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OM Group, Inc. (NYSE:OMG)

Q3 2012 Earnings Call

November 09, 2012, 10:00 am ET

Executives

Joseph Scaminace - Chairman & CEO

Chris Hix - VP & CFO

Analysts

Mike Harris - First Analysis

Chris Kapsch - Topeka Capital Markets

Rosemarie Morbelli - Gabelli & Company

Operator

Good morning and welcome to the OM Group’s Third Quarter 2012 Financial Results Conference Call. Information presented on the call may include forward-looking statements that are subject to uncertainties, risks and factors which are difficult to predict. Actual results could differ materially from those expressed or implied. A more complete disclosure regarding forward-looking statements can be found at the bottom of OM Group’s press release or in their Form 10-K, and applies to this call.

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

Joseph Scaminace

Good morning, everyone, and welcome to our third quarter earnings call. Today, I am joined by Chris Hix, our CFO and Rob Pierce, VP of Finance, whose responsibilities include Investor Relations.

You could see our standard Safe Harbor disclosures on slide two, so let’s get right into the details on slide three. I am pleased to report that we've delivered exceptionally strong cash flows in the third quarter of 2012. The $96 million of cash flow from operating activities was the highest quarterly total in nearly four years and the second highest total in the past decade. We accomplished this milestone in the face of challenging macroeconomic conditions, demonstrating again, the strong cash flow profile of our company.

Our great cash flow this past quarter added to an already strong balance sheet. During the third quarter, we elected to use some of our substantial cash balances to repay $72 million of debt ahead of schedule and we ended the third quarter with $325 million of cash and $594 million of debt. After the end of the quarter, we repaid an additional $100 million. These repayments deployed our cash efficiently and effectively to reduce future interest costs.

Our liquidity position remains rock solid. And along with expected future cash flows, a US tax refund of $37 million that we received in October and our untapped revolver of $200 million, we have the capacity to execute our strategy.

As we anticipated, sales and profitability were down compared to a year ago as difficult economic conditions more than offset solid results from our most recent acquisition. On our Q2 call, we discussed our expectations for a slowly firming cobalt price in Q3 based on the up tick seen in July and sentiment for the remainder of the quarter. However, the cobalt price later trended downward and ultimately the average Q3 price came in below the average Q2 price significantly impacting Advanced Materials and enterprise results in the third quarter.

On the other hand, Magnetic Technologies and Battery Technologies, both had favorable results, demonstrating the power of higher value added and more predictable businesses in our portfolio. We now generate a significant portion of our sales and earnings from more stable, non-commodity businesses.

Slide four provides an overview of our business portfolio. Advanced Materials, our cobalt franchise, contributed $8 million of adjusted EBITDA during the quarter, less than we’ve typically seen, because of cyclically low cobalt prices. This is a great business, with growing volume demand and market leading positions, but it does have significant exposure to these volatile metal prices.

On the right side of the chart are our three transformative platforms that we’ve built by executing our strategy. Magnetic Technologies, Battery Technologies and Specialty Chemicals. These businesses contributed $49 million of adjusted EBITDA in the third quarter of 2012, over 85% of the consolidated total excluding corporate expenses.

Magnetic Technologies is an innovator that gets rewarded for it's technology. It's a market leader working closely with customers to meet complex applications and requirements and it is very well positioned in diverse end markets.

Our next transformative platform that we acquired, Battery Technologies has also demonstrated it's capacity for innovation, both in legacy markets such as defense and aerospace to newer areas like metal, medical, oil and gas and commercial aviation.

Within our Specialty Chemicals platform, we’ve transformed our advanced organics business in to a technology driven innovator, solving industry problem with new technology like Borchi Oxy. Our electronics business continues to be known for its market leading solutions for print and circuit board and hard disk drive applications while also developing newer chemistries for photovoltaic applications. Most of our performance is now driven by our transformative platforms. These are businesses with multiple patents for organic growth and synergistic growth through acquisitions to create shareholder value.

Please turn to slide five; our strategy clearly provides our company with the ability to grow profitably and sustainably. As these charts demonstrate, the acquisitions we have made in recent years provides a strong foundation for growth and enable us to deliver solid results.

Sales have increased, and we are now positioned in more diverse and attractive end markets. Adjusted EBITDA is also up year-over-year driven by the strong results for Magnetic Technologies and Battery Technologies.

