Rockwood Holdings, Inc. Q3 2008 Earnings Call Transcript

Rockwood Holdings, Inc. (ROC)

Q3 2008 Earnings Call Transcript

October 28, 2008, 3:00 pm ET

Executives

Timothy McKenna – VP, IR and Communications

Seifi Ghasemi – Chairman and CEO

Robert Zatta – SVP and CFO

Analysts

Silke Kueck-Valdes – JP Morgan

David Begleiter – Deutsche Bank

Michael Judd – Greenwich Consultants

Michael Harrison – First Analysis

Robert Koort – Goldman Sachs

Sergey Vasnetsov – Barclays Capital

Chris Shaw – UBS

William Matthews – Canyon Capital

John McNulty – Credit Suisse

Craig Irwin – Merriman

Laurence Jollon – Barclays Capital

Edward Wong [ph] – Trust Company [ph]

Presentation

Operator

Ladies and gentlemen, welcome to the Rockwood Holdings third quarter conference call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for questions and instructions will be given at that time. (Operator instructions)

I'd now like to turn the conference over to Tim McKenna, Vice President, Investor Relations and Communications. Please go ahead, sir.

Timothy McKenna

Thanks. Good afternoon. Welcome to Rockwood's third quarter results conference call. We thank you for your adjusting your schedule for a 3 p.m. call. We had a scheduling conflict that prevented us from doing a morning call, and we'll return to the 11 a.m. Wednesday slot for the future.

With us on the call are Seifi Ghasemi, our Chairman and CEO, and Bob Zatta, our Chief Financial Officer. They will present the results as usual. You can follow the presentation with our slides available on our Web site at rocksp.com, and then we'll have the typical Q&A session afterwards.

Before I begin the call I need to read forward-looking statement disclaimer. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, concerning the businesses, operations, and financial conditions, condition of Rockwood Holdings Inc, and its subsidiaries. Although Rockwood believes the expectations reflected in such statements are based upon reasonable assumptions, there can be no assurance that its expectations will be realized.

The forward-looking statements consist of all non-historical information including the statements referring to the prospects and future performance of the company. Actual results could differ materially from those projected in Rockwood's forward-looking statements due to numerous risk factors and uncertainties, including among other things the risk factors described in Rockwood's 2007 Form 10-K on file with the SEC.

We do not undertake any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect unanticipated events.

With that I'll turn the call over to Seifi.

Seifi Ghasemi

Thank you very much, Tim, and good afternoon to everyone. We would like to thank you for joining our conference call. I will use the material that we have posted on our Web site. So if I may ask you to please turn to page 6 of that material.

I am very pleased to report that Rockwood had another successful quarter and we can announce the solid performance for third quarter of 2008. We achieved net sales growth of 15.4%, which includes 4.8% in price increases and our adjusted EBITDA was up 12.2% versus third quarter 2007.

Even on a constant currency basis, net sales growth was 10.4% and adjusted EBITDA grew by 5.9%. Our EBITDA increase was primarily driven as it has been all this year, by our strong performance in the specialty chemical and advanced material sectors of our businesses. We continued to see a slowdown in construction related businesses in the U.S. and parts of Europe.

The market conditions, including pricing pressure and current industrial capacity continued to negatively impact our TiO2 business although our margins in the third quarter improved versus second quarter.

Our net debt to last 12 months adjusted EBITDA ratio was 3.2 lower than before, and for covenant calculation purposes it is 3.77 and we will go into more detail about our covenants.

In August of 2008, as we have already reported, Rockwood completed the acquisition of Holiday Pigments, and in September we completed the acquisition of Nalco Surface Treatment Business.

And in addition, we concluded our joint venture with Kemira for our TiO2 businesses. We are very pleased with all of these acquisitions and joint ventures. Also in October of 2008, we completed the sale of our pool and spa business that we had reported publicly before.

Now if I may turn to page 8, please. I have already gone through the numbers on this page for third quarter, and you'll see the year-to-date numbers. I would like to draw your attention to the earnings per share line, the adjusted earnings per share, excluding one-time events which is we are reporting for the third quarter $0.45 a share versus last year of $0.34 a share, which is an improvement of 31%. And for year-to-date we are reporting $1.69 versus $1.15, which is up 47% versus last year.

If you turn to page 9, please, we always break down our sales growth for you so that you can see the effects of price increases and currency. In the third quarter, our sales growth was 15.4%. 4.8% was pricing. That has been an area of focus for Rockwood to make sure that we recover all of the cost increases in raw materials and energy and we have achieved that. Currency accounted for 5%, and volume and mix which is basically acquisitions was up 5.6% for the quarter.

On page 10 & 11, we have the details of the performance of the reporting units. I am going to focus on each one of the units separately. So please go to page 12. Our Specialty Chemicals sector, which consists of our lithium business and our surface treatment business, continued to perform very well. Actually, the margins are almost 2.5 points better than last year.

