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OM Group, Inc. (NYSE:OMG)

Q1 2011 Earnings Call

May 5, 2011 10:00 am ET

Executives

Troy Dewar – Director, IR

Joe Scaminace – Chairman & CEO

Ken Haber – CFO

Steve Dunmead – VP & General Manager, Specialties Group

Analysts

Rosemarie Morbelli – Gabelli & Company

Saul Ludwig – Northcoast Research

Chris Kapsch – DDR Research Group

Mike Harrison – First Analysis

Operator

Good morning. My name is Sean and I will be your conference operator today. At this time, I would like to welcome everyone to the OM Group First Quarter 2011 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.

I would now like to turn the conference over to Mr. Troy Dewar, Director of Investor Relations. Sir, you may begin the conference.

Troy Dewar

Thank you, Sean. Good morning, everyone, and welcome to our review of OM Group’s 2011 first quarter 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 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 Web site at investor.omgi.com.

During the course of this call, we will be discussing certain non-GAAP financial measures. I’ll refer you to our company’s 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 apply to this call.

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

Joe Scaminace

Thank you, Troy, and good morning, everybody. We had a very strong first quarter. It was characterized by the same positive factors that brought a successful result in 2010. Global economic expansion is powering growth in many sectors we serve such as semiconductors, memory disks and printed circuit board and vast materials used in rechargeable batteries, hard metal cutting tools for automotive and industrial production and specialty batteries for defense and aerospace applications. As a result, volumes were strong for many of our businesses.

Revenue grew 9% this quarter compared with last year and we grew our top-line despite a reduction in cobalt price. It’s worth noting that it was not only strong end market demand that helped us. Diversification of our business model into sectors and products that were not dependent on metal price is paying off. This is additional proof that further transformation [ph] and diversification will in fact create value.

Not only do we grow revenue, but we also improved our operating profit by 18%. Thanks to higher gross profit and disciplined cost management. We’re raising prices where possible in order to stay ahead of rising raw material costs. The increase in profit along with discipline working capital control resulted in positive cash flow from operations.

One of the most common questions we received from the investment community is what are you going to do with the cash. Our answer to this question is the same as it’s always been. We intend to fund our strategic initiatives by investing in organic growth opportunities as well as tactical and transformational acquisitions.

Our first quarter results clearly reflect the benefits of diversifying our business model and reducing our dependence and cobalt price. Transformation however does not in any way eliminate other means of using our cash for creating value in the short-term.

Our growing cash balance in fact provides more options today than in the past, and we will continue to evaluate and consider all options before us.

Our primary goal, however, is to properly identify opportunities for the strategic use of our cash to obtain exposure to diversified and growing end markets. Our transformation is all about growing OM and increasing our opportunities in the global marketplace.

This management team and our entire board of directors are committed to creating value through the implementation of our strategy. Be assured that we will continue to act with this appropriate judiciary duty to ensure we are fulfilling this mission.

Looking to the future, our global end market diversity provides exposure to various patterns of trends which should include and continue to provide growth opportunities.

We are helping our customers to improve efficiency and reduce costs. For example, we are developing chemicals that will be used to reduce costs and increase the efficiency of solar panels. We saw materials that we do submissions in petrochemical refining and improve the performance of electronic vehicles.

We’re ramping up sales of specialty additives that allow coatings customers to remove volatile organic compounds from the formulations, and we’re increasing our involvement in recycling materials to reduce waste and limit environment impacts.

Another trend that provides growth opportunities for us is the growth of electronic devices. These products touch nearly every phase with our life. It’s that something you do every day, chances are there is an apt for that. This is not just the traditional market for computers, laptops and cell phones but encompasses everything from home appliances to automobile to greeting cards. As these devices involve they are becoming smaller, faster, and more functional and less expansion. Our products are enabler for these developments.

We saw specialty chemicals that allow manufacturers to lower their costs, while meeting these evolving requirements. Similarly, the global need for portable tower is accelerating. We see this everyday as we now consider portable electronic devices such as cell phones, smartphones, tablets, e-readers and music players as necessities rather than luxuries.

More and more battery power tools are being sold every day. The potential growth in hybrid, plug-in hybrid and electric vehicles may fundamentally change the automotive industry and breakthroughs in treating various medical conditions with implantable medical devices premises to enhance health and wealth being for many.

All of these means that we’re becoming more dependent on battery power and this is a favorable trend for the OM group. We currently saw battery materials and technologies that are used on all these applications. The bottom line is that you like rechargeable batteries you have to like OMG.

We are able to improve our performance and protect our earnings because of our efforts to diversify and limit our exposure to volatility. We’re working hard and we’re performing well with the strong start to the year. We’ll continue our transformation through deploying our cash strategically to gain exposure to end markets.

Before I ask Ken to provide a detailed overview of our financial results, let me offer a few comments regarding the recent disaster in Japan. First and foremost, I’m pleased to report that all of our employees and their families are safe and then none of our facilities was directly harm by the earthquake or subsequent tsunami. It also appears that our customers escape direct harm from the disasters. This resulted in relatively minimal impact to our business activity in the region during the quarter.

