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OM Group, Inc. (NYSE:OMG)

Q2 2008 Earnings Call

August 7, 2008 10:00 am ET

Executives

Joe Scaminace - Chairman, Chief Executive Officer and President

Ken Haber - Chief Financial Officer

Greg Griffith - Vice President of Strategic Planning & Business Development

Steve Dunmead - Vice President and General Manager of Specialties Group

Troy Dewar - Director of Investor Relations

Analysts

Mike Harrison - First Analysis

Rosemarie Morbelli, - Ingalls & Snyder

Saul Ludwig - Keybanc Capital Markets

Operator

Welcome everyone to the second quarter 2008 financial results conference call. (Operator Instructions) Mr. Dewar, you may begin you conference sir.

Troy Dewar

Thank you for joining us today for our review of OM Group’s 2008 second quarter results. On the call this morning are Joe Scaminace, Chairman and Chief Executive Officer; Ken Haber, Chief Financial Officer; Steve Dunmead, Vice President and General Manager of Specialities and Greg Griffith, Vice President Strategic Planning, Development and Investor Relations.

If you have not seen a copy of the press release we issued earlier this morning, you can find it as well as the presentation materials as well that our discussing on the OM Group website at www.omgi.com under Investor Relations.

Finally the comments made this morning by any of the participants on the call may include forward-looking statements based upon specific assumptions and subject to uncertainties and factors which are difficult to predict. Actual results could differ materially from those expressed or implied. A more complete disclosure regarding forward-looking statements can be found at the bottom of our press release or in our Form 10-K and applies to this call. At this time I will turn to the call over to Joe Scaminace.

Joe Scaminace

By nearly every measure 2008 is shaping up as one of the best years in the history of the company. Our second quarter continues the trend of improving results that we have posted over the last several quarters. Two key factors are contributing to our success.

First volume in nearly every end market we serve is growing, especially those that use our cobalt continuing products. Rechargeable batteries, powdered methodology and semiconductor production are all examples of end markets in which positive economic factors are increasing demand for our products. More importantly our technological advantages in product and process development coupled with our superior customer service, is helping us gain market share.

Second, through our operational excellence initiatives we’ve established to correct measures and incentives to improve productivity and profitability for years to come. By implementing a company wide ERP system our management team is able to make better decisions quicker by utilizing a dashboard for monitoring and approving the company’s performance.

Metrics for improving productivity, new product development and safety are showing positive trends. I am proud of our improve results and the hard work of our employees and what they’ve demonstrated to achieve them. Not only have we improved performance over the last several quarters, but we’ve positioned OMG for continued success in the future.

For example our efforts to reduce debt and improved cash flow have resulted in the clean and strong balance sheet. We hold a leading, strategic and enviable position within the cobalt business, a business that we know very, very well. We’ll grow in our portfolio as specialty chemical businesses, this is especially true in our electronic chemical technology sector were we are achieving more consistent and predictable margins and finally we continued to make progress on our strategic transformation.

Success here will enable us to meet our growth objectives. It will also result in earnings that are more predictable and sustainable over the long-term and less dependent on changing metal prices. As we enter the second half of 2008 I would like to briefly recap our strategy, report on our progress and provide an outlook for our future direction.

Again our strategy seeks to extend our existing competencies in value-added offerings. We want to grow our product lines into adjacent markets, and we want to expand our product portfolio and technology base to a three growth platforms, we have identified and communicated repeatedly; electronic chemicals, advanced materials and portable power. In other words move our company toward more specially chemicals.

Our goal is to reduce our exposure to metal price volatility, while increasing our focus on our true competitive advantages. What makes our company unique is our world class expertise in converting raw materials into formulated products. These products deliver performance enhancing characteristics that meet or exceed our customer exacting standards. We believe firmly in the soundness of our strategic direction. The two acquisitions that we completed at the end of 2007 provide ample evidence of our desire to act on this strategy.

“We are using our strong distribution platform in North America to sell the superior technology products of our newly required business.” This is exactly what we intended to do and is working out great for us. Within electronic chemical we’ve achieve critical mass for our printed circuit board business and establish a presence in the semiconductor market. These factors provided an enabling platform for future growth. Both of these acquisitions met our strategic and financial criteria and they are already accretive to earnings and cash flow.

