being very selective on deals and returning capital to shareholders. This team is laser focused on creating long-term value for our shareholders.

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

Chris Hix

Thank you, Joe, and good morning, everyone. Turning to Page 9, you’ll see the income statement for the second quarter of 2013 and '14 on an adjusted pro forma basis which excludes the divested Advanced Materials business and charges for cost reduction actions as outlined in the Appendix.

Second quarter sales were up 1% compared to last year’s Q2 and were up 3% sequentially compared to Q1 of this year. The higher sales were driven by favorable FX and higher volumes in our Magnetic Technologies business which partially offset the effect of lower rare earth price pass-throughs.

Sales in our Battery Technologies business were higher versus last year due to medical volumes which offset expected minor weakness in legacy defense and aerospace markets. Specialty Chemicals sales were down due to lower sales volumes. As Joe described earlier, the growth in the electronics market has been lower than expected and we are also rationalizing our customer activities as communicated in previous calls.

On the profit side, we achieved 31 million of adjusted pro forma EBITDA in Q2 which was up from last year’s second quarter and up sequentially compared to Q1 of this year. Profit growth resulted from Magnetic Technologies higher sales volumes and lower corporate expenses due to $1.3 million litigation settlement that offsets some of our legal fees this year and from prior years.

Joe talked about steps we’re taking to improve business performance and in Q2 we incurred 400,000 of charges related to these actions. For the full year 2014, we anticipate charges of 5 million to 6 million and once implemented annualized benefits of 3 million to 4 million. These figures could expand as our new leaders identify other near-term actionable initiatives.

Below the line, we’ve recorded an FX loss in Q2 due to the weakening of the euro during the quarter. The opposite occurred last year resulting in the 2013 FX gain. Our income tax expense was 26% for the second quarter, in line with our expectations of low to mid-20s.

On Page 10, we show our cash flow performance for the quarters. In the second quarter of this year, we generated an impressive $24 million of operating cash flow. We continue to expect solid operating cash flow for the remainder of the year. CapEx was $8 million in the quarter and we continue to forecast $40 million to $50 million of total spending for the full year which suggest a heavy second half. However, much of these projects are under review given current market conditions and we could adjust this range downward.

The other item in investing activities on the cash flow statement is $1 million of proceeds from the sale of an old unused property. The cash flow statement also includes our quarterly dividend and $10 million of share repurchases.

Page 11 includes balance sheet highlights. Even after returning 12 million to shareholders, we finished the quarter with $114 million of cash and no debt and our $350 million revolver remains undrawn. Our financial strength primarily supports the acquisition element of our strategy but it also enables us to return capital on a regular basis through the dividend and from time to time through share repurchases. This disciplined approach to allocating capital demonstrates our commitment to long-term shareholder value creation.

As a reminder, our balance sheet also includes a $64 million hold-back liability relating to the 2011 acquisition of VAC, 53 million of which is classified as short term. We remain in discussions with the seller of VAC about these amounts.

The chart on the right-side of the page illustrates our networking capital performance over the last few years. We again showed a sequential decrease in the metric this quarter but at a lower rate of improvement than we would like due to sales levels not materializing as expected. Our biggest opportunity is to improve inventory efficiencies.

Now let’s review the business platform results starting with Magnetic Technologies on Page 12. The table on the left bridges last year’s results to this year’s performance. Volumes grew 4.7 million or more than 3% mostly because of continued strength in automotive applications. This volume growth contributed $2 million of EBITDA.

Reported sales also benefitted from 6.2 million of translation benefit because of the stronger euro as compared with the prior year, but we received little profit benefit from that. Declining rare earth prices led to lower pass-throughs to customers and a small timing hit to profit.

Continuous improvement initiatives and other cost actions contributed 1.6 million to this year’s EBITDA. While we showed year-over-year improvement, performance fell short of our expectations due to the slower adoption of certain new products, a sluggish European recovery and declining demand in renewable energy markets.

Page 13 summarizes the second quarter performance of our Battery Technologies business. As expected, quarterly sales improved over last year due to increased medical sales offset by lower sales into legacy defense and space programs. This mix shift created a slight profit headwind in this year’s second quarter.