You need to consider that without these acquisitions, our exposure to cobalt prices in our Advanced Materials segment would be significantly higher on a relative basis compared to the enterprise as a whole. Instead, as a result of our strategy that we have executed, we have lessened the relative impact of cobalt pricing on our overall results and we delivered an increase in EBITDA in spite of lower cobalt prices. The final set of bars shows the cash flows in each period; 2011 flows were good, 2012 cash flows have been exceptional.

Turning to slide six, it highlights our key enterprise priorities for 2012 and specific examples of accomplishments made to-date. In these challenging macroeconomic conditions, we are focused on growing market share across our businesses; at VAC, a vast majority of our product offerings are customized to meet the individual requirements of our customers. Our team of scientists and engineers work with our customers to develop solutions to meet the evolving needs of the marketplace.

One example is in the automotive systems market, where growth of exhaust gas recirculation coolers is meeting market demand for lower nitrogen oxide emissions from automobiles. We supply the brazing foil for Magnetic Technologies for this very application. And while this product may only develop into about $20 million of annual sales over the next couple of years, it is only one example of the growth prospects of this business.

Technology and innovation are key drivers for our success and this differentiates us in the marketplace. In our advanced organics business, we signed an exclusive worldwide distribution agreement with AkzoNobel for our Borchi Oxy Cure accelerators. This agreement with a market leader will provide a key channel for our Borchi Oxy Cure products to reach customers in the composite industry. As the product sales of Borchi Oxy line increase, we expect to reach incremental sales in excess of $20 million by 2016.

Another key priority for 2012 is improving working capital and fixed asset utilization. Our efforts in this area have helped drive significant operating cash flows that I discussed earlier. And there is room for more improvement going forward. We continue to focus on optimizing working capital as a percent of sales and continually review our capital expenditure needs and fixed asset utilization in the light of these current business conditions. As an example of our operating efficiency and what is taking place at EaglePicher; Lean Six Sigma segment teams are driving meaningful productivity gains there.

Our other main priorities for 2012 relate to M&A activity. Capitalizing on the benefits and synergies from recent acquisitions and pursuing strategic acquisitions which along with organic growth is a pillar of our growth strategy. The VAC and EPT businesses continue to deliver strong results and positive cash flow and while both of these were added to the portfolio as key transformative platforms rather than synergistic deals to tuck into our legacy businesses, we continue to find synergies that benefit the enterprise right now. For example, electronic chemicals of VAC teams are working closely together to develop an application in the printed circuit board market that utilizes magnetic materials.

Turning to slide seven, we recognize that many of our end markets are experiencing difficult macroeconomic conditions in the short-term. Throughout the year, we've been controlling our costs, reducing discretionary spending and rationalizing capital expenditures all to protect our short-term profits and cash flow.

We are also developing plans for adjusting our cost structure to improve our competitive position and better support our long-term growth strategy. Our business and corporate leaders are pulling together these plans as part of the 2013 financial planning process and we expect to update you with more details at a later date.

Turning to slide eight, we've been consistent and unwavering in our strategy. Our vision is a company where sales grow faster than GDP and earnings grow faster than sales due to our operating leverage. We are committed to strong financial discipline and operational excellence to maximize earnings growth and cash flows and to improving returns both on internal investments as well as acquisitions. We have a rigorous process to evaluate and integrate potential acquisitions which we believe will create additional long-term value for our shareholders.

Slide nine shows the summary, the impressive cash flows of the first nine months of 2012 have further enhanced our strong balance sheet. We are well positioned for the future with the capacity to execute our strategy. Our transformative platforms led by our most recent acquisitions of VAC and EPT are driving our results and validating our strategy to move toward value added businesses that get rewarded from customers for innovation and technology.

As we look ahead to the near-term challenges of business conditions in many of our markets, we are taking steps to adjust our cost structure for both short-term and long-term benefits. The actions we take will position us well when the market begins to recover.

And finally, as we look ahead, we remain committed to our strategy and are excited about our growth opportunities on the horizon and were well positioned with a strong balance sheet to deliver significant shareholders value.

At this time, I will turn the call over to Chris Hix to walk us through the financial results.

