OM Group CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb.24.11 | About: OM Group, (OMG)

OM Group, Inc. (NYSE:OMG)

Q4 2010 Earnings Call

February 24, 2011 10:00 am ET

Executives

Troy Dewar – Investor Relations

Joseph M. Scaminace – Chairman and Chief Executive Officer

Kenneth Haber – Chief Financial Officer

Stephen D. Dunmead – Vice President and General Manager, Specialties Group

Analysts

Michael Harrison – First Analysis

Andrew Dunn – KeyBanc Capital Markets

Saul Ludwig – Northcoast Research

Operator

Good morning. My name is Falisha and I will be your conference operator today. At this time, I would like to welcome everyone to the Forth Quarter Year-End 2010 Results Conference Call. All lines have been placed on mute to prevent any background noise. (Operator Instructions) Thank you.

Mr. Dewar, you may begin your conference.

Troy Dewar – Investor Relations

Thank you, Falisha. I’d like to welcome everyone to our review of OM Group's 2010 fourth quarter and full-year results. Joining me this morning are Joe Scaminace, Chairman and Chief Executive Officer; Ken Haber, Chief Financial Officer; Steve Dunmead, Vice President and General Manager of Specialties; and Greg Griffith, Vice President, Strategic Planning, Development and Investor Relations.

A copy of the press release we issued earlier this morning as well as the presentation materials that will 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 forward-looking statements can be found at the bottom of our press release or in our Form 10-K and applies to this call.

At this time, I will turn the call over to Joe Scaminace.

Joseph M. Scaminace

Thank you, Troy. And good morning, everyone. As you can tell from our release this morning, 2010 was a strong year for the company. Total sales improved 37% over last year and finished closed to $1.2 billion for the year.

Excluding acquisitions, sales grew 24%, reflecting strong volume growth in our global markets. The acquisition of EaglePicher Technologies added another 13% to our top line growth.

Organic volume growth was driven by a global recovery in end market demand and customer restocking across most of the sectors we serve. Particularly, we were excited about the growth in the following markets: powered metallurgy, memory disk, printed circuit boards and semiconductors. In addition, higher selling prices and favorable product mix contributed to our top line growth.

We were able to meet the surging demand without adding costs that were taken out during the downturn. And as a result, we were able to convert this improved top line into profitable earnings growth.

Excluding special items from both years, income from continuing operations was nearly three times higher in 2010 than in 2009. The strength of our operational strategy can be found in our ability to continue to generate positive cash flow from operations.

We are able to self-fund our future growth by reinvesting in our business through high-return capital projects, new product development and acquiring strategic assets. For example, we’ve laid down a formidable foundation to grow in the battery business through our acquisition of EaglePicher Technologies.

This business has excellent access to attractive end markets, such as aerospace, defense, medical, and alternative energy as well as giving us an in depth knowledge of battery chemistries and technologies. Its contributions to our 2010 results are just the beginning of our growth in the battery business. And EaglePicher is representative of the type of transformative deals we will continue to seek as we move OM Group forward. I'm confident in our ability to deliver value creation to its full potential.

Here are a few of the reasons why I’m optimistic about our future. First of all, I truly believe that we've made progress in achieving sustainable earnings performance going forward. And so long as the global economy permits, we fully expect continued and meaningful growth across the various markets we serve. The diversity of our product offerings and the broad geographical footprint of our operations gives us exposure to various global market economic sectors.

Here are a few examples of events that reflect my confidence and the confidence of all of us at the company. The electronics sector will benefit from new products and investments by corporations upgrading their IT networks. The battery materials business is expected to grow from strong portable electronic sales and growth in electronic and hybrid vehicles.

Industrial production should be supportive of increasing volumes for our powdered metallurgy products and we believe that the construction markets are nearing the bottom and will continue to recover this year and begin to recover this year. By maintaining our financial discipline, we expect to translate our increasing revenues into additional earnings growth.

We've seen a surge in M&A activity. And we remain confident that we will ultimately be rewarded for our diligence and discipline in this arena. We'll also selectively increase our funding levels to achieve organic growth with prudent capital expenditures, especially for capacity expansions that offer us attractive returns and funding for R&D to develop new products.

