Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Rockwood Holdings Inc. (NYSE:ROC)

Q1 2009 Earnings Call

April 29, 2009 11:00 AM ET

Executives

Timothy McKenna - Vice President - Investor Relations and Communications

Seifi Ghasemi - Chairman and Chief Executive Officer

Robert J. Zatta - Senior Vice President and Chief Financial Officer

Analysts

Silke Kueck-Valdes - J. P. Morgan

Constantinos Karathanos - Goldman Sachs

Michael Harrison - First Analysis Corp.

Michael Judd - Greenwich Consultants

Michael Boam - BlueBay Asset Management

Laurence Jollon - Barclays Capital

Robert Felice - Gabelli & Company

John McNulty - Credit Suisse;

Operator

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter Results Conference Call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for questions and instructions will be given at that time. (Operator Instructions).

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

Timothy McKenna

Thank you, Kathy. Good morning, welcome to Rockwood's First Quarter Results Conference Call. With us on the as usual is Seifi Ghasemi, our Chairman, CEO and Bob Zatta, our Chief Financial Officer, they will present the results. You can follow the presentation with slides available on our website which is rocksp.com, then we'll have a question and answer period after the presentation.

Before we begin, I must read following statements. This conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the business operations and financial condition of Rockwood Holdings Inc and its subsidiaries. Although, we believe 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 the forward-looking statements, due to numerous known and unknown risks and uncertainties, including among other things the risk factors described in our 2008 10-K which is on file with the SEC. We do not undertake any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events.

With that I'll turn it over to Seifi.

Seifi Ghasemi

Thank you very much, Tim. Good morning everyone. Thank you very much for joining our conference call. For the purposes of my opening remarks, I will use the slides that we have posted on our website.

So if you'll be kind enough please turn to page six of those slides which says first quarter highlights. As you note, sales for the first quarter were significantly below last year due to this business weakness across all our business sectors. The downturn was especially severe in construction and particularly, the auto sector in Germany.

On a pro forma basis taking into account all of the acquisitions that we have made, sales were down by more than 23% for all of Rock. But, there were areas of growth as such as our ceramic medical application which sales were up 9%, our aerospace business was up 13%, the Pharma, food and cosmetic products business in TiO2 was up 12% and again in TiO2 packaging inc. products was up 3%. So we did have glimmers of hope in the middle of the significant downturn.

As we told you at our conference call in February, and as we have mentioned many times before, we had prepared ourselves for these downturns by putting in place significant cost saving measures. As a result of these cost saving measures taking effect we were able to deliver an EBITDA margin of 16.5% for the company, despite the 23% drop in sales.

I will talk about additional cost savings as we move on later on in this presentation; because we are focused on that that is the key activity that is under our control. And I'd like to tell you more about what we have done in order to make sure that we protect our margins and EBITDA as we move forward.

Please also note, that despite, the downturn and despite, the fact that our EBITDA in total was much lower than before, we still generated free cash. Generated $18.9 million of free cash flow. This has been a point that we have been we always been making that Rockwood's actual cash requirements are around 350 to 360 if you control CapEx and therefore, we will always be cash positive, no matter what the economic circumstance is.

We are going to spend sometime on the covenants because I fully understand that that's an issue that everybody is focused on. As you see at the end of the first quarter, we were fully compliant with all of the requirements of our credit agreement and we had extra headroom because we have extra cash, $325 million on hand. Mr. Bob Zatta will go through this covenant issue a little bit more detail as we move forward.

If now -- you please turn to page eight; we always breakdown for you the details of our sales growth. And you will see on page eight, that we were able to get a significant amount of price increases 5% of our sales, despite the economic downturn. This is an item that we have always mentioned to you about strength of Rockwood's portfolio and the unique products that we have that do command premium prices. That continues to be the case.

On page 9, we have delineated for you the covenant as of the end of December and as of end of March. Calculating the covenants for Rockwood is a little bit complicated because you have to adjust for currencies, you have to adjust for acquisitions and you have to adjust for synergies. So we have done that for you here, we have a posting on our website about how to actually calculate the covenant and Mr. Zatta will go through this in some more detail, so I don't want to steal his thunder; but the bottom line is that we are in compliance with our covenants as of the end of March.

Now on page 10, is the detail -- we are presenting the details of the performance of each business sector. I will take each sector and go through the details. But again as a general comment I would like to point out that despite the significant downturn in sales in the first quarter Rockwood's businesses are all double digit EBITDA margins and some of them are in the 20s.

So with that like to go to page 11, our specialty chemical sector. Sales on a constant currency basis were down 18.7%. We had lower sales in our lithium business about 15% lower sales. Metal sulfide business which serves basically the breaks for the auto industry was down 40% and our surface treatment which again serves a significant part it is auto industry in Germany was down 28%. But, at the same time, we were able to get the higher prices which helped us with maintaining the margins for this business at 22.3%. We do mention the high phosphoric acid prices which had a negative impact in the first quarter that pressure has eased, so we should see a benefit in the second quarter.

Now, if I may go page 12, our performance additive sector. Obviously the volumes versus first quarter of last year are affected by significant downturn in construction. But I would like to point out that we feel that the construction downturn has bottomed out and you will notice, if you look consequentially from quarter-to-quarter that our results for the quarter improved.

The first quarter results for this sector achieved an EBITDA margin of 13.3%. Fourth quarter of last year for this sector, we had an EBITDA margin of about 4.5%. So quarter-to-quarter, we have seen an improvement in our profitability because the synergies and cost savings and price increases have helped us achieve that. Therefore that is a positive trend that we see in that sector. Next page our TiO2 sector, although the volumes on a pro forma basis continued to be down versus last year by almost 30%, we maintained our EBITDA in this sector of about 15.5%, which is a demonstration of our ability to realize the significant synergies by putting our business together with Kemira. We are now beginning to feel optimistic about this business as we move forward.