Our other financial criteria are sustainable EBITDA in the range of 20% of sales and ROI of 12% to 15% and even higher for built on acquisitions and return on equity of 15% to 20% or greater. Before I hand the call over to Ken, let me address one final important topic that has emerged. I’ve had the opportunity to speak was many of you over the last several weeks and months pertaining how best to use our cash and strong balance sheet to build shareholder value.

At this halfway point of the year and in this credit constrained environment we enjoy a level of financial flexibility that would be the envy of most companies, especially companies in the specialty chemical arena. We are essentially debt free with improving cash flows from operations in the second quarter. This improvement in cash flow will continue through the balance of the year. I can assure you that we continue to consider all options to increase shareholder value; this includes a formal share buyback program. As we repeatedly made very clear our priority is the transformer our business model.

This transformation will deliver exactly what many of you have been asking for in more predictable and consistent earnings, with less dependency on uncontrollable cobalt prices. We are actively engaged in evaluating a full slate of tactical and transformation acquisitions. This includes a range of strategic partnerships, each promises to move the company closer to our goal of more predictable results improve sustainability and ultimately to higher multiples on the earnings that we generate.

Portfolio transformation is not a new concept in the chemical industry and one that appears to be gaining momentum currently. You only have to loot at two recent announcements involving Dow and Ashland to see the latest examples. This type of transformation is no loss a strategic comparative for OMG than it is for other companies in the chemical industry. We well understand the environment we are in today, we know also that our shareholders demand and deserve that we do everything in our power to enhance the value that we provided. We believe the course of action that we established is the right course.

Every since we lay out the details of our long-term strategy more than a year ago, we have clear about what we will do and our action to-date have been consistent with that strategy. Our entire board, the management team and I remain committed and confident that the strategy that we’ve articulated is the right one for OMG and for our shareholders.

At this point I would turn the call over to Ken Haber to walk you through the details of our financial performance. Following Ken’s comments Steve Dunmead will take a few minutes to highlight the trends we are seeing in end markets. As well as offer his view of the cobalt market. Ken

Ken Haber

Please turn to the presentation materials on our website and turn to page three. The key drivers for the record net sales of $511 million on a year-over-year comparison were higher selling prices contributing $89 million and $87 million increase in cobalt metal resale, an increased volume of $20 million primarily from the advance materials segment.

Also, the acquired electronics businesses and coating business contributed $77 million to the increased net sales. The $31 million increase in operating profit in the current quarter versus last year second quarter was due to a $27 million increase in advance materials profit and a $5 million increased in specialty chemicals profit. Partially offset by a $1 million increase in corporate, general and administrative expenses.

Income from continuing operations of $56.6 million reflects the operating profit of $84 million partially offset by income tax expense of $22 million at an estimated 2008 annual effective tax rate of 27%. A minority partner share of income of $4 million which is net of tax, related to the companies 55% owned joint venture in the DRC. The second quarter of 2008 includes income tax expenses related to income earned in the DRC. No income tax expense was record by the joint venture in the second quarter of 2007 due to a tax holiday at that time.

As a remainder, we cannot recognize our share of the joint venture profits until the inventory repurchase from the joint venture is manufactured and sold to an outside customer. There is a time lag between when we recognized the minority partner share of income and when we recognize our 55% share. The $4 million minority partner share of income is 45% of the joint venture net income for the period. In the second quarter of this year, we recognize $27 million of operating profit.

Income from continuing operations on a year-over-year comparison was impacted by a drop in other income and expense, primarily due to the $5 million decrease in interesting income as a result of lower average cash balance this year versus last year. Net income for the second quarter 2008 was $56.2 million or $1.85 per diluted share versus a $1.52 per diluted share in the second quarter of 2007. Excluding discontinued operations, income from continuing operations for the current quarter was a $1.86 per diluted share versus a $1.46 in the second quarter of 2007.

The other $1 million decrease in consolidated operating profit from the first quarter was related to $16 million drop in advanced materials segment, offset partially by a $4 million increase in specialty chemical segment. This decrease in consolidated operating profit was more than offset by lower income tax expenses of $5 and a decrease in the minority partner share of income, net of tax of $8 million. Net of this resulted in an increase in income from continuing operations of $1 million in the second quarter versus the first quarter of this year.