2010 was a very good year for the OM Group. And as you heard if my comments, I believe the momentum is building for us. Looking ahead to 2011, we believe that we’re well positioned for growth and profitability.

At this time, I’ll turn the call over to Ken Haber to walk us through the details of our financial performance.

Kenneth Haber

Thank you, Joe, and good morning everyone. Fourth quarter revenue improved 21% compared with last year. The most significant factor to the increase was our EaglePicher Technologies acquisition, which contributed $31 million in net sales. Excluding this acquisition, revenue grew 9% as demand strength from improving global economic conditions drove volume increases in many of our end markets.

Despite the top line growth, operating profit fell 12% mostly due to the compression of gross margin within advanced materials due to a timing and direction of changes in raw material costs compared with the fourth quarter of last year and higher SG&A expenses across the organization.

SG&A increased $12 million due to the EaglePicher Technologies acquisition, higher performance-based employee incentive compensation and some growth in volume driven activity.

Net income this quarter increased 66% compared with 2009 as an income tax benefit of $2 million offset the reduction in operating profit, higher interest expense and larger foreign exchange loss.

The income tax benefit is due primarily to an adjustment in the fourth quarter to our full-year effective income tax rate as a result of movement in foreign exchange rates and their impact on tax expense. Excluding discrete items our full-year effective tax rate for 2010 was 22.6%. Income from continuing operations as adjusted for special items was $22 million or $0.72 per diluted share compared with $20 million or $0.66 per diluted share last year.

Shifting to our segment results, revenue in advanced materials rose 14% with growth in nearly all end markets, higher cobalt volumes and favorable product mix resulting in improved selling prices were all factors in the sales increase. Metal resale improved $8 million on higher price and volume and by-product revenue increased as higher copper price offset lower volumes.

Battery materials revenue improved despite lower product volumes due to a mix of higher cobalt containing materials. Demand for battery materials continues to be strong with growth in electronic portable devices.

Powder metallurgy volumes were down from its record-setting third quarter, but remained well above 2009 levels. With restocking activity essentially complete, future growth in this market will be driven by global expansion in automotive, construction, energy and mining markets. Chemical and ceramics volumes improved in the fourth quarter as the underlying catalysts and global construction markets continue to grow.

In aggregate, we forecast volumes to increase approximately 10% for this segment in the first half of next year. Specifically, this will be achieved through strong growth in battery materials and powder metallurgy, complemented with more moderate growth in chemical and ceramics.

The largest contributing factor to the lower operating margins during the fourth quarter when compared with last year was the impact on gross margins from the declining cobalt reference price. The reference price for cobalt had been trending down during the second quarter of 2010, compared with the upward trend in 2009. This relative directional change in the reference price led to lower operating margins this year.

Specialty chemicals revenue edged slightly higher than last year. Results were mixed as advanced organics benefited from favorable pricing, while volumes fell as a result of the previously announced plant closure.

Volume growth in electronic technology businesses was partially offset by unfavorable pricing and mix, particularly within memory disk and semiconductor. Revenue to the semiconductor end market grew as strong demand drove unit growth that was partially offset by unfavorable mix.

PCB sales were strong and volume growth and positive price and mix. Memory disk memory fell on lower volumes and pricing. In aggregate, the electronic technologies end markets benefited from growth in demand and we expect this to continue in 2011. Advanced organics volumes were down as a result of the Manchester, England plant closure. Pricing was positive, but not enough to offset the volume drop.

Future growth in this business will be dependent upon our ability to grow sales of higher margin additives to offset the drop in cobalt volumes due to our restructuring actions.

Segment operating profit improvements were due to the benefits from higher volumes, offsetting lower pricing and mix and higher SG&A. Margins in 2011 should benefit from continued volume growth, especially in new high value technologies with potential headwinds from pricing pressure and rising raw material costs.

Looking at battery technologies, as we had indicated during our third quarter conference call, fourth quarter revenue in this segment fell sequentially due primarily to the decline in aerospace. Recall that the third quarter aerospace revenue was particularly strong due to the overall pickup in demand in satellite and aircraft, aided by timing of completion of some programs in the third quarter.

In the other end markets, defense was slightly softer and lower demand for missile programs powered by our products, while medical sales were in line with the third quarter performance. However, despite lower revenue, operating profit was equal with the third quarter as a favorable mix of program deliveries and operating efficiencies offset lower overall volumes.

