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Executives

Tim McKenna - Vice President, Investor Relations

Seifi Ghasemi - Chairman and Chief Executive Officer

Robert Zatta - Senior Vice President and Chief Financial Officer

Analysts

Costas Karathanos – Goldman Sachs

Silke Kueck - JP Morgan

David Begleiter - Deutsche Bank

Mike Harrison - First Analysis

Michael Boam - BlueBay Asset Management

Laurence Jollon - Barclays Capital

Robert Felice - Gabelli & Company

Rockwood Holdings Inc. (ROC) Q4 2008 Earnings Call Transcript February 18, 2009 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter and full-year 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) As a reminder this conference is being recorded.

I’ll now turn the conference over to Tim McKenna, Vice President and Investor Relations.

Tim Mckenna

Thank you, Kathy. Good morning, welcome to Rockwood’s fourth-quarter and full-year results conference call. As usual, Seifi Ghasemi, our CEO and Robert Zatta, our CFO will present the results. You can follow the presentation on our website www.rocksp.com and then we will have a question-and-answer period following the presentation.

Before I begin the call, I need to read a statement. This conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which concerns the business operations and financial condition of Rockwood Holdings and its subsidiaries.

Although, Rockwood believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, there can be no assurance that its expectations will be realized. Forward-looking statements consist of non-historical information, including the statements referring to the prospects and future performance of Rockwood.

Actual results could differ materially from those projected in Rockwood’s forward-looking statements, due to numerous risk factors, unknowns and uncertainties, including among other things the risk factors described in our filings with the Securities and Exchange Commission. We do not undertake any obligation to publicly update forward-looking statements to reflect events or circumstances after the date on which these statements are made or to reflect occurrences of unanticipated events.

With that, I’ll turn the call over to Seifi.

Seifi Ghasemi

Thank you, Tim and good morning and thank you for joining on our conference call. During my presentation today, I will be referring to the material we have posted on our website. So would you please turn to page six.

In the fourth quarter of 2008, we experienced as expected a decline in demand for our products across all our business sectors, except for our medical products in our ceramic business. Our task in this environment was to produce acceptable profit margins despite the global economic downturn.

In summary, our sales were $732.3 million in the quarter, down 6.6% versus the similar quarter last year, but our adjusted EBITDA from continuing operations was $131.4 million, giving us an adjusted EBITDA to sales ratio of 17.9%. This performance was due to the aggressive and proactive cost reduction programs put in place since in the middle of 2007 and also maintaining the pricing levels that we have put in place in 2008.

At the end of 2008, we had a cash balance of $470 million on hand. Net debt-to-EBITDA ratio was at 3.32 times which is better than the goal of 3.5 times we have set for ourselves two years ago.

Now please turn to page seven; Looking at the right hand side of that page, Rockwood had a good performance for all of 2008 with sales up 10.3% and adjusted EBITDA up 6.1% versus last year. Our reported EPS is negative for the year due to one time non-cash charges related to goodwill, which we have explained in our press release, but our adjusted EPS was $1.89.

If you please turn to page eight, as usual we breakdown the details of our sales, so you’ll see that for the fourth quarter, we managed to obtain 5.1% pricing increase in order to compensate for any additional cost for raw materials and energy. Currency affected our sales negatively by 7.2% and volume mix and acquisition in total was 4.5% negative due to obviously the global economic downturn.

For the full year, we achieved a pricing increase of 3.8%. Currency was favorable by 4%. Volume and mix was also favorable by 2.5%, basically as a result of the acquisitions. If you exclude acquisitions and pricing volumes were down about 7%.

On page nine and 10, we had the details of the performance of each one of our business sectors. I’m going to skip those two pages because I will comment separately on each one of those businesses, starting on page 11.

Our specialty chemical sector, which consists of our lithium and our surface treatment businesses, which happens to be the largest business unit within Rockwood, continued to do well. Our margins improved both in the fourth quarter and obviously for the full-year. As you can see for the quarter margins were at 26.9 versus last year of 24.5 and for the year we achieved a margin of 25.4 versus 24.2 last year. These good results are driven by the proactive measures that our business unit is taking in controlling cost and also it is due to the very strong position we have in our lithium business.

If you please turn to page 12 our performance additive sector; as you all know very well this sector is very exposed especially to U.S. construction. Volumes in this sector have been and continue to be 35% to 40% down versus last year. It’s not a surprise considering the state of the housing and construction in general in the United States. We have been focused on significant restructuring in these businesses in the last year and a half in order to make sure that we maintain a positive margin despite the 30% to 40% drop in our sales. This sector will continue to be weak in the coming quarters.

At this stage, if you please turn to page 13, our Titanium Dioxide business. This business again is negatively impacted due to a global recession. This sector does have exposure to construction although, parts of this sector we sell a special material for manufacture of nylon fibers.

Overall, again our focus has been to maintain our margins and you will see that for the fourth quarter, despite the intense pressure on the volumes we maintain the 15% margin, which is a significantly better than margins of comparable companies in this sector. Our management team in this sector has done a very good job in controlling their cost and especially extracting synergies from the combination of our business with Kemira’s.

Please turn to page 14, our ceramic business. This business continues to perform mainly as a result of our very strong performance in our medical sector and as you can see for the year, we manage to improve the margins for this business. In the fourth quarters, the margins were negatively impacted due to very weak sales in the automotive sector in this business.

