Arch Chemicals Inc. Q3 2008 Earnings Call Transcript

Arch Chemicals Inc. (ARJ)

Q3 2008 Earnings Call

November 10, 2008 11:00 am ET

Executives

Michael Campbell - Chairman, President and CEO

Steve Giuliano - CFO

Louis Massimo - COO

Analysts

Ivan Marcuse - KeyBanc Capital Markets

Ian Zaffino - Oppenheimer & Co.

Frank Mitsch - BB&T Capital Markets

Robert Felice - Gabelli & Company

Christopher Butler - Sidoti & Co.

Presentation

Operator

Good morning, and welcome ladies and gentlemen to Arch Chemicals' third quarter 2008 Earnings Call. At this time, I would like to inform you that this conference call is available to the public, including the media, is being recorded for rebroadcasting, and that all participants are in a listen-only mode. The call is being broadcast live at www.archchemicals.com and is Real Media Player and Windows Media Player compatible. (Operator instructions)

I would now like to turn the conference call over to Mr. Michael Campbell, Chairman, President and CEO. Please go ahead, sir.

Michael Campbell

Thanks you very much. Good morning. Thank you for joining us. With me today are Louis Massimo, Chief Operating Officer; Steve Giuliano, Chief Financial Officer; and Mark Faford, Director of Investor Relations.

Throughout this call, we will make statements regarding estimates of future performance. Actual results could differ significantly from those projected. Some of the factors that could cause such differences are described in our earnings release.

Earlier today, we filed our earnings release as part of an 8-K that has been posted on the Arch Chemicals website in the Investor Relations section.

Our third quarter 2008 sales were slightly lower than last year, has improved pricing in most of our businesses, in particular performance urethane and favorable foreign exchange rates were only partially able to offset volume declines.

We reported third quarter earnings from continuing operations of $0.68 per share. These earnings included a charge of $0.03 per share related to a pension settlement associated with severance recorded in 2007. Excluding this special item, earnings were $0.71 a share.

The year-over-year earnings increase was driven by performance urethanes and water products, including the timing and amount of a favorable ruling in our China import duty matter.

Despite increasingly difficult market conditions, lower demand, and higher raw material and freight costs I'm pleased with our third quarter earnings. We delivered solid results driven by price increases in many of our businesses and by cost reduction measures.

Taking a closer look at the quarter, our core Treatment Products segment posted slightly lower sales, while operating income was well above last year's results. Within the segment, HDH water product sales increased, as favorable currency exchange rates in Brazil and Europe improved pricing, and improved pricing offset slightly lower volumes.

Volumes were lower due to unfavorable weather in Brazil and Europe, mostly countered by higher North American volumes of non-branded cal hypo sold to re-packers for their private label products. Volumes were particularly strong in September, as some customers pre-bought ahead of our October price increase.

Water products operating income improved by $11 million over last year's third quarter. This improvement was due primarily to the favorable antidumping duty received from the Department of Commerce on isos we import from China. We had originally assumed this ruling would occur in the fourth quarter and would amount to $8 million.

Personal care and industrial biocides posted lower sales and operating income compared to last year's excellent third quarter results. Sales decreased as higher pricing for health and hygiene products, and favorable foreign currency exchange rates were unable to fully offset lower volumes. We saw lower demand for biocides used in both building products and antidandruff shampoos.

The lower building products demand was a result of the housing slowdown, which continues to adversely impact paints, coatings and wallboards used in residential construction and remodeling.

The year-over-year decrease in shipments of our zinc Omadine antidandruff agent was a result of very strong sales in the prior year period due to a customer product launch, as well as the timing of some pre-Olympic shipments to China during the second quarter of this year.

Third quarter operating income declined as lower sales volumes and higher raw material freight and distribution costs offset improved pricing and cost savings from our restructuring initiatives.

Wood protection and industrial coatings posted lower sales compared to the year ago period, as improved pricing in both businesses and favorable currency exchange rates weren't sufficient to overcome lower volumes of residential wood preservatives in North America. Operating income was also lower than last year.