Later in the call Steve Dunmead will address the impacts of these events and what they may have on our operations later this year.

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

Ken Haber

Thank you, Joe, and good morning everyone. Revenue in the first quarter improved 9% compared with last year as global demand for our products remain strong. Nearly, all of our end-markets saw volume growth, particularly, noteworthy where semiconductor, powder metallurgy and printed circuit boards.

We continue to benefit from our exposure to a diverse range of markets and geographical regions. Partially offsetting the benefit from higher volumes was unfavorable pricing due primarily to the year-over-year decline in the cobalt reference price.

Operating profit rose 18% pushing margins to 11.4% of sales. Improvements in Advanced Materials and battery technology led the way.

Gross profit improved to 24.8% of sales while SG&A rolled slightly to 13.3% of sales. Back at the volume growth along with the increase contribution from byproduct sales and Advanced Materials and lower manufacturing expense were the main drivers for improving gross profit, partially offset by unfavorable price mix.

The increase in SG&A is attributable to improved sales, higher employee compensation, benefit cost and increased professional service fees. We also received a $1.2 million insurance recovery related to an environmental remediation for a closed U.S. manufacturing site.

Net income this quarter was $30.7 million, a 36% increase compared with 2010. Other expense was approximately $3 million lower due to foreign exchange gain of a $0.5 million versus a loss of $3.2 million last year. Tax expense in the first quarter was $5.7 million and pre-tax income of $37 million for an effective tax rate of 15.5%.

Income from continuing operations as adjusted for special items in the first quarter was $31 million or $1.02 per diluted share, compared with $21 million or $0.69 per diluted share last year.

Within our Advanced Materials segment, revenue improved 6% as higher cobalt volume and an increase in byproduct sales offset the impact of lower cobalt reference price and a drop in metal resale.

Our end markets achieved increased sales with the exception of a slight decline in Battery Materials. In our end markets saw growth in cobalt volume. Metal resale slipped $3 million as lower price offset higher volume and byproduct revenue increased on higher copper price and volume.

The slight decline in Battery Materials revenue was due primarily to lower cobalt reference price, which was partially offset by higher cobalt volumes due to the strength we are seeing in high cobalt chemistries.

Powder Metallurgy volumes were again at record levels due to demand from automotive, construction, energy and mining activity. Chemical and ceramics volumes improved with the pickup in catalyst activity in a seasonally strong first quarter for picking up.

Volumes in the second quarter to trend lower from the first quarter as we will shut down our Kokkola facility for its annual maintenance.

We typically see third quarter volumes improve from the second quarter and our expectation is that both periods you should see higher volumes than a year ago.

Operating profit improved 10% resulting in slight improvement in operating margins compared with last year. Contributing to the increase were higher cobalt volumes, growth in byproduct profit and lower manufacturing expense, primarily due to the expenses related to the maintenance shutdown of our joint venture smelter in 2010.

Cobalt price is down from last year and has been trending lower since the beginning of this year. This along with the strong euro relative to the dollar will challenge our ability to grow margins in the near-term for the segment.

So actually chemicals revenue improved 5% compared with last year, due primarily to higher volumes in our electronic technologies end markets and better pricing in advanced organics.

Combined volumes in advanced organics end markets of tire, coatings and chemicals were down 5%, reflecting the restructuring activity that we completed within this business last year.

Volume declined from the restructuring activity has been partially mitigated by our ability to retain more tire customers than originally anticipated. Additionally, growth in specialty additives for coatings and initial recovery in construction has benefited the business. Improved pricing in tire and coatings partially offset the reduction and volumes.

Revenue from semiconductor end markets grew a strong demand drove unit growth offsetting unfavorable mix. PCB sales were strong in volume growth and positive pricing. And memory disk revenue increases favorable pricing offset lower volumes. In the aggregate, our electronic technologies end markets benefit from growth in demand, and we expect this trend to continue in 2011.

For the segment, operating margins fell as higher volumes and lower manufacturing expenses were not enough to offset lower mix and rising raw material costs and higher SG&A. We are taking pricing actions now to address the raw material costs and expect to see improving margins in the second quarter.

We plan to capture future increases and costs in pricing and to continue our focus on developing higher value products with our customers. Revenue in Battery technology was $31 million, significantly higher than last year. Recall last year’s results included only two months of activity based on our acquisition date of January 29, 2010.

Excluding the additional month in 2011, first quarter revenue improved approximately 12% due to higher customer deliveries and defense and improved demand in aerospace for aircraft applications. Medical sales also improved an increase neuromodulation demand.

Operating profit improved from last year due to volume growth and favorable product mix. The 2010 period did include $1.5 million in purchase price adjustments that did not repeat this year. Sequentially, margins fell primarily due to mix of programs deliveries.