Page four reflect the consolidate revenue by segment and by region. Compare to last year consolidate operating margin percentage was lower due to higher cobalt metal resale volume and the impact of higher cobalt raw material cost in the advance material segment.

Please turn the page five, which is a reconciliation of the companies GAAP reporting of net income, an income from continuing operations to non-GAAP results for the period shown. Excluding total income from discontinued operation in the special items as shown, income from continuing operations as adjusted for special items was $56.3 million or $1.86 per diluted share versus a $1.41 per diluted share in the second quarter of 2007.

On page six is the second quarter 2008 operating results for the advance material segment. Revenues were up 132% year-over-year on a 34% volume growth. Excluding cobalt metal resale and copper byproduct sales revenues were up 87% driven by increase product selling prices of $89 million as mentioned earlier and a 30% increase in product volumes. The increase in the year-over-year volume growth was driven by all end markets expect for ceramics, with batter volume of 73% and powdered methodology up 19%.

The improvement in the operating profit versus the second 2007 was related to a $29 million net impact of higher product selling prices, partially offset by increases in cobalt raw material cost, $13 million from increased product volume, including metal resale and $5 million from copper byproduct sales.

These increases were offset by higher manufacturing expenses, process chemicals and non-cobalt raw materials cost totaling $12 million, a $2 million loss in cobalt forward purchase contracts and a $1 million charge to reduce the carrying value of resale inventory to market as at June 30, 2008. Also unfavorable currency impact of $6 million negatively impacted operating profit in the current quarter.

The primary factors that explain the drop of $11 million in the second quarter profit compared to the first quarter are the cobalt forward contracts and the associated sales of the product hedged by these contracts. A $1 million lower cost of market charge and lower production volume at the Kokkola refinery, due to the annual maintenance shutdown in June. These combined factors are partially offset by a $9 million increase in the detailed operating profit recognize and slightly higher product sales volume.

On Page seven, is the second quarter 2008 operating results for the specialty chemical segment, which includes the end markets as shown. As stated earlier the acquired electronics and coating businesses contributed $77 million in the second quarter 2008, increased pricing in advanced organic of $15 million was offset by lower volumes and advanced organics in electronic chemicals totaling $13 million, lowered pricing electronic chemicals of $2 million and negative sales mix of $3 million.

Starting with the end markets of advanced organics, total revenues of $74 million were up 51% versus the second quarter of 2007 driven by price increases of $50 million and $21 million from the acquired coatings business. Partially offset by lower sales volume of $9 million and an unfavorable sales mix of $2 million. Excluding the acquired coatings business volumes were down in all end markets. Lower coatings and chemicals volumes contributed to reflect the economic conditions of the U.S. and the reaction to OMG’s position on pricing.

Also we are starting to see some indications of soft housing markets in Europe, specifically the U.K. Volumes in the tire end market were down 15% year-over-year based on a combination of softness in North America vehicle production, a shift to smaller tires due to the move away from SUVs and larger trucks, and a reaction to OMG’s pricing position.

The combined revenue of the other end markets, which includes semiconductors transcircuit boards, memory disks and general metal finishing were $79 million. This is the $50 increase over the second quarter of 2007. Of which $56 million was related to the electronics acquisition.

Net of the acquisitions revenues were down $6 million related to net lower pricing primarily related to a decline in the nickel price and a 13% decrease in volume. Excluding the acquired electronic businesses, general metal finishing volume was up 45% due to new customers, new applications and market share gains in Asia. Electronic packaging and finishing was up 24% due to market share gains in Asia.

Transcircuit board volumes were down 25% due to prior year external sales to the acquired business that are now classified as internal transfers. Memory disks volumes were down 24% due to a combination of inventory reduction program at some of our key customers, a maintenance shutdown at one of our key customers and changes in the memory disks supply chain.

Operating profit in the second quarter 2008 of $12.4 million includes $5.6 million from the combined acquisitions. Excluding the acquired businesses, the impact of favorable pricing of $5 million offset by decreased volumes of $5 million. A negative product mix increased manufacturing distribution expenses and higher administrative expenses.

As a reminder, the second quarter 2007 includes $2 million in legal fees and $1 million charge to increase the environmental liability.