For our 2011 outlook, we expect growth in defense as the projected mix in military spending should favor the programs in which our products are used. In medical, the implantable device industry is expected to grow in 2011 due to an increase in activity related to new product development. And in aerospace, we are looking for an acceleration in the expected technology shift to lithium ion batteries, a trend which we believe we will benefit from.

Year-end cash balance of $401 million was above the balance at the beginning of the year, but below the third quarter balance. The biggest driver of the quarterly decline in cash was $6 million to $8 million outflow into a cash deposit account held by the Jersey Court related to the injunction against GTL making payments to their joint venture partner for raw materials.

Due to the timing of this outflow, cash used for operating activities was $35 million, compared with $61 million provided by operating activities during the fourth quarter of last year.

Networking capital was higher than the year-ago period due to the increase in sales and the acquisition. However, we were able to effectively manage the increase and achieve reductions in networking capital when measured as a percent of sales and in number of days.

The presentation materials on our website contains slides for our full-year results, which are offered for your reference. I will now refer to these slides in detail. However, I would like to make a few observations.

Full-year growth in revenue and operating profit was driven by our EaglePicher Technology acquisition, favorable selling price and mix, higher volumes from improving end market demand and the goodwill impairment and restructuring charges incurred in 2009 that did not repeat in 2010.

Interest expense in 2010 was $5.3 million. The majority reflecting the money we borrowed from our revolver to fund the acquisition of EaglePicher Technologies. At the end of 2010 we had total debt of $120 million.

Within other income and expense line, non-cash foreign exchange loss related primarily to cash on our balance sheet held at foreign locations and non-functional currencies worth $11 million.

We have stated before that approximately 80% of our cash is held by our international locations. Due to the quantity of cash on our balance sheet, our exposure to various currencies and the movement in foreign exchange rates we incurred a non-cash loss this year.

Finally, total capital expenditures in 2010 were $26 million. This is little more than what we would consider to be maintenance CapEx, which is approximately $20 million. For 2011, our current CapEx plan is between $40 million and $50 million with approximately one-third of that amount targeted for capacity expansion and new product introductions.

Some of these projects were originally slated for 2009, before the economic recession. Now that the end market demand has recovered and is expected to grow, we are investing to capitalize on these organic growth opportunities.

This completes my review of the financial results. I’ll now turn the call over to Steve. Thank you very much.

Stephen D. Dunmead

Thanks, Ken. As is the case in most years, the cobalt market weakened sequentially during the fourth quarter. Demand in powders and chemicals was down approximately 5%, but up 13% versus the prior year. Cobalt prices declined slightly during the fourth quarter with low-grade averaging $17.41 a pound down from $18.10 in the third quarter.

Near the end of the year demand began to strengthen with prices rebounding to the $18.60 to the $20 range for the low and high grades respectively. The recent increase in cobalt price is due to a combination of continued tightness in super alloy grade materials, further delays in additional capacity coming on stream and uncertainty in the DRC. The situation in the DRC is very fluid with Presidential elections planned for the fall and continued security problems in the eastern part of the country.

Now for some of the key end-use markets impacting our advanced materials segment. As previously noted, Q4 is typically the weakest. Our fourth quarter cobalt sales volumes were essentially flat versus the third quarter, but up 7% versus the prior year.

Looking forward, we are optimistic about the demand outlook for first half of 2011 with new applications continuing to develop for rechargeable batteries and continued strong demand in the powder metallurgy market resulting in an overall increase of approximately 10% versus the prior-year period.

During the fourth quarter, the battery and materials market held onto the gains of the third quarter. The market saw solid demand for consumer electronics, especially tablet devices and smartphones, continued conversion to lithium ion battery driven power tools and the emerging electrical vehicle market.

Overall, our fourth quarter cobalt sales into the rechargeable battery market were up 4% sequentially and flat versus a strong prior-year quarter. Lower cobalt containing chemistries continue to gain market share in some applications like laptop PCs. However, polymer type lithium ion battery cells that contain pure cobalt are preferred in more demanding applications that require slim designs such as the rapidly growing tablet devices.

