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OM Group, Inc. (NYSE:OMG)

Q4 2011 Earnings Conference Call

February 28, 2012, 10:00 AM ET

Executives

Joseph Scaminace - Chairman and Chief Executive Officer

Troy Dewar – Investor Relations

Christopher Hix - Chief Financial Officer

Stephen Dunmead - Operations

Gregory Griffith - Corporate Planning, Development and Investor Relations

Analysts

Ivan Marcuse – KeyBanc Capital Markets

Michael Harrison - First Analysis Securities

Saul Ludwig - Northcoast Research

Operator

Good morning, my name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the OM Group fourth quarter 2011 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator instructions).

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 on slide. A more complete disclosure regarding forward-looking statements can be found at bottom of OM Group’s press release or in their Form 10-K and applies to this call. At this time, I will now turn the call over to Mr. Joseph Scaminace, Chairman and Chief Executive Officer.

Joseph Scaminace

Good morning and welcome to our fourth quarter earnings call. I would like to start the call this morning by welcoming OMG’s new Chief Financial Officer, Chris Hix. Also on the call with us this morning is Troy Dewar, heading up Investor Relations; Greg Griffith, Corporate Planning, Development and Investor Relations; and Steve Dunmead, heading up Operations.

We have decided to better our communication with you. We are going to talk to you about how we are moving OMG to the other end of the supply channel and closer to end markets. We will discuss how are margins are improving because we are getting rewarded for technology and innovation. We would demonstrate how we are gaining control over our destiny by participating in growth around the world. And you will see that higher profits and more stable earnings will be the result of our efforts. You can follow our presentation in the slide that we published this morning.

So let’s get started and I would like to refer you to slide 3 in your deck. 2011 was a great year for the OM Group. We achieved outstanding financial results, highlighted by revenue growth of 27% and adjusted EPS increasing 34%. This growth was driven primarily by our mid-year acquisition of VAC. If you look at the full year on a pro forma basis, revenue was $1.9 billion or an increase of almost 60%. We were once again able to generate positive cash flow from operations. 2011 marked the 6th consecutive year in which we are able to do this. Our ability to generate cash has been a consistent strength of our model and affords us the opportunity to invest in growth. In addition to the outstanding financial performance, we also delivered on our transformation objectives by creating the Magnetic Technologies platform.

With the (Audio Gap) VAC we are now exposed to additional downstream markets all over the world. VAC enables us to simultaneously meet several key objectives. First, VAC is a global leader in developing materials and technologies, utilizing high quality alloys with advanced magnetic properties. This expands OMG’s downstream presence, converting raw materials into specialized products to meet specific market needs. Second, the business provides access to broader global markets, with favorable long-term trends. These markets include automotive, renewable energy, electrical infrastructure, and industrial automation. With over 700 patents and clear technological leadership, VAC has the ability to develop new products targeted directly at growth trends in every part of the world. There is no doubt in my mind that that positions OM Group for profitable growth.

Third, VAC was immediately accretive to earnings. It has performed well during the five months that we have owned them and is exceeding our expectations. This new business improves the profitability profile of our entire organization, with higher and more sustainable earnings. Finally, VAC brings abundant growth opportunities for both organic growth and bolt-on acquisitions. For example, we are growing this year in the automotive sector as past investment in product development is paying off. Also, VAC competes in some fragmented spaces and there are multiple acquisition opportunities. While VAC was certainly the biggest acquisition we have made since I joined the company, it was not the only one.

In December, we acquired Rahu Catalytics, a developer of specialty additives for coatings and composite applications. This acquisition adds to our product development pipeline, by providing us with the technology behind our cobalt replacement additives. We call this family of products Borchi OXY-Coat. This is critical for the long-term strategy of Specialty Chemicals, providing a clear path for growth and margin improvement while providing our customers with equal and friendly solutions. While we made significant investments this year, we did not compromise the strength and flexibility of our balance sheet. In fact, we have enhanced our balance sheet and created the capital structure to provide additional options in funding future growth opportunities.