If you move now to page 15, our specialty compound business; we are fortunate in this sector that we have a management who is determined to keep the margins constant, no matter what happens to the sales. So, although we had weak sales, we did maintain the margins in this sector by flexing all of our costs.

Now, I’d like to turn to page 16. I have been talking about 2008, but now I want to focus on the actions that we have taken and we are going to take to deal with the current global recession. We are fully aware that we are as predicted in a very difficult economic environment.

As a result of the anticipating this downturn, we began taking action to manage our cost in mid-2007. The actions we took was related to reducing our SG&A, consolidating and shutting down facilities, major cost reduction programs like innovative processes, like our direct lithium chloride process, extracting acquisition synergies and numerous productivity improvement programs.

Through mid-2008, we implemented cost reduction measures totaling $125 million. We realized the benefit of $23 million in 2007 an additional $38 million of cost reduction programs benefited us in 2008, which is the principal reason we were able to produce the results that we did in 2008 and the balance was for 2009 and beyond.

Obviously, as the global recession intensified in October of 2008, we stepped up our cost reduction programs to bring it to a total of $150 million. Taken together, we expect that these measures will result in the elimination of 893 jobs or almost 9% of Rockwood’s global workforce. We have recorded as Mr. Zatta will explain later on one-time restructuring charges in order to deal with this cost reduction programs.

If you move to page 17, we have for the first time, are showing you the details of these cost reduction programs. We thought that it was appropriate to share this detail with you. As you see, I mentioned that the total of the programs we have put in place amounts to $150 million. We realized a total of $61 million in 2008, which means 2008 versus 2007, gave us the $38.5 million of cost reduction in 2008. With what we have put in place, we expect to get an additional $63 million benefit in 2009 from these programs and then the balance will be for the future years. These programs are in place and we have acted upon them.

If you go to page 18, we have been asked some questions about our liquidity. I mentioned before that we have cash and cash equivalent on hand of $470 million. We have our revolver that we haven’t touched of $250 million, but net of our letters of credit we have $225 million available. We also have that revolver for our Kemira joint venture facility. So, in total the company has access to $735 million of liquidity.

Also next page on page 19, the target was appropriate to graphically show you the maturity of the debt that we have. You will note that we do not have any significant obligation for debt payment until 2012.

Now if I may summarize on page 20, once again we are fully aware of the economic environment that we are operating and therefore we will continue to implement cost reduction in productivity programs that we have already announced. In addition we have frozen the salaries for everybody in the company for 2009.

In selective business units, we have actually reduced the salaries, including management salaries. We have also in certain business units reduced working hours. We have implemented very tight cost control over discretionary spending such as travel. We have reduced capital expenditure across all business units and we have initiated programs to reduce working capital and generate additional cash.

So with that background, I would like to now turn it over to Mr. Bob Zatta, our Senior Vice President and Chief Financial Officer and after his presentation, we are all available for any questions that you might have. Thank you. Bob.

Robert Zatta

Thank you, Seifi and good morning everyone. I am now on page 22 of the presentation. Page 22 presents our reported income statement for the fourth quarter and full-year of ‘08. As you can see, Rockwood reported sales of $732.3 million for the quarter and $3 billion and $380.1 million for the full-year. The gross profit margin of 27.4% for the fourth quarter was below last year, primarily due to lower volumes that Seifi has discussed already and higher D&A on acquisitions.

We did achieve sufficient pricing in the quarter to offset any impact of raw material or energy cost increases. The reporting operating loss of $786.1 million is driven primarily by the $809.5 million goodwill impairment charge we took in the quarter. I will discuss that a little more on the following page.

Moving down the chart, you can see that we recorded $91.4 million of interest expense in the quarter. This consists of $44.2 million of cash interest, $2.5 million of deferred financing costs and a mark-to-market loss on interest rate swaps of $44.7 million. Regarding this mark-to-market charge and as we have discussed in the past, 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 either a gain or loss.

Since the swaps are remaining in place, there is no cash or economic impact on the company. The next line item on the reported P&L is the foreign exchange loss of $20.1 million. In the fourth quarter this was largely due to movements between the euro and U.K. pound sterling and impacts our euro-denominated debt on the books of our U.K. companies. That movement is what determines this non-cash charge to the P&L.

We recorded an income tax benefit of $74.5 million in the quarter, given the loss before taxes. I will discuss this more in a couple of charts. The minority interest in the quarter is $83.2 million. This now includes the Viance JV and the TiO2 JV with Kemira Pigments. For the fourth quarter it also includes that portion of the impairment charge which goes to minority interest. This brings us to a net loss from continuing operations of $734.1 million. We have then recorded a gain on the sale of discontinued operations of $42.9 million and this is almost all related to the sale of the Advantis business.

Page 23 provides the detailed reconciliation of reported net income to adjusted EBITDA. Beginning with our reported net loss from continuing operations of $734.1 million, we have added back the tax benefits, minority interest, interest expense and D&A, bringing us to a loss of $733.9 million and we have added back the goodwill impairment charge of $809.5 million.

Now, regarding the goodwill charge during the past couple of months, we have been monitoring trends in the stock market and especially Rockwood’s market equity value versus our book equity. Given the continuing negative global economic and market outlook, we have worked with our auditors and determined that in accordance with accounting standards we should record a non-cash charge of $809.5 million in the fourth quarter to write-down the carrying value of the goodwill in several of our businesses.

This determination is not driven by our outlook to these businesses, but it is based on the general economic and market outlook and the accounting requirements in this regard. Importantly, this write-down has no impact on the company’s debt, adjusted EBITDA or any lender covenants.