Another bright spot was the successful commercialization of the new mass-produced Nissan Leaf electronic vehicle and the Chevy Volt plug-in HEV during Q4. Both battery systems contain cobalt in the cathode material. We will continue to watch the acceptance of these and other advanced battery powered vehicles closely during 2011.

Looking forward, during the first half we expect volumes of battery materials to be up approximately 10% versus the prior year. Coming off of a record third quarter, our sales into the powder metallurgy market during the fourth quarter was down approximately 15% sequentially, but up 66% versus the prior year.

For 2010 in total, our sales into this market were up 131% versus the prior year. This improvement was due to a combination of improvements in end applications such as energy, mining and construction, supply chain restocking and market share gains.

Looking forward, during the first half of 2011, we expect our sales to get back to the third quarter record levels and be up approximately 15% versus the prior-year period. As has been the case for nearly two years, the chemical market was essentially flat both sequentially and versus the prior year. First half sales volumes are expected to be up approximately 5% based upon increased demand in petrochemical processing catalyst.

As we have been discussing for most of 2010, increased global construction activity and share gains have led to significantly higher sales in the ceramics and pigments markets. Sales during the fourth quarter were down 15% sequentially, but up 22% versus the prior year.

Looking forward, we expect first half sales to be up approximately 5% versus the prior year, based upon continued improvement in construction activities globally.

Now for a few comments on the key markets impacting our specialty chemicals segment. As expected, sales into our key specialty chemicals markets were down slightly, approximately 3% sequentially and essentially flat versus a strong prior year period. The performance versus the prior year was due to improved market conditions offsetting the impact of the shutdown at the advanced organic facilities in Kokkola and Manchester.

During Q4, our sales into the coatings and chemicals market were down approximately 12% versus the third quarter due to seasonality. Our sales were flat, however, versus the prior year as market improvements and share gains offset the reduction due to the previously mentioned shutdown of two of our advanced organics facilities.

Our strategy in this business is to offset declines in the traditional carboxyl dryer market with increased sales of higher margin additives which were up 8% year-over-year.

Looking forward, we expect our sales in the first half to be down approximately 4% as market recovery and share gains are offset by reductions associated with the previously mentioned shutdowns. The global tire market continues to recover slowly with the first three quarters of 2010 showing sequential improvements over 2009.

During the fourth quarter, our sales volumes into this market were down 13% sequentially and down 30% year-over-year. Our decreased sales were due to a combination of timing, the shutdown of our facility in Manchester and the continued shift of tire production to Asia.

For the first half, we will continue to see the impact of the shutdown on a year-over-year basis and expect sales to be at or near the level of Q4, 2010 or down 20% from first half of 2010 levels.

Turning to the electronics markets, during the fourth quarter global semiconductor sales were reported to be down approximately 4% sequentially but were up 12% year-over-year. Our volumes were up 3% sequentially and up 21% year-over-year.

The latest semiconductor sales forecasts call for first half 2011 sales to be flat to down slightly on a sequential basis and then climb in the second half to give an overall unit growth for 2011 of approximately 7%. We expect to be in line with the market.

For the electronic chemicals-related markets, fourth quarter saw demand staying relatively constant versus the third quarter. Overall volumes of electronic plating chemicals were flat sequentially and up 4% versus a strong prior-year period.

For the full-year, our sales were up an impressive 23% versus 2009 due to a combination of market recovery and share gains. In 2011, we expect to build on the strength of the prior year with projected volume increases of approximately 8% to 10% driven by market penetration in PCB.

Hard disk drive shipments were reported to be up 2% verses the third quarter, while those using aluminum disk media were estimated to be up 3%. Our sales into this market were up 12% sequentially and essentially flat year-over-year.

For 2011, industry analysts are expecting the hard disk drive market to be up approximately 5% to 10%. Glass substrates are projected to grow at 13% while aluminum media, which utilizes nickel-plating chemicals is forecasted to be flat. We expect to be in line with the market.

Printed circuit board market also continued to perform well. As expected, due to normal seasonality, overall volumes were down approximately 5% sequentially and up 8% year-over-year.

During the quarter, we started to see a recovery in the LCD sector and continued strength into the applications going into smartphones. Industry analysts are calling for the PCB market to grow by approximately 6% in 2011. Due to additional market penetration and our geographical split being more heavily weighted towards the higher growth regions such as Taiwan and China, for the first half of 2011 we are expecting to be up approximately 10% versus the prior year.