Sales growth was about 22% versus same quarter last year, and even on constant currency basis, sales growth was 15.7% and EBITDA growth actual rate was up 35% and at constant currency it was up 29.4%. Very good performance from that business.

The reason for the good performance is strong pricing and volume growth in our lithium products. And in addition to that, our surface treatment business was favorably impacted by increased volumes, particularly, in general industrial applications, higher selling prices, and bolt-on acquisitions.

We did have higher raw material costs, which obviously will be compensated by the higher prices. We continue to believe that this business, this sector will do well for the balance of the year.

Our performance additive sector continued to suffer from the downturn in U.S. and now European construction. We have not seen the situation getting significantly worse, but we have not seen the situation getting any better, and we expect that this kind of performance will continue for the balance of the year and into 2009.

On page 14, our TiO2 business margins improved versus second quarter of 2008. The reason that you see that our actual EBITDA is higher than last year is that is because of the inclusion of the Kemira joint venture for one month. If you exclude that, the margins are not significantly different than from what we had before, a slight improvement in the margins.

Overall, this sector is continuing to suffer from their over capacity and pricing and we expect this kind of performance to continue for the balance of the year.

Our advanced ceramic sector on page 15 continued to perform well. Sales were up 13.2% and EBITDA was up 24.1%. The margins in this business are holding up because of the very strong performance in our medical sector and cutting tools, and we are having continued productivity improvement in this business. We expect the business to continue to do well for the balance of the year.

On page 16, Specialty Compounds, the trend and their profitability was in line with what we have seen in the past two quarters, so no dramatic change there.

At this point, before I turn it over to our CFO, Mr. Bob Zatta, to cover the details of our financial statement, I think it is appropriate to make some comments about our overall financial position.

As of last night, Rockwood had $520 million of cash at hand. In addition, we have access to a revolver of $250 million that we have not used. Therefore, we have plenty of liquidity to run our business.

In addition, please note that our bonds mature in 2014 and we do not have to make any significant cash payment on the principal of our term debt until 2012.

Recently, we have had a lot of questions from investors about the status of the covenants in our credit agreement. There are two key points that need to be clarified regarding this position and this question.

First of all, since more than 50% of our total debt is denominated in euros, the dollar to euro exchange rate does not have much of an effect on our covenant ratios. That is covenant ratios calculated at $1.45 to euro is about the same as calculated at $1.10 to euro. And that's one point.

The second point is that for the purposes of covenant calculation, our credit agreement allows us to pro forma the joint venture and acquisitions on a full-year basis.

In addition, we are allowed to take credit for the synergies from these joint ventures and acquisitions. Therefore, our last 12-month adjusted EBITDA for purposes of covenant calculation is $753.5 million, and not the reported $671.8 million derived from our financial statements. This is an important point to note and Mr. Bob Zatta will give you more details on this during his presentation.

And now, I will turn it over to Bob.

Robert Zatta

Thank you, Seifi, and good afternoon, everyone. As Seifi has already provided an overview of the third quarter and a summary of results by business, I would like to go directly to page 21 of the presentation. Page 21 presents our income statement as reported for the third quarter and year-to-date.

Looking at the third quarter, we reported $880.8 million of sales and gross profit of $257.5 million or 29.2% of sales. As Seifi showed on page 9 of the presentation, we had solid pricing in the quarter which more than offset any increases in raw materials.

However, higher D&A from the acquisitions, slightly lower margins on the Elementis acquisition and Kemira and foreign exchange have resulted in the 1.9 percentage point decline in gross margin percent sales year-on-year.

SG&A as a percent of sales was 19.3% and essentially flat year-on-year, resulting in operating income of 9.8% of sales or $86.5 million on a reported basis.

Interest expense in the quarter was $56.3 million and the details are at the bottom of the page. As you can see, we had interest expense on debt of $49.3 million, and that includes one month of the Sachtleben TiO2 joint venture debt. We also have the deferred financing cost of $2.4 million and a mark-to-market loss of $10 million.

Now regarding the mark-to-market charge, and as we have discussed before, the expected movement in interest rates impacts the fair market value calculations for our interest rate swap contracts and since we do not have hedge accounting treatment, the change in the fair market value calculation from one period to the next runs through the P&L. This can be a gain or loss. However since the swaps are remaining in place, there is no cash or economic impact on the company.

The next item on the reported P&L is the foreign exchange loss of $26.5 million. This represents the FX impact resulting from translating intercompany receivables to dollars for financial reporting. Since the euro came down from 1.58 at the beginning of the period to 1.41, that changes what determines the P&L charge.

The next item in the income statement is our income tax provision of $10.3 million. Now, I had mentioned during our Investor Day back in September that we expected a high book rate for tax in the third quarter. And as we've explained in the past, since Rockwood is in a net NOL position, and we have full valuation allowances against those NOLs, there is no tax provision benefit on reported U.S. losses.