Due to the medical battery customer loss described by Joe earlier, we will be taking actions in the third quarter to reduce operating capacity in line with expected demand. This will help to reduce but not completely offset the profit impact from lower sales.

We expect seasonally lower sales in the second half of the year in defense and space. A bit of this sequential decrease will be offset by growth in commercial applications such as grid energy storage.

Joe covered the Title III contract award earlier in the call. The short-term financial effect of this win is a financial support for expanding our lithium ion production capacity in the U.S. Longer term we believe it validates our competitive advantages and will contribute to higher sales and profits.

Page 14 includes the performance of our Specialty Chemicals business. As previously discussed, our electronic chemicals business continues to focus on higher margin products and customers which also means walking away from volume to improve profitability. These actions contributed to the $5.8 million lower year-over-year sales volumes but also resulted in the 3.8 million price and mix top line benefit. Lower volumes also resulted from decreased sales of Advanced Organics less differentiated carboxylates products.

Looking ahead on Page 15, we are lowering our EBITDA forecast for the year to approximately 120 million. While we remain confident in the potential of our businesses, current market conditions are not supporting the profit growth we expected. Businesses conditions in Europe are not showing signs of improvement in most of our key markets.

Electronics markets have not recovered as expected and adoption of new products and applications has been delayed. We will also be challenged by the loss of the medical battery customer and continued moderate softening of U.S. defense and aerospace legacy business. Our cost actions will help to partly recover the EBITDA loss by these market changes.

In the third quarter, we expect to see sequentially higher sales volumes in EBITDA and Magnetic Technologies based on recent trends and also some progress on the cost side. Battery Technologies should have sequentially lower EBITDA due to normal seasonality as well as the effects of the lost customer in the medical business somewhat offset by cost actions and growth in commercial applications.

We expect Specialty Chemicals to achieve a similar EBITDA to that of the second quarter with Electronic Chemicals continuing its sequential growth and Advanced Organics experience difficult seasonal weakening. And we expect higher corporate expenses due to the absence of the second quarter litigation recovery.

So that concludes our prepared remarks. Operator, we’d like to open up the call for Q&A now.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). Your first question comes from the line of Kevin Hocevar from Northcoast Research. Your line is now open.

Kevin Hocevar - Northcoast Research

Hi. Good morning, everybody.

Joe Scaminace

Hi, Kevin.

Kevin Hocevar - Northcoast Research

I was wondering if you could comment on how should we think of the EBITDA margins here in the near term, say, 2014 and '15 for Magnetic Tech? I think – long term you’ve talked about 12% to 17% I believe is the range you’ve thrown out there and it sounded like little optimistic at the Investor Day that maybe with all the actions you’re taking that could shift a little higher over time. So just kind of wondering how should we think of that in the near term, say, 2014 and 2015? Are we looking at the very low end of that? Wondered if you could help with that.

Chris Hix

Kevin, it’s Chris. We still believe that this business will operate in the near term in that previously communicated range of 12% to 17%. I’d say if it weren’t for some of the cost actions we’d taken, then we would expect to be at the lower end of that. I think we’d be somewhere between the lower to middle end of that range for 2014. So I think we have made some progress there. And we do believe that longer term, given the differentiated products, the long-term growth opportunities and our ability to manage the cost structure, we believe that we can shift that range up over time as we communicated earlier this year.

Joe Scaminace

In addition to that, we have a new leader there with a new set of eyes that we think is really going to turnover every rock we can to improve the overall profitability of that business.

Kevin Hocevar - Northcoast Research

Okay. And I’m wondering if you could comment too on – give us some type of color on how Europe is playing out compared to what your expectations were? I mean were you looking for maybe mid single digit type sales growth in Europe and it’s low single digits or flattish. Could you kind of somehow parse out for us how much under it’s performing your European businesses?

Joe Scaminace

When we put together our plans for 2014, we explored a range of options in each of the key end markets but all of that was underpinned by a basic premise of continued European growth with some acceleration. And what we’ve seen instead is PMI levels continue to be supportive but that’s largely because of activity going on in German automotive and some industrial sectors. It has been translated into a broader recovery in Europe including in construction applications. And then of course this decline in the solar activity is really running more to a government support dynamic rather than an overall European economy. So that’s I think a little bit of thinking that we had going in and what’s been a little bit of a difference for us, so we just haven’t seen this broad based and a stronger recovery is what we’d expect.

