OM Group, Inc. (OMG)

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OM Group Inc. (OMG)

Q2 2010 Earnings Call

August 5, 2010 10:00 am ET

Executives

Troy Dewar - Director of IR

Ken Haber - CFO

Steve Dunmead - VP and GM, Specialties Group

Greg Griffith - VP, Strategic Planning, Development and IR

Analysts

Mike Harrison - First Analysis

Rosemarie Morbelli - Ingalls & Snyder

Saul Ludwig - Northcoast Research

Douglas Chudy - KeyBanc Capital Markets

Chris Kapsch - BDR Research

Presentation

Operator

Good morning. My name is Felicia and I will be your conference operator today. At this time, I would like to welcome everyone to the OM Group’s second quarter 2010 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Dewar, you may begin your conference.

Troy Dewar

Thank you, Felicia. Good morning everyone and welcome to our review of OM Group’s 2010 second quarter results. Joining me this morning are Ken Haber, Chief Financial Officer, Steve Dunmead, Vice President and General Manager, Specialties; and Greg Griffith, Vice President of Strategic Planning, Development and Investor Relations.

Joe Scaminace, OM Group’s Chairman and CEO, is unable to be with us today due to a death in his family. He asked that we continue the call as originally planned. We will return to our normal line-up in the third quarter. I should remind everyone that a copy of the press release we issued earlier this morning as well as the presentation materials that accompany our discussion can be found on the Investor Relations portion of our website at investor.omgi.com.

One other reminder, 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 the forward-looking statements can be found at the bottom of our press release or in our Form 10-K and applied to this call.

At this time, I will turn the call over to Ken Haber.

Ken Haber

Thank you Troy and good morning everyone. Second quarter revenue increased $100 million or 49%, compared with the same period last year. $28 million of the increase was attributable to the acquisition of EaglePicher Technologies which was completed in January of this year. Excluding this acquisition, revenue increased 35% through higher pricing and increased volumes as global demand improved in most end markets.

Growth in metal resale and by-product sales also lifted year-over-year revenue. Operating profit in the second quarter was $30 million compared with a loss of $29 million last year. The 2009 period included a $35 million goodwill impairment and a $1.2 million intangible asset impairment charge. Excluding these special items, year-over-year improvement was driven by higher revenue and a lower cost structure due to the actions taken last year to protect operating margins.

Interest expense rose to $1.6 million due to the outstanding balance of our new secured credit facility, which was primarily used to fund the EaglePicher acquisition. Foreign exchange loss of $4.2 million reflects the impact or stronger US dollar hedge for the most part on the revaluation of non-functional currency cash balances held by specific foreign entities.

Tax expense in the quarter was $18.3 million, which includes a net $10.4 million in discreet tax expense items, mostly related to $11.5 million allowance against prepaid tax assets in the DRC. The allowance was required because of two changes that are occurred during the quarter: First, the DRC government is no longer granting requests to utilize prepaid tax assets to offset more than 20% of current taxes payable; second, we will not be subject to certain import taxes. We were previously planning to utilize our prepaid tax assets to offset certain import taxes. Based on these changes, we recorded an allowance to update our estimate of prepaid tax assets that will realize in the future. Excluding all the discreet items in the second quarter, our tax rate would have done 32.5%.

Income from continuing operations was $21 million or $0.67 per diluted share, excluding purchase accounting adjustments related to EaglePicher Technologies, restructuring charges in Advanced Organics and the discrete tax items. This compares with a loss of $3.5 million or $0.11 per diluted share in the second quarter 2009, excluding the special items for that period as shown on slide 4.

Moving on to slide 5. Advanced Materials revenue climbed 44% compared with last year as prices rose with cobalt reference price, and end market demand for cobalt based products grew. Increases in metal prices also led to higher revenue from metal resale and by-product sales. Our cobalt volumes improved compared with last year. Total product sales volumes were lower due to a reduction in by-product volumes. Excluding metal resale and by-product sales, total product volumes increased 9% as strong growth in powder metallurgy and ceramics were partially offset by slight decreases in battery materials and chemicals.

Our metallurgy markets continue to recover with a rebound on automotive and industrial production, while customer restocking drove significant year-over-year volume increases. Ceramics volumes which are closely tied to construction grew as we are able to capture market share. Shipments of battery materials to the rechargeable battery market were down slightly from what was a relatively strong second quarter in 2009.

Chemical volumes were lower due to timing of shipments to certain large catalyst customers. Operating profit more than tripled from last year due to the impact from changes in the cobalt reference price, higher cobalt volume and lower cost from process-based raw materials. This was partially offset by higher operating expenses for the extended maintenance shutdown of our smelter joint venture in the DRC.

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