Our near-term outlook for this segment calls for steady revenue and improving margins. As we have stated in the past margins can vary quarter-to-quarter depending on the mix of program deliveries during the period, which should be more stable year-to-year.

On the revenue side we still see the same drivers for growth we identified during our last call. Growth in defense as a projected mix and military spending should favor the programs in which our products are used. The implantable medical device industry is expected to grow in 2011 due to an increase in activity related to new product development and the expected technology shift to lithium ion batteries in aerospace should accelerate, the trend which we believe favors our technology.

Our cash balance at the end of the first quarter was $409 million, slightly better than our yearend balance due to cash provided by our operations. As we have stated in the past our strategy involves diversifying the business models such that we can achieve more sustain predictable earnings across our portfolio. We believe this is best achieved by investing in organic growth opportunities and strategic acquisitions. Our strong balance sheet and demonstrative ability to generate cash from operations are key to our successful acquisition of our strategy.

Net working capital increased during the quarter compared with both last year in last quarter primarily reflecting increased sales for the period. As a percentage of sales net working capital is lower than last year. Net working capital days increased as accounts payable days fell due to a payment by GTL for raw materials which had been held by the Jersey Court injunction. This completes my review of the financial results. I’ll now turn the call over to Steve. Thank you.

Steve Dunmead

Thanks, Ken. During Q1, the cobalt market strengthened sequentially with demand in powders and chemicals up 14% versus Q4 and up 6% versus the prior year. Cobalt prices firmed during the first quarter as low grade average 18.38 a pound up approximately $1 versus the fourth quarter to down from approximately $20 average of the prior year.

Price is stalled from early margin till the end of April as uncertainty with potential decrease demand due to the disaster in Japan changed trading sentiment and a shift to speculative selling occurred.

During this recent softening of the market, super alloy grade such as (inaudible) and Russian K1AY all remain relatively tight thus limiting the overall downside.

Most market reports have yet to show any significant reduction and demand in Japan and as such it now appears that the sentiment is improved with low grade increase into $17.50 a pound from a low of $16.33 per pound at the end of April.

Before I discuss the key end use markets, I’d like to make a few comments regarding the disaster in Japan. As Joe mentioned previously the net impact on our business during the first quarter was probably neutral to a small positive as any business lost in Japan was offset by increased sales elsewhere.

Looking forward, the major area of concern is regarding the stability of power supply and the impact that will have on the global electronics and automotive supply chains. At this point we believe that the Q2 impact will be neutral, but the outlook for Q3 and beyond in some markets is still uncertain.

Now for some of the key end use markets impacting our Advanced Materials segment. Virtually, all of our end markets were strong during the first quarter resulting in record cobalt sales, up 14%sequentially and up 12% versus the prior year. On a sequential basis, our Q2 sales would be impacted by the annual maintenance shutdown in cobalt, it takes place at the end of May.

Nevertheless, overall for the next two quarters we expect to see cobalt volumes down only slightly approximately 3% versus Q1 levels. The Battery Materials market was very strong during the first quarter with demand being driven by growth in consumer electronic applications such as tablet devices and smartphones. Cobalt sales volumes in this market were up 8% both sequentially and versus the prior year.

Our Q1 sales mix stranded toward higher cobalt containing products and does a total physical volume was up only 1% sequentially. The cathode material markets were shifting to lower cobalt containing chemistries for lower end laptop computers is trending toward cobalt based cathode materials in more advanced slim designed electronics.

Meanwhile, other new applications for lithium ion batteries such as EVs, power tools and e-bikes continue to drive increased demand for mix metal chemistries. As a result, our mix metal sales were up over a 150% versus the prior year. Overall, OMG is well-positioned regardless of the chemistry in the battery market.

Looking forward, at this point we expect cobalt volumes to drop by few points during the second quarter and then pick up again in Q3 and surpass Q1 levels. At this point we’ve seen very limited impact of the events in Japan on our Battery Materials business.

Our Powder Metallurgy team recorded another record quarter in Q1 due to a combination of share gains and very strong global tooling demand. Cobalt sales volumes were up 22% sequentially and up 19% versus the prior year.

Looking forward we expect volumes to remain near these levels for the next couple of quarters. Organic chemicals also recorded a strong quarter due to improved demand for petrochemical processing catalysts and steady growth from other chemical applications. Volumes were up 20% sequentially and up 13%versus the prior year.

Looking forward, we expect some softening in the market as higher oil and gasoline prices should impact demand at the pump which will ultimately impact refinery output and demand for processing catalysts.

The Kokkola maintenance shutdown loss will limit product availability and as a result we expect Q2 volumes to be done by about 15% sequentially and then recover partially during Q3. As it’s being the case for the past year, demand for ceramics and pigments continue to be solid driven by global construction activities.

During the quarter we held on to our share gains with cobalt sales volumes up 35% sequentially and up 29% versus the prior year. Looking forward doing part to the maintenance shutdown in Kokkola for the next couple of quarters we expect volumes to drop by approximately 10% and then come back in line with 2010 levels.