And both the mark-to-market loss that I mentioned and the foreign exchange loss noted above are in the U.S., no tax provision benefit against these. Thus, the mismatch between the reported pretax income and the tax provision.

The minority interest is basically our Viance joint venture and a little from the Kemira JV, which gives us net income from continuing operations of a loss of $4.8 million. This is reduced a little to $3.3 million when you include our pool and spa chemical business, which is now a discontinued operation as a result of having sold it. On a year-to-date basis we have reported net income of $102.4 million.

Page 22 is a tax rate reconciliation from the reported tax provision and rate to an adjusted rate, which is 35% in the quarter and 31% on a year-to-date basis.

Page 23 provides the detailed reconciliation of reported net income to adjusted EBITDA beginning with our reported net income from continuing operations in the quarter of a negative $4.8 million, we have added back our tax provisions, net interest expense, D&A, bringing us to $125.8 million. Then we've added back the FX loss, specific one-time expenses related to current acquisitions, restructuring charges and deducting the gain on certain asset sales.

This results in adjusted EBITDA from continuing operations of $163.2 million and $165.9 million when the pool and spa business is included. On a year-to-date basis, adjusted EBITDA is $512.6 million.

Page 24 shows the bridge from reported net income in EPS to adjusted net income in EPS. These are the same adjustments as we saw in the prior page, but given the already discussed U.S. tax situation, there are minor differences in some of the numbers. On an adjusted basis, our net income in the quarter is $34.7 million and EPS is $0.45. Year-to-date adjusted net income is $129.6 million and EPS is $1.69.

Page 25 provides a lot of detail on our cash and deposition. As you can see at the end of December, we had total cash of $410 million. Now this does not yet include the cash receipt on the sale of the pool and spa business, which occurred post this period. We have total debt of $2.8339 billion and net debt of $2.4236 billion.

The change in net debt versus December 31st 2007 is driven by three factors. First, the inclusion of the Sachtleben JV debt. Second, we did pay down about $100 million in debt during the nine months and then the reduction in reported debt of about $47 million as a result of the euro going from 1.46 at the end of December to euro 1.41 at the end of September.

Page 26 shows how we have continued to track with a lower leverage ratio to its current leverage ratio of 3.2 times. Page 27 is our free cash flow. As you can see, we generated $82.5 million of free cash flow in the quarter. This follows $48 million of free cash flow in the second quarter, and brings us to $103 million for the year-to-date for September free cash flow. All of this is totally in line with what we have expected and have been discussing.

Page 28 provides our estimated metrics for all of 2008. These metrics include all of the acquisitions through the end of the year.

Now, page 29 is a new slide that we have added to our presentation and is the one Seifi mentioned in his comments. It's very important to keep in mind during these times, that requirements under Rockwood's credit agreement do not map directly with what gets reported in our Qs and Ks.

First of all, adjusted EBITDA. For covenant purposes, we must use the LTM adjusted EBITDA at monthly average FX rates. So we don't use the euro rate at the end of a specific quarter or even average rates for the latest quarter. It is the prior 12-month average.

In addition, we are permitted to include in the LTM calculations the full year pro forma EBITDA from acquired businesses plus synergies. This makes sense and is fair since the cash to pay for the acquisitions is already reflected in our net debt position. So as you can see, we are adding about $82 million to our reported adjusted EBITDA.

Regarding debt, for covenant purposes, it is also determined using the same FX average rates as what is used for EBITDA. With the Sachtleben JV, we now have well over $1 billion of debt in euro denominated debt.

So for each penny movement in the dollar-euro FX rate, our covenant debt will increase or decrease $11 million or $12 million. Given how EBITDA moves with the euro-dollar rate, the overall ratio of euro debt and EBITDA is just under four times leverage. And since our covenant leverage test will move to 4.2 times beginning in 2009, the movement in the dollar-euro rates has as Seifi said very minor impact on our covenant debt.

If you look at the table on the bottom of page 29, we bridge the reported LTM EBITDA and debt to what would be used for our covenant debt at September 30th of this year. EBITDA goes from $672 million to $754 million, and covenant debt goes from $2,734 billion at an FX rate of 141 to $2,838 billion at an FX rate of 150.

Using the reported numbers, our leverage ratio would be 4.07 times versus what it will actually be for covenant purposes of 3.77 times, which gives us close to an incremental $230 million of headroom on our debt. If we use total cash, the leverage ratio becomes 3.35 times. We will make these pro forma adjustments to our covenant calculations until the earnings and synergies from acquisitions are fully reflected in our reported results.

And with that, Seifi, I'll turn it back to you.

Seifi Ghasemi

Thank you, Bob. And at this point in time, we are obviously ready and delighted to take any questions that people have. So, Cathy, would you please turn it over to questions?

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from Silke Kueck with JP Morgan. Go ahead, please.