Chris Hix

Thank you, Joe and good morning everyone. Slide 10 provides an overview of our third quarter P&L compared with last year. The GAAP reconciliations are on the appendix of this presentation. Enterprise sales declined 5% year-over-year in the third quarter. We experienced increases due to the August 2011 acquisition of VAC and stronger performance in our battery technologies business, but these forward strides were more than offset by continued weakness in cobalt prices and lower volumes across our key specialty chemical product lines.

The weaker European economy is impacting sales volumes in most of our businesses. Lower sales affected our profitability, especially because of cobalt pricing and we also had lower pricing benefits in our Magnetic Technologies business as signaled to you in last quarter’s call.

Below the operating profit line, interest expenses are higher because last year’s quarter only included two months of debt related to the VAC acquisition. The FX loss of $2.7 million resulted from a stronger Euro during the quarter, which increase the US dollar reported value of our Euro denominated net debt. The opposite effect occurred a year ago when the weakening Euro resulted in an FX gain of $7.4 million.

Other income includes a $1.8 million dividend from a Magnetic Technologies joint venture. The adjusted tax rate for the quarter was 33%, a little higher than expected due the rate changes in the DRC. However, the year-to-date adjusted tax rate remains roughly in line with expectations at about 30%. Combining all of these factors, our adjusted EPS was lower than last year, driven by lower adjusted operating profit, higher interest expense and the FX swing from a gain to a loss.

Slide 11 shows an overview of our cash flow for the quarter. As Joe mentioned, the $96 million of operating cash flow in Q3 was our best performance in four years and a second best in a decade, really incredible performance. This cash flow resulted from lower working capital levels due to lower sales, improved working capital efficiency and reduced production in the DRC. We expect positive cash flows to continue for the remainder of the year albeit at lower levels. We're rationalizing capital expenditures in light of current business conditions and due to our sharpening investment discipline.

As you turn to slide 12, you can see that we used $72 million of our growing cash balances to repay debt. We've reduced our net debt $115 million this year to only $269 million at the end of the third quarter. In addition to early debt repayments in Q3 that are reflected in the chart on the left hand side of the page, we repaid another $100 million in October to reduce future interest costs. So our total debt currently stands at under $500 million.

The chart on the right side updates the progress we are making on working capital efficiency. We began trending up last year following the VAC acquisition and increased again in the fourth quarter due to a misalignment between sales and inventory levels. This stabilized in the first quarter of this year and since then we have seen improvements as strived to optimize working capital levels especially inventory. We expect to see continued progress in Q4.

The next few slides provide an overview of our business results beginning with Magnetic Technologies on slide 13. Demand was again solid for automotive systems applications due to favorable electrification trends in passenger cars. Year-over-year demand was mixed in industrial applications but mostly weaker as a result of European economic conditions. Alternative energy and retail applications were also weaker.

The year-over-year decline in profitability [aside] to lower volumes due to lower Eurozone demand. The business enjoyed what we believe is its last quarter of repricing benefits and we expect to Q3 adjusted EBITDA margins of 18% to moderate in Q4 to the lower end of businesses low-to-mid teens normalized range.

Slide 14 summarizes third quarter performance of our battery technologies business. Sales and operating profit increased primarily due to higher volumes across the product lines and because of a favorable mix of projects and project execution. The business continues to enjoy healthy sales into the defense and aerospace sectors including sales to US defense contractors for foreign delivery.

We also have a small but growing exposure to medical applications which is benefiting from new device adoptions. The business benefited from shipments in Q3 that have been forecast for Q4 and we expect to sequential decline in Q4 because of this reason and because of the typical seasonality in the business.

Longer-term, this is a business with multiple growth paths. One recent development is engines starter battery systems were fixed in rotary wing aircraft. We do not currently participate in this market but we are getting a first system qualified and within the next five years we believe this application could produce annual sales of $10 million or more.

In our specialty chemicals business on slide 15, third quarter volumes were lower than in the prior year. The chart on the right shows the volume performance of our advanced organics and electronic chemicals product lines over the past two years.

In our electronics product lines, we have experience soft demand since the third quarter of last year particularly for chemicals for hard disk drives. However, we are seeing the first signs of typical fourth quarter seasonal strength getting at this point.