On Page eight, is a summary of selected financial data and metrics for the current quarter. The financial data and metrics as shown for the first quarter 2007 exclude the acquired electronics businesses and coatings business. During the second quarter of this year operating activities provided $68 million of cash, which allow the company to reduce borrowing from the revolving line of credit by $22 million, leaving an outstanding balance of $25 million as of June 30 2008. Cash balance at the end of the second quarter was a $115 million, an increase of $40 million from the first quarter of this year.

Looking at networking capital days, which reflects the cash cycle of the businesses, the comparable numbers are 96 days this current quarter versus 89-days for the first quarter 2008, and a 109-days for the second quarter 2007. Compare to the first quarter of this year, our reduction in accounts payable days by seven days had the biggest negative impact on the networking capital days. This was due, somewhat to timing of payments and also lower metal prices which tend to have a bigger impact on accounts payable dollars, than on the inventory dollars initially, because payable dollars are less than the inventory dollars.

Turning to page ten, consolidated EBITDA from continuing operations was $94 million for the second quarter 2008, compared to $62 million for the same period last year. The increase is attributable to the rise in operating profits in 2008, versus 2007, if this current level of EBITDA, the company is within its required debt covenants under the current $100 million revolver. This completes my review of the company’s second quarter 2008 results. I will now turn it over to Steve.

Steve Dunmead

First I'll make some comments regarding the cobalt market. In the first half of 2008, we averaged an all-time record high of approximately $46 a pound for low-grade cobalt. Prices drifted sideways during the first half of Q2 and began to drop in mid-May, ending the quarter to approximately $41 a pound. This drop in cobalt price coincided with substantial increases in cobalt raw material exports from the DRC, in February, March and April.

The increased exports were to be expected due to mining operators in the DRC attempting to cash in on recurred cobalt prices. This increased flow of cobalt raw materials found its way in the Chinese chemical manufacturing. An oversupply of these materials has resulted in these chemicals, competing with low-grade metal in some applications.

As we looked forward, we expect demand across most major sectors to remain strong. The exports from the DRC for May and June decreased back to the historical level seen throughout 2007, which should impact the supply situation in China later in 2008. Additionally, the cobalt market tends to firm up after the European summer holidays season, as consumers come back to the market.

Now, I would like to cover some of the key end use markets impacting our advanced material segment. In a rechargeable battery market, lithium-ion battery cell volume is expected to be up 15% year-over-year and reached 3.3 billion cells for 2008. Recently, Sanyo, Sony, Samsung and Matsushita have all announced expansions of their lithium ion battery cell production that should come on stream in 2009. These expansions totaled approximately $3 billion U.S. in capital spending.

The increased demand continues to be driven by strong demand for laptop computers as consumers continue to move away from desktops, steady growth in cell phones and other portable consumer electronic devices and high growth in new applications such as power tools. Additionally, with high gas prices HEVs and EVs continue to gain momentum. We continue to make inroads into new mixed metal and cobalt precursors. New product sales volumes in this area are up more than 700% versus 2007.

The powder methodology market continues to be solid. Demand for hard metal tooling is being driven by continued infrastructure development in areas such as China and India, mining and aerospace offset somewhat by softness in the automotive market.

We continue to gain share due to our expansion that came on-stream at the end of 2007, and our focus on the development of new products, which were up 64% year-to-date. The only area that has been soft for advanced materials is ceramics and pigments. Competition in this market has been very strong due to the previously mentioned Chinese chemical manufacturing, and decreased demand due to a downturn in construction specifically tile. Our specialty chemical segment touches a wide range of end use applications and is truly global with approximately 70% of our sales outside of the U.S.

Now for a few comments on the key markets impacting our specialty chemicals businesses; Softness in U.S. housing continues to hurt demand in the coatings and chemicals markets. We’ve also seen some of the softness moving into Europe. Volume declines in North American coatings have been estimated to be between 7% and 10%.

There is an expectation however, that the coatings businesses in North America are at or near the bottom with 2009 expected to be flat and 2010 getting back to long-term growth rates of approximately 2.5%. Global demand for tires is now growing at less than GDP. Tire shipments in North America are expected to be down 4% in 2008 driven by lower vehicle production and associated OEM sales.