Our wood protection business saw increased demand for our preservatives used for North American industrial applications. This increase demand was a result of product substitution, hurricane-related replacements and customers pre-buying ahead of our September price increase.

However, this business continues to be adversely impacted by the decline in the US construction and do-it-yourself markets. In addition, operating results were adversely impacted by higher raw material costs of over $3 million for copper, MEA and chrome.

The lower residential demand in the US combined with the higher raw material costs more than off set the improved pricing in our cost containment initiatives. As a result, wood protection's operating income was significantly lower than the year ago period.

In our industrial coatings business, sales were slightly ahead of last year, as lower volumes were more than off set by favorable foreign currency exchange rates and improved pricing. We successfully raised prices in European markets. However, the economic slowdown in that region has reduced demand for wood coatings.

Operating results for this business improved year-over-year. Lower demand and higher raw material costs for oil-based solvents and resins were more than countered by price increases and cost containment initiatives.

Now to our Performance Products segment. Sales were slightly below the year ago period while operating income improved year-over-year with the urethanes business returning to profitability. Urethane sales decreased 5% due to the slowing US economy and construction industry. This volume shortfall was mostly overcome by successful price increases implemented in July and August in response to rising raw material costs.

Urethanes operating income increased by $2 million from last year's comparable period. This dramatic turnaround occurred as higher pricing for our polyol and glycol products more than offset the record high propylene and ethylene raw material costs.

Although market prices for these oil-based raw materials were 50% higher year-over-year, we benefited from our purchasing and pricing strategies. Our urethane team has done a fantastic job of managing this business in the face of a weak economy and unprecedented high raw material costs.

Our final business is hydrazine, and here we posted sales and operating results comparable to the year ago period.

Let's turn to our outlook. For Arch, as a whole, we now expect 2008 full year sales to increase by approximately 2% over 2007. This revised sales guidance reflects the depressed US housing sector and weakening global economies, impacting our wood protection and industrial biocides volumes, lower urethanes demands and decreased coating sales due to economic slowing in Europe. These headwinds should be partially countered by the impact of our Advantis water treatment acquisitions.

Our full year earnings from continuing operations and before special items remain in the $2.20 to $2.30 per share range. Weak demand for global residential wood preservatives will be more than countered by the positive contribution from our recently completed Advantis acquisition and improved results posted by performance urethanes.

Capital spending projections for 2008 remain in the range of $50 million to $55 million while appreciation and amortization is still expected to be approximately $48 million for the full year.

Turning to our fourth quarter outlook, we anticipate earnings per share from continuing operations to range from $0.07 loss to a positive $0.03. In the fourth quarter of 2007, earnings from continuing operations and before special items were $0.41.

Last year's earnings though included a net benefit of $0.30 per share from Department of Commerce's final determination on a favorable antidumping ruling and the benefit of $0.15 per share from the impact for share-based compensation expenses.

Within the Treatment Products segment, HDH water product sales are expected to increase from last year due to our acquisition. One month ago today we acquired the water treatment chemical business of Advantis Technologies. This acquisition expands our position in the residential swimming pool and spa treatment market and will also accelerate our growth in non-residential water treatment markets.

We are thrilled with the Advantis businesses and most of all with the talented people who are now part of Arch. Our joint business team is diligently integrating our two operations and we expect to realize significant pre-tax synergy starting in 2009. This is a winning combination.

Last year's fourth quarter operating income for HDH water products included a favorable antidumping duty benefit of approximately $14 million. Excluding this benefit, we expect this year's operating results to improve year-over-year as a result of higher selling prices in North America and the contribution of the Advantis acquisition.

Moving on to personal care and industrial biocides, we expect fourth quarter sales to be slightly ahead of the year ago period. Reduced demand for our biocides used in building products due to the slowdown in the residential construction and remodeling markets should be countered by improved pricing and higher demand for biocides used in marine paints. Personal care and industrial biocides operating income is projected to be comparable to last year. The margin from the higher sales is expected to be balanced by higher costs.