Moving down to fourth quarter column, we have added back the foreign exchange loss I mentioned on the prior chart and acquisition related expenses and restructuring and severance costs. As Seifi has already mentioned, we implemented a number of cost cutting programs in the quarter in the year and the costs associated with those actions is reflected in these one-time costs and that brings us to adjusted EBITDA from continuing operations for the fourth quarter of $131.4 million. This was below the fourth quarter of last year. However, for the full 2008 year, we did generate adjusted EBITDA of $638.9 million from continuing operations versus $602.4 million last year.

Page 24 provides a detailed reconciliation of net income and EPS on a reported basis to net income and EPS as adjusted. As you can see most of the adjustments relate to the items I’ve already discussed, but also include some accounting driven adjustments, which we normally make related to the tax treatment between continuing and discontinued operations. This brings us to an adjusted EPS for the quarter of $0.19 and $1.89 for the full-year.

Page 25 provides a detailed bridge between the tax benefit as reported for the quarter to the as adjusted rate before minority interest. As you can see, our tax rate for the quarter is 29.7% and 30.9% for the full-year. These tax rates are largely a function of the countries in which we earn most of our profit before tax and in ‘08, this was Germany and Chile.

Page 26 provides the summary of our debt and cash position at December 31 of 2007 and 2008. We have provided the data based on what is in our reported financial statements and more importantly, how it is calculated for debt covenant purposes. As you can see, as of December 31, ’08 our adjusted EBITDA was $638.9 million on a reported basis and $702.6 million when we include the allowed additions for acquisition related adjustments.

Total cash was $468.7 million. Now, for covenant purposes only $100 million of cash can be included in the net debt definition and on this basis our leverage ratio was 3.97 times versus the covenant limit of 4.5 times. However, if we include all our cash, the ratio improved to 3.45 times. Since we have the option of paying down debt at anytime, it makes sense to think of our leverage ratio using all our cash. So either way, at year-end we were well within the limits of our covenant requirement.

Page 27 shows our continued trend in reducing Rockwood’s total leverage and page 28 shows free cash flow in the fourth quarter and full-year. As you can see, we generated $62 million of cash in the quarter from operating activities and that cash was used to fund capital expenditures. As noted in the footnote, this does not include the $122 million of net cash we received from the Advantis sale. For the full-year, we generated $101.2 million of free cash.

Page 29 router is our liquidity position at year-end. This is the same chart, Seifi showed earlier. As you can see at 12/31, we had $470 million of cash and a total of $265 million available under our revolvers. So, we have significant liquidity to meet operating requirements.

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

Seifi Ghasemi

Thank you very much, Bob. Kathy, now we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Costas Karathanos – Goldman Sachs.

Costas Karathanos – Goldman Sachs

Seifi, question for you. What’s your take with the lithium markets? There are some reports out there saying that, there is not enough lithium supply to support the global growth in the current market and then there are other reports over there that saying that there is plenty of lithium, Bolivia is getting into the market. They want to be the new Saudi of lithium.

What is Rockwood’s take? Do we have enough lithium? What’s going on short-term, medium-term, long-term and what has happened with the pricing?

Seifi Ghasemi

Costas thank you for your question. We made a presentation in Chile in the middle of January and we have posted that presentation on our website addressing very much the question that you’re asking. In that front, we demonstrated that we have sufficient access to lithium to not only supply the current market, but obviously any future demand for hybrid cars.

Obviously that lithium is in the ground, we do not have the facilities to process that yet, but we can always put that. The raw lithium molecules are there and there is no reason for anybody to worry that even if all of the cars in the United States are running on lithium that we would be short of lithium. With respect to supply demand at the current time, the supply demand is very tight as it has always been and that is why we have been able to maintain our pricing and we continue to maintain the pricing, because the supply demand for lithium products is very tight.

With respect to Bolivia, we have always said that we do not believe that lithium in that part of the world is easily accessible or of the kind of quality, but we don’t want to speculate on that, people can find out for themselves. None of that material is on the market and it will be many, many years before any of that material could possibly come through the market process.

Costas Karathanos - Goldman Sachs

Thanks for the clarification, Seifi and then a follow-up, if I may. You spoke about the cost containment initiatives. Now, can you please talk a little bit about the growth targets for 2009? I mean, in the past you always put those charts on the 533, 5% organic based on GDP 3% on bolt-on and 3% productivity and improvements.

I mean, how do you see 2009 based on where we are right now and then lastly, on the cost containment initiatives, which businesses have you been targeting primarily? Thank you.

Seifi Ghasemi

Sure. First as in terms of growth, we have always said that organic growth, Rockwood has the potential of growing 1.5 times GDP. Now, we certainly do not extend the GDP in 2009 to be positive. There are some indications there is some parts of the world like in Japan, it dropped about 12%. So, we do not expect really any kind of organic growth in total for Rockwood, but we will have organic growth in selected parts of our business.

We believe that our ceramic hip joints will continue to grow. We believe some sectors of our lithium products will grow, but if you take Rockwood in totality, considering that we expect that the construction will continue to be weak and auto will be weak. We do not expect organic growth for Rockwood in totality.

With respect to cost reduction, we have targeted all of our business units, especially obviously, our focus has been on our Color Pigment business and our TiO2 business, but in addition to that, we have instituted programs that are being implemented in our ceramic business, in our surface treatment business, even in our lithium business and obviously corporate headquarters and all of our discretionary cost.