Silke Kueck – JP Morgan

Good afternoon. How are you?

Seifi Ghasemi

Good afternoon, Silke. How are you today?

Silke Kueck – JP Morgan

I'm doing okay. A couple of questions. On the – regarding the Specialty Chemicals business, which again had a very good quarter, I think that you sort of have gained market share now from your competitor in Europe for a couple of quarters, and it seems like pricing is still strong and volumes have gotten less in your business. Over the next 12 months, how sustainable is this growth rate, and is that something that will continue at the similar pace? Should it slow? Maybe can you add a little bit more color there?

Seifi Ghasemi

Silke, we believe that our lithium business will continue to do well. Our surface treatment business as you know, we serve the general industry and the automotive sector. So if there is a material decrease in automotive production, at the end of the day, we would see some of that. As you know, 14% of Rockwood's total sales are automotive. We have been pretty much insulated from any downturn because we have no exposure to the U.S. auto industry. Our exposure has been to the European auto industry. But, now we are beginning to see the European auto industry slowing down. So again, I expect that Specialty Chemicals sector in general will continue to perform well, but the part which is related to a surface treatment might slow down not because we will be losing market share or pricing, but because the demand might go down if there is a significant drop on the automotive as people are predicting in Europe.

Silke Kueck – JP Morgan

Okay. On the performance material side, it looks like the business office has taken another step down. And it looks like if I adjust for the benefits of acquisitions, maybe volumes were down 3% to 4%. Do you have any visibility when this business may trough, going forward should there be raw material benefits from copper prices going into 2009? If you maybe can just talk a little bit about that?

Seifi Ghasemi

We believe that the business will trough probably in the fourth quarter of this year at least from what we know today. Therefore, I think fourth quarter will continue to be difficult for that sector, but not materially different from what you have seen up to now. And then we would expect that 2009 would be flat or maybe improving.

Silke Kueck – JP Morgan

Okay. And lastly, a question on TiO2. How much was the contribution to sales from the joint venture with Kemira this quarter, like $60 million or something around those lines?

Seifi Ghasemi

The Kemira contribution is about $40 million.

Silke Kueck – JP Morgan

40 million. Okay.

Seifi Ghasemi

Approximately.

Silke Kueck – JP Morgan

And what has looks like lead to the sequential margin improvement, that is like the operating margin – in an adjusted EBITDA margin moves back to 17% and I understand still lower than a year ago, but sequentially, the margin moved up. What steps have you taken and do you expect the margin to recover back to 19% or 20% going forward?

Seifi Ghasemi

The combination of two actions, okay? One is obviously we have been watching our cost and improving productivity. The second part is that we are beginning to see some improvement in price. It's a combination of those two factors.

Silke Kueck – JP Morgan

Okay. That's helpful. I'll get back in the queue. Thanks.

Seifi Ghasemi

Thank you very much.

Operator

Next we'll go to David Begleiter with Deutsche Bank. Please go ahead.

David Begleiter – Deutsche Bank

Thank you. Seifi, can you comment on lithium pricing, what you were seeing both sequentially as well as year-over-year?

Seifi Ghasemi

Hi, David, how are you?

David Begleiter – Deutsche Bank

Good, thank you.

Seifi Ghasemi

Lithium pricing continues to be favorable, both sequentially and year-to-year, in general.

David Begleiter – Deutsche Bank

And just on the volume side, how much – what are you seeing on the volume side and how much more can you supply on your current capacity?

Seifi Ghasemi

Bob was just reminding me that the pricing for our lithium business has been pretty – the improvement in pricing has been pretty strong year-to-year and sequentially. As I mentioned, he's just emphasizing that. But in terms of volumes, we are continuing to see improvements in volume in our pharmaceutical applications and we are obviously seeing increased volumes for lithium carbonate that goes into batteries.

David Begleiter – Deutsche Bank

Can you just comment what you're seeing in Europe in general in October? How much has activity slowed?

Seifi Ghasemi

Overall, we are beginning to see a slowdown in automotive. We see a continued slow down, that's not new in construction, and those are the two things that we are seeing right now. But I do want to point out, David, as you and I have talked about before, Rockwood's performance is not really a (inaudible) of what is really happening in Europe because we have unique businesses with unique market positions. So sometimes, although the headlines might be that things are really going down, Rockwood might not see that to the same extent that you see or you would expect from the general statistics. But we have seen a slowdown in automotive for sure.

David Begleiter – Deutsche Bank

Thank you. And just one more thing. On advanced ceramics, were there any benefits of this business from a lower euro in terms of export or supplying export based industries?

Seifi Ghasemi

Overall, it's the euro is cheaper. We sell our product to companies in Europe who make things for export. So obviously, if euro is cheaper, our customer sales will improve and therefore in turn we would improve from that, yes.

David Begleiter – Deutsche Bank

Thank you very much.