Our advanced organics product lines experienced lower year-over-year demand principally due to lower demand for coating additives and rubber adhesion promoters for tires in Europe. As Joe mentioned earlier, Borchi® Oxy is gaining a bit attraction and is expected to grow as our customers produced more environmentally friendly formulations and address regulatory requirements. Operating profit in the business was down in the quarter primarily due to lower sales volumes.

Turning to slide 16, the chart on the right tells the story of our advanced materials business in the third quarter. Cobalt prices looked to be improving when we talk with you in early August but ultimately turned down at average 19% lower than Q3 last year.

The chart shows that volumes grew about even with last year’s levels. This growth in demand for rechargeable batteries was offset by declines in construction and chemical end markets. The table on the left shows the financial impact of lower cobalt pricing and it includes the impact of lower metal (inaudible) which was associated with the Norilsk supply agreement that expired in March.

You can also see that we had $6.5 million of other operating profit benefit in the quarter, which resulted mostly from lower manufacturing expenses in the Congo as electrical problems there limited our production by about 35%. I will wrap up with our 2012 fourth quarter outlook on slide 17. Overall, we expect adjusted EBITDA to be sequentially lower in the fourth quarter. Magnetic Technologies, the absence of our pricing benefits and a weak European economy will lower profitability. Battery technologies EBITDA is projected to be lower due to the usual Q4 seasonality, other shipment timing and fewer pricing mix benefits.

We expect to see EBITDA for the specialty chemicals business increase, primarily due to higher demand in electronics end markets. Working capital improvements are expected to continue to contribute to positive cash flows from operations, but less so than in the second and third quarters. And interest costs will be reduced due to the recent debt repayments.

That concludes our prepared remarks. Sam would you please open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) your first question comes from the line of Mike Harris of First Analysis.

Mike Harris - First Analysis

Just in terms of the outlook and throwing up your hands on the advanced materials sequential outlook, it looks like the operating profit this quarter would have gone negative except for some of the issues you had in the DRC. So help us understand what your expectations are for the DRC piece of the business and in that sort of other “impact” on your operating profit, as we look to the fourth quarter, and then we can draw our own conclusions on what might happen with cobalt pricing.

Joseph Scaminace

Yeah, Mike just to clarify there the benefit that we got from lower electricity costs and other things that resulted in lower production, had we had the production that would have gone into producing more inventory, so that cost would have been capitalized into inventory and would have been part of the inventory flow in the business. So just to be clear with or without that electrical disruption, we would not have expected a loss of business.

Mike Harris - First Analysis

Okay, so is it fair to say that for Q4 something above zero is likely assuming that we don't see cobalt pricing drop off a cliff.

Joseph Scaminace

Yeah, we are generally not in a great position as we've talked about to forecast the price of cobalt even in the short run; but I think it's safe to assume that we expect to have some operating profit in the business.

Mike Harris - First Analysis

Okay. You guys had some nice progress on debt pay down this quarter. Can you give us some guidance on where the interest expense should shake out for Q4 and as we get in to Q1, I understand sort of, it's a moving target for now?

Joseph Scaminace

Yes, so what I’d say there, Mike is you can apply the roughly 5.9% interest rate that we have on the debt to the 72 million that was repaid in Q3 and the 100 million we repaid at the end of October. So you would expect that we get about 2 months of benefit for the 100 million.

Mike Harris - First Analysis

How do you guys think about the corporate strategic or board level, how do you think about use of cash for debt pay down versus potentially a repurchase authorization.

Joseph Scaminace

Mike clearly as we have indicated in all of the calls in the past, we are looking at every way possible to return capital to shareholders including share buyback, including looking at dividends. It balanced up against what our strategic goals are to continue to look synergistic acquisition that could really help the business and enhance our growth prospects. So the answer to that question is that absolutely it is a subject of discussion. We have a good balance sheet to be able to weather any financial storm, but in addition to that clearly we are looking at all of those options as we go forward.

We have the resources now when you think about our balance sheet to consider everyone of them. When you think about the companies that you’d like to be investing in right now whatever economic storms are out there and macroeconomic conditions. These battles are often won and lost in the balance sheet because having the flexibility to do all is what is all about.