In wood protection and industrial coatings, we expect a significant year-over-year decline in fourth quarter sales and operating results. Wood protection's operating results will be adversely affected again by reduced demand for our residential preservatives due to the continued slowdown in the US housing sector.

In addition, we are experiencing the slowdown in some of our major markets due to weakening economies, depressed housing markets and strengthening of the US dollar. Specifically our UK, Australia and New Zealand businesses are expected to deliver lower operating results from last year's fourth quarter.

We have implemented price increases wherever possible and further cost reduction initiatives will help mitigate the impact from the increasingly difficult global market conditions.

In regard to mitigating our expenses, one area we have not cut back on is investing in new product development and commercialization. We remain very excited about our wood preservatives being introduced into 2009 and believe this business is very well positioned when the housing market recovers.

Industrial coatings' operating results are expected to be lower than last year, here to we are being adversely impacted by reduced demand for wood coatings, stemming from the economic slow down in key European markets.

Our Performance Products segment is forecast to deliver lower sales but operating income comparable to last year's fourth quarter. In performance urethanes, we are forecasting lower sales as a result of the weak US economy and increasing competitive activity.

Demands for our products sold into the coatings, adhesives, sealants, and elastomers applications are expected to be down approximately 30% from last year due to the slow down in the US economy generally in construction markets in particular.

Urethanes' operating income in the fourth quarter is expected to be comparable to last year as the lower demand should be offset by declining raw materials.

And finally, the hydrazine business should deliver sales and operating results comparable to the year ago period.

In conclusion, I'm confident that we are taking aggressive action to respond to the increasingly difficult global macroeconomic environment. All of us remain focused on profitably growing our company. We are on target to deliver record profitability in our HDH water products, personal care and industrial biocides businesses. Our biocide strategy is working and we remain committed to maximizing our cash generation, all keys to enhancing shareholder value.

That concludes my prepared remarks. We would be glad now to respond to any questions you might have. And to facilitate this, let me turn the call back over to the operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ivan Marcuse with KeyBanc Capital Markets.

Ivan Marcuse - KeyBanc Capital Markets

Hi, guys. Nice quarter.

Michael Campbell

Thank you, Ivan.

Ivan Marcuse - KeyBanc Capital Markets

Real quick. How much was the pension expense in the first nine months compared to in '07 versus '08?

Steve Giuliano

About $3 million, $4 million lower than comparable period last year.

Ivan Marcuse - KeyBanc Capital Markets

The $3 million, was that all in the third quarter that you pointed in your corporate expenses?

Steve Giuliano

No.

Ivan Marcuse - KeyBanc Capital Markets

No, and then two quickies. How much were assets down as of September 30th? And what do you expect pension expense to be in '08 assuming a slight increase in the discount rate and will that increase your cash contribution and how does that exactly work for '09?

Steve Giuliano

You have got a couple questions there. But with regards to pension assets, obviously we experience a decrease in the value broadly in line with benchmarks. US assets were down more than our UK assets and that's principally because the US assets are more heavily funded in equities versus the UK plan which is more heavily fixed income base.

Ivan Marcuse - KeyBanc Capital Markets

Right.

Steve Giuliano

So for the US, we contributed $3 million this year. We have no further funding requirements for 2008. Again this was above the minimum and allowed us to meet the full funding phase and thresholds. Going forward, everything is sort of on the table and really predicated upon where we fall out at year-end with interest rates and with asset values, so the rules are very prescriptive.

Ivan Marcuse - KeyBanc Capital Markets

Would you expect pension expense to be higher next year, right?

Steve Giuliano

The pension expense, we expect it to be higher, yes.

Ivan Marcuse - KeyBanc Capital Markets

And then when would your an increased cash contribution to catch you with under-funded, would that be in '09 or probably not experience that until 2010?