Seifi Ghasemi

Thank you, sir.

Operator

We have Mike Judd with Greenwich. Please go ahead.

Michael Judd – Greenwich

Yes, good afternoon. Thanks for taking my question. I got on the call little late, so if you've already answered this question, I apologize. Can you talk about just in general terms perhaps in the fourth quarter and also maybe into the early part of next year, with the decline in commodity prices, particularly, copper and energy prices and things like that, how that flows through your various businesses?

Seifi Ghasemi

We have always said that one of the key features of Rockwood is that we have an inorganic raw material base, therefore, we are not subject to fluctuations in oil prices since our raw material prices do not significantly change. So raw material prices, oil prices going down and so on is not going to significantly help improve our margins for the same reason that the oil prices end up to $140, they didn't significantly deteriorate our margins. Our raw material cost as a percentage of sale doesn't really change too much.

Michael Judd – Greenwich

But you do consume quite a bit of copper, and I understand that those, are those contracts negotiated it yearly or annually and what is the impact there please?

Seifi Ghasemi

We use approximately 15 million pounds of copper a year. We have basically secured the copper requirements for 2009 already, at prices which are around $2.80.

Michael Judd – Greenwich

Very good.

Seifi Ghasemi

Right now copper going to $2.80, I mean $2.00 doesn't make much of a difference for us.

Michael Judd – Greenwich

Thanks for the help.

Seifi Ghasemi

Thank you, sir.

Operator

Next question is from Mike Harrison with First Analysis. Go ahead, please.

Michael Harrison – First Analysis

Hi, good afternoon.

Seifi Ghasemi

Hi, Mike, how are you?

Michael Harrison – First Analysis

Doing well. Thank you. First question I have is actually for Bob, kind of a housekeeping question, but was wondering if you could explain the difference between the diluted share count on the GAAP income statement and the as adjusted share count that you're showing in the reconciliation. It looks like there's – the GAAP number is $74 million and the adjusted number is closer to $77 million.

Robert Zatta

Yes. I think, Mike, the answer to that is because we are in a loss position, you don't use the higher number. It's just the accounting requirement.

Michael Harrison – First Analysis

Okay. And then looking at the increase in your sales due to volume mix, the 5.6% number, you call it $42.8 million. What was the organic volume decline if you were to back out acquisitions from that number? You commented that the Kemira contribution was $40 million on its own.

Seifi Ghasemi

Mike, it would be about minus 1%.

Michael Harrison – First Analysis

Okay. And then in terms of the lithium business, I know it was a few quarters ago that you had some issues with your natural gas supply and you switched the form of fuel that you were using there. I was just curious if you could give us some more detail on how energy costs are impacting the lithium business, and maybe if you're going to be seeing any kind of tail wind from lower energy cost going forward?

Seifi Ghasemi

Mike, at the time, we said that switching from natural gas to diesel fuel oil will cost us about $3 million to $5 million and that is a good estimate. So we have been absorbing those costs basically for the last year, they are already in our numbers. And for next year, if diesel fuel goes down, we would benefit from that but the order of magnitude of the benefit would be $0.5 million to $1 million, nothing material.

Michael Harrison – First Analysis

Okay. And in terms of the color pigments business, the operating synergies that you would hope to get from integrating the Elementis acquisition and maybe doing some manufacturing rationalization there. Are you able to quantify those savings on maybe an annualized basis?

Seifi Ghasemi

Yes, it's about $10 million a year.

Michael Harrison – First Analysis

Alright. Thank you very much, Seifi.

Seifi Ghasemi

Thank you.

Operator

We'll go next to Robert Koort with Goldman Sachs. Please go ahead.

Robert Koort – Goldman Sachs

Thank you. Good morning or good afternoon.

Seifi Ghasemi

Hi, Bob, how are you?

Robert Koort – Goldman Sachs

Good. Seifi, can you talk if there is any – you guys have any exposure or risk to what's going on in the market share shift in the hip and knee joint business. I know some customers of yours maybe having tougher times than others, I wasn't sure what your customer concentration looks like.

Seifi Ghasemi

On the hip joints, which is basically our market right now because the knee joint we are still experimenting, Bob, but the hip joints, we sell to basically three major customers, which is Stryker and Johnson & Johnson and Simet [ph]. These customers, the end user is the number of people who are getting hip replacements, and that number hasn't changed a lot and actually, the volumes in our medical, in ceramic medicals are actually pretty good.

Robert Koort – Goldman Sachs

Got it. And if you look to next year, given some of your comments about what's happening in some of your end markets and geographies, is it reasonable to think you could still get to that targeted 5% organic growth rate and 20% EBITDA margin. Or do you think you might have to relax those goals during a recessionary environment.