We are approaching this across the Board, because we just want to make sure. We are very focused on maintaining our margins and therefore a combination of cutting cost and maintaining our pricing should help us as it did in fourth quarter.

Operator

Your next question comes from Silke Kueck - JP Morgan.

Silke Kueck – JP Morgan

A couple of questions. What is your outlook for capital spending and working capital? So this year the working capital drag was $126 million. I think you spent about $220 million in CapEx. So, should the working capital numbers come down as inventories come down and maybe raw material costs and what do you expect to spend in terms of capital this year?

Seifi Ghasemi

Our targets for capital expenditure this year, is something between $150 million to $180 million and our working capital target is to reduce that as a percentage of sales to about 18.5%. Those are the targets that we have for ourselves.

Silke Kueck – JP Morgan

Okay, and secondarily can you quantify what benefit to sales with Kemira joint venture? Was it on the orders like 6% or 7% or was it more or less than that?

Seifi Ghasemi

The Kemira joint venture in the last four months of the year produced about $80 million of sales for us.

Silke Kueck - JP Morgan

$80 million for the last four months of the year?

Seifi Ghasemi

Right, because we had it since September and so for September, October, November and December it added about $80 million of sales.

Silke Kueck - JP Morgan

Okay and so given that December probably wasn’t particularly good or maybe the benefit was like zero. That means that maybe the benefit for the quarter was something like $40 million?

Seifi Ghasemi

No, Kemira’s sales are approximately $20 million to $25 million a month and so when we did the joint venture, since we consolidate all of the joint venture in our numbers, it adds about $20 million to $25 million of sales every month for us on the average. So, you are right that sales were lower than $20 million in December and were higher than $20 million in October and November, but on total it added about $80 million.

Silke Kueck - JP Morgan

Okay and then lastly, there are all sorts of questions around the debt covenant calculation and maybe you can help us out there a little bit and that is, maybe a place to start is how do we look at the adjusted EBITDA number that you will be using if you look at, four quarter trailing basis, given that you can probably pro forma those for the Kemira joint venture?

Seifi Ghasemi

Well, that is the way you should look at it and that is why Mr. Zatta mentioned a number, if you include all of that for the last 12 months, the way you calculate the covenants the EBITDA that you use is around $702 million and then as we go another quarter, then you can make an assumption for what the first quarter of this year is, take the first quarter of last year out and you come up with another last 12 months. We believe we are in good shape with respect to the covenant in the first quarter.

Silke Kueck - JP Morgan

Do you have data available that acts just like lays out what like the first quarter of ‘08 and the second and third and the fourth quarter would have looked like pro forma?

Seifi Ghasemi

We have all of that and offline, Tim will give you all of that. That’s not a problem at all.

Silke Kueck - JP Morgan

One other question to clarify, the acquisition related adjustment that was made. If we look at adjusted EBITDA as reported and for covenant purposes, the $63.7 million is that simply the adjustment related to Kemira or is that something else?

Robert Zatta

It is related to it’s the pro forma for things like Kemira, Feralco for the e-Tech acquisition and it’s also the pro forma for the synergies related to those. All of those are specifically defined within our credit agreement as allowed adjustments to the EBITDA and the logic is that we paid the cash. So, the cash has gone out and that theoretically is part of our debt number, we don’t have the cash number.

So consequently, the other side of that is that we get to count all of the EBITDA that would be attributed and so it’s the pro forma synergies as well as the pro forma for what the full-year would have been if we had acquired the business on the 1 of January.

Silke Kueck - JP Morgan

Okay. How much are the synergies out of that number?

Robert Zatta

It is about a third of that.

Silke Kueck - JP Morgan

Okay. I guess that’s helpful and in terms of looking at that business from a cyclical basis, is the fourth quarter sort of like a bottom or given that normally or I guess from a seasonal standpoint, your second and third quarters are much better. How do we look at an EBITDA run rate going forward? Could the first quarter be even worse than the fourth quarter or should it begin to step up?

Seifi Ghasemi

Silke, you have to look at it under normal conditions and under current conditions.

Silke Kueck - JP Morgan

Yes, under current conditions.

Seifi Ghasemi

Yes, under normal business environment, first quarter is our weakest quarter. Second quarter and third quarter are our strongest quarter and the fourth quarter is kind of in between. That is under normal business conditions, but right now obviously we are not under normal business conditions. We expect first quarter to be worse than fourth quarter of last year.

Silke Kueck - JP Morgan

Okay. Do you think given like the run rate and EBITDA in the first quarter may drop significant that you may have to go back to your lenders to renegotiate your covenants?

Seifi Ghasemi

We do not expect that at all because I said first quarter, we expect it to be not better than fourth quarter of last year, but even with that expectation, we do not believe that we will have an issue with the covenants at the end of the first quarter.

Silke Kueck - JP Morgan

So the assumption is that then seasonal and both maybe cyclically in the second and third quarter. You believe that the EBITDA run rate would step up again?

Seifi Ghasemi

That’s what we expect, but we obviously are adjusting our costs and so on to deal with any eventuality, but that’s what we expect. Yes.

Silke Kueck - JP Morgan

Very last question and I go back into queue. If the estimated synergy number that include as part of the covenant calculation. Is that a number that could increase if there are like additional restructurings that may take place?

Seifi Ghasemi

We expect to do better on the synergies than the numbers that we are using for covenant calculations.

Operator

Your next question comes from David Begleiter - Deutsche Bank.