Steve Giuliano

There are many different options and we are looking through all those options. There is an option that would allow us to contribute nothing next year. There is other options that would require significantly higher contributions than we originally expected in 2009 if we were to try to get to full funding thresholds.

Ivan Marcuse - KeyBanc Capital Markets

Steve, while I have you, how much did FX help your EPS in the third quarter and in the first nine months? And then on top of that for every 10% move in the Euro, how does that impact your operating income or are you naturally hedged by raw materials?

Steve Giuliano

Okay. First the quarter was roughly $1 million. And for nine months it's in the $1 million pre-tax.

Ivan Marcuse - KeyBanc Capital Markets

$1 million in operating income.

Steve Giuliano

It's probably $5 million to $6 million on a nine month basis.

Ivan Marcuse - KeyBanc Capital Markets

Okay.

Steve Giuliano

We don't really have a rule of thumb that says X percent of a euro equates to anything. We hedge and we have natural hedges and as you know, with the strengthening dollars in certain locations, translation will up lower translated profits on a short-term basis. That could be very dependent upon our seasonality and also depending upon US exports will be little bit less competitive, but where we produce locally and we are competing against US dollar imports, we will have a better competitive position. So strength in dollar probably isn't helpful but I don't think it is a major negative for us.

Ivan Marcuse - KeyBanc Capital Markets

All right. Steve, you have financed the whole acquisition on your revolver. How much room do you have on your revolver as of, I guess, right now?

Steve Giuliano

We had $118 million outstanding as of end of the third quarter of your pro forma. It's probably about $245 million pro forma for the acquisition.

Ivan Marcuse - KeyBanc Capital Markets

Then you had $62 million due in March.

Steve Giuliano

Correct.

Ivan Marcuse - KeyBanc Capital Markets

Are you guys going to be able to refinance that, are you working on that or is there may be some issues if the credit markets remain the same, what do you anticipate going forward?

Steve Giuliano

We are working on it. Our intentions would be to refinance not only the acquisition of Advantis but also the $62 million that is coming due at the end of March on a longer-term basis. Our expectations right now is we don't think there is going to be liquidity until at least the first quarter of 2009.

Ivan Marcuse - KeyBanc Capital Markets

Remind me again, what is your current rate on your revolver, LIBOR plus half 50 basis points?

Steve Giuliano

Correct.

Ivan Marcuse - KeyBanc Capital Markets

Mike, you guys have done a real good job getting prices on all of your businesses. Looking out at '09 fourth quarter with volumes falling, raw materials falling, are you able to maintain price in all of those if you go through them real quick or do you tend to have to give them back? Assuming we are in a recession, how do your businesses typically react in recessionary period looking probably more specifically at the personal care, wood coatings more or less not too concerned about the water products?

Michael Campbell

Okay. Ivan, we are going to have to make this the last question.

Ivan Marcuse - KeyBanc Capital Markets

No problem.

Michael Campbell

You can get back in the queue, we have a number of people waiting. Our going in position is we are not going to give up any of the pricing because we are merely catching up with what the raw materials, how the raw materials hurt us in the beginning of the year. However, we are realistic in our forecast assume that there is going to be some give back but we are not going to give back the whole price increase. And in some businesses, the entire price increase should stick. For example, in the water business, that will stick.

In terms of how these businesses react in a recession. As you pointed out, the water business is resilient in a recession. We see in personal care that there tends to be a decline in the higher priced products and that consumers move down to lower price products. We have actives that will go into all of them, so I don't think that we will be badly hurt in that area. It is certainly not our expectation.

The wood protection is strictly a function of the housing market, at least the residential half of the wood protection business. You can almost track it with the housing starts and as long as that remains down, regardless of what else is going on in the economy, it is not going to come back up. However, I will say as I said in my prepared remarks, we remain very excited about this business.

We think we have a good array of products that we are offering to the public. We have a good organization. We have a global organization. So we expect to be a very successful in this business once this housing market returns to some level of normalcy. Coatings had been doing well, but we are seeing some weakening in Europe and that's why that has gone down. That will be largely dependent on what happens in Europe.