Seifi Ghasemi

Bob, we have always told people that our organic growth will be 1.5 times GDP, and on the average we said that normal circumstances worldwide GDP is about 3.5 times, 1.5, you get 5%. If the worldwide GDP next year stays at 3% to 3.5%, obviously, we will get to 5% but if any indication that the GDP will disappear and we will have zero GDP so we won't have any organic growth. In terms of our margins, we obviously work very hard to keep our margins at around the 19% that we have been performing at.

Robert Koort – Goldman Sachs

Very good. Thank you.

Seifi Ghasemi

Thank you, sir.

Operator

Next we have Sergey Vasnetsov with Barclays Capital. Please go ahead.

Sergey Vasnetsov – Barclays Capital

Yes, hi. Seifi, I want to ask you about share – sorry, cash use. You had pretty good cash balance right now and the share price is quite low, and yet I saw in the comments that you were looking for acquisitions, which is obviously one of the uses of cash. What are your thoughts on share buy backs at this level?

Seifi Ghasemi

My thought on share buy back is basically that we cannot buy shares. Our credit agreement doesn't allow us to buy shares. So even if we wanted to, we couldn't buy shares.

Sergey Vasnetsov – Barclays Capital

I see.

Seifi Ghasemi

So that is why our use of cash, depending on how things are, we might consider reducing debt. We might consider acquisitions depending on what is available, but right now, our strategy has been to collect cash and make sure we are very, very liquid and that's why I'm very happy that considering what's going on in the world, we do have almost $800 million of liquidity.

Sergey Vasnetsov – Barclays Capital

Indeed. I thought you were building up your sort of payment baskets to quite a robust number. How many quarters of those good results you would need to have before you would be able to buy shares if you like to?

Seifi Ghasemi

You see, with our structure, the people, the entity that (inaudible) is Rockwood Holdings, and Rockwood Holdings to have money, it has to have money coming up from the subsidiaries. So and if you want to have money coming from subsidiaries to Rockwood Holdings, first we have to pay down our debt, so no matter how well we do, it doesn't matter, we basically cannot buy shares.

Sergey Vasnetsov – Barclays Capital

Okay. Thank you.

Seifi Ghasemi

Sure.

Operator

Chris Shaw with UBS. Go ahead, please.

Chris Shaw – UBS

Hi, gentlemen, how you doing?

Seifi Ghasemi

We are doing fine. And you?

Chris Shaw – UBS

Pretty good. I think most questions were covered by the other analysts, but actually one question I had. On the performance additives, can you just remind me how much of that is U.S. based and how much is European based approximately?

Seifi Ghasemi

Our performance additive in total, which includes our timber business, our color pigment business and clay based additive business is about 65% to 70% U.S. and the balance is in Europe.

Chris Shaw – UBS

Okay. So I think someone asked the question and you were saying the trough is probably the fourth quarter and you might be flat to even slightly up next year, that's because the U.S. has already sort of been down for a while right size?

Seifi Ghasemi

That is correct.

Chris Shaw – UBS

Alright. And I guess going to what you were saying more broadly on your organic growth based on GDP, but you cited sort of global GDP. Now do you think that's – given that you're pretty predominantly based in the U.S. than Europe, would the global GDP be more accurate because the U.S. and Europe is supplying the rest of the world as well? Is that how you're looking at it?

Seifi Ghasemi

I think to be very precise, I think you should look at Europe and U.S. GDP for us. The global GDP is not that relevant.

Chris Shaw – UBS

Okay. I was just trying to clarify that.

Seifi Ghasemi

You're absolutely right. I'm glad you did that, yes.

Chris Shaw – UBS

And then on, just sort of theoretically lithium business, is there a scenario that you can sort of come up with, I don't know, global GDP or Europe and U.S. are both down 2% GDP next year, that lithium volumes would be lower or I guess between pharma and just the increased use of lithium in batteries, I would assume it would still be up, but can you think of a scenario where volumes might be down?

Seifi Ghasemi

I'm sure one can always come up with a scenario that if the whole world stops that it would be having a lower volume, but what is being discussed right now and the prospects that the GDP in U.S. might be minus 1% or Europe would be 0 or minus 1 or 2%, if nothing catastrophic happens we expect lithium volumes to hold up.

Chris Shaw – UBS

That's what I was looking for. Thanks a lot, guys.

Seifi Ghasemi

Thank you very much.

Operator

Next question is from William Matthews with Canyon Capital. Go ahead, please.

William Matthews – Canyon Capital

Good afternoon.

Seifi Ghasemi

Good afternoon, sir.

William Matthews – Canyon Capital

Just on slide 29, on the covenant analysis, so it seems that the credit agreement allows you a maximum amount of $100 million of cash to calculate your consolidated EBITDA?

Robert Zatta

That is correct, yes.

William Matthews – Canyon Capital

So then, in the event, as I understand it, on January 1st, that ratio will drop from 4.5 times to 4.25 times?

Robert Zatta

Correct.