As Ken mentioned earlier the hard disc drive market has gone through a significant structural change because of Western Digital’s purchase of COMAG and the associated switch to 100% internal consumption. In addition, Seagate has announced that they will be shutting down their Limavady Ireland plating facility earlier than previously announced. Due to the combination of these two factors we expect our memory disk volumes to be down approximately 10% year-over-year in the second half.

The overall general metal finishing market is expected to be up greater than GDP for 2008. As we have seen in the first half of ’08, OMG’s growth in the GMF market has been substantially higher. We expect this trend to continue for the balance of the year with continued share gains in Asia and the development of new applications and new customers.

During the first quarter conference call, we talked about softness in the PCB market and our expectations that this softness would continue until at least third quarter. This recovery actually began earlier than expected with our volumes increasing by more than 20% Q2 versus Q1. Overall we expect to see continued growth of approximately 7% year-over-year with some potential disruptions in China associated with the Olympics in Q3.

Our new photo mask and UPC businesses are tied to two different demand drivers within the semiconductor industry. Photo mask demand is tied to the introduction of new devises. Capital spending in the semiconductor industry, which continues to be down 15% to 20% from 2007 levels, tends to be a leading indicator for introduction of new devises. This market continues to be weak in Europe impacted somewhat by the strength of the Euro and the GBP versus the U.S. dollar.

UPC demand on the other hand is directly related to the volume of devises produced. This demand is expected to be up approximately 8% for 2008, which is inline with our first half results. Our view is that this trend will continue for the balance of the year.

At this point I would like to turn the call back over to Jose Scaminace.

Joe Scaminace

Thank you Steve for your report and at this time let me turn the call over for your questions.

Question and Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Harrison - First Analysis.

Mike Harrison - First Analysis Corp

Joe, you mentioned some difficult market conditions for the electronics business; can you talk about how much of that business is related to capital spending as opposed to consumables in the semiconductor market?

Joe Scaminace

I’m going to turn that over to Steve because actually it has impacted some of our photo mask business and he could probably give some more detail on that.

Steve Dunmead

Mike, this is Steve. Certainly the capital spending part of this has impacted the photo mask business specifically in Europe but from a consumable standpoint as we said at least in the Ultra Pure Chemicals, the UPC business we’ve seen steady demand growth in both our manufacturing products and also our services business out of Asia. In addition as we talked about in electronics the PCB business actually rebounded in the second quarter faster than we had originally thought, so that part of it faced some headwinds in the first quarter, but looked stronger in the second.

Mike Harrison - First Analysis Corp.

And Steve, you were talking about the surplus of Cobalt material in China, do you think that is the primary driver in the decline that we’ve seen in the Cobalt price or can you talk about maybe other issues that are at pay here?

Steve Dunmead

I think it’s a combination of things, first of all this was a record first half for Cobalt prices. I mean the fact that we were above $50 and we averaged $46 for the first half is an all time record. Certainly anyone that’s been associated with the cobalt market for a period of time has seen highs and lows and a great deal of volatility.

Certainly what we’re seeing at this point in time is these cheap Chinese chemicals competing with low grade metal in a few applications; certainly not alloys, but in some applications. People are buying some of these cheaper chemicals instead of buying metal because they can buy it cheaper and converting it into other chemicals.

In addition from a high grade standpoint, we’ve also seen some pressure likely coming from other Chinese producers in high grade metal, but again that’s all tied to exports coming out of the DRC and so I believe it’s simply a supply issue associated with people trying to get Cobalt out of the DRC, while it was at the peak of the market.

Mike Harrison - First Analysis Corp.

I was wondering also, as you look at pricing I know that in the advanced organics business, what formerly was advanced organics, those products used some Cobalt as a raw material and then you have to go after pricing in order to recover higher raw material costs. I was wondering to what extent are you also out there working for price increases in advanced materials, when Cobalt prices are going up and then if you do get sort of a separate price increase independent of the market related price of Cobalt, how sticky would that price increase to be as cobalt prices are coming down?

Steve Dunmead

Mike really good questions; you right about the advanced organics part and really the pricing stances that Ken mentioned in his prepared comments, those have been both from a metal standpoint, but also from increased distribution costs. Increased costs of all the hydrocarbons go into those things and we have taken a very firm stance from a pricing standpoint and it’s cost us some volume quite honestly.