At this point, I’d like to turn the call back over to Joe Scaminace.

Joseph M. Scaminace

Okay, thank you, Steve and Ken for your report. And at this time, I would like to turn the call over to your questions.

Question-and-Answer Session

Operator

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

Michael Harrison – First Analysis

Hi, good morning.

Joseph M. Scaminace

Good morning, Mike.

Michael Harrison – First Analysis

Wanted to ask you a few questions about your battery materials volumes, it seems to me like you’ve given a couple of different metrics there. In your presentation it says a negative 18% battery materials volume year-on-year. Steve, I think you gave a different number for battery volumes and suggested they were up quarter-on-quarter at least.

So I guess help me understand exactly what it is you are seeing there and maybe if we could get a little bit more detail on exactly if the volumes were down 18% year-on-year, given that battery-powered gadgets presumably were up year-on-year, what’s going on there to drive these apparently accelerating declines and share loss of cobalt-based materials?

Stephen D. Dunmead

Yeah. Mike it’s a good question. I want to clarify a couple of things. First of all, there is no share loss, it’s really a mix issue. So as we've discussed before, we sell everything ranging from pure cobalt that is used as a raw material to precursors such as cobalt sulfate which only contains 25% cobalt or mixed metal precursors or cobalt oxide in the case of cobalt oxide may contain 70% cobalt.

And so depending on what that mix is, ends up determining the overall physical volume. Whereas the amount of cobalt contained in that is a different measure and so as we've talked about also before we're getting to the point that different than historically, we're pretty agnostic to what the chemistrians are being moving forward and so we're participating in the mixed metal markets and really I think that the combination, ultimately what drove this was that we had decreased sales of the very low cobalt contained sulfate during the fourth quarter. So we didn't have any share loss, we actually had share gains and the market is growing.

Michael Harrison – First Analysis

So just to be clear on a cobalt contained basis, hearing things about flat year-on-year but when you have lower sales of a low cobalt contained product it negatively impacts your volume.

Stephen D. Dunmead

The total physical volume, yes.

Michael Harrison – First Analysis

All right. Okay.

Stephen D. Dunmead

If you were trying to look at it from the impact on the business, it’s the combination of those two factors that have you to be looking at, because premiums are different, costs are different according to which one of those we’re selling into what part of the market.

Joseph M. Scaminace

Powder metallurgy is a good example, where we get a higher margin on powder metallurgy, because pure cobalt going to that market, Mike.

Michael Harrison – First Analysis

All right. But at the same time, I mean, we are seeing a loss of share in terms of lithium cobalt oxide cathode materials compared to other cathode materials, nickel, manganese cobalt and you addressed polymer based batteries

Joseph M. Scaminace

The market is certainly seeing a shift, so what you are seeing, you are still seeing growth in overall units of cobalt going to the market, but there has been a shift that it is in most applications, in some of the newer applications you are getting the shift to, whether it is nickel cobalt aluminum, nickel cobalt manganese or whatever, so, yes, there is a shift in the market to more lower cobalt containing chemistries and actually in some cases that’s good for us.

Michael Harrison – First Analysis

Wanted to ask also about the impact of hybrid and electric vehicles on the battery business. I know you mentioned that the Nissan Leaf and the Chevy Volt, those batteries contain cobalt. They are not lithium cobalt oxide based, in other words they are much lower percentage of cobalt than the battery that’s in my blackberry, for example, so given that those batteries are generally not, don't have that much cobalt in them and then you've also said in the past you don't want EaglePicher to get into the automotive market necessarily, can you explain to me how you are viewing the HEV and EV market long-term and how much exactly you would expect to benefit from growth there?

Joseph M. Scaminace

Yeah, again, this is an issue, Mike, first of all if you take the Leaf or the Volt, they have anywhere from the Leaf probably about 50% to 80% more cobalt than the Prius on a vehicle basis and the Volt probably has about 50% more cobalt contained in it. But again in those value chains for either the Leaf or the Volt, we could be selling a mixed metal precursor which may have much more value to us than simply selling something that’s got pure cobalt in it. And so and I did want to clarify one other thing, I do not think we ever said that we don't want EaglePicher to go into the vehicle market. It’s finding a place that there is value of the technology that EaglePicher has.