Now for few comments on the key markets impacting our Specialty Chemical segment. Overall, Specialty Chemical sales were up 5% year-over-year and up 10% sequentially due to a combination of the overall market strength, supply chain replenishment in the memory disk market and share gains.

During Q1 our sales into the Coatings and Chemicals markets were up 8% year-over-year and up 18% versus the seasonally weak fourth quarter. Our strategy in this business is to offset declines in the traditional carboxylic dryer market with increased sales of higher margin additives which were up 13% year-over-year.

Looking forward we expect our sales over the next couple of quarters to be at the modest 3 to 4% as commercial construction and industrial foam applications gradually improve.

Global tire market continues to improve slowly. Our volumes were down 34% year-over-year due to the shutdown of our Manchester U.K. facility and associated sales that were put forward.

Looking forward the markets are somewhat mixed as tire producers continue to reshuffle production and are now dealing with the production slowdowns and automakers related to part shortages due to the events in Japan.

As mentioned previously high oil and gasoline prices are also beginning to impact driving patents. Although visibility is not great over the next two quarters we expect volumes to be flat to down slightly approximately 2% to 3%.

Turning to the electronics markets, during Q1, global semiconductors sales were down 3% sequentially but were up 10% to 12% year-over-year. Our sales were up 3% sequentially and up 15% year-over-year. Analysts have yet to modify their 2011 forecasted growth rates of approximately 7% due to the events in Japan.

We are expecting a modest of 1% to 2% increase duringQ2. Beyond the end of Q2 the impact of the overall electronic supply chain and associated demand is not yet clear.

For the electronic chemicals related markets Q1 saw demand remain very strong. Overall volumes of electronic plating chemicals were up 3% sequentially and up 5% versus the prior year. Due to uncertainties in the overall supply chain related to Japan, we are expecting volumes to be down approximately 5% over the next two quarters.

Hard disk drive shipments globally were reported to be down 5% versus Q4, due in part customers replenishing inventory after a strong Q4, our sales into this market were up 6% sequentially and essentially flat year-over-year. For 2011, industry analysts are expecting the hard disk drive market to be up 6%.

Glass substrates are projected to grow at approximately 10% while aluminum media which utilizes nickel plating chemicals is forecasted to be flat. Over the next two quarters, we expect volumes to be down approximately 10% due to a combination of the inventory restocking coming to an end and some impact due to a portion of the drive assembly supply chain being temporarily squeezed by the events in Japan.

Printed circuit board markets also continue to perform well during the first quarter. Our volumes into this market were flat sequentially and up 7% year-over-year driven by strength in the LCD and smartphone sectors.

Industry analysts are calling for the printed circuit board market to grow by approximately 5% in 2011, not taking into account any potential impact of the disaster in Japan on the overall electronics supply chain. Although, the outlook is not very clear beyond the end of Q2, we are currently expecting volumes to be flat to down slightly versus Q1.

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

Joe Scaminace

Thank you, Steve and Ken. At this time, we like to turn the call over to you for your questions.

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Rosemarie Morbelli with Gabelli and Company. Your line is open.

Rosemarie Morbelli – Gabelli & Company

Good morning, all, and congratulations on the strong set of quarter.

Joe Scaminace

Thank you.

Rosemarie Morbelli – Gabelli & Company

Could you help me see if I did the math properly? If I look at the amount of revenues going to the rechargeable battery market, it is 39% of advanced materials plus the battery technology business which amounts to approximately 356 million annually, is that correct, and could you share with us the percentage of operating income from that particular side of the business?

Ken Haber

Revenue is correct; we do not disclose operating profits by end markets.

Rosemarie Morbelli – Gabelli & Company

Okay. Would you say that the margin for that particular business is substantially higher than the overall corporate margin?

Steve Dunmead

It’s comparable. I think if you look at the margins for the Advanced Materials that we have on our slides this quarter and it varies but 17% is an overall margin for our businesses. I think as we’ve said before there are differences along products lines relative to their functionality and how they are used in our customers products and processes and that’s where the value added come. So that’s reflected in those various products and applications.

Rosemarie Morbelli – Gabelli & Company

Okay. And as you get closer to the end user which I believe is the goal, how much of an improvement do you think you can expect on those margins?

Ken Haber

I don’t think we will see significant improvements. I think actually when we will get to those move up their supply chain as we talked about before for example, battery materials is the precursors and certainly those have been priced competitively to the market. So it’s hard to speculate at this point now that.

Steve Dunmead

Rosemarie, this is Steve. I think certainly, there is incremental improvements that further down the value chain that you do. I think the biggest improvement that we would see is more concrete visibility to the end of the value chain and what the next generation product need to be so that that helps guide our new product development which then expanse the margins beyond what you are talking about. If all we’re doing is buying the next chunk in the value chain it’s an incremental improvement. If we’re able to get increased visibilities so that we are tailoring our products to the exact need to the market, then I think you start to see some significant margin expansion.

Joe Scaminace

Plus stability.

