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Executives

Michael E. Campbell - Chairman, President and Chief Executive Officer

Louis S. Massimo - Executive Vice President and Chief Operating Officer

Steven Giuliano - Vice President and Chief Financial Officer

Analysts

Brian Denyeau - Oppenheimer & Co.

Christopher W. Butler - Sidoti & Company, LLC

Ivan Marcuse - KeyBanc Capital Markets

Saul Ludwig - KeyBanc Capital Markets

Robert Felice - Gabelli & Company

Arch Chemicals, Inc. (ARJ) Q1 2009 Earnings Call May 5, 2009 11:00 AM ET

Operator

Good morning. And welcome ladies and gentlemen to Arch Chemicals First Quarter 2009 Earnings Conference Call. At this time, I would like to inform you that this conference call is available to the public, including the media, and is being recorded for re-broadcasting and that all participants are in a listen-only mode. This call is being broadcast live at www.archchemicals.com and is Real Media Player and Windows Media Player compatible. If you wish to access the replay for this call, you may do so by dialing 888-203-1112 or 719-457-0820 from outside the U.S. The access number is 6234103.

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

Michael E. Campbell

Thank you very much operator, and good morning. Thanks for joining us. With me today are Louis Massimo, Arch's Chief Operating Officer; Steve Giuliano, our Chief Financial Officer; and Mark Faford, Vice President of Investor Relations.

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

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

We're off to a solid start in 2009, which is all the more satisfying given the sever global recession. Our quarterly earnings were stronger than our previous guidance, primarily due to strong results from the HTH water products business.

We announced that first quarter sales were down 15% year-over-year. The benefits of higher pricing and our acquisition of the water treatment chemicals businesses of Advantis Technologies were more than offset by decreased volumes and unfavorable foreign exchange rates.

Despite the sales decline, first quarter 2009 earnings from continuing operations were a positive $0.13 per share. That compares to our forecast of a loss of $0.10 per share and earnings of $0.23 per share during the prior year quarter.

Taking a closer look at the quarter, our Treatment Products segments posted lower sales and operating income compared to last year. Lower volumes and unfavorable foreign currency exchange rates were only partially countered by the Advantis acquisition and improved pricing.

Within the segment, HTH water product sales were up over last year's first quarter. We benefited from improved pricing in all regions as well as from the Advantis acquisition. These positive factors more than compensated for the lower organic volumes in North America and Europe, and unfavorable currency impact, primarily Brazil and South Africa.

North American volumes were lower in the repacker and professional pool dealer segments, partially offset by higher sales into the mass retail segment.

Water products operating income increased by nearly $4 million year-over-year, while operating margins expanded by over 300 basis points. This improved performance was principally a result of the higher pricing, which more than made up for the lower volumes, higher product costs, unfavorable foreign currency exchange rates and the seasonal loss for the recently acquired Advantis business.

In our personal care and industrial biocides businesses, as expected sales and operating income declined compared to the year ago period. Sales decreased as improved pricing was more than offset by lower volumes and unfavorable currency exchange rates. The lower volumes were a result of reduced demand for industrial biocide used in building products, and to a lesser extent metalworking fluids.

The considerably lower building products demand was a result of depressed global housing markets which continued to adversely impact paints, coatings and wallboard used in residential construction and remodeling. Demand for metalworking biocides dropped as a result of the depressed automotive production.

Operating income declined as improved pricing for biocides used principally in health and hygiene applications was more countered by the lower volumes I mentioned in building products and metalworking fluids. The overall business also incurred additional costs for our new manufacturing facilities in China.

The wind protection and industrial biocides businesses posted sales and operating results well below the year ago period. Improved pricing and wood protection and the benefit from cost reduction initiatives in both businesses weren't sufficient to overcome significantly lower volumes in unfavorable currency exchange rates.

Wood protection continues to be adversely impacted by the steep decline in the global residential and commercial construction markets.