Mike Harris - First Analysis

Last question for now and then I will get back in queue. But I was hoping that you could formally address some of the rumors around potential sale of some of your cobalt asset. At the very least could you may be talk about the importance of being back integrated in the cobalt business now as oppose to when you first got in to that arrangement, the joint venture in the Congo and may be the cobalt market supply with a little less certain.

Joseph Scaminace

Mike let just say, with respect to the India question there about integrated supply. We have been experts in the cobalt business. We know what we are doing there; we’ve operated in the Congo; we know how to get supply; we like the integrated channel; we like the control that we have; we like the customer base that we have; we like the volumes that we have. So if you look at cobalt as being part of the history of OM Group, clearly those factors are all in play.

And there is no way we are going to address any bullet and rumors that are out there at this point. But let me just suffice to say that if you listen to my comments early on and you have listened to a very consistent message coming from me for the last seven years. It has been to move this company in a direction where we can mitigate the effect of volatility on our earnings stream, that’s been the one big value detractor we feel. It’s been the one big issue of unpredictability, and it’s something that we can’t really control.

So in terms of our strategy, we’ve always talked about moving away from commodities, generating more profits from stable businesses that are closer to end users, and I would leave it right at that and not comment on any rumors that may or may not be out there.

Operator

Your next question comes from the line of [Dave LaPuma]. Your line is open.

Unidentified Analyst

Thank you for taking my call. My questions have been answered I appreciate it.

Operator

Your next question comes from the line of [Andrew Dunn]. Your line is open.

Unidentified Analyst

Just trying to get a little more clarity on the ramp up that kind of 500 million in cost savings that you are calling out in the 2014. Can you give us some idea of the timing of when we can start to see those hitting?

Joseph Scaminace

Is this Andrew on the call?

Unidentified Analyst

Correct.

Joseph Scaminace

Andrew we have not talked about 500 million of cost savings …

Unidentified Analyst

I am sorry, let’s say 5 million. If I said 500 I apologize?

Joseph Scaminace

Yeah, so we had talked about, I think we had introduced this concept in our last call, we reminded the folks about it again, and this is a variety of budgets that we have underway in our advanced materials business to improve the longer term profitability. This is a combination of tweaks that we have within the processes in our Kokkola facility, its also looking and we might be able to change certain formulations or processes to reduce some of the input cost or some of the chemicals that are used in that process. So it’s really a host of productivity, a projects underway that we think will ramp up over the next two to three years here. So we’ll start to see some of that benefit next year and some of the years after that as well.

Unidentified Analyst

Okay, next question. Just looking at your SG&A in the quarter, it’s come down and looks like a little bit sequentially over the last couple of quarters. But the percentage of sales seem to have jumped a decent amount in this fourth quarter. If we are looking at demand continue to be soft, the volatility in your up and your EBITDA outlook coming down, should we look for further cuts come in SG&A as well, what kind of run rate maybe we should be think about going forward?

Chris Hix

Yes, so as sales levels have turned down a little bit its not surprising that we see the SG&A percentage popup a little bit in the short term. As Joe, had mentioned in his comments, we are going through the 2013 financial planning process and that includes just taking a harder look at cost across the enterprise, not just in SG&A within our manufacturing base as well. So I think it we’ll hold off on giving the specific guidance in that area and until we get through our planning process and get it all better down and as Joe mentioned we’ll come back to you and give you a bit of an update on how that’s going to progress.

Unidentified Analyst

All right, and then just one more question, if I may looking at your Specialty Chemicals segment and kind of in that advanced organics business, you mentioned you are expecting lower seasonal volumes, looking at your AO index there, the trend seem to be moving downwards and your volume index is actually quite low in 4Q of ’11. So if trends continue, do we see that index moving even below where it was in 4Q ’12 or do you think its about on par, can you comment at all on that?

Chris Hix

Yeah, just as a reminder though some of the earlier activity that we had was the last bit of reflection of the company's older AO strategy which was a more volume driven commodity based strategy. You will recall that back in 2009 and ’10 we really restructured this business to get focused more on technology and we gave up a fair bit of volume, but we've actually increased the margins and the returns in the business significantly. So what I would say is there's a little bit of that that's baked into the very end of 2010’s numbers.