On page 14 is our advanced ceramic business. Here without a doubt the downturn in sales was significant more than we expected, although our medical products saw a 9% increase in sales, but all of the other businesses that the serve the auto and general industry sector, they are down by 40 to 50%. Our people have done a good job in implementing cost control measures to still maintain more than 20% margin in this business and we expect the performance of this business to improve as we move forward to the second quarter.

On Specialty Compounds, on page 15, I have always said that we have a great management team that can maintain our margins no matter what happens to the sales and they have proved that once again in the first quarter that despite the sales being down almost 17% on constant currency basis, we did achieve a margin of 15.3% which is better than last year. This business is stabilized and will continue to perform well.

On page 16, I'd like to get back to the cost reduction and restructuring plans. These plans involve plant closures, significant reduction of sales and administration expenses, expect R&D; we are keeping our R&D expenditure intact because that is the future of our company. Overall productivity improvement, salary increase across the board in all of Rockwood, salary reduction in certain business units, reduced working hours, programs to reduce working capital, weekly review of our businesses; we are very much on top of these businesses and as a result, when you go to page 17, you'll notice that in February, we presented you a plan for total cost saving of 150 million and a cost saving in 2009 of about 64 million which is the difference between the 125 for 2009 and the 61 for 2008.

We have increased those efforts and now we believe that we can deliver $135 million of cost savings in 2009. We monitor these projects very closely and we are on schedule in achieving those results. And obviously, when you are saving cost, it involves reduction of headcount and we expect 790, 800 people headcount which is 8% of our workforce.

At this time, I would like to turn it over to Mr. Bob Zatta, our Chief Financial Officer. And after he is finished with his presentation, I will come back for a summary and then we will take your questions. Bob.

Robert J. Zatta

Thank you, Seifi and good morning everyone. I am on page 19 of the presentation.

Page 19 presents our reported income statement for the first quarter of 2009 and for the first quarter of 2008. As you can see, Rockwood reported net sales of 660 million for the quarter compared with 843.8 million last year. The gross profit margin of 27.6% for the first quarter was below last year, primarily due to lower sales volume as Seifi has discussed along with higher D&A from acquisitions and higher raw material costs, especially for store gas (ph) and iron oxide as we work our way through higher cost raw materials and inventory. This was partially offset by higher selling prices in the quarter.

In the quarter, there is about a 145 million of SG&A and a one time restructuring charge and severance charge of 7.8 million which is related to our cost cutting programs. Deducting these from gross profit results in a reported operating income of 29.1 million. The next two line items are interest expense and interest income. We have detailed the components of interest expenses in footnote A, at the bottom of the page. As you can see, we had interest on debt in the quarter of 37.7 million, down from last year due to lower interest rates and debt pay down. Partially, was offset by the addition of the side TiO2 JV financing in the third quarter of '08.

The mark-to-market loss on interest rates swaps was 9.6 million regarding this mark-to-market charge and as we have mentioned in the past, the expected movement in interest rate impacts the fair market value calculation for our interest rate swap contracts. And since, we do not have hedge accounting treatment, exchange in the fair market value calculation from 130 to the next runs through the P&L. This can be again a loss. However, since the swaps are remaining in place there is no cash or economic impact to the company.

The next major item delineated in the P&L is the foreign exchange loss of 5.6 million. In the first quarter, this is mostly due to the impact of foreign currency changes on inner company payables and receivables and due to movements between the euro and pound sterling and the impact that movement has on our Euro denominated debt on the books of our UK Company. Again these are all non-cash charges to the P&L.

The next line item is the 2.2 million gains on the early extinguishment of debt. In the first quarter, we purchased in the market at a discount €12.2 million, principal amount of our senior self notes. The gain recorded here is the net of the purchase price gain reduced by the attendant of our financing cost write-off on the sub-debt and the term debt prepayments.

This brings us to loss from continuing operations before tax of 23.5 million. We have an income tax benefit of 16.7 million against this loss in continuing operations. The 16.7 million tax benefit reflects a 10.1 million non-recurring tax benefit related to the foreign currency changes as well as 8.2 million in domestic tax benefits allocated from other comprehensive income. The benefit of both of these items is eliminated in calculating the normalized tax charge for the quarter which I will discuss further on page 22 of this presentation. This brings us to a net loss from continuing operations of 6.8 million which when adjusted for discontinuing operations and minority interests resulted in a net loss on a reported basis of 1.5 million.

Page 20 of the presentation provides a detailed reconciliation from the reported net loss to total adjusted EBITDA. Beginning with the net loss of 1.5 million, we have added back all the items getting us back to the pre-tax loss from continuing operations of 23.5. Then adding back net interest expense and D&A brings us to a subtotal of 93.3 million. To this, we add or subtract the non-recurring items in the quarter bringing us to adjusted EBITDA in the quarter of $109.2 million.

Page 21 provides the detailed reconciliation of net income in EPS on a reported basis to net income in EPS as adjusted. As you can see, the adjustments as shown on an after-tax basis and all the items are discussed already on the previous charts. This brings us to adjusted loss per share for the quarter of $0.02.

Page 22 provides a detailed reconciliation, firstly, between the as reported loss from continuing operations of 23.5 million to the normalized profit before tax of 1.4 million and, secondly, from the as reported tax benefit of 16.7 million to the normalized tax charge of 4.7 million.

As you can see, the adjustments to the as reported loss before tax or the non-recurring items already discussed and the normalization adjustments to the reported 16.7 million tax benefit are essentially driven by the two items mentioned already being the tax allocation from other comprehensive income and the foreign currency benefit impacting taxes.