Kenneth Haber

You know, the other issue, when you talk about long-term here, Mike, the fact of the matter is that this is incremental growth in the battery market so the more that electric vehicles and HEVs are accepted by the consumer, that’s all upside for our company but we have specifically chosen not to throw any fixed capital at building, capacity on the battery side because the technologies still are being tested and proven. We're in the catbird seat because we’ve materials either on the cobalt side or on the precursor side as Steve mentioned to be able to capitalize on that growth.

Stephen D. Dunmead

And, Mike, I think it's important as we mentioned when all the battery stimulus money went out that we believe that we've got ourselves well-positioned because we're supplying or being considered for supply in every one of those value chains or supply chains that are leading up to those vehicles. So today the electric vehicle or the HEV market is small compared to what we're doing with consumer electronics but it continues to grow and it’s growing at a very fast rate and so are we interested in it? Yes. Are we participating? Yes. And we have significant resources focused on that today.

Michael Harrison – First Analysis

All right. Thank you very much. I'll get back in queue.

Operator

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

Andrew Dunn – KeyBanc Capital Markets

Hi, guys, this is Andrew Dunn on for Doug today. I had a question kind of going back to the advanced material segment with regards to timing, as you mentioned that cobalt price ramping up here this year. In terms of how we think about that, should we see that starting to affect margins perhaps in the first quarter or is that really going to be something that’s pushed maybe a little further down to the second quarter?

Stephen D. Dunmead

This is Steve Dunmead. I think that really when you look at it, is what we're going to see if we look at, say, the first quarter, that cobalt prices have been relatively constant. We've seen a recent uptick since the end of the year. But when you look at it versus our supply chain, which can be four to five months in arrears from a raw materials standpoint, it’s relatively constant.

The margin compression that Ken mentioned relative to the fourth quarter versus last year's fourth quarter is really a short term, we had seen increasing cobalt prices throughout 2009, especially in the third and fourth quarters whereas we saw exactly the opposite occurring during 2010.

Andrew Dunn – KeyBanc Capital Markets

Okay. Great. And then also kind of looking at the battery segment, you guys had a kind of margins there that were bumping up right against 10%, kind of moving forward can you tell us is that how we should continue to think of it or are those kind of at the very high range? How should we see that moving forward?

Joseph M. Scaminace

Are you talking about battery technologies?

Andrew Dunn – KeyBanc Capital Markets

Correct, correct.

Joseph M. Scaminace

Yeah, I think that that was in the fourth quarter I would say that this business is tied around, you can’t look at a quarter basis with this business because it’s really tied around programs that stretch over anywhere from 12 to 24 months. So part of it as you've seen already in just what happened in aerospace that we talked about earlier, about third and fourth quarter, the timing of those programs and also the final cost of those have some, will causes some ups and downs from quarter-to-quarter. So I think that overall, I think when we look at next year or this year, looking at 2011, we would expect to see margins in that range. But I don’t want to comment on one quarter specific because there is a lot of timing differences relative to programs and completions of those.

Andrew Dunn – KeyBanc Capital Markets

Okay. And just real quick last also question, you are looking at kind of your freight and shipping costs as you move material from I guess Africa to Europe and then to end markets, should we expect to see any effects on margins should we look at oil kind of jumping off here going forward?

Stephen D. Dunmead

I think it's too early to tell. You are talking about from the shipping cost standpoint?

Andrew Dunn – KeyBanc Capital Markets

Correct, yeah.

Stephen D. Dunmead

I think it’s really too early to tell yet. It depends on whether or not this is a long, sustained issue or whether it is a short-term issue. But in the grand scheme of things, the logistic costs are not significant to the impact on our P&L.

Andrew Dunn – KeyBanc Capital Markets

Okay, great. Thanks very much, guys.

Joseph M. Scaminace

Thank you.

Stephen D. Dunmead

Thank you, Andrew.

Operator

(Operator Instructions) Your next question comes from line of Saul Ludwig with Northcoast Research.

Saul Ludwig – Northcoast Research

Good morning, guys.

Joseph M. Scaminace

Good morning.