Ivan Marcuse - KeyBanc Capital Markets

Thanks for taking my questions.

Michael Campbell

Thank you.

Operator

We will go next to Ian Zaffino with Oppenheimer & Co.

Ian Zaffino - Oppenheimer & Co.

Great. Thank you. I guess you just really closed on the Advantis deal, but what are your thoughts speaking with people there on the ground, what they are seeing as far as buying patterns in this quarter coming up? I know this is typically where the pre-buy happens? Are you seeing delays in that or is it kind of business as usual? What are you thinking as far as your fourth quarter guidance and as you look into next year? Thanks.

Louis Massimo

Ian, this is Louis. First of all, the Advantis business is made up of two components, the branded distribution and the surface water group. They have a seasonal business pattern that is similar to our dealer business that basically 30% of the sales come in the fourth quarter. The other strong quarter is the second quarter which is about a comparable 30%. The weakest or the lower quarter is the first quarter, so that is when you model that $70 plus million for us, that's how you should probably break it out a little bit.

As to the October early buy, both our dealer business and the surface water and branded distribution business started off very strongly. We are not seeing in October, at least, softness in the buying pattern. It also has to do with the impact when price increases went into play and they went into effect anywhere between the 5th of October to the middle of October, we saw a strong in the first part of it.

We are cautiously optimistic. That's the biggest part where the concerns on the future are the dealers. They don't want to go into next season with higher inventory levels and things like that. But right now on a comparable business to last year, we are seeing volumes and our historical dealer business comparable to last year and from what the surface water and branded distribution people tell me, it is about comparable to last year. So we are not seeing any real weakness.

Ian Zaffino - Oppenheimer & Co.

Okay. And then just following up more on Advantis, for the fourth quarter, what type of synergies are you looking at getting? What is really imputed in the fourth quarter guidance, and what are you looking at for next year?

Louis Massimo

As Mike said in the prepared remarks, the synergies will be taking place in '09. We've seen it is mostly in the supply chain area. So we are seeing it take place in the beginning of '09. I will tell you that the acquisition is accretive from day one. We were kidding the other day, it is 12:01 the day we bought it probably. But most of the synergies that we quantify will all be delivered in the early part of '09.

Ian Zaffino - Oppenheimer & Co.

All right. Great. Thank you very much.

Michael Campbell

Thanks, Ian.

Operator

We will go next to Frank Mitsch with BB&T Capital Markets.

Frank Mitsch - BB&T Capital Markets

Good morning, gentlemen.

Michael Campbell

Hi, Frank.

Frank Mitsch - BB&T Capital Markets

Mike, in response to the question before on selling prices versus raw materials, it sounded to me as if you were actually looking for margins to improve here as you get caught up with the previous raw material increases and we are seeing raw roll over here. Is that the way that we should be thinking about Arch?

Michael Campbell

Well, it's so specific to each business, Frank, that it is difficult to generalize. For example, in the industrial protection business, the volume decline makes it very difficult to see any margin improvement. If you had normalized sales, you would see margin improvement. If you are not going to see margin improvements there in the coating business, the sales price is barely covering the raw material costs.

On an annualized basis, the margin is going to change significantly. In performance urethane, you are going to see some margin improvement. You will see significant margin improvement in the water business. Industrial biocides hasn't been so much a margin crunch play nor has PCI, it is very specific to business, Frank.

Frank Mitsch - BB&T Capital Markets

Okay. All right. And then just a more broader question, you obviously referenced the challenging market environment for the fourth quarter here and we are about halfway through the fourth quarter. Can you talk about any visibility you have on business in 2009? Is there any reason to expect that the current trends will reverse itself or would you expect to see this greater than seasonal weakness persist in the early part of next year?

Michael Campbell

Frank, we are just going through, in fact we will start that process later on this week, just going through our budgeting process for 2009. Although I tend to get enthused, Steve does a very good job of holding me back and saying we will discuss in detail what we see in 2009 on our first quarter earnings call.