In addition, our European and Asian businesses were hurt by the strengthening of the U.S. dollar. This lower global demand, unfavorable currency exchange impact and higher raw material costs of approximately $2 million for copper and chrome more than offset improved pricing and the benefits of aggressive cost savings initiatives. As a result of all of this, wood protection's operating results were well below the year-ago period.

In our industrial coatings business, sales were lower than last year. The sales decline is attributable primarily to reduced demand for wood coatings in Europe due to poor economic conditions there, and to a lesser extent unfavorable FX rates.

Lower oil based raisin and solvent costs and the benefit from cost reduction programs was more than offset by this reduced demand. And thus coating's results were also below the year-ago period.

Now to our Performance Products segment. Here, sales decline from the prior year's first quarter, while operating results were up by $3 million. Urethane sales fell by 16% with the majority of that attributable to lower year-over-year selling prices. The price decline reflected competitive pressures in the polyol and glycol markets as a result of significantly lower raw material costs. While total volumes were down slightly, our flexible polyol volumes increased nicely from last year, thanks to our excellent customer relations, unique product offerings and success in further expanding our customer base.

Urethane's operating income rose by over $2 million as propylene and ethylene raw material costs fell more deeply than our pricing.

Finally, in our hydrazine business, we posted sales comparable to the year-ago period while operating income was up slightly.

Let's turn now to our outlook for the second quarter. It's traditionally the strongest of our year, primarily because it marks the peak of the North American water products season.

Second quarter earnings per share from continuing operations are forecast to be in $1.15 to $1.25 per share range, compared to last year's $1.33. We're forecasting year-over-year improved results from our HTH water products business and our urethane's business, as well as continued softness in the housing and construction markets. This softness adversely impacts end-use demand for our industrial biocide used in building products, as well of course as our wood preservation and woods coatings business.

We're also expecting corporate expense to increase, largely as a result of last year's mark-to-market impact of the lower stock price associated with our performance based compensation.

Let's take a closer look at the second quarter forecast for each of our businesses. And I'll start with HTH water products. This business should deliver significantly higher top-line and bottom-line results. Performance will be driven by improved global selling prices., the contribution from our Advantis acquisition including synergies, and improved market share in the mass retail channel.

The higher selling prices were implemented earlier this year to mitigate rising raw material and sourcing costs, and higher investments in research and development.

In our personal care and industrial biocides businesses, sales are expected to decrease from last year as we continued to face reduced demand for biocides used in building products and metalworking fluids. And we're also forecasting demand for our zinc Omadine antidandruff agent used in shampoos, to be less than last year's very strong quarter.

Operating income for these businesses is projected to be well below our 2008 results. Improved global pricing should somewhat counter the shortfall from the lower demand and additional costs for our two new plants in China.

In addition, to comply with European legislation, we're forecasting additional toxicological and regulatory spending. Spending, that is a wise investment in our future.

Turning now to wood protection and industrial coatings. We expect sales and operating results to decline year-over-year, principally due to reduced demand. Results, however, should improve sequentially.

In wood protection, we should see a seasonal pickup in demand during the second quarter, but sales are projected to be lower than last year's due to the weak global economies.

Wood protection's operating income is projected to be below last year. Improved global pricing and the benefits from cost reduction programs will not be sufficient to negate the weaker demand in residential and commercial housing markets. We're confident that once these markets recover, and they will, we're ideally positioned to capitalize on the recovery. We have the strongest global presence. We have the broadest line of products and we are the leader in new technology.

In the meantime, we continued to aggressively implement cost reduction programs, but do so without jeopardizing our future.

Second quarter sales from industrial coatings are also expected to decline from the year ago period as a result of the economic slowdown in Europe. Coatings' operating results are forecast to be below the year-ago period.

We've cut costs significantly. And while we're seeing lower oil-based raw material prices, these measures cannot counter the reduced demands for wood coatings in Europe.

Our Performance Products segment is forecast post-lower sales in the second quarter while operating income should be well above the year-ago period.