One other highlight before you turn the slide, worthy of mentioning is the additional expertise that we added to our Board of Directors in 2011. The addition of Pat Mullin from Ohio and Hans-Georg Betz from Europe brings world-class expertise in global finance, alternative energy technology and commercialization along with global supply chain experience in Europe, Asia, and the Americas.

Turning to slide 4, it is appropriate to take few minutes and recall the steps we have taken over the last several years to put us in the position we now enjoy. In 2005, we were a $1.3 billion company with a focus on the commodities of cobalt and nickel. We had no control over our destiny, because all of our fortunes were tied to the price of nickel and cobalt. We were totally dependent on commodity prices. At that time, we recognized the need change our business model into one that will deliver sustainable, profitable and (Audio Gap) with less reliance on commodity prices.

In order to achieve this goal we made several strategic moves including divestitures, acquisitions, restructurings, and capital structure improvements. As a result, we are now a larger with a more diversified product portfolio aligned with several growing market segments. More importantly, we have moved decidedly closer to the end user within the value chain. We are much less dependent today on commodity prices. We get rewarded for technology and innovation, so our strategy is paying off.

Looking at slide 5, it becomes apparent how our businesses are serving a particular set of end markets with attractive growth drivers. You can study this slide and see for yourself that our transformation is working nicely. Considering the diversity and growth potential within everyone of these markets, you can see why we are excited about our prospects.

The next slide is an important one and shows very clearly and simply our four sales platforms. If you look closely at this slide, you can see that each one of our four platforms has a clear value proposition. Advanced Materials, which entails our cobalt franchise is a clear leader in the cobalt supply chain, serving the high growth sector of rechargeable batteries, cutting tools and other value added markets. Specialty Chemicals, which sells plating chemicals to printed circuit board customers and paint additives to the coatings market, to name a few is able to utilize application expertise in meeting requirements. Battery Technologies is a leading developer of battery systems targeted at specialty applications, such as aero space and defense, with developing applications within medical and renewable energy. Magnetic Technologies is back, they produce cutting edge specialty alloys for use in automotive, surveillance, electronics, and alternative energies. VAC pioneered the use of vacuum induction furnaces to produce these high performance alloys and magnetic materials. They have significant intellectual property and several paths forward for growth including attractive organic growth opportunities.

I want you to note, the overlap between these markets and our business platforms and this is very important for you to understand. Several of our end markets are severed by more than one of our segments. For example, renewable energy includes magnetic products from magnetic technologies used in solar inverters. Specialty Chemicals, provides chemicals to manufacturers of solar panels. Advanced Materials, sells cobalt used as a catalyst and the gas to liquid conversion process to produce alternative fuels. And, Battery Technologies, is commercializing an industrial scale energy storage system to manage the variability and supply inherent with alternative energy. It is this type of focus on common end markets which has been an important theme of our transformation strategy.

Moving to slide 7, while we have been implementing our strategy, we constantly have our eye on the need to grow our sales and earnings. Since the economic recession in 2009, we have made tremendous improvements in both sales and earnings. During this period, sales have grown at a rate of 32% per year and adjusted EBITDA at an annual rate of 50%.

So, now looking ahead into 2012, I would like to share with you our priorities on the next slide. First, we will realize the expected benefits of our 2011 acquisitions. This is not simply limited to hitting our financial targets, but also entails adopting common approaches to areas such as managerial reporting and operational excellence. Second, we will work hard on developing the commercial potential that exists for organic growth. We now have great new technologies and products like medical batteries, current sensors, advanced magnet assemblies, alternative energy storage products and advanced additives for coatings, just to name a few. And, in each one of these cases, all of these technologies move us closer to end markets with less dependence on commodity prices.

In short, more control over our destiny. Related to this we will work hard to capture our share of new market opportunities within the markets we already serve. And finally, we remain committed to our long-term growth strategy. We have already reviewed the tremendous progress we have made over the last several years and while we feel pretty good about our progress so far, we clearly are not done.