Having said that, we began to experience weakness in the third and fourth quarter of last year in Europe that began impacting some of the results and we continue to live with lower results in Europe in that advanced organic product line throughout this calendar year. We had a little bit of an impact on coatings earlier and the season because of some of the weather issues in Europe as well. So just a quick reminder, as we look forward there we do expect to see as I mentioned a sequential downturn in the fourth quarter and how will it compare to last year’s fourth quarter, well, that will depend on a number of factors both the European economy, weather and so forth, so we could end up actually ahead of last year’s number.

Operator

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

Chris Kapsch - Topeka Capital Markets

I wanted to follow-up on the question about sort of the way the board and you Joe are looking at portfolio optimization in the context of your long held goal to further diversified away the company from its dependence and leverage on cobalt. So I'm just wondering obviously you talked about from now, from going forward some smallish bolt-on acquisitions that could be complementary to your transformative platforms, but what about, how does the board view portfolio optimization and rationalization as a way to get there quicker?

Joseph Scaminace

All those considerations Chris are always under consideration and I am assuming by your question, you are talking about further portfolio M&A or divestiture, is that what you are asking?

Chris Kapsch - Topeka Capital Markets

Yeah, right, focused on rationalizing the portfolio as a way to reduce the dependence on cobalt as opposed to further growing the company via acquisition?

Joseph Scaminace

Yeah, absolutely, we've never been wedded to a business that is not going to return the kind of hurdles that we need to return capital to our shareholders and quite frankly, we are going to continue to look at our portfolio and continue to rationalize it. The board is absolutely aligned with this strategy and when you look at the firepower that we have and what we've demonstrated already in terms of reducing reliance on volatility, you could tell the direction and the trajectory that the company is headed here.

Chris Kapsch - Topeka Capital Markets

And I also had a question I guess for Chris, obviously there has been good success here generating cash out of working capital and I believe the metric of working capital as a percentage of sales is one that you are keenly focused on. Just wondering, if you have any sort of parameters in terms of aspirational goals about how much further you could squeeze working capital in terms of a percentage of sales and the progress that you made to-date is it predominantly from any one platform like VAC for example, how much has really just been the year-to-date function of rare earth prices coming off?

Chris Hix

Chris, as we look at our metric of networking capital as a function of sales, it tends to help us look through FX or rare earth pricing and other issues since we're matching up the sales at the inventory levels together. So it's not so much a function of rare earth pricing changes. It's really, we've seen improvements across the enterprise in largely in inventory I would say, while maintaining a very nice metrics on the accounts receivable. And accounts payable, I think managing that not too aggressively to a level we can push a little harder if we need to.

Thinking longer-term, I think we talked publicly about our desire to see that come down from the peak. It was about 36% to try to shade that off into the lower 30s and then reassess that time how much further we can drive it. Biggest opportunities are probably, as I think about the businesses themselves, probably in the VAC business but again there are opportunities everywhere.

And, my experience and this has been, it's not so much finding the one home run idea but it's just continues improvement, Lean projects etcetera across the enterprise. Just one bund single after another that adds up to nice score overtime.

Chris Kapsch - Topeka Capital Markets

Can you put any time parameters around achieving those sort of low 30s as a goal?

Chris Hix

Yeah, we've talked about trying to get there by the end of 2013.

Chris Kapsch - Topeka Capital Markets

Okay. And then I had a follow-up on the cobalt business. I don’t know if there is really good data on sort of the industry costs curve, but I think there has been suggestion that at current cobalt prices were sort of below their cash cost of the highest cost marginal primary cobalt producers, so just want to know if there is any sense at current prices if there is any supply rationalization going on for those high cost producers that could may be sort of stemmed at the current trajectory of cobalt prices any sense of that?

Joseph Scaminace

Yeah, I can’t give you any specifics Chris on what the current activity is, but clearly the prices have come down far enough where the marginal guys are going to start falling off, but we did believe that in the second quarter and prices have weakened even further and up to this point, we can’t see where its demand driven because the volumes in the business have been fairly stable and it continue to be fairly stable. So the possibility of that, the history of that and furthermore when you look at the consensus of the experts out there, it does reflect a higher cobalt price than it is currently on the metal bolt.