Kevin Hocevar - Northcoast Research

Okay. And it looks like rare earth too continued to be a headwind and I think they’ve ticked down I think sequentially as the quarter progressed. So how should we think of those impacts on Magnetic Technologies in the back half? And also, looking back at the first quarter, it looked like it had a similar impact on the top line around $6 million but it was a lesser impact this quarter on the EBITDA number. So wondering if for whatever reason it’s having a lower impact on the EBITDA margin if that would carry forward or – I guess how should we think of the rare earth impacts for the balance of the year?

Chris Hix

As you would expect, rare earth is largely a pass-through item for us with our customers meaning that there is generally expected to be little profit impact from that. And we demonstrated that in the second quarter where you see the impact on the top line and much less on the bottom line. That bottom line impact really just results from a timing dislocation between when you procure the materials and the length of time in the supply chain and then ultimately when you’re selling it to customers. Given that rare earth prices have moved very modestly over the last 12 months, you expect to see a little P&L impact like what we demonstrated in the second quarter. We would not expect to see any benefit from rare earth movement in the second half of this year and there could be some slight pressures that we would continue to experience in the second half.

Kevin Hocevar - Northcoast Research

Okay. And then just a final question. Could you give us an idea, the order of magnitude, the net impact of the loss of the Battery Tech medical business compared to the cost savings? What would be the net effect of that kind of an annualized expectation?

Chris Hix

Kevin, we’re still working through all of our plans but we would expect there will be some impact to profitability there whether it’s – but anyway I guess I’m hesitant to put a number out there. What I would tell you is, is we think about all of these changes and expectations that we have whether it’s Europe, some of the growth initiatives, the electronic chemicals business recovering more slowly and then this medical – medical on a net basis is really the – probably the least of the contributors of those four components.

Kevin Hocevar - Northcoast Research

Okay, great. Thank you very much.

Joe Scaminace

Thank you. Operator, do we have another question lined up?

Operator

Your next question comes from the line of Gene Fedotoff from KeyBanc Capital Management. Your line is now open.

Eugene Fedotoff - KeyBanc Capital Markets

Good morning, guys. Thanks for taking my question.

Joe Scaminace

Good morning. Sure.

Eugene Fedotoff - KeyBanc Capital Markets

One is just a follow up on Kevin’s question. How big is the government contract, the new contract and do you think it’s going to be large enough to offset the loss in the Battery business?

Joe Scaminace

You mean on the Title III award that we received.

Eugene Fedotoff - KeyBanc Capital Markets

Right.

Joe Scaminace

Yes. What the Title III award really is, is a contract from the government that basically gives us the ability to go in and play a bigger role in the defense business. And so this really bodes well for our lithium ion center of excellence and the ability to sell more products to the government. So there’s no real number on that contract because there needs to be capacity added to it, but it’s a very positive development given the technology that we have, the relationship and the trust that the government has in us.

Eugene Fedotoff - KeyBanc Capital Markets

Got it. And then on Magnetic Technologies, you’re expecting sequential improvement in the EBITDA in the third quarter. Do you expect all that is going to be driven by cost savings?

Chris Hix

Gene, it’s a little bit of both. We’ve got some cost actions that are being taken in the business and we’ve got some near-term visibility on sales improvements as well. So we’ve got a little bit of contribution from both.

Eugene Fedotoff - KeyBanc Capital Markets

And I guess a question on working capital. Obviously, it’s been a focus. Why did it decline year-over-year?

Chris Hix

The net working capital efficiency metric has improved year-over-year because it is one of our operating metrics and I’d say global initiatives that we’re pursuing. We have made some improvements in inventory but again not quite at the pace that we would have expected. And only because in some of our businesses we have inventory that’s been staged for anticipated increases or for businesses initiatives, new products and so forth. And as those get delayed and pushed out, you lose a little bit of efficiency. So we’ve made improvements but not at the pace that we had planned.