By including the net loss attributable to minority interest brings us to a normalized as adjusted net loss of 1.8 million for the quarter. Please note Rockwood's PBT of 1.4 million is composed of a loss in the U.S. and a gain in foreign locations. Due to our U.S. valuation allowances, we get no tax shield on the U.S. loss and that is the reason for the higher tax provision.

Page 23 provides a detailed summary of our cash and debt position at March 31st, 2009. As you can see, on a reported basis our total debt at March 31st was 2.586 billion and our cash was 327.1 million. This result in net debt using all our cash of 2.2589 billion on an as reported basis. However, I would like to take a minute and walk you through our covenant calculation which is the last column on the right. The covenant purposes and per hour credit agreement we must make two adjustments to the reported results.

The first is to adjust the LTM EBITDA to include a full 12 months of pro forma EBITDA for acquisitions made during the previous 12 months and to reflect a full year of synergies which we expect to realize on these acquisitions.

This adjustment is allowed since our reported results do not include a full year of acquisition EBITDA made during the past 12 months but the cash used to pay for the acquisition is fully out of our cash balance. Obviously, as we achieve a full year of ownership, this adjustment will no longer be necessary since the results we fully reflected in our actual reported results.

The second adjustment is to convert our debt from the balance sheet rate which is the last day of the quarter to the weighted average FX rate for the LTM period. Making these adjustments for March 31st, 2009 results in covenant LTM EBITDA of 626.9 million and total debt of 2.6787 billion. For covenant purposes, we are only permitted to count 100 million of our cash incoming to net debt.

On this basis, we have a leverage ratio of 4.11 times. If we use all our cash, however, the leverage ratio is 3.75 times. This compares with the debt covenant of 4.25 times so we're well below that at the end of March. As we've stated before, we can use our excess cash over 100 million to prepay debt at any time which will lower our leverage ratio.

Page 24 shows the long-term trend in Rockwood's leverage ratio. And finally, Page 25 shows our free cash flow generation in the first quarter.

As you can see, we generated 18.9 million of free cash flow in the quarter. This is an excellent accomplishment in, as Seifi has stated, our focus on high control of working capital and capital expenditures.

On CapEx, the case (ph) spending in the first quarter does reflect higher CapEx started last year, so the '09 run rate is actually lower.

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

Seifi Ghasemi

Thank you very much, Bob. So in summary, just like to make a few comments. We continue, as you would expect, to focus on the items that we control which is our cost, our CapEx and our working capital. We still deliver $135 million of cost savings for 2009.

Next, although we do not have much visibility to our future sales under the current circumstances, there are customers who are not sure of their sales. We believe the second quarter will be an improvement over the first quarter because our additional cost savings will come into effect. We are very much focused on improving our margins and we are giving the price increases and cost savings that we need to do that.

We are, and I am confident, we will stay cash positive as we move forward during the year. We do have the cash and the liquidity to deal with the current global downturn as we move forward. I think I have to say that I fully do understand and appreciate that some investors are concerned about our covenants. Let me assure you that we fully understand the consequences; we monitor the situation very closely and we will do the right thing to deal with it as we have done in the past seven years.

We do have the cash on hand, we will be cash positive, as I mentioned before and our results for the second quarter will be better than the first quarter and therefore, we think we can deal with the situation.

With those comments behind us, I would like to now turn over to any questions that you might have. Hello?

Question-and-Answer Session

Operator

Yes, thank you. You're ready for questions?

Seifi Ghasemi

Yes, please.

Operator

(Operator Instructions) And our first question is from Silke Kueck with J.P. Morgan.

Silke Kueck-Valdes - J. P. Morgan

Good morning

Seifi Ghasemi

Good morning, Silke.

Silke Kueck-Valdes - J. P. Morgan

Couple of questions for both the, I guess, the Specialty Chemicals business and the Advanced Ceramics business. If you look at the March and April order trends, do you have any indications for second quarter volumes? So what makes that your (ph) volume decline would you expect in those segments from the first to the second quarter where I think it's improving?

Seifi Ghasemi

Silke, as I mentioned, if you look at the past years, we could always predict our sales for the next six months with an accuracy of plus minus 2% because our customers would give us good indication about what their demands are. Unfortunately, that has stopped. So the customers are not giving us any indication about what the order trend is or what they might. It is very erratic, some weeks it goes up, some weeks it goes down.

But having said all of that, we see the trend to be positive for the second quarter. I cannot quantify that for you, but we think that it is going to be better than the first quarter.

Silke Kueck-Valdes - J. P. Morgan

Fine, and maybe if I can ask some question on the covenant calculation just for clarification. Of the adjustments that are made to adjusted EBITDA, the 48 million, how much of that is related to estimated cost synergies and how much is due to acquisitions?

Robert Zatta

First of all, it's all related to acquisitions. About half of it is the pro forma adjustment for the EBITDA for the period in time for the 12 months that we didn't actually own the business and about half of it or slightly half, less than half of it is related to synergies we expect to realize from those acquisitions.

Silke Kueck-Valdes - J. P. Morgan

So what that would mean is that going forward next quarter, those adjustments will be lower because presumably you're one quarter off.

Robert Zatta

Absolutely, as the year unfolds as we last the full anniversary of each of the acquisitions, the results from the acquisition, the synergies from the acquisitions will, in fact, be reflected in our reported results and therefore we will not be able to include those as an additional EBITDA adjustment. But the reported result should benefit from those items.

Silke Kueck-Valdes - J. P. Morgan

Okay. What do you think the minimum level of EBITDA is that Rockwood have to generate in the second quarter to be in compliance with the covenants?

Seifi Ghasemi

Okay obviously we've this thing. You can easily calculate it. We have to go below upon 100 in order to do that.