Chris Kapsch - Topeka Capital Markets

Okay, got you. And then just one follow-up on sort of back on sort of the potential for cash flow generation, but I think you said CapEx for 2012 will come in less than $80 million; just wondering like looking to 2013 that $80 million I assume includes a slug of capital for the expansion in Finland refinery, I am just wondering like as you look to rationalize CapEx in this environment, what’s kind of like the new portfolio sort of run rate maintenance CapEx and any preliminary thoughts on what 2013 might look like?

Chris Hix

Yeah, we are still getting through the planning process, so I am not sure we are going to commit too much at this time, Chris. I would say that our objective for 2013 is to complete the expansions that were initiated in 2011 and ‘12 and have our total CapEx spend income come in at or lower than 2012 levels and going forward really to reduce the capital intensity of the businesses and the amount of CapEx that we spent really to continue to sharpen our financial disciplines around the capital spending.

Chris Kapsch - Topeka Capital Markets

And just how much CapEx has been spent on the expansion in Finland specifically?

Chris Hix

I don't have that information at hand but I would say we are about, my recollections we are about halfway through the projects maybe a little less than halfway through spending of the project.

Operator

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

Mike Harrison - First Analysis

On the battery technologies front, for a business that we have come to think of it as being a little bit lumpy, we have had surprisingly consistent results at least on the operating income line for the last three quarters, has that business turned to corner in your mind in terms of kind of the diversity of end markets and the timing of projects that you are seeing, and then I had a couple of other follow-ups on batteries?

Joseph Scaminace

Mike, I don't know that we have turned to corner there. What we can say that the lumpiness is not existent in battery technologies any longer. If you recall the rationale behind that business was to buy a business that clearly was diametrically the different model of an A123 that was not in the commoditized automobile battery market as you could see these companies right now are struggling out there and we are significantly profitable.

We have seen some steadiness in the defense business like most defense contractors right now. We are looking outside the United States for more business, finding some attraction in that area and continuing to look to grow in medical, aerospace and commercial aviation.

So, it would be way premature to say that the lumpiness has gone but it would be appropriate to say that our management team continues to work really hard at developing new applications, looking for new customers and trying to stabilize this business in a real good way for us.

Mike Harrison - First Analysis

And you talked a little bit about the aircraft starter battery market, is that the one that you said would be, you hoped could be a $10 million business?

Chris Hix

Yeah, that's right.

Mike Harrison - First Analysis

And what kind of, can you just give us a sense of what kind of share of that market that would be, is it 20%, is it 1%?

Chris Hix

We've got other interested parties listening in queue including competitors. So we don't want to be too precise with that but let me just say that $10 million does not require a great deal of market share.

Mike Harrison - First Analysis

And then you also mentioned some oil & gas applications in battery technologies, can you talk about what you guys are providing to that market?

Chris Hix

Well, at this point its very early days. We've got, we are working with one of the major oil & gas equipment manufacturers for some subsea applications and including for BOPs. So we've got to be a little bit careful with the names and all of that good stuff, but it does represent an interesting new opportunity for the business.

Joseph Scaminace

Yeah, there was a blow up prevented a failure that created the Gulf spill and so we are right at the leading edge right now of technology that could be very effective in preventing future spills like that.

Mike Harrison - First Analysis

That would seem to be in the wheel house of Eagle Pitcher in the sense that its critical one time use application. So

Joseph Scaminace

The applications can't fail.

Mike Harrison - First Analysis

That's right. A couple of more questions, just on the magnetic technologies business, you've got a PV inverter business in there and we've seen numerous companies now come out and talk very negatively about their investments in the PV area writing down some of their investments. Can you talk a little bit about what kind of resources you put into that business and how you are thinking about going forward? Is that business losing money right now?

Joseph Scaminace

For us that business exposure is primarily in our magnetic technologies business, and it’s really just a product line application within the business and not a freestanding business. So it’s a contributor to the overall results of magnetic technologies. As you know they are a supplier very broadly in the marketplace, so whether you are seeing wins in China, the US, Germany or what not, that's going to have a [balk] technology imbedded in it. But the overall global market continues to be down a bit and this remains really a small product line within the balk business.

Mike Harrison - First Analysis

Just in terms of, you've obviously, Magnetic Technologies have got a lot of European exposure, both on the automotive side and broadly on the industrial side. What kind of trends have you seen over the last two months and any sort of indication from your customers on what they expect to do around the holidays? Are we going to see extended, unusual extended downtime or too bad?