David Begleiter - Deutsche Bank

Seifi, just on the cash versus debt, do you expect to have debt repayments above mandatory maturities in 2009?

Seifi Ghasemi

David, that’s a very good question. We do have the cash, so the issue is do we want to proactively go and run and pay down the debt. You know the way our debt is restructured. We have the bonds, which mature in 2014. They are at around 7.5%. Then we have our senior debt, which is at LIBOR plus 1.75, perhaps 175 basis points. So currently our senior debt is cheap debt and we are not in a hurry to go and pay that down, but we can always do it in case it is necessary.

So, I don’t want to get ahead of myself predicting whether we will pay down debt or not, but we might do that or we might not. Its something that we on a very regular basis discussed with our Board and look at the different options, but we definitely do have the cash and as Bob said, our credit agreement is such that we can pay down the debt at any time we choose to.

David Begleiter - Deutsche Bank

Just to be clear on the covenants, do you expect to remain in compliance in all four quarters of 2009 of your debt-to-EBITDA covenant?

Seifi Ghasemi

David, I mean that’s a fairly long-term statement for me to make. I did say that, I think we will be okay in the first quarter, but in the other quarters, if the U.S. GDP becomes 20% negative then we have a different issue.

David Begleiter - Deutsche Bank

Understood and just on lithium, one of your competitors is saying that they expect their lithium business to be down in ‘09 versus ‘08 due to some volume declines in consumer electronics and flattish pricing. Do you expect your lithium business to be up or down versus 2009 versus 2008?

Seifi Ghasemi

Our goal is always to be up from the previous year and that’s what we expect for our lithium business.

Operator

Your next question comes from Mike Harrison - First Analysis.

Mike Harrison - First Analysis

In the lithium business, you have two pretty important end markets, pharmaceuticals and batteries. Presumably, the pharmaceutical business continues to hold up very well given the performance you showed here in Q4, but I was wondering if you could talk about what you’re seeing specifically in the battery market from a demand standpoint, given the weakness that we’re seeing right now in electronic markets and in consumer markets.

Seifi Ghasemi

On the battery side, there are two elements to that Mike, as you know better than I do. One is the battery that goes into electronics and the other side is the battery goes to hand tools. On the hand tools side, as you know the lithium batteries are replacing nickel hydride batteries. So, even if the number of hand tools sold is less, you still have growth in that market.

That’s why we think in totality between our pharmaceutical business and the hand tools business that combination would compensate for the shortfall in electronics and as a result, our lithium business would hold up, okay. We also expect that we would be able to increase prices.

Mike Harrison - First Analysis

Alright and then on the other side of the specialty chemicals business, I was wondering if you could talk about what you’re seeing from your European automotive customers on surface treatment and also if you could talk about how any weakness in automotive is impacting your ceramics business?

Seifi Ghasemi

We are definitely seeing an impact of the slowdown of automotive on our surface treatment business. Volumes on that sector in the fourth quarter were down about 14%. The way we are dealing with that is obviously we are restructuring and shutting down some facilities to reduce our costs to cope with that and we have been successful increasing pricing, so that kind of compensates for some of the loss in volume.

With respect to our ceramics business, our ceramic business does have exposures to automotive and we are seeing obviously a significant slowdown in that sector in Germany. As you know, the German Government has now come up with a program of giving people an incentive when they buy a new car. So, that might have an effect in changing the environment there, but we haven’t seen that yet, but we definitely are seeing an impact on the ceramic business. If it wasn’t for that our ceramic business would have done a lot better than what we have shown in the fourth quarter because our medical products are very strong.

Mike Harrison - First Analysis

Seifi, if you are seeing volumes down 14%, how are you still getting prices higher? Usually when demand weakens like that, you would expect that pricing would kind of go away.

Seifi Ghasemi

Well, I’m blessed with the very good sales force in all of our organization. They do a good job describing to customers about our requirements, the cost and also we are recovering the raw material cost and in addition to that, we obviously make very specialized products that our customers need and therefore we would obviously want to get paid for the quality of the products that we sell and all of the money we spend on R&D to support those product lines.

Mike Harrison - First Analysis

Then I had a couple questions for you on the performance materials business. You mentioned in the press releases some higher raw material cost that impacted the Color Pigments business. I was wondering if that’s related to some of the iron oxide purchases that you made earlier this year or if you could give some more details on that? And then also wondering if you have pre-bought any copper for your timber treatment business or if you are buying on an as needed basis with the copper cost much lower right now?

Seifi Ghasemi

On the Color Pigments side, you are absolutely right. The costs are reflection of the higher prices that we paid for buying the iron oxide pigments from China. That was driven by the elimination, as you well know of the subsidy that the Chinese Government was giving to the exporters of iron oxide that affected the prices by about 14% to 15%. So that is the reflection of those prices.

In terms of our timber business and the copper, we have bought copper for all of 2009. Our average, I don’t want to disclose the average for competitive reasons, but we have bought the copper for 2009. So, reduction in copper prices in 2009 is not going to help us.

Mike Harrison - First Analysis

Okay and then last question I have and then I will get back in queue, but, we have seen a few companies recently announced new credit agreements coppers came out yesterday as well as your friends at Arch Chemical. I was wondering if you could comment on any changes that you have seen and maybe Bob, you can comment as well changes that you’ve seen in the high-yield credit markets over the past several weeks?