Rosemarie Morbelli – Gabelli & Company

Okay, now, that is very helpful, thank you. And if I may ask one last question, could you give us a little more detail on the recovery on the construction side? Is that inventory replenishing or do you see actual real demand in that market?

Steve Dunmead

This is Steve again. Certainly, that part of the business is very global in nature and we’re seeing strengthening construction in various regions, we’re starting to see some more construction in the US certainly in Europe, specifically in Germany we are seeing a fair amount of industrial consumption there. So I really believe this increased demand is not just simply replenishing the supply chain.

Joe Scaminace

And main that will be construction related only, Rosemarie, maybe remodeling, replenishing and refurbishing industrial fixed assets base also.

Rosemarie Morbelli – Gabelli & Company

Okay, thanks.

Operator

(Operator instructions). Your next question comes from the line of Saul Ludwig with Northcoast Research. Your line is open.

Saul Ludwig – Northcoast Research

Good morning, guys. Great first quarter.

Joe Scaminace

Good morning, Saul.

Ken Haber

Good morning.

Saul Ludwig – Northcoast Research

A couple of things here that you’re manufacturing and distribution cost went down by $5 million, something number, within Advanced Materials, how did that come about and is it that type of improvement likely to be sustained?

Ken Haber

Also that change quarter-over-quarter, Saul is related to the shutdown of the GTL now to be record. We are winding that thing, winding that facility down and so most of that improvement is related to that, and that’s not going to be repeat. You will see a probably little improvement there in the second quarter because there was some carry over in the expenses and the relining costs are relative to that. But that’s not a sustainable number on that perspective.

Saul Ludwig – Northcoast Research

You said that overall volume was up $15 million which I’m trying to reconcile the 2% increase in product sales volume with the big increase in cobalt volume, like you’re really saying that the pounds of cobalt that were embedded in the products sales were up a bunch and therefore, the other materials that are used in product sales would have been down a bunch?

Steve Dunmead

Absolutely, you’ve got that right. So the best example that I can give you and this is an actual one that if we were selling extra fine cobalt powder into the Powder Metallurgy market, that’s a 100% cobalt or 99% cobalt. If we were selling cobalt sulfate into some other market it maybe 25% cobalt contained in it and so according to what that mix is it dramatically changes and that’s why we report both total physical volume and the cobalt volume because both are important to us.

Saul Ludwig – Northcoast Research

How much was that cobalt volume up, Steve, percentagewise?

Steve Dunmead

We were up 14% sequentially and 12% versus the prior year.

Saul Ludwig – Northcoast Research

Okay, great. Ken, how much increased profits did you get from taper this quarter versus last year?

Ken Haber

It was $3.5 million, of which 3 million of it was driven by price and the difference is all volume. So really the delta in the copper price year-over-year and quarter.

Saul Ludwig – Northcoast Research

And you also mentioned that the metal resale volume was up, but offset by lower price. How much percentage wise did metal resale volume go up?

Ken Haber

1 or 2%. That was remaining.

Saul Ludwig – Northcoast Research

Not a big deal there. And let's see. What was their pre-tax earnings?

Ken Haber

Pre-tax earnings was of $3.5 million.

Saul Ludwig – Northcoast Research

And what that wind down to when you get to the bottom line.

Ken Haber

Well, tax rate and all that it would get you to about 900,000.

Saul Ludwig – Northcoast Research

900,000 in profit?

Ken Haber

Yes. (inaudible)

Saul Ludwig – Northcoast Research

Now total earnings were being held but just separately, so it would have been like the tax rate is like 40% and the net, Ken …

Ken Haber

It’s more like 44, 45% now.

Saul Ludwig – Northcoast Research

Okay. 1.8 million in taxes. 1.8 million after tax. I got you.

Ken Haber

Yes, after tax that of net income.

Saul Ludwig – Northcoast Research

Net income 1.8 million. And how do you see the Big Hill results going forward? Is it fairly steady or anything coming along there that’s going to make a big difference?

Ken Haber

Certainly from a productivity standpoint, we don’t see anything, so it is running very, very well since the shutdown and restart. So we don’t see anything from that standpoint. So, overall results will ultimately probably depend on metal price.

Saul Ludwig – Northcoast Research

And then just finally from your outlook comments about the maintenance shutdown and some of the macro trends, you’re kind of saying and also the strong euro which is going to affect your results and lower cobalt prices, the $32 million that you made in Advanced Materials in the first quarter would be a somewhat lower number in the second quarter for the reasons that were announced here during the call?

Ken Haber

Yes, certainly, from volume standpoint, yes, the trend that is the projected trend.

Saul Ludwig – Northcoast Research

And if the year I would say that $1.45 versus was in the first quarter how much does that euro purchase because I know you pay your expenses in euros but then you sell a lot of dollars but what’s the sensitivity to the euro?