So let me rap up this portion of our call by discussing the reasons why I believe OMG is positioned for long-term profitable growth. First, we have created a diversified portfolio which serves many global end markets and we have shifted a large portion of our product portfolio away from commodity price movements. Again, I can’t emphasize this enough, we are moving closer to diversified end growth markets. Through this end market diversity, we are not reliant on any one particular segment of the global economy or any one raw material. In addition, we have a diversion balanced geographic presence further litigating our exposure. Secondly, our products are aligned with growing trends within these sectors, which affords us great opportunities. Strong growth trends like laptops, smart phones, and tablets, they would utilize advanced lithium ion batteries for energy storage. Consumer electronics which need chemicals to treat and plate the surfaces on the components used in these electronic devices.

Renewable energy which requires products to support solar, wind, hydro power, alternative fuel and energy storage along with grid management. And advanced automotive systems with the trend toward lower emissions, higher fuel economy, and the electrification of the vehicle. These trends will require high efficiency motors and sophisticated electronic control systems, all of which rely on magnetic parts and components, a key strength of VAC. The third reason for our optimism regarding our long-term growth and profitability, as that we have the needed financial strength and flexibility to fund our growth objectives.

In addition, we have a global organization capable of serving our customers wherever they are located. OMG has approximately 7,100 employees, with manufacturing facilities in North America, Europe, Asia, and Africa. And regional sales offices throughout the world to support our global customer base. Finally, we have a clear strategy for growth, which is closely aligned with the strengths we offer. The strategy has consistently focused and the clear objectives of moving downstream closer to end users, broadening into adjacent markets and creating new growth platforms. Our strategy is working and we are gaining control over our destiny. At this time, I would like to turn the call over to Chris Hix, to walk us through the financial results.

Christopher Hix

Well, thank you Joe and good morning, everyone. I am delighted to be joining OM Group and helping to execute our transformation and growth strategy. I am impressed by the team here at the company and I look forward to meeting investors over the coming months

Slight 10 provides an overview of our year-over-year sales and adjusted operating profit performance in Q4 and for the full year. The GAAP reconciliations are in the appendix of the presentation. Sales grew 27% in 2011 with the VAC business starting out better than expected and contributing 23 points of our growth. Our legacy platforms each achieved organic growth due principally to strong first-half performance. Fourth-quarter sales growth of 50% reflects a full quarter of VAC ownership. Organic sales declined 8% in the fourth quarter due to the pressures we signal to investors in our November call. Our specialty chemicals business was affected by the slowing European economy and the flooding in Thailand. The advanced materials business had higher volumes but lower cobalt prices. And as expected, the battery technologies business was impacted by lower spending in the US defense sector. Adjusted operating profit increased 20% for the full year and 33% in the fourth quarter due to the VAC acquisition. Margins contracted a bit due to lower sales volumes in our legacy businesses and due to lower cobalt prices in the fourth quarter.

Slide 11 goes into a bit more detail highlighting a few items below the operating profit line. Interest expense came in as expected. A weaker euro created foreign exchange gains in Q4 and the full year as we revalued our European debt into fewer US dollars. Our adjusted effective tax rate came in at 12% in Q4 and 13% for the full year consistent with our November commentary. These factors combined with our operating performance enabled us to slightly exceed the prior year's fourth quarter adjusted EPS and full-year EPS grew 34%.

Following the VAC acquisition, our normalized D&A run rate is about $102 million per year. Joe noted earlier, our growing EBITDA performance which was $224 million in 2011. As you turn to Slide 12, you see that cash flow was once again a positive story this quarter, the mirror image of last year's fourth quarter. While quarterly cash flow can be lumpy, OM Group has shown to be an effective cash flow generator over the last six years. As a percentage of sales, net working capital increased in the fourth quarter as a result of the VAC acquisition and receipt of longer lead time inventory items during the period of slowing sales.

On Slide 13 we touch on a couple of other matters. First, capital expenditures were higher in 2011 due to the impact of the VAC acquisition, as well as investments in other parts of the enterprise. Approximately half of our 2011 capital spending was targeted toward growth projects such as capacity expansion or new product development as we pursue the growth strategy. Cash and debt levels reflect the 2011 acquisitions of VAC and Rahu and our balance sheet remains strong giving us adequate resources to fund our strategic transformation.