Robert Zatta

I saw the announcement from Arch and the others. The reports, I haven’t seen anything that you guys probably haven’t seen in terms of what’s going on in the high-yield markets. I think there’s a lot of confusion out there at this point, but the real point is that from a Rockwood perspective, it’s not really something which is relative to us at this point. With the cash that we have and we went through our maturity schedules and so on. So, quite honestly, thankfully we are not worried about what’s going on right now in the markets.

Seifi Ghasemi

David, we have not engaged in any kind of discussion with our creditors and we don’t plan to because we don’t need to.

Operator

Your next question comes from Michael Boam - BlueBay Asset Management.

Michael Boam - BlueBay Asset Management

I have a few questions, if I may. First of all, going back to the covenants, are these tested on a gross basis such that you don’t ship out the non-recourse debt in terms of the Kemira acquisition, plus you also don’t ship out of EBITDA, the EBITDA attributable to the minorities?

Robert Zatta

We consolidate Kemira, so that’s part of the calculation. It’s all in there.

Michael Boam - BlueBay Asset Management

Can you just share with us, what the covenant tests are say the 30, of June on a year-end this year?

Robert Zatta

Year-end it was that the leverage ratio was 4.5 times and as we go into 2009, it drops to 4.25 times.

Michael Boam - BlueBay Asset Management

So it’s 4.25 times at year-end?

Robert Zatta

No, at year-end 2008, it was 4.5 times.

Michael Boam - BlueBay Asset Management

No, again I know that, so I’m just asking what year-end ‘09 is?

Robert Zatta

Four-point-two-five.

Seifi Ghasemi

Our ratio drops from 4.5 to 4.25 and it stays at 4.25 until the end of the agreement. So, it doesn’t change from there.

Michael Boam - BlueBay Asset Management

Couple of other questions if I can, I noticed that you built inventory in the fourth quarter, which I guess isn’t something that has happened historically. I would imagine that’s because obviously you’re under significant volume distortions as you run through the quarter. Was December, the weakest month of quarter and are we coming out into a very weak January?

Seifi Ghasemi

December was the weakest month in that quarter and January is not that dissimilar to December.

Michael Boam - BlueBay Asset Management

So, would you expect to be taking more downtime through Q1 than you did through Q4, purely because you have built this inventory to some degree or is that not fair?

Robert Zatta

Keep in mind also that a portion of that inventory build is related to acquisitions that we had done towards the end of the year. So, a good piece of that was acquisition related.

Michael Boam - BlueBay Asset Management

Then a couple of other sort of housekeeping questions, if I can. On the bank loans, have you actually hedged the interest rates? Have you swapped your floating for fixed or will you actually benefit from the full reduction that’s been witnessed in LIBOR over the last couple of months?

Robert Zatta

When I talked before about the mark-to-market, we have hedged our interest rates. We’re at the LIBOR plus 175. So, our all in cost of borrowing at this point is about 5.5%. So that includes the higher cost bonds and the higher cost debt associated with the Kemira JV. So, we’re in pretty good shape as far as interest rates are concerned.

Michael Boam - BlueBay Asset Management

Does that roll at all this year, such that you could roll into lower LIBOR costs?

Robert Zatta

No.

Michael Boam - BlueBay Asset Management

Then a couple of other very quick questions if I may, would you expect to be taking any inventory holding losses through Q1? Are prices coming down, if you like quicker than you can move inventory in any of the businesses?

Robert Zatta

We’re not anticipating that at this point in time based on what’s going on with pricing.

Michael Boam - BlueBay Asset Management

Then in terms of margin, should we expect for Q1 a better output purely because raw materials, I would imagine are quite a bit lower across the certain of the businesses and your prices, as you just alluded to maybe aren’t coming down that fast, such that given the pricing you had in place during the fourth quarter, we should expect to maybe see some margin expansion?

Seifi Ghasemi

Well, I think you would need to keep in mind that Rockwood, although we are a chemical company, but we basically have inorganic raw material base. So, the fact that oil prices have significantly comedown, doesn’t mean that our raw material costs are going down. For the same reason that when oil prices go up, our raw material prices do not go up. We do not expect any significant reduction in our raw material prices in the first quarter and therefore, we do not expect any margin expansion in the first quarter.

Operator

Your next question comes from Laurence Jollon – Barclays Capital.

Laurence Jollon – Barclays Capital

Good morning it’s Lawrence on the high-yield side. Regarding the fourth quarter cash flow, obviously your break-even on the free cash flow line, but you had I believe, $125 million of proceeds received from the sale of pool and spa. I just wanted to confirm that, because I would have thought that the cash balance would have increased a little bit more than $58 million.

Seifi Ghasemi

So, you are, right. We did get, Bob didn’t include that in that chart, because we are doing operating cash flow with the company, but if you include that obviously we have $120 million of positive cash in fusion into the company, sure.

Laurence Jollon – Barclays Capital

Well, I’m actually asking about the sequential increase in the cash balance from September to December; it only increased by $58 million and so if you…

Seifi Ghasemi

Because working capital went down.

Laurence Jollon – Barclays Capital

No, there had been something else in the investing and financing activities line. There is a slight debt pay down to a minor payment to minority shareholders, but there have to be something else material that’s flowing through, is that …

Robert Zatta

Yes, I mean answer to your question is its not to cut you short, but it was basically we had the acquisitions of Holiday Pigments and VTech and so, those items would have come through the other investing portion that doesn’t show up in that free cash flow calculation. During the quarter, we bought two other companies and detach to repay cash for those companies.