Ken Haber

In Advance Materials that’s where our biggest exposure is and again just refresh Rosemarie’s, as you said is mostly operating expenses they’re paid in euros there and Advanced Materials of operations in Kokkola. The sensitivity is for every penny change in the euro is approximately about a million dollars on an annual basis, approximately is the sensitivity.

Saul Ludwig – Northcoast Research

On an annual basis.

Ken Haber

On an annual basis up or down.

Saul Ludwig – Northcoast Research

Higher euro, question mark?

Ken Haber

Yes.

Saul Ludwig – Northcoast Research

Great. Thank you very much.

Ken Haber

Thank you, Saul.

Operator

Your next question comes from the line of Chris Kapsch with DDR Research Group. Your line is open.

Chris Kapsch – DDR Research Group

Yes, hi. Question on the cathode materials and so the mix that’s going on with respect to cobalt oxide versus mixed metal oxide. Because you are more integrated into cobalt production. Is it fair to assume that your margins are better for the traditional cobalt oxide cathode materials versus mixed metal oxides?

Steve Dunmead

No, that’s not a fair representation.

Chris Kapsch – DDR Research Group

Are they comparable or the mixed metal even because more innovative in newer they higher margin?

Steve Dunmead

I’m not sure we are going to go into infinite detail on it but I think from the first past (inaudible) was called them neutral or slightly positive.

Chris Kapsch – DDR Research Group

Okay. And then are you producing just nickel cobalt manganese, cathode materials, or are also doing some of the other I guess what would we characterize as mixed metals like manganese metal and lithium ion phosphate cathode material? In other words do you have a portfolio or just one that do you contain some cobalt?

Steve Dunmead

All of the compounds that we are currently commercially using contain some cobalt. We’re not in the lithium ion phosphate business, and everything else would either be development or qualification. But we have a variety of chemistries ranging from two metals to four metals but all of them at this point commercial ones currently contain some amount of cobalt even if it's very small.

Chris Kapsch – DDR Research Group

Got you. And then just like as this mixed metal market develops do you feel like you have comparable market share there as you had historically in the cobalt oxide cathode material market?

Steve Dunmead

I think we’re pretty well positioned. I think that as Joe has talked about historically we’ve been different than if you go back eight years I think we’re fairly agnostic to what the chemistry ends are being and I think being a material producer that’s the right tack to take because we don’t ultimately determine what that chemistry is going to look like.

Joe Scaminace

I think that served us well, Chris, that we’ve been the supplier that we have been because whenever the chip gets laid down and what the most comprehensive technology is from a weight flammability, recharge ability standpoint, mileage on a single charge, the chemistry is that would be utilized in those applications clearly could be supplied by us. And so we stand ready to gain without having made the fixed asset investment and what looks to be a quite a bit of capacity has been developed out there.

Chris Kapsch – DDR Research Group

Okay, and then just follow-up on that sort of market key. As growth going forward shifting from consumer electronics more to the EDV space, is the nature of the commercial qualification any different or are you talking to basically the same customers the battery guys or cell guys or you finding up to additional resources getting at OEMs and that sort of discussion?

Steve Dunmead

That’s a good question. There’s a few new people because if you look at the way that the ATV EV [ph] market it’s going to be at least at this stage more global than consumer electronics is today. So certainly from a geographical standpoint even a few new players were dealing with the broader cross section of people. Adding more resources it has been fairly minor because most of these customers ultimately will be pretty big customers when and if things take off, but I would say that the only thing I clarify there is you made a comment about its shifting more towards the EVA GV space and truthfully from a volume standpoint that’s a ways off before its really significantly shifting from a volume standpoint. It’s mostly consumer electronics today by par.

Chris Kapsch – DDR Research Group

Okay. Thanks a lot.

Operator

(Operator instructions) Your next question comes from the line of Rosemarie Morbelli with Gabelli & Company. Your line is open.

Rosemarie Morbelli – Gabelli & Company

Thank you for taking my follow-up. You made a comment in the press release regarding the weakening fundamentals in the supply and demand dynamics within the cobalt market. You touched on it during your comments but could you give us a little more detail?

Steve Dunmead

I’ll take that. This is Steve. Certainly one of the things that we talked about historically and part of our focus on the transformation is that as more copper projects in Africa keep come in and more nickel projects we’re going to see more byproduct materials coming to the market and in one way that’s very good for us because it's going to help stabilize prices and so we’re going to see those earnings swings, that was really what Joe in the press release said I believe was talking about. There is more cobalt coming to the market. It has been in great dross at this point in time and in most cases it is in the form of raw materials which is good for us.

Rosemarie Morbelli – Gabelli & Company

By raw material you mean the pure cobalt or do you mean the drug that you been refined on which you attract the cobalt?

Steve Dunmead

It’s unrefined. I’d necessarily, all of is not there, but yes, unrefined materials.

Rosemarie Morbelli – Gabelli & Company

Okay. What about the mine in Canada which I realized a few years ago and I should know what happened there but I don’t. Has it eventually come on stream?

Steve Dunmead

Minimal impact to us.