Let’s take a little deeper dive into the business results now starting with magnetic technologies on Slide 14 with the VAC business exceeded our expectations. The business benefited from continued strong sales into the automotive, wind energy, and industrial automation sectors and retail sector sales were up as a large customer restored inventory levels as expected. The business expanded its presence in the automotive market with the release of new products and expansion onto new OEM platforms. We continue to see weakness in solar applications as the channel works off excess inventory but we are picking up market signals suggesting improvements could emerge in the second quarter. We are also experiencing some easing in Rare earth pricing which could result in lower customer pass-throughs later this year. We continue to monitor the European economy for potential impacts on the business as well.

Slide 15 includes an update of our advanced materials business. In November, we talked about declining cobalt prices and by the end of the quarter the average price had declined 19% year-over-year, more than offsetting the fourth quarter volume growth of 12%. Higher volumes were driven by favorable demand for battery materials for tablets and smart phones and to a lesser degree by growth in construction and chemical applications. One area of weakness was in cutting tools where lower industrial sector activity and possible destocking affected the business. We expect mid single-digit percentage volume growth in 2012 in the advanced materials business principally due to growth in battery materials. Cobalt prices have recovered a bit since December but remain 15 to 20% lower than first quarter 2011 levels. In anticipation of continued growth in battery materials and to support our market-leading quality, we are expecting a significant investment in our primary processing facility in 2012 and 2013.

In our specialty chemicals business on Slide 16, overall volumes declined 12% in the fourth quarter. Electronic chemical volumes declined as a result of economic uncertainty affecting consumer purchases, the impact from the floods in Thailand and in sourcing by a customer, again as we discussed in November. Advanced organics volumes were lower on weaker European demand. Aggregate UPC and Photomask volumes were flat to slightly higher. On the brighter side, prices held up across our product lines, dampening the operating profit impact from lower volumes. Another positive is the Borchi OXY technology we secured in the December acquisition of Rahu. Although this is a small product line we expect it to outgrow the market as customers increase their acceptance of this environmentally friendly alternative to cobalt-based formulations. Sales level since the acquisition are meeting our expectations.

You don't see it on the slide but the specialty chemical segment and especially the electronic chemicals team did a superb job of generating cash flow on the fourth quarter and for the full year. Looking ahead in this business, we are seeing consistent signals of a mid 2012 recovery in the electronic supply chain. In conjunction with the inventory restocking, we believe electronic chemical sales will be stronger in the second half of the year. We also expect advanced organics product line sales to possibly recover in the second or possibly third quarter.

Wrapping up the business discussions, let's turn to Slide 17. Like our other segments, battery technology has also achieved full-year growth but was challenged in the fourth quarter where volumes declined but again prices held steady. We offset some of the volume decline caused by lower US defense spending with sales to non-US customers but this is a relatively small market. We were however encouraged to see growth in medical sales. Looking ahead, the battery technology business has new aerospace and medical applications that are moving closer to regulatory and customer approval which should help to recover some of the fall in revenue and operating profit from defense applications.

Let me wrap up on Slide 18. We expect some sequential strengthening of the business in Q1 as we exit the typical seasonal slowdowns in the fourth quarter. Having said that, we anticipate many of the pressures we faced in the fourth quarter of 2011 to continue through the second quarter or into the second quarter of this year when we expect to see a recovery in the electronics and solar sectors. We also expect benefits from new products and applications to contribute to our results. We will continue to watch the euro zone for signs of recovery.

In view of our outlook we are carefully monitoring spending and we are deferring less essential projects while continuing to invest to support our businesses’ long-term strategies. We expect substantially higher capital spending in 2012 because of owning VAC for a full-year and because of funding certain growth projects. We expect our normalized tax rate next year to increase from 2011 levels into the 20s as a result of the VAC acquisition and the Malaysian tax holiday sunset. We do not expect our interest cost to change from Q4 2011 levels. Cash flow from operating activities will be weak in the first quarter but will improve as we harmonize inventory and business levels. And that concludes my remarks, Joe.