Silke Kueck-Valdes - J. P. Morgan

Okay. And maybe I can follow up on the calculation offline. And just lastly, what are your expectations for capital expenditures for this year and for working capital improvement?

Seifi Ghasemi

For capital expenditure, Silke, we obviously can control the CapEx. Our maintenance CapEx, minimum maintenance CapEx is about 25, $26 million for the quarter. As you see in the first quarter we've spent 44 million. Because although the work seems to be stopping we have confidence in the company and the future and we are still investing for our growth.

But we can't control the CapEx depending on the circumstances. If we see the downturn still continuing, we can get our total CapEx for the year to as low as 150, 160 million. In terms of working capital, we obviously are controlling that. You see that in the first quarter, despite a significant drop in sales, our working capital didn't go up that much and as we go forward we expect that to be a positive contributor to cash rather than a cash consumer.

Silke Kueck-Valdes - J. P. Morgan

Thanks very much, I'll get back in the queue.

Seifi Ghasemi

Thank you very much.

Operator

Thank you. Then we will go to Costas Karathanos with Goldman Sachs.

Constantinos Karathanos - Goldman Sachs

Good morning.

Seifi Ghasemi

Good morning, Costas.

Constantinos Karathanos - Goldman Sachs

A couple of questions, Seifi, Bob. The first one, in Europe, there are some reports out saying that the pace of economic deterioration in Europe has slowed and we are nearing the trough of the cycle. You do a lot of business over there, what are your thoughts, what's your take; are things improving, just give me a sense it seems the consumer pick up in next productivity, if you can please give us what you see over there I will appreciate it.

Seifi Ghasemi

Constantinos, you asked a very good question and I like to kind of dwell in that a little bit to explain something. When you look at last year, when we announced our results everybody was very surprised that our sales in the month of November and December did not crash down as much as everybody else's. But obviously, Europe was going down it was going to effect our sales. We ended up ... our sales went down about two months later which was in January and February. So, there seems to be a lag between the economic activity and our sales.

Therefore, I think the reports that you are reading are true. There are indications of that, but you are not going to see that on our sales in the month of April. But, if that is true you will see that two months later in the months of May, June and July. So there seems to be a little bit of lag. So don't expect that as soon as any indications are up in Europe, our sales will automatically go up the same month. We had a lag the same day that we had a lag coming down.

Constantinos Karathanos - Goldman Sachs

Thanks, Seifi. The second question is on the price and volume; price up 5%, volume down close to 20 %. How hard or how easy is it to go to the customer right now in this tough economic environment and ask for price increases? And what percent of that volume do you believe ... volume loss do you believe is due to de-stocking versus customers walking way from the higher prices?

Seifi Ghasemi

We do not believe we are losing any kind of a significant market share due to higher prices because the higher prices are a continuation of the uniqueness of the products that we make and special characteristics of that. We've always told you that we have our hip joints, we have our lithium business, we have our Specialty Color Pigment business.

So, those price increases are a nature of our business and we deserve that. We spend a lot of R&D to develop those products. So we do need the higher prices the same thing that pharmaceutical companies charge higher prices for the Lipitor (ph) that I buy because to pay for the R&D that they have spent.

So we think that those will continue and we're very protective of those price increases. Obviously it is, under current circumstances, our customers are ready. We're very appreciative of that and we try to be as helpful as wherever we can. But, at the same time, we obviously need to make money in order to maintain our business.

Constantinos Karathanos - Goldman Sachs

Thanks, Seifi. And then one very last question and it's on covenants because that seems to be the topic with Rockwood. The capital market have opened up, I mean there is no doubt about that and many companies are able to issue equity debt, convertible debt and also the banks are raising capital, the outlook for the economy is getting better. The banks are also giving waivers out, extensions. So have you guys ... should you think about all those possibilities and how to do relations?

Seifi Ghasemi

First, we haven't enquired about that so we I don't what the markets are like that. We don't think that we would need to do that. We are very focused. Our objective here in Rockwood is to make our numbers so that we don't need any covenant relief; that is our objective. And obviously the developments in the market are what you said but ... and more they improve the better the conditions are in case we need anything. But our objective and our focus in the company and our target is, let's make our numbers in order to make sure that we don't need any relief.

Constantinos Karathanos - Goldman Sachs

Good. As always, I appreciate the conversation. Thank you.

Seifi Ghasemi

Thank you, sir.

Operator

Thank you. We'll go next to David Begleiter with Deutsche Bank.

Unidentified Analyst

Thanks, good morning. It's actually Jason Weathers (ph).

Seifi Ghasemi

Hey, David, how are you?

Unidentified Analyst

No, no. it's Jason this time sitting in.

Seifi Ghasemi

How are you, Jason?

Unidentified Analyst

Sneaking in for David. Thank you, good morning. Just, Seifi, you made a comment that the construction seems to have bottomed, I'm wondering if you could share what data points or pieces you might have that give you the confidence to say that?

And then I wonder if we might expect any restocking to help a rebound in volumes, that's too optimistic?

Seifi Ghasemi

Well, the reason I say that is construction this first quarter versus last quarter, if you look at volumes, it was down 40%. But it is again October, and November, and December, and January and February. So what I'm saying is that it has not gotten worse. When it doesn't get worse, since we have our cost savings and synergies, what happens is that our profitability and our margins go up. And you can see that very clearly when you compare the fourth quarter of last year to the first quarter of this year. So that is our indication that things don't seem to be getting worse.

Unidentified Analyst

So is it more of an earnings comment than an end market demand comment then?

Seifi Ghasemi

Yes. I mean the rate of decrease has not increased. What I'm saying is that if it is down 40% in November, we are down 40% in January and February. If it's still 40% down, but it hasn't become 50% or 60% down. So that is my comment, but for Rockwood we see improvement, because it is an earning improvement, yes.