Rosemarie Morbelli – Gabelli & Company

Okay. And you also mentioned some increase in professional services, could you give us a feel for that, is that part of your M&A activities or is it something else?

Joe Scaminace

The answer to that is yes, it is part of our M&A activities. We’ve been as I indicated in my comments, Rosemarie, we’ve been evaluating the strategic use of our asset base here to properly create value for our company and those would indicate the level of activity.

Rosemarie Morbelli – Gabelli & Company

Did you share with us the amount and I missed it?

Ken Haber

No, we did not share.

Rosemarie Morbelli – Gabelli & Company

Would you?

Ken Haber

No.

Rosemarie Morbelli – Gabelli & Company

Okay, that was easy. And you talked about the trend in demand but I was wondering if you have a feel for the inventories levels at your customer side and if you could talk about where you think you are in your own inventories whether this is adequate level or little too high or little to low could you give us a bit of picture?

Steve Dunmead

Yes, I mean we serve such a wide variety of end customers but in general if you go back to sense the recession started certainly, we driven our inventory levels down as a way to generate cash, I believe that our inventory levels are in pretty good shape and we do keep especially in the Advanced Materials side we keep very close watch on what’s going on with inventory levels to the customers, we don’t see any gluts at this point in time, Rosemarie.

Rosemarie Morbelli – Gabelli & Company

And you say where are gluts, how quickly do you see it? Meaning a quarter or did we take only a few weeks presciently everybody deciding all right we have enough inventories, we don’t know what the demand is going to be, and now we are going to leave out of them.

Steve Dunmead

For our key customers on Advanced Materials we are having those inventory discussions on our weekly sometimes depending on size on a monthly basis. So I think we are pretty much on top of it.

Rosemarie Morbelli – Gabelli & Company

Okay, thanks a lot.

Operator

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

Mike Harrison – First Analysis

Hi, good morning.

Joe Scaminace

Hi, Mike.

Ken Haber

Good morning, Mike.

Mike Harrison – First Analysis

I joint late so I apologize if any of these questions have already been answered. But wanted to ask about the copper byproduct sales, it sounds like you hit a sweet pocket in your raw material stream and I’m just wondering is it just a coincidence that you saw higher copper content in your raw material right at the time when copper prices are the highest they’ve been in many, many years or do you actually have some control over which pockets of raw material you’re getting and you’re doing some selection there?

Ken Haber

Mike, this is Ken, I’ll answer the first part and let Steve answer the sourcing question I think you’re asking. Really, the driver here year-over-year was all driven primarily by price, very little impact from volume, so there wasn’t much of a shift in our metal mix or feed mix I don’t believe but Steve can. Correct, Steve, I am wrong on that.

Steve Dunmead

Yes, Mike, do we have some ability to select? Yes. Those are over short periods of time because as you know one of the main reasons people buy from us is security and supply and so we have long-term contracts. So if you took it over an entire cycle our copper content is going to be what our copper content is going to be, but certainly we have some ability on a month-by-month basis or quarter-by-quarter basis and say we’re going to use higher copper materials or lower, but as Ken said on year-over-year comparison it really was price enough volume.

Ken Haber

You weren’t on the call before but I stated that the operating profit year-over-year has improved by 3.5 million and 3 million, and that was all price driven.

Mike Harrison – First Analysis

All right, I appreciate the color there. Do you have any capability or to kind of stockpile the copper byproduct that you’re making or do you basically sell it as soon as you produce it?

Steve Dunmead

We have the ability to do that.

Mike Harrison – First Analysis

Would you?

Joe Scaminace

It’s just an inventory.

Ken Haber

It’s just an inventory item at that point and depends on what the customer needs are on demand so at any given period. But if you’re trying to ask might whether or not we plan the copper market I think the answer is no.

Mike Harrison – First Analysis

That’s sort of what I’m trying to get at, so okay. And then in terms of the Battery Materials number at least in the press release, your commentary and this is within Advanced Materials said that battery materials volumes were lower year-on-year, but I was just wondering if maybe you can kind of square that up after adjusting for a mix and for cobalt price kind of what you’re seeing in that Battery Materials business what you saw this quarter and what your outlook would be into the next quarter or two?

Steve Dunmead

So in my comments Mike, I talked about cobalt volume in the Battery Materials was up 8% sequentially and up 8% versus the prior year. Total physical volume because of the mix that you talked about year-on-year sequentially was only up 1%. Yes, it was down versus the prior year, I don’t have that number in front of me and the biggest issue there is that we were selling a fair amount of low cobalt containing things like cobalt sulfate a year ago and that because of changes in customers’ production processes we have shifted what type of material they are buying. So that because cobalt sulfate is 25%, cobalt and something else might be 75% cobalt is a big difference in physical volume.

Mike Harrison – First Analysis

Got it. And then last question for Ken and again I apologize if you said it already but guidance for the rest of the year.