Frank Mitsch - BB&T Capital Markets

Okay. All right. Thank you.

Operator

We will take our next question from Robert Felice with Gabelli & Company.

Robert Felice - Gabelli & Company

Hi, guys. Just a couple of questions. I guess first a follow-up I believe that was Ian's question on the magnitude of the synergies. Specifically, I know you said significant synergies, but is there a specific number that you are targeting at this point?

Louis Massimo

I think when we gave guidance on the acquisition, I think we said it would be $6 million of synergies, that would say that that's low end of our range. That didn't assume any revenue synergies, but we are not at the beginning of the building off of Mike's comment and I guess our earnings call will be probably at the end of January or first week of February. We will update that synergy analysis for you. I will say that the teams are working together and the number, it will be higher than that $6 million.

Robert Felice - Gabelli & Company

Okay, so six million at a minimum but shooting for hopefully a couple million more than that?

Michael Campbell

Yes. I think if I can just add to what Louis said, we are obviously very pleased with the fact that it is already accretive for us and the way the teams are working and the talent that we are finding there and the opportunities that we are finding from supply chain right through to revenues, the gem that the surface water business is, everything has been very positive, so we are really quite excited about this business in 2009 and beyond.

Robert Felice - Gabelli & Company

Okay. Great to hear that. You mentioned that in 2007 the benefit from the antidumping was $14 million. It's $12 million this year. With the lower rate, how should we think of '09 and beyond in terms of the annualized benefit you will get?

Michael Campbell

Louis, I am going to let you answer that question, because you have to look at it from two different perspectives, and that is the ongoing duty that is impacting our cost as well as the rebate of the formerly imposed duty.

Louis Massimo

Well, from a cost of sales line, Rob, you are really doing a calculation from the 20% duty rate down to basically zero-ish. So it is a couple million dollars of a benefit on an ongoing basis. We are going to lose $11 million that we booked this year in next year. When you look at on a pure cost of sale basis, it delivers about a couple million dollars of benefit incremental on a cost of sales line excluding, as you know, just like everybody else know in the world we have a significant increase in our cost of isos coming out of China, so the net impact of the lower duty and the higher cost is going to represent a higher cost for '09.

Robert Felice - Gabelli & Company

If I'm getting this correctly the way to think about is that $11 million on a net basis should probably face somewhere around an $8 million or $9 million headwind as this benefit goes away next year? As the $12 million goes away, that will be tapered by the lower rate going forward, is that correct?

Louis Massimo

Everything you said other than the very end, you might be a little bit off. You are right when you look at it on a pure antidumping duty line item, we have an $8 million headwind going into next year.

Robert Felice - Gabelli & Company

Okay. That's helpful.

Louis Massimo

Right. That's all. We will give guidance at the beginning of the year where our costs increase from our supplier. Our pricing strategies with our customers and stuff like to mitigate that increase, we will give you at the beginning of the year, but right now you are right on the net, net of just looking at the antidumping duty rate benefit that gets in one particular quarter like last year it was 14. It went to 11 this year and next year it's going to be a couple million dollars.

Robert Felice - Gabelli & Company

Okay. Louis, if we were to exclude Advantis and the synergies associated with it and look to '09, would you still expect bottom line improvement or given the magnitude of this headwind, you think that will prevent that from coming to fruition?

Louis Massimo

Rob, I love the way you keep coming back to try to get me to give '09. I gave you a little taste. I haven't come off my 100 basis point improvement year-over-year and I'm not losing sleep over it going into the '09 season. The Advantis acquisition, I would call it a cherry on the top.

Robert Felice - Gabelli & Company

Okay, then how much of your copper have you hedged so far two 2009, and would you expect to hold onto prices as copper prices decline?

Michael Campbell

We would expect to hold onto most of the pricing as it declines and we have a policy of hedging between 50% to 80% on a 12-month rolling average and let me just say at this point that we are within that policy range.