Stephen D. Dunmead

Good morning, Saul.

Saul Ludwig – Northcoast Research

You know we are just talking about the timing issue and the duration and the raw material cost and advanced materials, what was the magnitude of the impact of that in the fourth quarter?

Kenneth Haber

Well, on our slides we show you the gross numbers but the net impact would be probably in the $2 to $4 million range.

Saul Ludwig – Northcoast Research

Okay. And that goes away…

Kenneth Haber

And that just on inorganic business, certainly GTL also, their profits were down quarter-over-quarter last year based on deliveries so the combination of those two items are the key drivers.

Saul Ludwig – Northcoast Research

What was GTL's pretax in the fourth quarter?

Kenneth Haber

Pretax was well, their operating profit was $800,000. And then you had miscellaneous expense, some other expenses, tax benefit in that fourth quarter because it is one of those discretion items so the taxable income then became $0.50 million and minority interest at the 45% roughly about $200,000, and that’s what you see on P&L.

Saul Ludwig – Northcoast Research

Gotcha. When you think about the Joe, when you think about 2011 and you and Steve gave some pretty optimistic outlook, what would you say are the biggest headwinds that you face in 2011 that risk immuting some of the positive outlooks that you talked about?

Joseph M. Scaminace

Yeah, yes. Saul, that’s a great question. We're certainly not sitting here with these pie in the sky forecasts but in addition let me just reiterate what we see as some of the positives, many economic indicators seem to be showing positive, our end market demand is stable and in many cases where we've gained market share in powder metallurgy, we just feel good about that. We have a good hand on the pricing throttle where we're really watching our raw materials but on the other side of that you are absolutely correct in us being very prudent on what we might face in headwinds and even though I mentioned in my comments that we believed that construction maybe bottoming out, the residential and non-residential, construction markets still seems like there is a lot of stress out there.

The latest news is that housing prices might, still be under a lot of pressure. But we are seeing a good demand on our coatings customers which would indicate, good construction deplaned. Continued weakness in housing, like I said, rising foreclosures, there is still the issue of global sovereign debt weighing on the markets.

I mean, I was shocked that when the whole Mubarak thing happened in Egypt that there wasn't a discussion on the sovereign debt on the part of Egypt that owed, tremendous amounts of money to the French and other countries. So I think that looms out there which really, the whole geopolitical risk just seemed to be rising and, we're watching with concern about what’s happening in the Middle East right now.

I mean, if oil prices, move well past $100 a barrel, there is a good chance that things could start to slip so I think that those are some things that we're worried about. We're worried about currency wars, and just uncertainty regarding, legislative and regulatory changes that are out there. So those are I think, with the theme I could give you, Saul, is that those are fairly macro issues that are beyond our control. I will tell you that the cost that we took out during the downturn, the things that we're focused on right now, the incentives we have for our salespeople to gain market share, the things that are in our control, we feel pretty darn good about it.

Stephen D. Dunmead

Saul, the only other thing that I’d add is I think that we are starting to see, as demand across all these different end markets globally start to increase, there is some pressure I think as Ken alluded to starting to appear in some of the raw materials. It is spotty.

But, if you look at, say, yellow phos coming out of China, some of the petrochemical hydrocarbons we're starting to see some increases so I think there's we're being cautious on raw materials from apprising.

Saul Ludwig – Northcoast Research

Okay. Thank you. Steve, could you talk about the status of all this new cobalt supply that's been coming on stream for the last two years and say particularly the 10-Q project and any others. What’s your read on where that stands? We realize whatever answer you give may turn out to be different tomorrow. But how are you seeing it today?

Stephen D. Dunmead

I’ll talk about it in general because I really don’t want to talk about anyone else's specific project. I think as usual in the Congo things and I’ll make that more general because I think it is all of Africa at this point, that projects take longer to start up and they typically aren’t at the capacity at that they think that they are going to be at. However, we are seeing additional material coming.

You've got the project in Madagascar that I haven’t heard any recent updates but I hear some rumors on that one and so overall, yes, additional materials coming. Most of it turns out is in the form of either feed or low-grade materials and so we keep mentioning quarter after quarter that there's a shortage of high-grade materials to go into super alloy applications and I think that’s a direct reflection of what’s been put in the capacity is being put in, either they are either making raw materials or they can’t make cathodes that’s good enough to get into super alloy applications. So it is coming and I think quite honestly that gives us some options from raw materials standpoint as we look forward.