Ken Haber

We’re right now in the, what I’ll call the 16% feud that’s what we’re currently forecasting again. As a reminder, this is an estimate based on what I projected earnings are going to be across our global footprint. And so right now we’ve recorded a 16%, I’d say given the possible mix and earnings and also the FX as we talked about before can have some and can have significant impact on their rate. So we’re thinking in the range of 16 plus or minus 3%, 4% up or down, and it can swing either way they may.

Mike Harrison – First Analysis

Understood. Thank you very much.

Ken Haber

Well, great.

Operator

And your next question comes from the line of Saul Ludwig with Northcoast Research. Your line is open.

Saul Ludwig – Northcoast Research

Ken, wasn’t that tax rate a lot different in the guidance you had back on the fourth quarter poll that was around 29%

Ken Haber

It certainly was, Saul, and if you go back over the last year we were tracking pretty much steady at 30% and also going into this year and our budgeting that’s what we had estimated. The biggest difference if you look year-over-year between that 30 and where we are now is driven by two factors. One, we talked about that in the past, the FX impact and that probably have somewhere around 3 or 4 percentage points of impact at this point where we’re today. But the other and the more bigger one is affected year-over-year our net losses in the US have come down without any base.

So what’s happening is we are actually generating more profits here in the US and that’s seen an increase in our tax expense right now at this point. So incomes are up, tax expense is basically flat to that point and so it’s driven the effective tax rate down, and we think that will continue throughout the year. So as I said to Mike, 16% with the plus or minus 3% or 4% on either side of that estimated at this point.

Saul Ludwig – Northcoast Research

The copper volume was up 25%, 30% wasn’t it?

Ken Haber

No, we don’t.

Saul Ludwig – Northcoast Research

Well, you said your other volume was up 27% you gave us that number

Steve Dunmead

That’s not all copper.

Saul Ludwig – Northcoast Research

And very little of it was metal resale, I mean, because before you told us metal resale was up 2% so metal resale was up 2%, everything else a bunch to get the total of 27% and this isn’t copper what else you’re selling?

Steve Dunmead

We have other small amounts of byproduct to come out such as nickel sludge and other things that have been significant volumes so volumes are very little pricing revenue.

Saul Ludwig – Northcoast Research

Percentage wise, how much was your copper volume up?

Steve Dunmead

We said it was basically flat. When you look at revenue there is $8 million of increase in revenue from copper byproduct sales. 6.7 million of that was all price driven and the delta of difference was volume.

Saul Ludwig – Northcoast Research

6.7 million of the 8 million?

Ken Haber

Correct.

Saul Ludwig – Northcoast Research

All right. So what was price, I got just only 1.3 million is really what I thought

Ken Haber

Is volume, so that again it’s the same story is primarily majority of it's driven by price

Saul Ludwig – Northcoast Research

So these other materials were huge volume but didn’t really make a whole hell of beings worth a difference?

Ken Haber

That’s a good conclusion. Yes.

Saul Ludwig – Northcoast Research

And Steve, when you think about this is pretty precedes Japan problems, we had six, seven months in a row of lower than 1.0 book-to-bill ratio even when I start to go below one, you still have pretty good year-over-year volumes this year leaving off of prior months when you had stronger book-to-bill ratios. How do you think about this long-term trend now declining book-to-bill ratios when you look at how your Electronic Materials business is going to be in the second half of this year and maybe even in the first half of next year?

Steve Dunmead

As I said in my comments I firmly believe that once we get beyond the end of Q2 it's really unknown. There are various pockets of things in that, that overall electronics supply chain whether its resins or whether its electrolytes or whatever that were high concentration of them were sourced out of Japan. And in most cases it hasn’t been massive damage to a plant, but if these growing brown outs or say to with this stability the power issues and so yes, we watched the book-to-bill and semiconductor and other markets, but at this point we’re pretty positive about the next quarter and really the next two quarters, but I think Q3 is a bit on the fussy year side.

Saul Ludwig – Northcoast Research

Now, a final question, it was really glad to hear to talk about the 150% increase in your sales of mixed metals pre-closure materials that are going to the battery market and I know this is an area you’ve been working on for a long time and it was great to see that improvement. But that even with the 150% increase is the sales dollars of those products still are pretty tiny number, what magnitude of sales do these mix metals non-cobalt containing mixed metal pre-closures now amount to?

Steve Dunmead

We had a long debate about whether or not we’re getting to answer this question and I think from a strategic standpoint we’re not going to answer this question. It is certainly increasing and it continues to increase, it is a significant portion of our sales today. The majority no, but I think from a strategic competitive standpoint we’d be hurting ourselves if we disclose exactly what the revenue were or the volume was.

Saul Ludwig – Northcoast Research

Okay, very good, thank you very much.

Joe Scaminace

Thank you, Saul. You’re welcome. Okay, well, if there is no further questions and we would like to thank you again for your time and interest in OM. We’ve made a great start to the year and I hope you could see our optimism for the future and sure there are going to be challenges but I’m confident in our people and I look forward to updating you on our progresses we got. Have a great day.

Operator

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

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