Eugene Fedotoff - KeyBanc Capital Markets

Thank you. Just a last question on share repurchases. Obviously, it could be a large portion of the current authorization during the quarter. Do you expect the Board will increase authorization or do you expect to be a little bit more aggressive on the share repurchases going forward? Thank you.

Joe Scaminace

We’ll continue to look at that at the Board level. We still have remaining authorization on the current one of $26 million, so I think we continue to do have that dialogue but it’s very difficult to say whether there will be another authorization at this point.

Operator

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

Chris Kapsch - Topeka Capital Markets

Good morning. Thank you. Just a slightly higher level picture for Joe. Joe, this transformation has been completed and you’ve recast yourself as more of – or recast OM Group as more of an industrial growth company. I feel like you have a portfolio that can grow organically sort of mid single digit over the course of the cycle. I guess with this sort of revised guidance downward, I know there’s some puts and takes here but generally kind of what we’re seeing is there hasn’t really been a recovery of a trough of a cycle at least in some of the key businesses you participate in. I’m just wondering though if you still feel strongly that this company has the characteristics of an industrial growth company, what evidence is there – you’ve owned VAC for three years now, what evidence is there that in fact the strategy is to grow that business or working? And this year it looks like EBITDA will be flat year-over-year and obviously down from the prior year which benefitted from rare earth pass-throughs. But just wondering your thoughts on sort of conceptually the strategic positioning and recasting of an industrial growth company?

Joe Scaminace

Yes, that’s a great question Chris and I’m more than glad to answer that. Let me remind you that when we acquired VAC and when we acquired EaglePicher, if you recall, we were in a major transformation mode to move away from a commodity profile into a higher technology, higher growth profile with the higher valuation characteristics. And let me remind you that when we acquired those businesses, we did not have base businesses to tuck those into. In other words, we had no synergies. We were building platforms. And when you do that, you buy leadership, you buy management, you buy a mindset. And we liked the businesses that we acquired. We still like the businesses that we acquired. And I will tell you it was – this is no excuse but it was only a year and a half ago that we sold our [cobalt] (ph) business. And what we’ve been working on over the last year is a much deeper dive into these businesses. And this has resulted in that progression of leadership changes basically across the board with the exception of our Battery business which has been performing effectively. And so the answer to your question is I absolutely have the confidence in this business being a growth business. I absolutely have the confidence in this business being capable of growing and delivering great value over time. With that said, I do think that we’re going to be challenged. We’ve talked about the 5% growth in revenue over the course of the business cycle. So here we are as we’re doing these deep dives finding out that we’ve got customers within electronic chemicals, for example, where we were losing money. So we’re going into those accounts, attempting to raise prices where we can but in some cases losing business. And we’re doing that because we want to create a higher profitability business. So let me just say that the one thing that really I’m very, very excited about, I’m very encouraged about is the new crop of leaders that we’ve brought into this organization. We’ve spent time doing this. This is not something that happened overnight either. We basically did exhaustive searches globally to find high powered people with great talent, great experience, a proven track record. So, there’s no doubt in my mind given the talent that we’ve brought to bear on this portfolio, given the actual portfolio itself with our leading technology, I am very, very confident in our ability to grow this business.

Chris Kapsch - Topeka Capital Markets

Joe, if I could just follow up because you touched on leadership changes a couple of times and I think the most recent one that was just mentioned prior in the call over at VAC, could you just share some more color on the change there, the rationale, the timing behind that, what the skill set is that the new manager or managers might have and what would be the focus and imperatives associated with transitioning to a new leader there?

Joe Scaminace

Absolutely, I’d be more than glad to do it. When we embarked on a change in mindset in the VAC business that’s absolutely required – I mean when we bought VAC, I knew that there’s a great model for the tremendous technology that the Germans in particular bring to their product line. There has been, and we’ve stated this, some type of need for a global business. The German business itself, as most Germans are, are very German-centric and one of the things that attracted us to the VAC business was the opportunity to take a great German technology, apply marketing, apply a global thinking, apply a global distribution to that product line and take it globally. So we embarked on a change out there to try and find the correct leaders. And I will tell you we went through a retained search with a high profile search company. We interviewed untold number of candidates that could fit that bill and we landed on an individual who actually has lived in Germany for 20 years. He lives in Nuremberg. He is a British decent. He is a tremendous proven leader with a large global company that you would all know. It happens to be Eaton Corporation that we’ve hired him out of is the U.S. company that has great insight into industrial growth. This man has tremendous knowledge of the product line, tremendous knowledge of globalizing businesses and that mindset being brought to the VAC profile given our desire here at our headquarters to support that growth through global marketing, we feel very, very confident. So I could give you a lot more color on how excited we are about the changes out there but I think that’s as far as I’d like to go right now.