Robert Felice - Gabelli & Company

Okay. As I think about the wood protection business. Obviously, the external environment has gotten significantly worse and in the same token, you should have a nice tailwind next year from the decline in copper costs. How should I balance the headwinds and tailwinds? As I try to get my hands around, the outlook for '09, should I think that you should show bottom line improvement or will the external environment be too much to offset the benefit from copper?

Michael Campbell

We are going have to have a better understanding of what the external environment is going to be and we will have that better feeling when we give you guidance for ' 09.

Robert Felice - Gabelli & Company

Well, let's assume for a moment it doesn't change versus what you are seeing today?

Louis Massimo

First thing you have to do, Rob, remember as Steve and Michael said, we do hedge copper, so you can't look at the spot price right now. Our average cost would be, I would say significantly higher but it is a lot higher than spot right now. It will be lower than last year.

We will have to as we get closer to the beginning of the year, I think on all of the businesses, it is still early to tell. Rob, you are trying like heck to get to '09, but I think overall everybody is looking at and everything we see in all the businesses, it is going to be a tough first half of the year and it's from a macro environment and I think people are expecting to see a little bit of recovery in the second half.

I think if you can be a little more patient at the beginning of the year, we will give you some guidance. I think that nobody is really expecting to see in the wood protection business a significant uptick, but if housing and home improvement and consumer confidence come back, I think that business is highly levered to those factors, the second half, I think would be better than the first half. Do you agree, Mike?

Michael Campbell

Yes, I definitely would.

Robert Felice - Gabelli & Company

Louis, you have got to appreciate my persistence.

Louis Massimo

Well I know and you know how it works. I'm sitting on the far side of the table from Steve so he can't kick me when I trying to give a guidance.

Robert Felice - Gabelli & Company

Thank you for taking my questions. I’ll hop back in queue.

Michael Campbell

Thanks. Rob.

Operator

We will go next to Christopher Butler with Sidoti & Co.

Christopher Butler - Sidoti & Co.

Hi, good morning, guys.

Michael Campbell

Good morning, Chris.

Christopher Butler - Sidoti & Co.

You touched on this a little bit, but I was hoping for a little more color. Now that you have had an opportunity to look underneath the hood of Advantis and see some of the technologies that they may have regarding surface treatment. Do you think there are opportunities to be able to put together Arch's expertise with their expertise and be able to get something greater than the sum of the parts there?

Louis Massimo

Absolutely. When I looked under the hood, I saw a Maserati being Italian I had to use that one. The surface water is an outstanding business. It is a gem we didn't know a lot about. The branded distribution is also a gem. No disrespect to them. If we knew more about the branded distribution. We didn't know a lot about the surface water until we got into a little more due diligence.

It aligned itself very nicely with our industrial municipal business and our efforts there. There is significant growth opportunities and revenue synergies within North America but tremendous opportunities outside of North America because they weren't able to take a lot of their products because they were with us, the small business and the big business and now they are a part of a water business, part of our Arch that is basically 40% of our company.

They are getting a lot of help and resources and the gentlemen who runs that business, Brad is very excited about what he can bring to the table and deliver part of Arch's footprint worldwide. We see it in South Africa, Brazil, Europe, and in particular the way they treat the reservoir application before it goes into the I would call the pump house that aligns itself nicely to our I&M business.

So that's why I say I was pretty bullish on the synergies that we think that we found a heck of a lot more through the surface water group aligning itself with the I&M business and I think you will be very surprised on the opportunities we are going to deliver on that one.

Christopher Butler - Sidoti & Co.

Staying with the pool chemicals as we move into winter months here in North America, have a little bit more challenge trying to get my thumb on the pulse of what your demand environment is going to be like in the southern hemisphere. Could you help us out on what you have seen there so far?

Louis Massimo

This is the slowest part of our North American business. As far as in Brazil and South America, I assume that's what you are asking.

Christopher Butler - Sidoti & Co.

Yes.

Louis Massimo

We are seeing nice strong volumes there. We are bringing the plant in both places we added capacity to both of those facilities because we were actually shipping a lot of product from North America and we were incurring a significant freight penalty to get the product down there, so at the beginning of the season starting out very nicely.