From an advanced material standpoint, the bulk of our sales are a metal basis plus and so it’s almost a direct pass-through from a metal standpoint given the lag from an inventory, but because of what had happened with shortness of supply specifically coming out of China in 2007 we have seen increases in the premiums that we charge in a lot of the key markets and those contractually are pretty sticky.

Operator

Your next question comes from Saul Ludwig - Keybanc.

Saul Ludwig - Keybanc Capital Markets

Steve, I wonder if you could talk a little bit about battery technology. No question about the major expansion in cell production over the next couple years, that’s very good. To what extend has lithium titanate and lithium phosphate begun to lets say replace lithium cobalt and do you guys play in the titanate and phosphate market and just talk about this different changing technology in batteries and what it means to OMG?

Steve Dunmead

Yes Saul certainly we have development programs associated with lower cobalt containing chemistries and the chemistries that contain no cobalt. Those new chemistries are being driven by a combination of no price volatility, but also end use applications specifics.

So, in some cases you’re more worried about the safety of the device than you’re worried about how fast it will recharge and so, certainly we’re planning those and as we’ve stated before we’re looking at this as we have said in our strategy from a portable power strategies standpoint and not simply from a cobalt standpoint and so, certainly we have made significant inroads into mixed metal precursors that are going to low cobalt-containing chemistries.

Relative to the iron compounds and that the titanates those have made no real significant inroads into the kinds of applications, cell phones and laptops, where we deal with. Certainly they’ve made a little bit of inroads into power tools, but we’ve seen more inroads being made by mixed metals, but still cobalt volume is growing nevertheless.

Ken Haber

I want to add to that. Saul this is Ken that when I reported that battery was up 73% that’s on a volume basis, so that’s total products, so that again reflects what Steve was mentioning about us participating in other applications and technologies relative to portable power.

Saul Ludwig - Keybanc Capital Markets

So, it sounds like at this point, that it’s the cobalt based products that are clearly 90 plus percent of where you’re at and how these new technologies will emerge remains to be seen.

Steve Dunmead

Yes, I think that’s a fair assessment Saul?

Saul Ludwig - Keybanc Capital Markets

Hey Ken, given that Cobalt is now 30 bucks, we don’t where will be tomorrow, but we know where it is today. Does that mean in terms of lower cost to market adjustments that might have to be taken here in the third quarter -- if we assume that the $30 cobalt price stays in effect from now until the end of the quarter, let’s start with that assumption. It may or may not be that way; what would you have to do in that regard and then Joe if the price is $30, the goal of having EBITDA 20% of sales, what happens to that in the $30 cobalt price environment?

Ken Haber

This is Ken, Saul. Certainly given the recent trend in the cobalt price, since the end of June, we do have a potential exposure particularly with the inventory of cobalt metal resale material, which has low gross margins as we’ve reported in the past. I think that it’s impossible to provide a number or even a range of this moment given that there is other variables just besides price.

Also we’re still two months away from the end of the reporting period in September, but there are a lot of different variables; I mean actual quantity of materials on hand at the end of that period; what's the mix of our fee material with that end of that period? What's our actual cost basis given that? So there is a very, very large variation, a number of key variables that go into this. So, I’m sorry to disappoint you, but I can’t give you a number or even a range given that.

Saul Ludwig - Keybanc Capital Markets

You may that when you’re talking internally you’re not alerting management or the board to say “well if this stays, this is what the implications could be because, you don’t have an answer to that?”

Ken Haber

That is a different question Saul; I do have an answer to that. You asked me a hypothetical question on the price. We are certainly managing aggressively, we have been. We’ve been doing that all year, we’ve actually impressively minimized the amount cobalt material on hand of resale, including using it internally.

At the end of any given period, we also have a percentage of our feed and materials that’s on price, so that partially as a natural hedge. We are certainly aggressively looking on our logistics, if you look at our inventory days, over last year, that’s demonstrated, so we are doing everything in our power to continue to minimize any exposure at any given time during the cycle.

Saul Ludwig - Keybanc Capital Markets

And that’s kind of inline with Joe’s view of reducing the supply chain, I’m encourage to hear, that’s good. How much cobalt did you guys produced in the quarter; usually you give us that data every quarter?