Joseph Scaminace

Thank you Chris for your comments. So let me summarize what you have heard so far today. We have made significant progress against our strategy this year, evidenced by the acquisition of VAC. 2011 was a year of great financial performance with strong growth in revenue and earnings and positive contributions from operating cash flow. And finally, OMG presents a compelling investment proposition through access to a diversified product portfolio aligned with favorable secular growth trends, financial strength and flexibility to create shareholder value, a global organization to support a global customer base, and a growth strategy designed to take advantage of our strengths. And this creates the opportunity to get rewarded for our efforts and control our destiny.

At this time, let me hand over the call to the operator to be able to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Mike Harrison of First Analysis, your line is open.

Michael Harrison - First Analysis

Hi good morning.

Joseph Scaminace

Good morning Mike.

Christopher Hix

Good morning Mike.

Michael Harrison - First Analysis

You referred to some investments you are doing in your primary processing facility in advanced materials. Do I understand that correctly to mean that you're increasing capacity at the refinery?

Stephen Dunmead

Mike, this is Steve. No this is more downstream focused on battery precursors.

Joseph Scaminace

As well as increase the capability but not throughput through the refinery.

Michael Harrison - First Analysis

Okay. Is that something that that's still pretty squarely in the advanced materials side or is that something that's going to bring you may be more into alignment with some of the work you're doing in the battery technologies segment?

Stephen Dunmead

There is some overlap Mike but in general that that is really focused on the battery materials coming through advanced materials segment.

Michael Harrison - First Analysis

Alright. Was hoping that maybe you could quantify that investment and then talk about that in the context of your other comment that you're watching, keeping an eye on spending and maybe deferring some projects given the weakness that you expect to continue into Q1?

Christopher Hix

Yes Mike it is Chris. We anticipate that capital spending increasing up to this $80 to $100 million level in 2012 and that includes this investment that we refer to for the battery precursors. Having said that, as we mentioned, the reason we've got a bit of range there is we are managing the spending, looking for items that we can defer just to better matchup the cash flow and business levels with some of these investments. Having said that, we are committed to the strategy and we want to make sure that we are supporting our businesses’ growth opportunities.

Michael Harrison - First Analysis

It sounds like you are expecting to see some improvement by mid 2012 in the electronic supply chain and just the inventory reduction that's been going on there. Can you maybe give a little bit more detail about where you are seeing customer inventory levels there and maybe why you seem to be seeing a discrepancy between electronic chemicals which are weaker and batteries which don't seem to be seeing much of an impact from inventory management?

Stephen Dunmead

Yet this is Steve Mike. I think there is a couple of different things going on there. The electronics chemicals part and the Ultra Pure Chemicals part of the business has been impacted fairly significantly by the flooding in Thailand. That has had a lesser impact on the batteries going into consumer electronics. We do believe that the inventory levels whether it is in the printed circuit board industry or whether it is in the semiconductor industry are pretty close to reaching a bottom and we're seeing some signs of life but obviously depending on what's going to happen with the European economy.

Michael Harrison - First Analysis

And just to maybe get a little bit more clarity on the solar inverter business within VAC. We saw December pickup in installations in Germany, was curious if you guys saw any benefit from that? And do you think that benefit is going to be pretty short-lived given the proposed changes to subsea levels in Germany?

Stephen Dunmead

Yes, certainly we have seen some signs, some very short lead time orders coming through the pipeline, nothing to write home about yet but certainly indicating that people are living on decreasing inventory levels across the globe not just in Europe.

Michael Harrison - First Analysis

And do you think that’s something that's beneficial longer term or do you still think that the 2012 for that business is going to be pretty challenged?

Joseph Scaminace

This is Joe, Mike. I think it is beneficial longer term. I think what we're seeing is pricing firming up about in the April-May time zone. You mentioned the interplay with VAC, you have to make sure you are differentiating between panel production and inverter supply because in many cases VAC is specd on multiple panels. So whether the panel is made in the United States, in China or Europe we typically -- or we have a very good chance of being specd in on our inverter components.

Stephen Dunmead

But Mike, as Chris pointed out in his comments, certainly in solar as what we can see right now, second half is going to be stronger than first half.

Michael Harrison - First Analysis

Got it, got it. And then maybe a last question for Steve, if he could just comment a little bit on what you are seeing in Cobalt market supply and demand dynamics?