Unidentified Analyst

Okay, that's very helpful, thanks. Then just on lithium, I wonder if you might expect any increase in price pressures, given the consumer downturn and the volume pressures you're seeing. And I guess, just to expand the question a little, is there any destocking you think going on that's accelerating volume declines in lithium?

Seifi Ghasemi

Well, I think the lithium volumes for us, they're down about 15%. When you look at the end users of our lithium products, one of the end users is obviously lithium iron batteries. Lithium iron battery use was down because of the downturn in sale of computers and cell phones and all of that that you see, the overall electronic consumer goods.

The second thing is that some of our lithium like lithium carbonate goes into aluminum manufactured glass ceramics. All of those are down because of the general downturn. So that is the dynamics that is pushing down the demand for the volume. Now how much of that is customer destocking and how much of it is demand?. I think it is, the customers don't keep a huge amount of inventory. Most of it is actual demand has been down.

The comment about the pricing, obviously, this is a comment that I have been giving in the past three years and everybody is worried about the Chinese are coming and they have never come. We have a unique product. It's a specialty product. We have spend a lot of time and effort developing these products; we spend huge amount of investments; we need to get a return on our investments, therefore, we need the kind of pricing that we demand.

Unidentified Analyst

Fair enough. Thank you.

Seifi Ghasemi

Thank you, sir.

Operator

Thank you. We have a question from Mike Harrison with First Analysis.

Michael Harrison - First Analysis Corp.

Hi, good morning.

Seifi Ghasemi

Good morning, Mike.

Michael Harrison - First Analysis Corp.

In terms of the $135 million in cost cuts, does that include actions that might fall under the umbrella of acquisitions synergies or are those cost cuts completed related to the base business and the 24 million in synergies for the purposes of the covenant calculation or incremental to the 135 million in cost cuts?

Seifi Ghasemi

That includes the acquisitions synergies.

Michael Harrison - First Analysis Corp.

Okay. I was wondering on the Advanced Ceramics side that in the past we have seen a little bit of choppiness related to inventories on the medical side and clearly there is some ordering on a more as needed basis going on from your automotive and electronic customers. Do you have sense of the magnitude of inventory destocking in the automotive and electronic customers? And are you concerned that given the performance of the medical side of that business that, maybe, you could see some weakness in the next quarter?

Seifi Ghasemi

No, I think the results for our ceramic business next quarter is going to be better than the first quarter. Our medical business is growing and then with respect to the sales to the automotives ... I mean, when you look at the automotive production in Germany in the month of January and February, most of the plants were shut down. So some of our customers didn't think very much.

So I think it is fundamentally a function of that effect that at the end consumer demand just wasn't there for a lot of these products. In the ceramic business, a lot of times you look at our sales directly to the automotive industry which is about 22 to 23%, but at the end of the day when they stop making cars they don't buy components for making cars that the car companies buy from other people. So when you look at it that way, then we had an exposure of about 40% of our sales to automotive. And when automotive was down that much then our sales went that much further down. But, I do definitely think that our ceramic business will do better in the next quarter.

Michael Harrison - First Analysis Corp.

Have you started seeing any benefit, Seifi, from the automotive incentive legislation in Germany?

Seifi Ghasemi

The automotive incentive legislation in Germany actually worked in a very interesting way. Germany put that into effect that they would give you about €2500 if you were going to junk a nine year old car and that ... so that was an interesting incentive. But most of the people who had junked nine year old cars that is smaller cars. So they immediately replaced those, they got their money and they went and bought new prejors and renaults and all of that. So it became a big political issue in Germany. There it seemed that the German government was subsidizing French auto manufacturers.

Our main exposure to the auto industry in Germany is with Mercedes Benz and BMW. And as a result of that, we didn't get much of a benefit from that. And as a result we're not going to get hurt because it is a stop. So that was the dynamics there.

Michael Harrison - First Analysis Corp.

Okay. And then looking at the margin in Specialty Chemicals, I intend to think of that surface treatment side of the business has been a little bit less sensitive to volume declines whereas the lithium side of the business has much higher fixed cost. I was wondering if you saw a bigger margin decline on the lithium side than in the surface treatment side.

Seifi Ghasemi

Actually in the real world it was the reverse. Because, Mike, the fixed cost on the surface treatment side is significant because most of what we do in surface treatment is providing service. The cost of the product is not a big part of what we do.

SG&A in surface treatment, we usually don't disclose these numbers, but SG&A in surface treatment is close to 35%. So when volumes go down, we actually got hurt more on the margin in surface treatment than we did on lithium because lithium SG&A is almost 10%.

Michael Harrison - First Analysis Corp.

Did the Surface Treatment side of the business make money in the quarter on a operating basis?

Seifi Ghasemi

Yes, it did.

Michael Harrison - First Analysis Corp.

And then the last question I had is on the Clay-Based Additives side of the performance materials business. Is the weakness that you are seeing there, primarily related to the slowdown in drilling activity or is it weakness in coatings markets or is it both?

And which key market for Clay-Based Additives are you most concerned about long term, the drilling side or the coatings side?

Seifi Ghasemi

The downturn that we saw in the first quarter was in the coatings side and all of that. We did not see much of a downturn in drilling side. Going forward, I think that coatings will come back and the drilling might get hurt.

Michael Harrison - First Analysis Corp.

All right. Thanks very much, Seifi.

Seifi Ghasemi

Thank you, Mike.

Operator

Thank you and next we have Mike Judd with Greenwich Consultants.

Michael Judd - Greenwich Consultants

Yes, good morning.

Robert Zatta

Good morning, Mike.

Michael Judd - Greenwich Consultants

You guys have been fairly active with your portfolio and I am just wondering are there any additional divestitures that you are considering at this point or is anything more likely to go than something else? And then I had a follow up question on copper.