William Matthews – Canyon Capital

So in the event you came close to that, you could simply take cash from your balance sheet to pay down some of your term loan and then –

Robert Zatta

Correct.

William Matthews – Canyon Capital

– be able to use the full cash balance effectively?

Robert Zatta

Correct, yes.

Seifi Ghasemi

That's exactly the point that we are trying to make, that we have a lot of flexibility.

William Matthews – Canyon Capital

Great. And then Seifi, just another comment, kind of given share buy backs are off the table. How do you look at the leverage you can pull to create shareholder value, for example, maybe purchasing your debt at a discount that trades at a discount. What are the ways that you think about creating shareholder value, or is it just continuing to run your business and when the market itself clears up its anxiety, your stock will participate.

Seifi Ghasemi

Obviously, our primary focus in creating shareholder value is to run the business as well, improve our margins and do accretive acquisitions. That has been what we have been doing. In terms of buying our shares – buying our debt, we have looked at that. And although some of our debt right now is so-called traded at 82%, 83% or 85%, every time we look at it and we go to the market and say we want to buy some, it isn't there. And if we actually start buying, it's going to go, so it is – those numbers are not, are a little bit artificial. If we could buy, if we could buy our – obviously, our bonds into open market at a discount, we would look at that. That would be a good use of our money, but it is not really practical.

William Matthews – Canyon Capital

Okay. That makes sense. And then on the acquisition landscape asset prices have come down –

Seifi Ghasemi

Yes, they have.

William Matthews – Canyon Capital

– across the board obviously, so there must be many more attractive assets for you to look at. What's kind of do you see as kind of a near-term event or what should we expect over the course of 2009?

Seifi Ghasemi

We have told you that to expect us to increase sales by about 3% a year because of acquisitions, and we think we can deliver that.

William Matthews – Canyon Capital

Great.

Seifi Ghasemi

By being disciplined about the use of our cash, because we always want to maintain a lot of liquidity.

William Matthews – Canyon Capital

Okay. Great. Thank you.

Seifi Ghasemi

Thank you.

Operator

Next we have John McNulty with Credit Suisse. Go ahead, please.

John McNulty – Credit Suisse

Yes, good afternoon.

Seifi Ghasemi

Hey, John, how are you doing?

John McNulty – Credit Suisse

Good. Good. Few quick questions. Can you give us an update as far as what the NOL is left that you have out there? I know you've sold off some assets and used at least some of that against? Can you give us an update on what the NOL is left at?

Seifi Ghasemi

Bob will do that.

Robert Zatta

Probably about $80 million.

John McNulty – Credit Suisse

Okay, so you still aren't going to be paying taxes for a while, at least on –

Robert Zatta

No.

John McNulty – Credit Suisse

Okay. When you think about with your acquisitions that you've made and you've got raw materials moving down, currency kind of moving, can you give us a rough idea of what you think your working capital will be for 2009 in terms of, will it be use, will it be a source of funds?

Seifi Ghasemi

Our target is to maintain our working capital at around 17% to 18% of sales. That is our target. So theoretically, in 2009, it could be a source of capital but I want to be a little careful about how I characterize that but 17% to 18% is our goal.

John McNulty – Credit Suisse

Okay. And then the last thing, just now that you had the Kemira JV for now a good month, can you give us an update in terms of opportunities that you think you may have there that you've seen that maybe you didn't know about when you kind of first got into it?

Seifi Ghasemi

Actually, we are seeing that the opportunities are better than we thought. When we did the joint venture, we were talking I think I'm sure that I mentioned to you that we expect the synergies of about $20 million, and now we are expecting synergies of around 18 million euros to 19 million euros. So we expect – that is proving to be better than we thought.

John McNulty – Credit Suisse

Okay. Great. Thanks very much.

Seifi Ghasemi

Thank you, sir.

Operator

Next we have Craig Irwin with Merriman. Please go ahead.

Craig Irwin – Merriman

Afternoon, gentlemen. Thank you for taking my question.

Seifi Ghasemi

Sure, Craig.

Craig Irwin – Merriman

I have a question, really looking for a little more color on your Specialty Chemicals side and really lithium carbonate for batteries. Back in the cycle that the lithium ion battery market saw in 2001, the unit volumes went down north of 20% year-over-year. Did you have substantial leeway – substantial visibility on changes in delivery schedules or push outs in front of the fundamental changes we saw in the market back then? And is that something that, if there was a change either on the positive side or negative side this time that we would again have a lot of visibility on?

Seifi Ghasemi

I think what has significantly changed since 2001 is that the penetration of lithium ion batteries in cell phones and laptop computers and then on top of that, what you have is the lithium ion batteries for hand tools that didn't even exist at that time. So the combination of all of those things makes us feel that the lithium ion batteries have been growing just that sector had been growing around 15% a year. So if there is a slowdown, it might slow down to 5%, but I don't see a scenario where it will go down.