Stephen Dunmead

Certainly, after the December lows, January ticked up and was looking now fairly strong. Since the end of January, we have seen some trickling down, but from a positive standpoint, we don’t see any huge excess of any high grade materials out there. So, I think this is a bit of uncertainty associated with the economy, and a perception issue and not long terms supply demand.

Michael Harrison – First Analysis Securities

Alright. Thanks very much.

Stephen Dunmead

Thanks Mike.

Operator

Your next question comes from the line of Ivan Marcuse at KeyBanc Capital Markets. Your line is open.

Ivan Marcuse – KeyBanc Capital Markets

Thanks for taking my question guys.

Stephen Dunmead

Sure and good morning Ivan.

Ivan Marcuse – KeyBanc Capital Markets

Looking at the Thailand, do you quantify how much of an impact that was for the fourth quarter? And then going forward, but do you still or will there still be residual facts going into the first quarter, second quarter or are those issues sort of behind you and now it’s more of a demand, volumish issue in specialty chemical or electronic chemicals.

Christopher Hix

Yeah Ivan. This is Chris. As we mentioned in the comments earlier here, this is an impact that affected us in Q4. We expect to see that continuing through Q1 and in the Q2 as well. In terms of the magnitude of that, that was certainly for the specialty chemicals business, that was worth somewhere between, say mid single digits or slightly higher impact on revenues. And you can imagine there would be a bit of a flow through impact on operating profit, associated with that as well. So it did impact the business overall. We do expect to see that continue in Q1 and begin to moderate in Q2 of it.

Ivan Marcuse – KeyBanc Capital Markets

How did it impact Q1 and Q2? Isn’t the flourish is over or something get destroyed?

Stephen Dunmead

Ivan, this is Steve. We aren’t directly selling in most cases into Thailand. This is an assembly area for a lot of the electronic gadgets, whether it is a hard drive, or a GPS unit or whatever it is. Some of those plants were completely demolished. They were sitting under two meters worth of pretty nasty water, but we are starting to see orders coming from the direct sales that we do in Thailand. But it was mostly an assembly issue and for us tied mostly to the hard drive industry.

Ivan Marcuse – KeyBanc Capital Markets

Got you. And then in the batteries, I suspect defense spending is probably not going to get much better much at least for the next couple of quarters. So does this business continue to sort of run at a loss or do some of your growth opportunities offset that?

Stephen Dunmead

Yeah. The fourth quarter loss that we had, was due principally it is some timing on the revenue line, that we expect to see which came with the dis-benefit of Q4, but will help Q1, we believe. In addition that there are couple of other moving parts on the cost side, which we don’t expect to repeat. I guess that is just a long vented way of saying, we expect to see the business sequentially grow in Q1and be restored to some solid profitability.

Ivan Marcuse – KeyBanc Capital Markets

How much were the costs in the quarter and what were they related to?

Stephen Dunmead

I hate to have a long excuse list there. There is always going to be things that come and go in here, but we had somewhere between, I’d say a million to a million and a half of some cost that we had which -- again we’re just a variety of reasons, but I think the important thing is looking forward into Q1, where we see the business resuming its profitability profile, that we saw in the first three quarters of 2011.

Ivan Marcuse – KeyBanc Capital Markets

Okay Great.

Stephen Dunmead

And Ivan. I have to tell you, when you refer to the battery volume, the defense business itself, I do think we are going to continue to get benefits from that business in the form of good decent volume and cash generation out of battery technologies.

Ivan Marcuse – KeyBanc Capital Markets

So you do expect your defense related volumes to increase sequentially?

Stephen Dunmead

Somewhat. But some more because of this timing issue I’ve mentioned before, some program shipments are going to come in Q1 at the expense of Q4 of ’11.

Ivan Marcuse – KeyBanc Capital Markets

Got you. And then in your beginning comment, you talked about how you’re taking the businesses to more of a stable and more growth areas for the company, as a whole. If you look at this electronic chemicals, it is a highly cyclical business. Really there hasn’t been much growth there. So what’s the strategy with that business going forward, and how do you expect to maybe get that grow, or how do you somewhere to cobalt, add some stability to that segment.