Seifi Ghasemi

Sure, at the current time we are not contemplating any divestitures and we are not contemplating any acquisitions. All of the efforts of the company is focused on improving our results.

Michael Judd - Greenwich Consultants

Okay, and then just secondly on copper, you guys seem to be pretty close to the market and that material has been fairly volatile, I guess, as it relates to purchases by the Chinese. Do you have any view on what's going on in that market and what your expectations are for the rest of the year?

Seifi Ghasemi

Well, that's a very good question for an answer. We have bought all of the copper we need for 2009 because we didn't want to take risk of dealing with the ups and downs because it was very unpredictable.

In terms of predicting what the copper market will be, as I said, we ... our prediction was it's going to be very volatile, let's buy our requirements and wait and see what happens. So that's what I can tell you.

Michael Judd - Greenwich Consultants

Okay, thanks.

Seifi Ghasemi

Thank you, sir.

Operator

Next we have Michael Boam with BlueBay Asset Management.

Michael Boam - BlueBay Asset Management

Hi, thanks for taking my question. I just wanted to... with respect to the covenants, are the course of the covenants actually published anywhere? Have they been filed anywhere such that we can find out what they are and if it not, is it possible you can may be share them with us?

Seifi Ghasemi

They are definitely, definitely published. It is in our 10-K and all of the documents we have. You have access publicly to credit our agreement. It is spelled out exactly what is going on. So, it is all matter of public information but if you have difficulty locating that, we will be more than happy to help you locate that or explain that to you. There is no issue. Please give us a call Mr. Tim McKenna or anyone above that or anybody else, we will be happy to help you with that but they are all matter of public record.

Michael Boam - BlueBay Asset Management

I'm trying to ask with respect to the Ti02 joint venture, obviously there is sort of refinanced the earnings that it generates within that business, are they required to pay down debt within the business or well are they distributable to both joint venture partners? And it is they are distributable, can you just may be tell me how much cash was distributed in minority dividends in 2008 and what you envisage for 2009 maybe if that's possible?

Seifi Ghasemi

The cash can be transferred to the parents (ph) there is no issue with that. The loan that we have received for that business has its own covenants. Therefore, we are in compliance with those covenants and any ex and the cash pay down requirement for that business is something in the order of five to $10 million a year, which they should be able to make and anything excess of that is distributed to the parents.

The amount in 2008 was almost insignificant because the joint venture is started in September and so, there wasn't much to be distributed. And for 2009, we usually don't make predictions so I would have to excuse myself from answering that question.

Michael Boam - BlueBay Asset Management

No, that's fine. But as such seen there will be a reasonable dividend going out to the joint venture partner during 2009, I mean our business looks like it's certainly profitable?

Seifi Ghasemi

It could be the case.

Michael Boam - BlueBay Asset Management

Okay. Thank you very much for your time.

Seifi Ghasemi

Thank you sir.

Operator

Thank you. And we'll go next to Laurence Jollon with Barclays Capital.

Laurence Jollon - Barclays Capital

Good morning

Seifi Ghasemi

Good morning.

Laurence Jollon - Barclays Capital

Good morning. Coincidentally I was going to ask around the covenants from the Ti02 facility just like I did last quarter, but you are kind enough in the 10-K to give us the exact calculations and perhaps we could just look at the leverage coverage ratio, it's four times at the end of the year you said you were at 3.38. Is that simply the dollar amount of the term loan less some small of cash, which I would assume is call it 20 million. That would be the numerator. And then can I simply divide that by the adjusted EBITDA, segment EBITDA that you report, which were at peak on, 80, 83 million on an LTM basis. Is that how we should think about calculating that?

Robert Zatta

That is pretty much correct, yes.

Laurence Jollon - Barclays Capital

And I know you have three covenants there; leverage coverage ratio, interest coverage, and then the cash flow coverage. I guess with the leverage coverage, do you think to be the most restrictive I guess is the first question. And then the second question is you not concerned at all about these covenants and you're much more focused on your broader covenant package under the credit agreement?

Robert Zatta

Yeah I mean obviously the leverage coverage ratio is the one that we're most focused on. I mean as we had worked through this agreement with the banks. Last summer we were able to negotiate I think a pretty good range on the other one. So they're not really relevant as far concerns -- we're involved with. But we focus on similar to the way we do with Rockwood in total. We've got good headroom on the -- if I believe in covenants and I mean quite honestly at this point we feel we're in pretty good shape there. So we're not really concerned about that.

Laurence Jollon - Barclays Capital

Okay thanks.

Seifi Ghasemi

Thank you.

Operator

Thank you. We have question from Robert Felice with Gabelli & Company.

Robert Felice - Gabelli & Company

Hi guys most of my questions have been answered, just one or two more. I guess first on advanced ceramics. I was hoping you can give us a sense as to the magnitude of 135 million in cost savings that you expect to accrue to that business? And Seifi, you have mentioned several times that you expect sequential improvement; can you give us a sense as to magnitude of sequential improvement?

Seifi Ghasemi

Probably make sure I understood. The 135 million of cost saving is across the board. In terms of how much is it for every business; I can tell you for that for the ceramic business the amount of cost savings that we have is going to be the difference of about 10 million.

Robert Felice - Gabelli & Company

Okay. So 10 million of the 135.

Seifi Ghasemi

Yes.

Robert Felice - Gabelli & Company

Falls into advance ceramic. And then I guess second part you had mentioned you expect sequential improvement. I guess what underpins your confidence there and may be you can give us a sense as the magnitude of sequential improvement you expect?

Seifi Ghasemi

For ceramic?

Robert Felice - Gabelli & Company

Yes.

Seifi Ghasemi

For ceramics, I think that the cost savings are going to come into effect and the second thing is that I believe our sales will be higher.