Saul Ludwig – Northcoast Research

So as of this moment you are still, you are getting your raw materials from Norilsk, and from the Congo, that's and from the Big Hill those are your raw materials sources as of now?

Stephen D. Dunmead

Yeah. We have the two different sources coming from Norilsk, the one from our old nickel refinery in Finland and the other the hydroxide then the material coming from the Big Hill, which is the bulk of it, we are sourcing some other from some of the projects you may know, some other materials from Africa and then we are doing a fair amount of recycling right now.

Saul Ludwig – Northcoast Research

Okay, good. Another question, Ken, tax rate for this year?

Kenneth Haber

Well, we are using 30% plus or minus 3%, 4% on either end given the fluctuations on the exchange rate as we talked about in that regard.

Saul Ludwig – Northcoast Research

And then finally on the big increase in the capital spending as it relates to increase in capacity, what are some of the areas where you are planning to increase your capacity and to what extend will it impact your capacity?

Joseph M. Scaminace

Great question, Saul, we're excited about what we're doing here and I'll let ken answer of Steve answer some of that.

Stephen D. Dunmead

I think Saul is either Ken or Joe, one of them mentioned that when, we had a bunch of things in the works in early 2009 that were on the books and the plans and then we pulled back and honestly people talked about doing some of these expansions last year and we got too busy and so if you look at the four main areas from expansions, the areas are not going to surprise you. Its electronic chemicals where we are getting, we've seen significant increases, we are back above the 2007 kind of volume levels, it’s in battery materials, the battery precursor types of things that Mike Harrison was asking about.

Its fine powders going into the powder metallurgy market that we were up a 131% year-over-year and semiconductor materials, so it’s the area that you would expect to see us investing in.

Joseph M. Scaminace

And let me just mention on the fine powder issue, where we have powder metallurgy cobalt going into that market, it really is reflective of an increase in industrial production globally, because when you look at the customer base out there, like a Sandvik or Canametal these are companies that are manufacturing cutting tools.

Cutting tools are used in industrial production so where you see the German car industry taking off, where you see global industrial production, we’re the beneficiary of that end-market move and we believe that we need more capacity there.

Kenneth Haber

And would I just add, Steve talked to the other segment, battery technologies, they have money budget for new product development so all told, I think right now we're looking at $15, $20 million if we get it all done this year.

Saul Ludwig – Northcoast Research

Great. And the final question is, continued to have a huge percentage of your battery material going to one customer. Is that customer faring well in the marketplace being a Japanese customer who has high currency? Is that a issue that you face going forward in terms of your customer mix of your battery materials?

Kenneth Haber

No, I do not think so, Saul. I think that they are in pretty good shape. And I think if we look historically, say, over the past four, five years, we've certainly diversified our customer base, and certainly the currency issue for any of the not just that customer but any of the Japanese customers versus the Korean Won or the R&B is an issue. But in the case of our bigger Japanese customers, I think they are doing fine right now.

Stephen D. Dunmead

And, Saul, they have a pretty – we would never take this for granted, but they have a very good supply line where, you know, using our cobalt from a quality standpoint. And if you remember, you know, where there were some fires and the like this is a high quality producer of battery materials coming out of this Japanese customer. And in addition to that they've got an incredibly strong LED unit within their company, which is really very profitable for them. So, we certainly don't see any risk in terms of their financial ability. I guess the only risk could be market share risk and we haven’t seen any problems there.

Saul Ludwig – Northcoast Research

Thank you very much, guys.

Stephen D. Dunmead

Thank you.

Joseph M. Scaminace

Okay. Well, thank you very much for participating on our call. As we wrap up another year, I want to thank you all and express my appreciation for your ongoing interest in our company. We're pleased with our achievements this past year and as I indicated, we've all indicated, we're confident that we've set the stage for an even stronger 2011. We’ve created significant momentum moving forward and we think that we're going to be making progress on our strategic goals. Have a great day.

Operator

Thank you. This concludes today's fourth quarter year-end 2010 results conference call. You may now disconnect.

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