Stephen Dunmead

Well, I think one way Ivan. This acquisition of Rahu, clearly gets a leg down in terms of the whole idea of innovation and technology, which was the theme of our strategy and my opening comments here. And it’s wherever we can differentiate ourselves, we’re running towards that differentiation and adding value. Right now, we have most of the coding’s companies in the world are basically looking at this Borchi OXY product line right now as an additive, for both codings and composites. And so, that is one area, where we are looking to do it.

The other area is that we are looking to diversify the business to not just be dependent on any one area. We are developing. We have two labs that are working around the clock developing new plating technologies, for our printer circuit board. We have great deployment in the global market right now, with ultra pure chemicals. That’s the way we plan on doing it. It is going to be basic blocking and tackling and clearly, we are not dependent on commodity prices there, so we get rewarded for the efforts that we put into customer service developing technologies, and that’s what good business is doing, and that’s what we are running for.

Ivan Marcuse – KeyBanc Capital Markets

Speaking of Rahu, was there any acquisition or any sort of inventory step up or related costs for anything that would fall into Advanced Materials that maybe were called out and released some of the batteries?

Stephen Dunmead

No. The Rahu acquisitions are actually a part of the specialty chemicals business, but there was no inventory step up or other charges that were called out.

Ivan Marcuse – KeyBanc Capital Markets

Got you, and then my last question would be every year, you have maintenance shut downs. Are you expecting any in the first half of the year or how do you expect to see those to 2012, how do expect that to play out and what quarters do you think will be most impacted by that?

Stephen Dunmead

Yeah Ivan, this is Steve. The inner maintenance shut down in (inaudible) will happen in the May time frame as it always does. And that will have some impact on Q2 and a little hangover into maybe the first month of Q3. But it shouldn’t be any different than any other year that we have done it. But there will be beyond the maintenance shut down at GTR.

Ivan Marcuse – KeyBanc Capital Markets

So any year over the year, it will be about the same, as it was recently. So there shouldn’t be any sort for a negative or a positive swing up or down?

Stephen Dunmead

Not year-over-year. No.

Ivan Marcuse – KeyBanc Capital Markets

Got you. Thank you for taking my questions.

Stephen Dunmead

Thank you Ivan.

Operator

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

Saul Ludwig – Northcoast Research

Hey, Good morning everybody.

Stephen Dunmead

Hello Saul.

Saul Ludwig – Northcoast Research

You know, on profile basis I had, I think the top line must have been up, 30 to 40%. I forget what the numbers were, we had given (inaudible) previously. What contributed to this? If you think about VACs growth in 2011, how much is related to hardcore volume improvement was that the rare earth or was there some other factors that drove their topline so strong.

Stephen Dunmead

Okay. I can’t give you a detailed order of magnitudes off, clearly they had benefited from strong rare earth prices which are passed through to our customers and they did achieve very good volume there, but globally their business performed very well. They did experience from weakness like everyone else in the solar area, but volume did contribute, but there was contribution from higher rare earth prices.

Saul Ludwig – Northcoast Research

And how should we think about VACs, topline in 2012, both, if you tell us where we are? What the averages were? In 2011 for both rare earth prices and their volume till the end of plus, there is plus volumes and there is minus volumes as you pointed out, but how should we think about their outlook for 2012 versus the performing numbers for 2011.

Stephen Dunmead

Well, I think if you look at some of the details of that and you really have to breakdown their businesses into what was permanent magnets cores and components of materials and parts and clearly on the permanent magnet side we probably will see some revenue reductions there relative to ’11 just primarily because of the pass through effect of rare earth. However; on the other hand that is a very positive trend for us when rare earth prices are coming down a little bit primarily because that is a pass through and that will board very well for direct drive generators, which is a big part of their business. And we do think that there is good growth in the automotive industry globally right now. We are seeing a pick-up in that side of the business in their cores and components business and so I think relatively we expect pretty good performance out of that and we think that while not operating at the highest margin that they were operating at ’11. We think that will be operating at a very good margin level.