Robert Felice - Gabelli & Company

Okay. And in terms of the magnitude, I mean should we expect a five to $10 million type sequential improvement. Is that too much, too aggressive?

Seifi Ghasemi

Bob, I obviously have a number (ph) in mind, but it's against our policy to kind of start predicting specific things, so give me a break on that one please.

Robert Felice - Gabelli & Company

Okay, fair enough. And then I guess secondly, we've heard a number of your peers suggest that March volumes improve versus February and January, and you suggested that may be Rockwood is on a one or two month lag. Are you confident that perhaps you'll see that dynamic over the next couple of months?

Seifi Ghasemi

We certainly hope so.

Robert Felice - Gabelli & Company

Okay. And then I guess lastly, just broadly speaking thinking about the first quarter results here, did the numbers meet your internal forecast?

Seifi Ghasemi

Yes they did.

Robert Felice - Gabelli & Company

Okay, great. Thanks for taking my questions.

Seifi Ghasemi

Thank you.

Operator

Thank you. And next we have Paul Christaffirson (ph) with Wilfred Securities.

Unidentified Analyst

HI Good morning. Two questions. One; just to beat up from the covenant a little bit more. If I did my own stress test on EBITDA and I got a trough EBITDA of 530, which I understand is completely arbitrary, but if I get 530 you are okay, if debt extends to 2.25 billion. And I am wondering if you have any kind of timetable on when you might hit 2.25 billion in debt? I understand you can give us all day. That's just happens to by question?

Second, have you sold any lithium product yet to people who are going to use it for vehicle batteries?

Seifi Ghasemi

Okay. Are there only two questions, sir.

Unidentified Analyst

That's it.

Seifi Ghasemi

On your first question, if ... at 530 million...

Unidentified Analyst

Yeah, I am not really, I know you can really comment on the 500. Oh well you are completely welcome to comment on the 530. My question is, do you have time in mind when your debt might get two and a quarter measured the way the covenant measures it?

Seifi Ghasemi

Well. If you look at our net debt currently, it is not too far from that. Net debt as of the end of January ... as of the end of March, was 2.25. So...

Robert Zatta

Including all the cash

Seifi Ghasemi

Including all the cash. So we are there I mean, we can go down, use all of our cash pay down, pay to banks and then we have end up being at 2.25 and then as you said it may hit by 530, we wouldn't close the covenant. So your calculations are right and that is where you want us to be.

And then the second question that you asked which was...

Robert Zatta

have we sold lithium to the...

Seifi Ghasemi

Yeah, we definitely have sold lithium that has gone into batteries that goes into hybrid cars. There they don't go into hybrid cars because hybrid cars...

Unidentified Analyst

Right.

Seifi Ghasemi

Currently don't use but they have gone to all electric cars like Setla (ph) and like the Mercedes Benz, hybrid that Mercedes Benz is going to put out and it will be in obviously the all electric car that GM is thinking about.

Unidentified Analyst

Can I ask just a follow up on that, how did you get that business? And did you have to compete for that business against SQM or FMC? I mean, how did you get that business? And second, when do you see that market ramping up to something significant?

Seifi Ghasemi

First of all, when I say we got that business it doesn't mean that the other guys didn't get anything sir. I mean, we have a certain market share. They have a certain market share. So when people want to buy lithium they buy some from us and some from the other people. So the other people are also participating in the growth.

In terms of when we think that that would be something substantial; obviously, depends on some significant factors that are obviously not under our control, which is a government support and when the auto companies actually bring these cars into play.

The one thing that I'm sure of is that if you look at 2020, there will be a lot of electric cars running around, probably, 50% of the cars that we drive today. But, in terms of how fast we get there, is the $64 million question. So it's you were looking at draught food for the purpose of evaluating our performance in 2020, I would be very optimistic. If you are talking shorter-term one has to make your own judgment.

Unidentified Analyst

Thank you very much.

Seifi Ghasemi

Thank you, sir.

Operator

We'll go to Edison Hawain (ph) with TCW.

Unidentified Analyst

Hi, most of my questions have been answered. One housekeeping question; the repurchase of the 75 based (ph) at a discount, I was just wondering just given what the rating agencies have been doing with us likely defaults on debt purchased below par. I'm assuming you didn't purchase these at an extremely discounted level?

Seifi Ghasemi

We sir, haven't purchased a lot. I think the order of magnitude of the numbers about $40 million. 40 to $45 million.

Robert Zatta

And that's over a period of five or six months from last quarter.

Seifi Ghasemi

As Mr. Zatta says that's on over a period of six months. So we haven't had any conversation with the rating agencies about this. So we cannot really comment on that.

Unidentified Analyst

I see, I guess my second question really and I know it's been brought up in the calls several times, but it is sort of going into your Q2. I mean, given a lot of your competitors are experiencing sort of the same pressure in EBITDA, and a lot of your ... it seems a lot of you and your competitors particularly have been managing your working capital to sort of offset this. I mean, what do you ... are you seeing just sort of a rebound from your clients in terms of demand because it seems like people, especially in the industry, have been bleeding their inventory and kind of worried the working capital offsets the sort of the declining in EBITDA is, you know, the EBITDA number we're seeing for Q1 sort of a new reality for what's being going forward because, again, I know it's hard to quantify why you think Q2 will be better but it just seems like the working capital has just been really keeping most of our competitors afloat flow for Q1, and I don't see where the demand side is picking up in terms of on your client side, if you could just give me some insight on that?

Seifi Ghasemi

Well that's the part that I was saying that unfortunately, we don't have much of the visibility to make a judgment on that because at the end of the day we don't sell anything directly to any consumer, we sell to people who make things to give somebody else to give to somebody else and give it again to end of the ... to the consumer. So, it is very difficult to judge how much of the downturn was due to actual consumer demand and how much of it is this inventory adjustment that you are talking about. Obviously, I am sure that our customers are cutting down their inventories. There is no question about that.