Chris Kapsch - Topeka Capital Markets

Fair enough. And then if I could, just one last one. I know you get this question when you’re out visiting investors a lot and I’ve witnessed it myself. But I understand acquisitions are part of the strategy and acquisition multiples have been – expectations have been high if not frothy. And so here you sit with an underleveraged balance sheet. From the tenor of your voice, Joe, you have tremendous confidence in this company and stability to grow obviously like some end market tailwinds instead of headwinds, but here we sit with an underleveraged balance sheet and call it the stock trading at around five times for EBITDA. So it sort of suggest that if you have that confidence in a business that you know so well that’s trading at this cheap level, why not step up the buyback a little bit more to take advantage of the underleveraged balance sheet vis-à-vis the strategic acquisition route?

Joe Scaminace

Sure. I think in my comments, Chris, and Chris’ comments, we’re not saying that that is not on the table. I mean clearly what we did in the second quarter with our 10 million share repurchase is indicative of our desire to do that. We are absolutely capable of doing that. But oftentimes those decisions on whether or not we do that need to be balanced against what could be a very strategic enhancing acquisition that could take us these platforms and build them out in the strategic direction that we had always intended to do. Again, let me go back to the fact that we’ve laid down these platforms and the whole idea was to then may deals that are synergistic, complementary that would allow us to build those out, improve margins, get technology launched globally. So to answer that question, there is no doubt that there is a propensity on our part to have discussions all the time about returns of capital but how that plays against opportunities on acquisition.

Chris Hix

Chris, I might also add that we think that we can create value to both channels both through returns of capital, both the regular return that we initiated with the dividend earlier this year as well as the share repurchases but also through the acquisition programs. So we’re running down those parallel paths and it is a dynamic capital allocation process but it’s got the same end goal in mind which is generating good returns long term and creating long-term shareholder value.

Chris Kapsch - Topeka Capital Markets

Thank you for the color guys.

Joe Scaminace

Thank you, Chris.

Operator

Your next question comes from the line of Dan Walker from Heartland Advisors. Your line is now open.

Daniel Walker - Heartland Advisors

Good morning, gentlemen.

Joe Scaminace

Hello, Dan

Daniel Walker - Heartland Advisors

I guess the last question or sort of hit on something I wanted to talk about why M&A is the right strategy right now? You guys have spent over $1 billion on acquisitions in four years and your enterprise value today is 700 million. So basically you’re getting paid to take the Specialty Chem business and I guess I just want to reiterate trading sub six or in the five times forward, do you think you’re likely to find assets cheaper than your own stock right now?

Joe Scaminace

I think we have to allocate capital for the short run which leans forward share repurchases and dividends and that’s a favorable return for shareholders. And then we’ve also got to continue to build out the enterprise for long-term shareholder value creation which is why we’re investing CapEx in our businesses and also acquisitions. So we think, Dan, that we’ve got to continue to balance both of those. We don’t think there’s a single direction or a single channel or a single answer. We’ve got to balance both the short term and the longer term.

Daniel Walker - Heartland Advisors

Okay. Thanks for the questions.

Operator

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

Mike Harrison - First Analysis

Hi. Good morning.

Joe Scaminace

Good morning, Mike.

Mike Harrison - First Analysis

Joe, you talked at your Analyst Day about some areas where you had product lines that were losing money. It sounds like in particular on the electronic chemicals side. You exited some business this quarter. Are those efforts going to be gaining momentum such that maybe as we look at our models, we should be modeling some more top line headwinds related to shedding of less profitable business but improvement in earnings and margins?