Laurence Jollon – Barclays Capital

Okay, that’s very helpful. Thank you and then, regarding your full-year cash flow on slide 28, you calculate $100 million. I believe at the October Investor Day, you had guided to $150 million to $170 million and I know the world’s changed since then. Was the variance really working capital driven as well as.

Seifi Ghasemi

Working capital and also EBITDA we had a lower EBITDA.

Laurence Jollon – Barclays Capital

That makes sense. Okay and then pension funding for ‘09, I was hoping for the expense running through the P&L, as well as your cash contributions in excess of the expense?

Seifi Ghasemi

We have mentioned before that, Rockwood does not have any defined pension benefit program in the U.S., so, we don’t have any real pension obligations there. With respect to the rest of the world, which is mainly Germany, England and Finland, as we expect that in 2009, we might due to the significant drop in the value of the stock markets, we might have to fund somewhere between $20 million to $50 million to shore-up those pension funds. That would be the extent of our liability.

Robert Zatta

The expense in ‘08 would have been around $30 million.

Laurence Jollon – Barclays Capital

So in ‘09, should we expect that the expense would be comparable $30 million, but that you could have cash contributions?

Robert Zatta

Yes, that’s a fair assumption.

Laurence Jollon – Barclays Capital

Okay and then lastly, you have actually, three covenants at your TiO2 JV, the new term loans. At September 30, the leverage covenant was 3.5 versus 4, I was hoping for that covenant at year-end, as well as the other covenant and I was also hoping politely if you could share that information with us in the slides going forward, because I think it’s important.

Seifi Ghasemi

We can do that that’s not an issue. We did, okay at the end of the December.

Robert Zatta

We have no issue with the cycling covenant, so we can certainly do something.

Seifi Ghasemi

That was not an issue at the end of the quarter and we will show that’s a good point. That’s not an issue.

Operator

Your next question comes from Robert Felice – Gabelli & Company.

Robert Felice – Gabelli & Company

First I wanted to follow up on a previous question regarding debt reduction. Seifi, you’ve said before in the past, that you’re comfortable with a high level of leverage for Rockwood. Yet in the current environment with limited economic clarity and financial market turmoil, the equity value of company’s with high-debt are being substantially penalized. So to that end, are you considering taking more aggressive steps to reduce leverage? And could you highlight your net debt targets for 2009, so as 2009 progresses, what should we expect from net debt?

Seifi Ghasemi

We would like to, considering as you said, the perception and so on we have set a new goal of 3.5 times for ourselves two years ago we have achieved that. Our new goal is to reduce it to less than three times. That’s we want to do.

Robert Felice – Gabelli & Company

You believe you can achieve that during 2009 or will that take you into 2010 and beyond?

Seifi Ghasemi

No, it would take us until 2010, at the end of 2010.

Robert Felice - Gabelli & Company

Then I guess flipping gears to wood protection. I was hoping you can discuss how pricing faired both sequentially and year-over-year. I’m interested in getting senses to how the industry is behaving in the face of weak demand and fall in copper prices?

Seifi Ghasemi

Prices have held up in that business for us.

Robert Felice - Gabelli & Company

Then I guess more specifically to Performance Additives, the business got hit quite hard during the quarter, which isn’t much of a surprise, but I was hoping you could take a second to walk through the pieces there in a little more detail and also give us a sense as to what we should expect from the business in the first quarter and through 2009, whether that business will stay profitable in the first quarter.

Seifi Ghasemi

I expect the performance of that business in the first quarter to be similar to the fourth quarter.

Robert Felice - Gabelli & Company

So, we shouldn’t expect any real magnitude of improvement or deterioration?

Seifi Ghasemi

That is correct.

Robert Felice - Gabelli & Company

Then I guess lastly, flipping gears to the TiO2 business. If I go back about a year, year and a half ago, the business got hit pretty hard by the weakening U.S. dollar as your product became less competitive in the export market. I’m wondering whether you are starting to feel the reverse of that yet and to what extent that tailwind could help offset some of the other headwinds that you are facing.

Seifi Ghasemi

Robert, that’s a very good observation. We are seeing the benefit of that and that is why the pricing in that business has stabilized and that is why we were able to have a 15% margin in that business, despite the fact that volumes were significantly down. So, your observation is very accurate. We have seen the benefit of that and that did help us in the fourth quarter and we expect that to help us in 2009.

Robert Felice - Gabelli & Company

As I think about the absolute level of profitability of the TiO2 business, including the Kemira JV and the synergies. Would you expect the profitability to decrease in 2009 versus 2008 or as you add up all the gives and takes, you think you can keep that business flat?

Seifi Ghasemi

Giving up all the ups and downs, I expect the margins in that business to be at around 14%, 15% for 2009 and as you know our goal for the long-term is to get that business to about 20%, but for 2009, I expect about something like around 14%, 15%.

Operator

Your next question comes from Silke Kueck - JP Morgan.

Silke Kueck - JP Morgan

Just one question on goodwill, If I look at the goodwill impairment, which was mostly in Performance Additives and Specialty Compounds and I believe some in TiO2. Is that just like the magnitude of are you sort of like done with that or are there more write-downs that could happen if the business deteriorates further and then I was also wondering what the period of review is to do these write-downs?

Robert Zatta

First of all, the goodwill that we have written-down of the businesses that you have mentioned and for those businesses, the goodwill has pretty much been written off at this point. The businesses that we didn’t write it down, our ceramics business and our specialty chemicals business, our businesses which are very strong performers and so on and so at this point, we are not anticipating that this is going to be a recurring issue, but obviously depending upon how market conditions develop and so on. We have to be looked at regularly.