Joe Scaminace

I think it’s in the Q. While he’s looking into that, I’ll ask you a question on the 20% goal. You had indicated or your question was with that in mind how could lower cobalt price potentially affect that goal. Well first of all, when we’ve laid out our EBITDA and ROI goals, we’ve indicated that on an acquisition basis, that’s what we’re targeting and it also represents the company goal.

Obviously Saul at $30 cobalt or at $15 cobalt or a $10 cobalt which you know the volatility over the last five to eight years has demonstrated that is precisely and exactly the reason why we are in transformation mode and why the Board of Directors and why the management team and the employees of the OM Group are committed to transforming the model to achieve a 20% goal recognizing that the cobalt vulnerabilities are ever present.

Ken Haber

I have the numbers for you. For the three months in the second quarter, production was 2,148 and that compares to the prior year quarter 2,071. Year-to-date we’re at 4,524 tons and last year for the first half we’re at 4,257 tons.

Operator

Your next question comes from Rosemarie Morbelli - Ingalls & Snyder.

Rosemarie Morbelli - Ingalls & Snyder

Joe, you were talking about acquisitions and it almost sounded as though you were talking about putting yourself up for sale, could you comment on that?

Joe Scaminace

That’s exactly how I did not sound I thought Rosemarie. No, we are not in that vein at all, absolutely not, I don’t know how it came across that way, buy I would tell you that…

Rosemarie Morbelli - Ingalls & Snyder

When you were talking about Dow and Ashland and two large acquisitions they had just made, so I wanted to make sure that this is what you were looking at as the acquire as apposed to the acquiring?

Joe Scaminace

Well absolutely, we’re actually I think everyone of us want to answer that; let me let Greg Griffith answer first and then I’ll jump in.

Greg Griffith

Rosemarie, the context for that was in the case of Dow for example; well documented, well understood need for portfolio transformation. Well documented, well reported drive to move to specialty markets, which drove their strategic decision and to move away from some of the commodity implications of their product line.

Ashland is in the similar case looking to diversify markets and technologies and products and so I think the context of what Joe was suggesting is two clear-cut examples of companies in the chemical industry that saw the need for portfolio transformation.

Joe Scaminace

And Rosemarie as I mentioned that inline of -- if I had mentioned Roman House and Hercules then I would have understood your question, but since I mentioned Dow and Ashland they were the acquiring companies.

Rosemarie Morbelli - Ingalls & Snyder

I put that on my foreign background, for misunderstanding what you said.

Joe Scaminace

No problem.

Rosemarie Morbelli - Ingalls & Snyder

Following-up on the rest, given then the appetite to transformation, are you seeing a change in the valuations, it doesn’t look as though they’re becoming more reasonable as time goes by with the poor economic conditions and are you willing to be more than what you would consider reasonably given the competitive arena in that particular area?

Joe Scaminace

That’s a very good question Rosemarie and quite frankly I will say in general, valuations they’ve comedown slightly from their lofty levels and then obviously some of the reason deals looked lofty again; however, there is a mixed bag. I would answer that, because in some cases valuations are viewed has being low and some typical candidates we’re saying weighted out and others as I think are saying “look, the environment and the synergies are required right now for us to combine with someone” because the train of consolidation globally continues to move down the track.

So, I would say to you that we are very cognizant of not wanting to overpay for an acquisition especially in light of all the pressures that are on us right now and I would say that values are down slightly, but we’re going to be very cognizant and certainly inline with the financial goals that we’ve stated.

Rosemarie Morbelli - Ingalls & Snyder

Would you accept dilution for a year or so if you found the right piece of business?

Joe Scaminace

No.

Rosemarie Morbelli - Ingalls & Snyder

Okay and you talked about self housing in the U.K., but I have heard that Spain and Italy are down as well and France seems to be going in the same fashion; any additional comment on Western Europe that you can share with us?

Joe Scaminace

Well, I think I’ll let’s Steve and Ken to jump in, but just this morning I don’t know if you saw the data that the German goods orders are down over 5% and there is this beginning talk of the possibility of Europe slowing down. I think we’ve seen some of that, we operate in these countries and the U.K. we operate and France and let Steve and Ken jump in on this, but clearly we are seeing some weakness there.