Saul Ludwig – Northcoast Research

When you talk about the headwinds that you face going into the first part of your year, the economic drivers is one factor, the lower cobalt prices is another factor and these forces that took place in the fourth quarter continuing, doesn’t appear that even with having VAC in the first two quarters of ’12 and their earnings are certainly contributing in a positive way that the other negatives would likely will cause your earnings comps in the first couple of quarter of the year to be negative versus the first two quarter of ’11 and then in the backend of the year as the volume improves the way it appears its reasonable like it would occur that you would then look for positive comps, but would that generally be the direction of earnings that we should be looking for?

Christopher Hix

Yes Saul, this is Chris. I think that it is a fair statement as we have pressure in the first half of this year versus no pressure in the first half of last year, you’d expect it to be a little bit more difficult comps and as we get toward the back of recovery and especially if you’re looking Q4 of 2012 versus Q4 2011 we would expect to see more favorable situation.

Joseph Scaminace

And Steve, I am putting together the plan for 2012 and we all know how impossible it is to predict cobalt prices, but we got to start with a number and then things might move up or down. Where are you sort of handicapping, you might say the average cobalt price for 2012 at least as a starting point, we all know that whatever you say is probably not going to be correct, but what is the starting point.

Stephen Dunmead

Saul, as we usually tell you we aren’t going to predict cobalt prices in a public forum.

Saul Ludwig - Northcoast Research

Okay, and then finally on the inverter business. Who your major competitors there and VACs is a leading company and the producer in the production of inverters or there are some other stronger or weaker competitors.

Stephen Dunmead

It is really interesting you should say that VAC is the number one cores and components market shark globally and there is some fragmentation as you go down the list. There is a company out of Zurich, Switzerland called LEM, there is a company out of Mexico called Felco, Hitachi has a certain part of that business. So, clearly we are a leader in that field.

Saul Ludwig - Northcoast Research

Okay. Great. Another question, it looked as through you paid $55 million in the fourth quarter for the acquisition of Rahu. Is that all 55 million related to Rahu and when we think about spending $55 million the yet EBITDA, what do you get for that $55 million?

Christopher Hix

Let me -- I will come in on the financial part of this thing and then (inaudible) strategic part of it, but the acquisition was accounted for in the fourth quarter. We had about 39 million of cash if I recall correctly then we had some contingent consideration that we also accrued for, for the transaction of the cash was less than the headline price that you saw there. In terms of the benefit for the enterprise here I will turn…

Stephen Dunmead

Yeah, so this Rahu acquisition that we made really and I don’t want to refer to the advanced organics business, but I’ll say if it is in specialty chemicals and it is a business that is the original carboxylate business of the old Mooney Chemical, the early OMG’s business where we supplied paint driers to the market and as paint driers basically began to decline and we were moving away from cobalt-based pain driers. The idea of getting into additives and adding more value in getting more profitability emerged. Rahu is a very competitive and very differentiated technology and provides properties to codings and composites which will be producing some significant EBITDA in 2012 and going forward.

Saul Ludwig – Northcoast Research

But, it wasn’t so much an EBITDA acquisition and much like your VAC or other prior deals, it was a technology driven deal.

Stephen Dunmead

So this is Steve, it was certainly a technology driven deal but the difference being that we had already been working on commercializing the materials, that Joe mentioned, that goes into to the coatings market for about three years. So, this isn’t brand new for us and so if their EBIDTA that will come with it, absolutely is there, was it based upon a technology play? Yes.

Saul Ludwig - Northcoast Research

And just finally with the big increase in cap spending, should we be sort of backing into our numbers either startup cost or training cost or some cost that are associated with the ramp up in cap spending?

Stephen Dunmead

The only cost that comes to mind initially is going to be relative to some of the depreciation that could begin to increase as you get into perhaps the fourth quarter of this year, but we don’t really have any particular projection on that number for you.

Saul Ludwig - Northcoast Research

Great thank you very much, guys.

Joseph Scaminace

Thank you, Saul. Okay, I think that wraps up our call this morning, thank you for the questions, thank you for your interest. As you can see, we have made some fairly significant strides in 2011 to move our platform forward and get more control over our destiny. And stay tuned, because we think that this is going to be 2012, well there may be some early year choppiness, we do see some benefits moving into year-end and we think we are positioned to capitalize on those. So have a good day everybody and thank you.

Operator

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

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