You do have some noise as everyone is having because, if you picked the day whatever the dollar is versus any currency, one day it is this. Next day it is that, you are seeing those kinds of things, but as Steven said earlier, in certain markets, our competition imports in US dollars so that our product is even more competitive priced and so we are seeing nice demand there. It is still early in the season. It is the first month of the season. October looked pretty good.

Christopher Butler - Sidoti & Co.

Shifting gears over to the personal care, biocides. For the first time, we saw declines for the first time in a long while. We had the build out of brand and pretty strong demand as a result of that. Is this just simply an inventory reduction. Have you gained any insight into end product demand if that's holding up as the global economy slows a little bit?

Louis Massimo

I'm assuming the industrial biocides and personal care and the health and hygiene piece of the biocides business. You remember last year we had a very strong quarter and that was a lot to do with our major customer with new bottles, new launches and stuff like that. So some of that is basically timing.

Going forward, I know that our major customer which everybody knows who that probably is, has backed off their growth rates a little bit worldwide and we are seeing that same trend, so it is not an inventory correction. It is just a slightly lower growth rate than they would normally be growing at the 6% to 8% and I think they are talking more like in the 2% to 3% right now.

Michael Campbell

You had a slight timing issue between the second and third quarter too.

Christopher Butler - Sidoti & Co.

Thank you for your time.

Louis Massimo

Thank you.

Operator

We have a follow-up question from Robert Felice with Gabelli & Company.

Robert Felice - Gabelli & Company

Just one or two quick follow-ups. First, could you give us an update on how the facility in China is progressing, when that will be up?

Louis Massimo

Rob, I thought you were going to ask me '09. The power plant which goes into the antifouling paints is up and running and the other plant which will be commissioned in the first quarter of ' 09 is running well. We are in the qualification stages right now, so both plants are doing basically completed and the health and hygiene plant is actually going to be basically fully qualified by the end of the first quarter.

Robert Felice - Gabelli & Company

Okay. Great, and you know, I was laying off the '09 guidance for a second but if you are willing to provide any additional detail, I'm willing to listen.

Louis Massimo

That was it. I think you are a Giants fan, so it looks good.

Robert Felice - Gabelli & Company

Then lastly, Mike, could you give us an update on where you stand in terms of some of the non-core assets and perhaps the process to further streamline the portfolio? I know obviously things are, with the credit markets have probably brought everything to some what of a halt but just your thoughts on that process.

Michael Campbell

They haven't brought everything to a halt in terms of the effort from our side. We, in fact, over the course of the quarter I think have ratcheted up our efforts and certainly going into the beginning of this quarter have. There is nothing to report. These are, we think, excellent businesses but businesses that would do better in someone else's hands and we are going to continue to pursue that and without disclosing information that is not in the best interest of the shareholders to be known publicly. I can tell you that every level of appropriate effort is under way.

Robert Felice - Gabelli & Company

Great. Glad to hear.

Operator

With no further questions at this time, I will now turn the conference back over to Mr. Campbell.

Michael Campbell

Thank you, operator. Let me make just a few closing comments. I hope that what came through this morning is that we genuinely remain very excited about Arch's future despite what is obviously a very challenging economic environment.

Bolstered by the Advantis acquisition, we have put together a focused portfolio of core biocides businesses and we are well positioned to accelerate profitable global growth opportunities.

Rob asked about divestitures. I will tell you that consistent with our track record, we are continuing to pursue biocides related acquisitions and taking a note from the Advantis acquisition, we will be very disciplined in pursuing those opportunities but we will be pursuing them. The entire Arch management team is committed to our goal of delivering strong top-line and bottom-line results while maintaining an attractive dividend yield. That's all for now.

I really want to thank you for your participation and for the opportunity to provide you with this update and I hope you all have a great day. Bye.

Operator

This concludes our conference for today. All parties may now disconnect.

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