Chris Hix

Mike. It's really difficult to say. We know that the automotive market itself continues to gain in the electrification of conventional vehicles. We play a big role in these centers for electronic power steering; CMCs for control units; [Tequila Sentry] in goal, high growth of exhaust technology to reduce nitric oxide emissions. You know, that's where the brazing foil comment came from.

So we continue to see fairly stable automotive market. The renewable energy market, we all know that that’s been a little bit softer than we all would like in terms of wind energy generators and so the solar market. But when you look at industrial motors, electronic counters, aerospace and defense, you know, we continue to play in those markets. We get higher return on capital there. We are not seeing the cycles that we see, the cyclicality and the volatility from the commodity based business.

So regardless with that in our portfolio, we are continuing to see stableness there. And to your question about these markets, it's really a toss up in terms of what the policies are going to be and whether or not, we could get the macroeconomic economy growing again. What we're focusing on Mike, and it's important for you to know this, is what's in our control. We may not be able to control what happens in European segment of VAC business, but what’s in our control is our product development pipeline, our tenacity of our sales force, the ability for us to cut cost where we are responding to these issues, and I just want to assure all of you that we have never been more vigilant in everyone of these areas to control the things we can control.

Operator

Your next question comes from the line of Rosemarie Morbelli of the Gabelli & Company

Rosemarie Morbelli - Gabelli & Company

Mike covered a lot of ground, but I was wondering if when you look at Europe or when we all look at Europe some companies are seeing kind of a bottom bumping along that particular level, others’ are seeing the possibility of further decline, and it sounds to me as though you are looking at further decline or am I wrong and why would that be compared to those who think that they have reached the bottom?

Chris Hix

I think the comments that Joe made were suggesting that we think it’s a dynamic situation not that we are necessarily forecasting further declines, but we are watching Europe just like everybody else to see which direction it goes. We have some product lines that have been bumping along the bottom. We have been talking about our rubber adhesion promoters, for example, in Europe it’s been struggling for 12 months now in Europe. So there is something that have been bumping along the bottom and others that have struggled within the last six months or more recently. So we try to give you the update as to what we have seen currently, but it’s a very dynamic situation and that we are not prepared to make a call for Europe for next year.

Rosemarie Morbelli - Gabelli & Company

Did I understand properly you are not seeing anything in particular in regards electrical vehicles and the batteries are going into that? Have you seen any pick up in your couple of products going into those particular applications or is that still kind of waiting to happen?

Joseph Scaminace

I will say the letter Rosemarie; we are still waiting for it to happen. There’s been nothing significant since the last call to speak up of in the electric vehicle front.

Rosemarie Morbelli - Gabelli & Company

All right. And then if you look at all of your businesses and says that you buy all the cobalt’s you need in the market place as opposed to having the DC and Kokkola and you use multi-year average, would you be more profitable or lesser or at about the same level then doing it yourself?

Chris Hix

I just want to make sure, we understand the question Rosemarie. Is your question if we source cobalt in all of our business whether its in metal form or other form, from others as opposed to some of the internal sourcing we do it would be better off.

Rosemarie Morbelli - Gabelli & Company

Yes, or worse off. Have you looked at it? If you pick an average cobalt price?

Chris Hix

We have very little of the cobalt that we produce in our Kokkola facility, we are in our advanced material business some are being used internally. So I am not sure it’s a really material issue for us either way.

Rosemarie Morbelli - Gabelli & Company

Given the fact that of there are some steel mills shutting down, is that affecting your business for hard metal tools or is it not related.

Joseph Scaminace

No, its not related. I think a lot of the steel mill issue from my understanding and not being an expert in iron ore technology here is really just like a lot of the commodity prices right now that have fallen Rosemarie. Iron ore being one causing the big steel guys right now to be under stress. That does not affect our cutting tool market. And as I indicated before, the weakness in our advanced materials is primarily due to lower cobalt pricing and not end market demand.

Joseph Scaminace

Okay, well that ends the Q&A, and I just want to thank everyone again for being on our call and remind you that our transformative platforms led by our most recent acquisitions of VAC and EPT are driving our results and continuing to validate our strategy, and we remain committed to this course of action and we are excited about our future growth opportunities. Thank you everybody and have a great day.

Operator

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

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