OM Group, Inc. (OMG)

Q2 2012 Earnings Call

August 9, 2012 10:00 AM ET

Executives

Joe Scaminace – Chairman and CEO

Chris Hix – CFO

Steve Dunmead – VP and GM, Specialty Businesses

Analysts

Rosemarie Morbelli – Gabelli & Company

Mike Harrison – First Analysis

Ivan Marcuse – KeyBanc Capital Markets

Saul Ludwig – Northcoast Research

Presentation

Operator

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Good morning, and welcome to OM Group’s Second 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.

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

Joe Scaminace

Good morning, everyone, and welcome to our second quarter earnings call. Today I’m joined by Chris Hix, our CFO; Steve Dunmead, VP, GM of our Specialties business; and Rob Pierce, Vice President of Finance, whose responsibilities include Investor Relations.

You can see our standard Safe Harbor disclosure on slide two, so let’s get right into the details on slide three. I’m pleased to report that in the second quarter of 2012, we delivered solid profitability and very strong cash flows. We accomplished this in the face of several difficult factors that were beyond our control.

Sales and adjusted EBITDA were both higher than last year, driven by excellent results from our newer transformative platforms, Magnetic Technologies and Battery Technologies.

We were able to deliver these overall results despite low cobalt prices. This further validates our strategy to move away from commodity businesses which subject us to earnings volatility. We now generate a significant portion of our sales and earnings from more stable, non-commodity businesses. Magnetic Technologies perfectly illustrates the progress that we’ve made.

VAC is a market leader, operating close to end users. They meet customers’ complex applications and demanding requirements. Magnetic Technologies is a leading innovator, and gets rewarded for its technology. And it’s well-positioned in diverse and growing end markets.

More importantly, they are a high-tech and efficient converter of raw materials into finished products; and most importantly, they prefer low material costs. This platform is the foundation on which we will grow both organically and through synergistic acquisitions.

Our other newer platform, Battery Technologies, also delivered another strong quarter for us. Defense and aerospace sales remain strong, and batteries for medical applications continue to grow, driven by new device wins and product enhancements.

We’re very proud of the fact that EaglePicher batteries, manufactured by our Battery Technologies business, provided electrical power which helped to safely land NASA’s new rover, Curiosity, on the surface of Mars earlier this week.

As anticipated in our last call with you, our other businesses face challenges in the second quarter, including lower metal prices in Advanced Materials; economic pressures in Europe; and continued disruptions in our customers from last year’s Thailand flooding, which impacted our Specialty Chemicals business.

In spite of these challenges, as a result of our strategy portfolio changes, we were able to deliver solid financial results. Compared with last year, sales grew 32%, while adjusted EBITDA grew 18%. Cash flow from operations was particularly strong in the quarter, as we generated $75 million. This was the highest cash flow in nearly four years, and is the result of heightened financial discipline to optimize working capital levels. Our second quarter results included positive rare-earth pricing effects, as we’ve discussed in the last few quarters.

Slide four provides an overview of our business portfolio. On the right-hand side of the chart are the three platforms that we’ve built by executing our strategy. These businesses contributed $58 million of adjusted EBITDA in the second quarter of 2012. This represents over 90% of the consolidated total, excluding corporate expenses.

Advanced Materials, our cobalt franchise, contributed $5 million of adjusted EBITDA during the quarter as a result of low cobalt prices and the maintenance shutdown of our Kokkola facility. This is still a great business, with growing demand and market-leading positions. It’s a consistent generator of cash, but it has significant exposure to metal prices. Most of our economic performance is now driven by businesses with attractive long-term and market dynamics. They are businesses that are better rewarded for the value they bring to customers, not for selling materials by the pound. We are in fact, a growth company, and our strategic platforms provide multiple paths for both organic and acquisitive growth to create shareholder value.

Slide five shows the value-added profile of our four businesses, based on cost of sales. And this is a really important slide for you to see. You can see that our newer transformative platforms of Magnetic Technologies and Battery Technologies enjoy a higher value-added profile, as they are better rewarded for their technology and innovation. These businesses are much less reliant on a single raw material or input cost and as such, have less long-term volatility in their results than our cobalt franchise.

In Advanced Materials, cobalt price changes have created many years of earnings volatility. This was seen in our second quarter results, and again, highlights the rationale for our transformation strategy.

Slide six demonstrates the execution of our strategy and how it enhances our ability to grow profitably and sustainably. As these charts demonstrate, trailing 12-month sales and adjusted EBITDA have more than doubled compared to 2009. Our strategy is clear, and its execution is well underway and already paying off.

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