But is that account for 10% of the downturn or that account for 50% of the downturn, that is the question that really we don't know the answer to that. And the only day we will find out is in four months from now in terms of how our sales have developed because inventory adjustment cannot go on forever if the consumer demand is there. But if the consumer demand is not there then obviously it can go on indefinitely.

But unfortunately, we are a little bit in the dark on this thing in terms of being able to make an accurate forecast.

Unidentified Analyst

Right. And just in terms of then your working capital management, back to that, how much more do you see yourselves being able to bleed inventories before you guys have to restock on your own and additionally so, when are your over the average course of the year, what quarters are do you see working capital being uses versus sources?

Seifi Ghasemi

When you look at the level of our sales last year on a pro forma basis and compare it to this year, the sales are lower. So I think that we will not get into a stage where we would have to use cash for building up working capital and we will monitor our production in order to manage that.

Robert Zatta

Yeah, I think, just to add to what Seifi said, I mean we came out of the fourth quarter with obviously more working capital than what we had wanted and most of it was in inventory. The good news for us is that the first quarter is always the quarter where we build the most working capital, and so we've been able to kind of manage that to our advantage.

So as we come out of the first quarter, we're pretty confident that as we go forward almost regardless of the level of demand that we can manage working capital or beat it down for certainly so that it's not an uptake. And I would think that as we go through this year even if things pick up, our working capital should stay as a net positive for us for the balance of the year.

So that's a ... I mean I view that as a very positive coming out of something which was a negative, a very positive kind of follow on.

Unidentified Analyst

Okay. Thanks a lot guys.

Seifi Ghasemi

Thank you, sir.

Operator

And next we have John McNulty with Credit Suisse.

John McNulty - Credit Suisse;

Yeah, good morning. Just a few questions.

Seifi Ghasemi

Good morning, John.

John McNulty - Credit Suisse;

On the lithium side, how much of a lead time would there be if, let's say, you want a big platform for an auto company that was going to ramp up, how many months ahead of that platform's launch would you actually have to be providing the lithium. So, let's say, if it's 2011 car platform, if those cars are built in mid 2010, when do the batteries and when does the lithium actually have to be supplied?

Seifi Ghasemi

Lead time is about a year.

John McNulty - Credit Suisse;

Okay and then just a couple of questions on some of the divisions. On the Specialty Compounds, the margins are the highest we've seen in about four, five years this past quarter. Is that a sustainable type of rate with all the cost cutting you have done or is that some ... is there some one-time kind of blip then it would maybe drips back down a little bit looking for throughout the rest of the year?

Seifi Ghasemi

And John, the sustainable EBITDA margin for that business is about 14%, 13 to 14 ... 15.5 to 14.5 is what those guys manage that and I would count on that.

John McNulty - Credit Suisse;

Okay, great.

Seifi Ghasemi

Yeah, so we achieve 15.5, next quarter it might be 14.5 but the guys are doing a very good job.

John McNulty - Credit Suisse;

Okay, that's helpful. And then the last question, I know you don't have a lot of petrochemical raw material exposure but you do have a lot of broad raw material exposure. Can you give us some color as what you're seeing there and if you would expect to see any benefit and maybe the magnitude of that benefit looking forward throughout the rest of the year?

Seifi Ghasemi

But John we have always said that our raw material base is not ... it's inorganic and therefore we do not have to spend a lot more money when oil prices go up. But at the same time we don't get the benefit when all prices go down. Where the petroleum prices do affect us is in price of energy that we use.

We are right now in Europe paying a higher cost for energy than last year because we had bought energy last year based on 140, $150 crude. So we would expect that as we go forward, at the end of this year and next year, we would actually see our energy cost go down.

In terms of our raw materials, once in a while things like phosphoric acid ... there is dislocations, prices go up but overall I do not expect any significant disadvantage or any significant advantage because of the raw materials as we go forward.

John McNulty - Credit Suisse;

Okay, great, thanks a lot.

Seifi Ghasemi

Thank you, John.

Operator

And next we have Jeff Holmes with Potter Poland (ph).

Unidentified Analyst

Yes, thanks. Two questions, one is in the last quarterly call you mentioned that in general that 2Q and 3Q are the quarters with your best seasonality, is that still apply to the business even in these very difficult times or are those trends kind of not applicable during this downturn and then I'll follow up?

Seifi Ghasemi

You make a very correct statement that historically those quarters have been our strongest quarters, and I do not have any reason to believe that the pattern has significantly changed, but it might have, but we have never gone through these things. So I don't have any kind of historical reference for you to say whether it will or not, but I expect it to behave the same way

Unidentified Analyst

Okay and a follow up on. Just on buying some of the bonds back, can you talk about the calculation you did or what made you think that was the best way to spend cash at this time?

Seifi Ghasemi

Well, at the time, we bought the bonds at around 76% of face value and we save ourselves 7.5% interest. So that sounds like a reasonable use of cash.

Unidentified Analyst

Yes, I agree. Okay, thank you.

Seifi Ghasemi

Thank you, sir.

Operator

And, Mr. Ghasemi, we have no further questions.

Seifi Ghasemi

Well, thank you very much everybody for listening to our call and we look forward to talking to you, a lot of very good questions, and we appreciate your interest in our company.

Operator

Thank you, ladies and gentlemen, this conference will be available for replay after 1 PM till midnight Wednesday, May 13th.

You may access the AT&T executive playback service at anytime by dialing 1800-475-6701 and entering the access code 994682. For international callers, dial 320-365-3844 using the same access code 994682. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Rockwood Holdings Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts