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Monday, October 15th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

OM Group CEO Discusses Q4 2010 Results – Earnings Call Transcript

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Mike Harrison with First Analysis.

Michael Harrison – First Analysis

Hi, good morning.

Joseph M. Scaminace

Good morning, Mike.

Michael Harrison – First Analysis

Wanted to ask you a few questions about your battery materials volumes, it seems to me like you’ve given a couple of different metrics there. In your presentation it says a negative 18% battery materials volume year-on-year. Steve, I think you gave a different number for battery volumes and suggested they were up quarter-on-quarter at least.

So I guess help me understand exactly what it is you are seeing there and maybe if we could get a little bit more detail on exactly if the volumes were down 18% year-on-year, given that battery-powered gadgets presumably were up year-on-year, what’s going on there to drive these apparently accelerating declines and share loss of cobalt-based materials?

Stephen D. Dunmead

Yeah. Mike it’s a good question. I want to clarify a couple of things. First of all, there is no share loss, it’s really a mix issue. So as we’ve discussed before, we sell everything ranging from pure cobalt that is used as a raw material to precursors such as cobalt sulfate which only contains 25% cobalt or mixed metal precursors or cobalt oxide in the case of cobalt oxide may contain 70% cobalt.

And so depending on what that mix is, ends up determining the overall physical volume. Whereas the amount of cobalt contained in that is a different measure and so as we’ve talked about also before we’re getting to the point that different than historically, we’re pretty agnostic to what the chemistrians are being moving forward and so we’re participating in the mixed metal markets and really I think that the combination, ultimately what drove this was that we had decreased sales of the very low cobalt contained sulfate during the fourth quarter. So we didn’t have any share loss, we actually had share gains and the market is growing.

Michael Harrison – First Analysis

So just to be clear on a cobalt contained basis, hearing things about flat year-on-year but when you have lower sales of a low cobalt contained product it negatively impacts your volume.

Stephen D. Dunmead

The total physical volume, yes.

Michael Harrison – First Analysis

All right. Okay.

Stephen D. Dunmead

If you were trying to look at it from the impact on the business, it’s the combination of those two factors that have you to be looking at, because premiums are different, costs are different according to which one of those we’re selling into what part of the market.

Joseph M. Scaminace

Powder metallurgy is a good example, where we get a higher margin on powder metallurgy, because pure cobalt going to that market, Mike.

Michael Harrison – First Analysis

All right. But at the same time, I mean, we are seeing a loss of share in terms of lithium cobalt oxide cathode materials compared to other cathode materials, nickel, manganese cobalt and you addressed polymer based batteries

Joseph M. Scaminace

The market is certainly seeing a shift, so what you are seeing, you are still seeing growth in overall units of cobalt going to the market, but there has been a shift that it is in most applications, in some of the newer applications you are getting the shift to, whether it is nickel cobalt aluminum, nickel cobalt manganese or whatever, so, yes, there is a shift in the market to more lower cobalt containing chemistries and actually in some cases that’s good for us.

Michael Harrison – First Analysis

Wanted to ask also about the impact of hybrid and electric vehicles on the battery business. I know you mentioned that the Nissan Leaf and the Chevy Volt, those batteries contain cobalt. They are not lithium cobalt oxide based, in other words they are much lower percentage of cobalt than the battery that’s in my blackberry, for example, so given that those batteries are generally not, don’t have that much cobalt in them and then you’ve also said in the past you don’t want EaglePicher to get into the automotive market necessarily, can you explain to me how you are viewing the HEV and EV market long-term and how much exactly you would expect to benefit from growth there?

Joseph M. Scaminace

Yeah, again, this is an issue, Mike, first of all if you take the Leaf or the Volt, they have anywhere from the Leaf probably about 50% to 80% more cobalt than the Prius on a vehicle basis and the Volt probably has about 50% more cobalt contained in it. But again in those value chains for either the Leaf or the Volt, we could be selling a mixed metal precursor which may have much more value to us than simply selling something that’s got pure cobalt in it. And so and I did want to clarify one other thing, I do not think we ever said that we don’t want EaglePicher to go into the vehicle market. It’s finding a place that there is value of the technology that EaglePicher has.

Kenneth Haber

You know, the other issue, when you talk about long-term here, Mike, the fact of the matter is that this is incremental growth in the battery market so the more that electric vehicles and HEVs are accepted by the consumer, that’s all upside for our company but we have specifically chosen not to throw any fixed capital at building, capacity on the battery side because the technologies still are being tested and proven. We’re in the catbird seat because we’ve materials either on the cobalt side or on the precursor side as Steve mentioned to be able to capitalize on that growth.

Stephen D. Dunmead

And, Mike, I think it’s important as we mentioned when all the battery stimulus money went out that we believe that we’ve got ourselves well-positioned because we’re supplying or being considered for supply in every one of those value chains or supply chains that are leading up to those vehicles. So today the electric vehicle or the HEV market is small compared to what we’re doing with consumer electronics but it continues to grow and it’s growing at a very fast rate and so are we interested in it? Yes. Are we participating? Yes. And we have significant resources focused on that today.

Michael Harrison – First Analysis

All right. Thank you very much. I’ll get back in queue.

Operator

Your next question comes from the line of Douglas Chudy with KeyBanc Capital Markets.

Andrew Dunn – KeyBanc Capital Markets

Hi, guys, this is Andrew Dunn on for Doug today. I had a question kind of going back to the advanced material segment with regards to timing, as you mentioned that cobalt price ramping up here this year. In terms of how we think about that, should we see that starting to affect margins perhaps in the first quarter or is that really going to be something that’s pushed maybe a little further down to the second quarter?

Stephen D. Dunmead

This is Steve Dunmead. I think that really when you look at it, is what we’re going to see if we look at, say, the first quarter, that cobalt prices have been relatively constant. We’ve seen a recent uptick since the end of the year. But when you look at it versus our supply chain, which can be four to five months in arrears from a raw materials standpoint, it’s relatively constant.

The margin compression that Ken mentioned relative to the fourth quarter versus last year’s fourth quarter is really a short term, we had seen increasing cobalt prices throughout 2009, especially in the third and fourth quarters whereas we saw exactly the opposite occurring during 2010.

Andrew Dunn – KeyBanc Capital Markets

Okay. Great. And then also kind of looking at the battery segment, you guys had a kind of margins there that were bumping up right against 10%, kind of moving forward can you tell us is that how we should continue to think of it or are those kind of at the very high range? How should we see that moving forward?

Joseph M. Scaminace

Are you talking about battery technologies?

Andrew Dunn – KeyBanc Capital Markets

Correct, correct.

Joseph M. Scaminace

Yeah, I think that that was in the fourth quarter I would say that this business is tied around, you can’t look at a quarter basis with this business because it’s really tied around programs that stretch over anywhere from 12 to 24 months. So part of it as you’ve seen already in just what happened in aerospace that we talked about earlier, about third and fourth quarter, the timing of those programs and also the final cost of those have some, will causes some ups and downs from quarter-to-quarter. So I think that overall, I think when we look at next year or this year, looking at 2011, we would expect to see margins in that range. But I don’t want to comment on one quarter specific because there is a lot of timing differences relative to programs and completions of those.

Andrew Dunn – KeyBanc Capital Markets

Okay. And just real quick last also question, you are looking at kind of your freight and shipping costs as you move material from I guess Africa to Europe and then to end markets, should we expect to see any effects on margins should we look at oil kind of jumping off here going forward?

Stephen D. Dunmead

I think it’s too early to tell. You are talking about from the shipping cost standpoint?

Andrew Dunn – KeyBanc Capital Markets

Correct, yeah.

Stephen D. Dunmead

I think it’s really too early to tell yet. It depends on whether or not this is a long, sustained issue or whether it is a short-term issue. But in the grand scheme of things, the logistic costs are not significant to the impact on our P&L.

Andrew Dunn – KeyBanc Capital Markets

Okay, great. Thanks very much, guys.

Joseph M. Scaminace

Thank you.

Stephen D. Dunmead

Thank you, Andrew.

Operator

(Operator Instructions) Your next question comes from line of Saul Ludwig with Northcoast Research.

Saul Ludwig – Northcoast Research

Good morning, guys.

Joseph M. Scaminace

Good morning.

Stephen D. Dunmead

Good morning, Saul.

Saul Ludwig – Northcoast Research

You know we are just talking about the timing issue and the duration and the raw material cost and advanced materials, what was the magnitude of the impact of that in the fourth quarter?

Kenneth Haber

Well, on our slides we show you the gross numbers but the net impact would be probably in the $2 to $4 million range.

Saul Ludwig – Northcoast Research

Okay. And that goes away…

Kenneth Haber

And that just on inorganic business, certainly GTL also, their profits were down quarter-over-quarter last year based on deliveries so the combination of those two items are the key drivers.

Saul Ludwig – Northcoast Research

What was GTL’s pretax in the fourth quarter?

Kenneth Haber

Pretax was well, their operating profit was $800,000. And then you had miscellaneous expense, some other expenses, tax benefit in that fourth quarter because it is one of those discretion items so the taxable income then became $0.50 million and minority interest at the 45% roughly about $200,000, and that’s what you see on P&L.

Saul Ludwig – Northcoast Research

Gotcha. When you think about the Joe, when you think about 2011 and you and Steve gave some pretty optimistic outlook, what would you say are the biggest headwinds that you face in 2011 that risk immuting some of the positive outlooks that you talked about?

Joseph M. Scaminace

Yeah, yes. Saul, that’s a great question. We’re certainly not sitting here with these pie in the sky forecasts but in addition let me just reiterate what we see as some of the positives, many economic indicators seem to be showing positive, our end market demand is stable and in many cases where we’ve gained market share in powder metallurgy, we just feel good about that. We have a good hand on the pricing throttle where we’re really watching our raw materials but on the other side of that you are absolutely correct in us being very prudent on what we might face in headwinds and even though I mentioned in my comments that we believed that construction maybe bottoming out, the residential and non-residential, construction markets still seems like there is a lot of stress out there.

The latest news is that housing prices might, still be under a lot of pressure. But we are seeing a good demand on our coatings customers which would indicate, good construction deplaned. Continued weakness in housing, like I said, rising foreclosures, there is still the issue of global sovereign debt weighing on the markets.

I mean, I was shocked that when the whole Mubarak thing happened in Egypt that there wasn’t a discussion on the sovereign debt on the part of Egypt that owed, tremendous amounts of money to the French and other countries. So I think that looms out there which really, the whole geopolitical risk just seemed to be rising and, we’re watching with concern about what’s happening in the Middle East right now.

I mean, if oil prices, move well past $100 a barrel, there is a good chance that things could start to slip so I think that those are some things that we’re worried about. We’re worried about currency wars, and just uncertainty regarding, legislative and regulatory changes that are out there. So those are I think, with the theme I could give you, Saul, is that those are fairly macro issues that are beyond our control. I will tell you that the cost that we took out during the downturn, the things that we’re focused on right now, the incentives we have for our salespeople to gain market share, the things that are in our control, we feel pretty darn good about it.

Stephen D. Dunmead

Saul, the only other thing that I’d add is I think that we are starting to see, as demand across all these different end markets globally start to increase, there is some pressure I think as Ken alluded to starting to appear in some of the raw materials. It is spotty.

But, if you look at, say, yellow phos coming out of China, some of the petrochemical hydrocarbons we’re starting to see some increases so I think there’s we’re being cautious on raw materials from apprising.

Saul Ludwig – Northcoast Research

Okay. Thank you. Steve, could you talk about the status of all this new cobalt supply that’s been coming on stream for the last two years and say particularly the 10-Q project and any others. What’s your read on where that stands? We realize whatever answer you give may turn out to be different tomorrow. But how are you seeing it today?

Stephen D. Dunmead

I’ll talk about it in general because I really don’t want to talk about anyone else’s specific project. I think as usual in the Congo things and I’ll make that more general because I think it is all of Africa at this point, that projects take longer to start up and they typically aren’t at the capacity at that they think that they are going to be at. However, we are seeing additional material coming.

You’ve got the project in Madagascar that I haven’t heard any recent updates but I hear some rumors on that one and so overall, yes, additional materials coming. Most of it turns out is in the form of either feed or low-grade materials and so we keep mentioning quarter after quarter that there’s a shortage of high-grade materials to go into super alloy applications and I think that’s a direct reflection of what’s been put in the capacity is being put in, either they are either making raw materials or they can’t make cathodes that’s good enough to get into super alloy applications. So it is coming and I think quite honestly that gives us some options from raw materials standpoint as we look forward.

Saul Ludwig – Northcoast Research

So as of this moment you are still, you are getting your raw materials from Norilsk, and from the Congo, that’s and from the Big Hill those are your raw materials sources as of now?

Stephen D. Dunmead

Yeah. We have the two different sources coming from Norilsk, the one from our old nickel refinery in Finland and the other the hydroxide then the material coming from the Big Hill, which is the bulk of it, we are sourcing some other from some of the projects you may know, some other materials from Africa and then we are doing a fair amount of recycling right now.

Saul Ludwig – Northcoast Research

Okay, good. Another question, Ken, tax rate for this year?

Kenneth Haber

Well, we are using 30% plus or minus 3%, 4% on either end given the fluctuations on the exchange rate as we talked about in that regard.

Saul Ludwig – Northcoast Research

And then finally on the big increase in the capital spending as it relates to increase in capacity, what are some of the areas where you are planning to increase your capacity and to what extend will it impact your capacity?

Joseph M. Scaminace

Great question, Saul, we’re excited about what we’re doing here and I’ll let ken answer of Steve answer some of that.

Stephen D. Dunmead

I think Saul is either Ken or Joe, one of them mentioned that when, we had a bunch of things in the works in early 2009 that were on the books and the plans and then we pulled back and honestly people talked about doing some of these expansions last year and we got too busy and so if you look at the four main areas from expansions, the areas are not going to surprise you. Its electronic chemicals where we are getting, we’ve seen significant increases, we are back above the 2007 kind of volume levels, it’s in battery materials, the battery precursor types of things that Mike Harrison was asking about.

Its fine powders going into the powder metallurgy market that we were up a 131% year-over-year and semiconductor materials, so it’s the area that you would expect to see us investing in.

Joseph M. Scaminace

And let me just mention on the fine powder issue, where we have powder metallurgy cobalt going into that market, it really is reflective of an increase in industrial production globally, because when you look at the customer base out there, like a Sandvik or Canametal these are companies that are manufacturing cutting tools.

Cutting tools are used in industrial production so where you see the German car industry taking off, where you see global industrial production, we’re the beneficiary of that end-market move and we believe that we need more capacity there.

Kenneth Haber

And would I just add, Steve talked to the other segment, battery technologies, they have money budget for new product development so all told, I think right now we’re looking at $15, $20 million if we get it all done this year.

Saul Ludwig – Northcoast Research

Great. And the final question is, continued to have a huge percentage of your battery material going to one customer. Is that customer faring well in the marketplace being a Japanese customer who has high currency? Is that a issue that you face going forward in terms of your customer mix of your battery materials?

Kenneth Haber

No, I do not think so, Saul. I think that they are in pretty good shape. And I think if we look historically, say, over the past four, five years, we’ve certainly diversified our customer base, and certainly the currency issue for any of the not just that customer but any of the Japanese customers versus the Korean Won or the R&B is an issue. But in the case of our bigger Japanese customers, I think they are doing fine right now.

Stephen D. Dunmead

And, Saul, they have a pretty – we would never take this for granted, but they have a very good supply line where, you know, using our cobalt from a quality standpoint. And if you remember, you know, where there were some fires and the like this is a high quality producer of battery materials coming out of this Japanese customer. And in addition to that they’ve got an incredibly strong LED unit within their company, which is really very profitable for them. So, we certainly don’t see any risk in terms of their financial ability. I guess the only risk could be market share risk and we haven’t seen any problems there.

Saul Ludwig – Northcoast Research

Thank you very much, guys.

Stephen D. Dunmead

Thank you.

Joseph M. Scaminace

Okay. Well, thank you very much for participating on our call. As we wrap up another year, I want to thank you all and express my appreciation for your ongoing interest in our company. We’re pleased with our achievements this past year and as I indicated, we’ve all indicated, we’re confident that we’ve set the stage for an even stronger 2011. We’ve created significant momentum moving forward and we think that we’re going to be making progress on our strategic goals. Have a great day.

Operator

Thank you. This concludes today’s fourth quarter year-end 2010 results conference call. You may now disconnect.

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