Joe Scaminace

Yes, absolutely. I mean what we’re finding and here again, Mike, I think a lot of the comments that I ascribed to the VAC leadership change were also lighting up the boards on the electronic chemicals right now with a very experienced leader in global markets in that regard also who also comes from actually a Fortune 100 company that has joined us recently and is already canvassing the world, has visited most of our sites. So what we’ve done is we’ve taken a portion of our product line where we were in fact losing money and exited some of that business. Now on the other side of that, we’ve also got new technology that’s very, very relevant in global markets, in particular not just China but into Korea and into other growth markets. And as these markets improve in printed circuit board with the current semiconductor volume growth, we feel that we will start getting growth in electronic chemicals over the next number of quarters at a higher profit level.

Mike Harrison - First Analysis

And is it just Specialty Chemicals where we’ll see that or could we see some in Magnetic Technologies as well?

Joe Scaminace

In Magnetic Technologies we are targeting customers where some of the business in solar, for example, has migrated more into China. So that will take a little bit longer, but we do think that we will be able to see that. But probably it will take a little bit longer than it will in EC.

Mike Harrison - First Analysis

All right. And then in terms of the medical battery customer, how big a percent of sales into the medical market did they account for? And is this a trend that we could see in other areas within battery of a customer taking production in-house?

Joe Scaminace

Yes, Mike, that’s a great question and I could tell you that that is not the trend and it is not something that is worrying us right now. Overall, our medical battery business is having a strong year and even with this loss we will have a good year for us. This loss of the medical battery customer and just to give you a little background on how this happened, we were the supplier of a startup medical battery company which typically comes to EaglePicher. We design a battery, we get it on the ground floor, we get FDA approval. Our volumes begin to grow and every now and then a very large medical supply company, device company will wind up acquiring that startup. In the case of our loss of this customer, this happened to be a 100% vertically integrated device manufacturer that acquired the startup. So we were in their generation I device providing that volume and that company decided to launch a generation II device. And once they did that, although we attempted to become the supplier of generation II, their vertical integration demanded that they go in-house on that. So, we’re still very bullish on our medical supply technology. We are very active there. We’ve got great R&D going on. We’ve got great customers and we think that we’ll continue to grow that volume.

Mike Harrison - First Analysis

All right, I appreciate the extra color there. And then just in terms of the cost saving actions, how should we think about the split between headcount reductions that could – happen fairly quickly and other kind of manufacturing-related and operational changes that you’re going to be making to reduce costs?

Chris Hix

Mike, the changes that we are contemplating and that we’ve got in our sights right now are largely reducing headcount. And so as we reduce the headcount, we reduce our capacity as well. So we’re primarily going to be making headcount changes here in the second half of this year to obtain cost savings.

Mike Harrison - First Analysis

All right. Thanks very much.

Operator

Your final question comes from the line of Eugene Fedotoff from KeyBanc Capital Management. Your line is now open.

Eugene Fedotoff - KeyBanc Capital Markets

Thank you. I have a couple of follow-ups for Chris. Looking at the accounts receivables, they increased in the quarter. Can you provide a little bit more color why?

Chris Hix

We don’t have any fundamental changes in the quarter. We just view that as a mix of customers that we’re dealing with in geographic regions. As you know, you’ve got different receivables profiles in Europe versus the Americas versus Asia and it really just reflects that.

Eugene Fedotoff - KeyBanc Capital Markets

Got it, thanks. And on corporate expense, you expecting corporate expense to increase sequentially in third quarter. Should we expect that to go back up to around $9 million and that isn’t behind lower interest corporate expense this quarter was solely the litigation gain that you had?

Chris Hix

That’s right. So you had the recovery – we had a successful conclusion to some litigation that we recorded that in the second quarter. I think you can add that back to the number and think about what corporate expenses might look like in Q3.

Eugene Fedotoff - KeyBanc Capital Markets

Got it. Thank you.

Joe Scaminace

Okay. Let me just wrap up by saying we’re really cognizant of what we’re up against here and the message again is that our strategy is intact, but I could reassure you that our leadership across the board up and down the organization is doing everything we can to control the things we can and to mitigate the effects of the things we can. So thanks for joining us this morning. Have a great day.

Operator

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

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OM Group (NYSE:OMG): Q2 EPS of $0.28 misses by $0.12. Revenue of $297.5M (+6.5% Y/Y) beats by $36.25M.