Steve Dunmead

Rosemarie, this is Steve. Certainly in Q2 we started to see the softness in the U.K., but then certainly as we got to the end of Q2 and started into Q3, we’ve seen exactly what you said, some of the softness starting to spread to other parts of Western Europe.

Rosemarie Morbelli - Ingalls & Snyder

And let’s assume that the Western European economy takes the same turn as the U.S., which it certainly seems to be doing just with the lag, do you have enough business in Eastern Europe, Middle East Africa, Asia to offset that particular impact or really put it in your operations if the U.S. has not recovered by then, which I don’t think it well.

Joe Scaminace

I mean certainly one of beauties of our business as a whole is the exposure that we have to all of the high growth area; certainly any softness in Europe similar to what we’ve seen in the U.S. isn’t good for us, but it’s not a killer because we also have great exposure to China, Taiwan, South East Asia, India and so it varies by business, but certainly it wouldn’t be good for us.

Rosemarie Morbelli, - Ingalls & Snyder

Overall, could you give us a percentage of your business in Western Europe; a percentage of the international part?

Joe Scaminace

I don’t really have that number in front of me I will give it to Troy and he can give that to you Rosemarie.

Operator

Your next question is a follow-up from Mike Harrison - First Analysis.

Mike Harrison – Fist Analysis

Ken, can you give us any guidance for what the minority interest payout might look like over the next two quarter. It actually came in a little bit lower I think than what you might have been guiding at the end of last quarter.

Ken Harber

Well, I think we gave you a range I think if your talking about the discussion we had I think there was a range that we gave; I think we’re probably at the low end of that range maybe, but the second quarter our actual receipts of product Kokkola were down below what certainly was significantly below what there was in the first quarter; actually I don’t think we received anything in the month of April in that.

I think that you’re going to here this again, but it depends on where the prices are going forward and how that will impact the profitability of the joint venture but certainly you’re not going to see a number like you saw in the first quarter. I think at this point I would say that something like what you saw in the second quarter or slightly less might be appropriate; so I would say three to four, maybe in that range, it’s a guesstimate.

Greg Griffith

If you look at it just from a volume basis, we said last quarter in the exhaustive discussion of minority interest that those volumes were unusually high and we said at the time that the second quarter was going to be unusually low, so you got a pretty good indication as to how the second half is going to go based on the first half all, things being considered.

Mike Harrison – Fist Analysis

And then did you see what the change in sales of copper byproduct was versus last year and what that contribution was to the top line.

Ken Haber

No, we didn’t do that. That was not in my prepared remarks.

Mike Harrison – Fist Analysis

Ken can you give me any guidance on that.

Ken Harber

It’s certainly disclosed in the Q.

Mike Harrison – First Analysis

I will check there and then maybe a question for Joe and I’ll be with Rosemarie a little bit; I was also curious to know if you were eluding to possibly OM Group being required rather than being be acquirer. I was wondering if you can give us some more details on what sounds like a pretty full pipeline of potential acquisitions and potential partnerships. Anything that we might see over the next quarter to on the M&A front and any change in direction in terms of type of business that you’re looking for in terms of built-on’s.

Joe Scaminace

I would tell you that the pipeline is there Mike, there is no doubt we have been very active. Greg and I and Steve and Ken basically we’ve been on the road, we’ve been meeting with potential candidates on the strategic acquisition front and I would say that clearly and I think we signaled this before that electronic chemicals and battery materials really emerge as the two top candidates, with catalysts being probably more of a distant third, just given the availability, the action ability of companies in that space. I will not answer the question whether or not you’re going to see a deal here in the next three months; I will tell you that the activity level is by, the candidates are there and we are in discussions with some of them.

Ken Haber

The incremental change for the copper byproducts revenue was up $9 million incrementally and the operating profit impact was $5 million incrementally.

Operator

There are no further questions at this time.

Joe Scaminace

I would like to thank all of you again for your time this morning. These are definitely existing times to be associated with OMG and I’m very optimistic that we’re going to be successful in transforming our company into an even better company than it is today. If you have any follow-up questions from today’s discussion please reach out for wither Greg or Troy. We appreciate your interest in OMG and I look forward to updating you on our progress as we move forward.

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Source: OM Group, Inc. Q2 2008 Earnings Call Transcript
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