Our normal testing period is at the end of the year, but I think from an accounting standpoint you really have to look at it on a quarterly basis. Normally, we do the big testing at the end of the year, but we are obligated to continually to monitor it and depending upon what happens with equity markets and everything else. We’ll see what happens.

Seifi Ghasemi

Silke, don’t forget that the main driver for the write-down was the disparity between our market cap and the book value of equity. It wasn’t so much that we set down and did a discounted cash flow of these businesses. As far as that our auditors said that your market cap is $500 million, $600 million at current share prices and your book value of equity is $1.8 million and so you have to write some of that difference down and therefore then we went into the business units and found out which business unit had goodwill and we started writing that off. So, it wasn’t done on a scientific basis of trying to do a detailed discounted cash flow analysis for every business.

Silke Kueck - JP Morgan

If I can ask a last question, regarding the restructuring charges that were taken in the quarter. The majority was actually taken in specialty chemicals. So, I think it was about $16 million of the $25 million and I would have expected write-down to be were the restructuring charges to be larger in Performance Additives and maybe in TiO2. So, why is that?

Seifi Ghasemi

The main reason for that is that in our Surface Treatment business, we decided to shutdown a facility in a certain country that, if you don’t mind I wouldn’t mention the country right now because we are implementing the program and therefore, we had to have significant charges due to the rules there Silke, in terms of it’s very expensive to shutdown and fire people in that some parts of Europe.

So that is why it created all of that charges. We have done a lot of restructuring in our TiO2 business and the other businesses, but we have been absorbing some of that as part of our cost and some of that is not as expensive as it was for this particular plan in this particular European country and Bob has some additional comments.

Robert Zatta

The other thing is, that specifically within Sachtleben, which is a TiO2 business and Color Pigments, where we had the Elementis and the Holiday acquisitions, a lot of that cost related to those things goes to purchase accounting. So, you don’t see it in that restructuring charge, but it’s in there anyway.

Silke Kueck - JP Morgan

Are there additional restructuring charges that you have to take to implement the cost savings that you outlined?

Seifi Ghasemi

We don’t expect any material ones during the quarter, but obviously we are monitoring what is happening in the world. If we have to do some more restructuring then there will be some, but we do not expect any significant ones at least in the first quarter.

Operator

Your next question comes from Mike Harrison - First Analysis.

Mike Harrison - First Analysis

In the Specialty Compounds business, your sales were down about 17% organically and yet, you were able to show EBITDA margin of 14.4% looks like about the best you’ve done since 2004. How are you able to do that and is that kind of margin sustainable into 2009, even if sales remain at these depressed levels?

Seifi Ghasemi

Mike as I said, we had a very proactive management in that business and they are the ultimate example of looking at everything and saying all costs are variable, there is no such thing as fixed costs. So, they adjust their cost, they’re very flexible, they have done a wonderful job in the past few years and they continue to do that.

In addition, they are extremely proactive in terms of pricing and then one other thing, which is helping them significantly, is that they are great innovators of new products. They constantly bring new products into the market and extract premium prices. I have a lot of confidence in their management, they’re doing great and therefore I have no hesitation to say that you should expect those kinds of margins for the business as we go forward.

Mike Harrison - First Analysis

Alright and question for Bob. Previously, you’ve provided some guidance for us on some of the below the line items D&A, interest expense, minority interest and tax rate. Could we get your thoughts on those numbers for 2009?

Robert Zatta

Yes. Obviously, I’m a little hesitant to give any specific guidance for 2009, but as we look at our numbers going into the year. We are looking, and it depends a little bit on what euro rate you use, but if you were at around 130, 135. We’re looking at depreciation and amortization, which is probably around 270 to 275.

We’re looking at interest expense, which is probably in the 150, 155 ranges, and as far as our tax rate is concerned, as we kind of calculated the numbers, it comes out to about 35% and as I said before that translates back to where we’re expecting to make money in 2009 versus where we made it in 2008. So, those are the figures that we’re working with at this point.

Seifi Ghasemi

Mike, you know very well that those numbers that Bob stated are exchange rate sensitive.

Operator

Your final question comes from David Begleiter - Deutsche Bank.

David Begleiter - Deutsche Bank

Just on the lithium pricing comment, can you talk about how you expect to get higher pricing in lithium amidst a global recession?

Seifi Ghasemi

David, everything is subject to supply and demand. Some sectors of the economy are slowing down. There are other sectors that are going up and besides that, we adjust our supply situation. We have shutdown some of our production of lithium carbonate, in order to adjust supply in the market. So, that’s why we think that some of that pricing will improve.

David Begleiter - Deutsche Bank

Can you state how much production you’ve shutdown lithium carbonate?

Seifi Ghasemi

David, there is only really 2.5 of us in this business and I don’t want to make any comments about pricing or how much production we have and all of that, you know that very well. Give me a break on that.

Operator

Thank you and we have no further questions.

Seifi Ghasemi

Well, thank you very much everybody. Thank you for listening to our call and we look forward to talking to you in three months. Thank you.

Operator

Thank you and ladies and gentlemen that does conclude our conference for today. Thank you for your participation and choosing AT&T Executive Teleconference. You may now disconnect.

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Source: Rockwood Holdings Inc. Q4 2008 Earnings Call Transcript
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