Craig Irwin – Merriman

Excellent. So is it fair for us to be thinking that there probably hasn't been any material change in the delivery schedules of your customers or maybe push outs on that side?

Seifi Ghasemi

No, we have not seen that.

Craig Irwin – Merriman

And any acceleration given the significant capacity that's coming on in the market?

Seifi Ghasemi

When you say significant capacity coming on the market, we are sold out. So we don't have anything that any additional – we are basically sold out. We have begun to mark under new carbon..

Craig Irwin – Merriman

I apologize. I can be more specific. The capacity for manufacturing cells on the part of your customers, but that would sort of suggest maybe you'd have a little bit of pricing power over the next couple quarters. Is that fair for us to assume?

Seifi Ghasemi

We have had pricing power and that is why pricing has improved in the last quarters. As we go forward, I obviously don't want to make any predictions about pricing because that's not an appropriate thing for me to say.

Craig Irwin – Merriman

Excellent. Thank you very much.

Seifi Ghasemi

Thank you, sir.

Operator

We have Laurence Jollon with Barclays Capital. Go ahead, please.

Laurence Jollon – Barclays Capital

My questions were mostly answered around buying back debt in the open market, but I did notice that the senior subnotes, the balance declined by $62 million sequentially. Was that all FX or were you able to buyback 5 million bonds or 10 million bonds?

Robert Zatta

It was all FX related.

Laurence Jollon – Barclays Capital

And then it looks like there was some debt repayment in the third quarter. Was that your term loans?

Robert Zatta

It's normal amortization. It was against term loans but normal amortizations.

Laurence Jollon – Barclays Capital

Okay. Thanks very much.

Seifi Ghasemi

Thank you, sir.

Operator

And we also have Edward Wong [ph] with the Trust Company [ph]. Go ahead please.

Edward Wong – Trust Company

Hi, guys. Actually most of my questions have been answered so, I guess the one question I don't know if you answered, my connection got a little choppy. But just going back to your free cash flow year-to-date, it seems you guys are – I mean great quarter you guys have turn off free cash flow. Just sort of like I saw a jump in the accounts receivables and the inventories also sort of pop-up. Bob, can you kind of give us color to what's going on there?

Robert Zatta

The only changes really on the balance sheet will be related to including the acquisitions.

Edward Wong – Trust Company

Right.

Robert Zatta

The impact of Kemira, the impact of Holiday Pigments and the impact of Elementis and so on, are the major changes – they are actually offset a little bit this time because of FX going the other way. In the last couple of quarters it's been FX going mostly the opposite way, but this time it's helped us a little bit. There has been no change really in our working capital position and quite honestly, receivables are still doing quite well, we're in pretty good shape on that, we watch it pretty closely.

Edward Wong – Trust Company

Thanks a lot. Great quarter guys.

Seifi Ghasemi

Thank you.

Operator

We have a follow-up from Silke Kueck. Go ahead, please.

Silke Kueck – JP Morgan

Yes, just one question of clarification. On slide 29, when you go through the covenant explanations, for the purpose of calculating your covenants, you said we can use pro forma adjusted EBITDA for the last 12 months and that includes EBITDA from the acquired businesses of $52 million and estimated synergies of $32.5 million. So is that the amount you expect to book in EBITDA in 2009 from the acquired businesses including synergies?

Seifi Ghasemi

Silke, that is synergies that we expect in the next three years.

Silke Kueck – JP Morgan

In the next three years?

Seifi Ghasemi

That is all of that is not going to be realized in 2009.

Silke Kueck – JP Morgan

This will cover the next –

Seifi Ghasemi

Yes, 2009 will be less than that. And then in addition to that you have to factor in how those businesses are actually going to do during 2009 if there is any kind of a slowdown.

Silke Kueck – JP Morgan

Okay. So you're saying you're going to realize the synergies in two and one – three years?

Seifi Ghasemi

I think it's a good bet to say two years.

Silke Kueck – JP Morgan

Okay. And is the run rate of $52 million for the acquired businesses like a good run rate for 2009 or what that –

Seifi Ghasemi

A run rate of about $50 million is a good number, Silke.

Silke Kueck – JP Morgan

And how much EBITDA will you lose from the sale of the pool and spa business to large?

Seifi Ghasemi

Our pool and spa business we did disclose it when we sold it was contributing about $12 million a year of EBITDA.

Silke Kueck – JP Morgan

Okay. Thank you very much.

Seifi Ghasemi

Thank you.

Operator

(Operator instructions) Mr. Ghasemi, we have no further questions.

Seifi Ghasemi

Well, thank you very much, and I like to thank everybody for taking the time to listen to our conference call. We very much appreciate it.

Operator

Ladies and gentlemen, this conference will be available for replay after 5 p.m. today through midnight, Wednesday, November 12. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 960105. International callers dial 320-365-3844 using the same access code 960105.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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