In urethanes, we anticipate lower selling prices and volumes due to increased competitive activities in the polyol and glycol markets. These pricing pressures are a direct result of the decline in oil-based raw materials.

Urethanes operating income is projected to be well ahead of last year's depressed results. Again, this quarter we're expecting significantly reduced propylene and ethylene raw material costs to more than offset the lower selling prices. And then Hydrazine we expect to report sales and operating results comparable to '08.

Looking forward for the full year, we now expect total company sales to be approximately 2 to 45 below 2008. This decrease from our previous guidance reflects weaker demand in our housing related businesses.

We're reaffirming our guidance of full year earnings from continuing operations to be in the $1.85 to 2.05 per share range. Our first half earnings are expected to be in the $1.28 to $1.38 per share range, compared to last year's earnings of $1.56. Therefore, we're tracking on target and remain comfortable with our full year forecast.

HTH water products operating results exceeded our expectations in the first quarter. And we are forecasting that they will deliver a 100 basis point improvement in operating margins for the full year. This better than expected performance should be offset by lower demand for our industrial biocides used in building products, and for our wood protection and industrial coatings products. This reduced demand is due to further weakness in the global market, global housing and construction markets and economic conditions in Europe.

While we expect our results to be below those posted in 2008, it will still be another very strong profitable year for us.

On the capital spending side, we expect spending into '09 to be in the 35 to $40 million range. This guidance represents a significant reduction from 2008 capital spending, which included the constructions of the two new biocides plants in China. Our depreciation and amortization forecast remains at approximately $50 million.

In conclusion, I'm pleased we get off to a good start to the year. Our management team has demonstrated it has the operational discipline to weather this challenging year in a manner to positions us for a strong, profitable growth as economies and markets recover.

We're addressing these challenges with a variety of cost improvement programs, which include head count reductions, eliminating contractors and the third-party toll manufacturers, pairing back workweeks, hire increases, campaign production runs and curtailing discretionary spending.

And let me assure you, we understand the importance of a solid balance sheet and ample liquidity to manage our businesses. Our recent completion of the new $100 million term-loan facility improves our liquidity and financial flexibility.

This was a tremendous accomplishment in today's challenging economic and credit environment. Our ability to add liquidity reaffirms the value of our core biocide portfolio and its long-term profitable growth prospects.

Finally, we remained committed to improving margins, maximizing cash generation and maintaining an attractive dividend yield, all keys to enhancing shareholder value.

And with that, I'm now happy to open the field to questions that you might have. To facilitate this, I'm going to turn the call back to the operator.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will begin at this time. (Operator Instructions). And our first quarter comes from Ian Zaffino with Oppenheimer. Please go ahead.

Brian Denyeau - Oppenheimer & Co.

Hey guys. This is Brian Denyeau sitting here for Ian. How are you?

Michael Campbell

Hi Brian.

Brian Denyeau - Oppenheimer & Co.

Great quarter.

Michael Campbell

Thank you.

Brian Denyeau - Oppenheimer & Co.

Obviously, you guys reported quarter much better than your expectations and you say this was driven by water. And I'm trying to pinpoint exactly what it was in water that really exceeded your expectations? Can you just give me a little more color on that?

Louis Massimo

Hi. This is Louis. What basically happened is we saw some order patterns that were a little bit better than we anticipated in market segments. We did have a stronger performance from our international operations, which is a strong part of the... and we did see some internally where we were able manage because of order flows and stuff like that. Our freight and distribution to a lower levels than we... when then when we were given the forecast back in January where nobody knew what freight and distribution will may or may not do during a period where fuel cost and things were going down. So --

Brian Denyeau - Oppenheimer & Co.

So, were there a kind of a combination of better volumes and less costs and expected this combination of both of those?

Louis Massimo

With better volumes in certain market segments and geographic segments and timing on some costs on how we buy things, we're expecting to see a little bit uptick in some of those product cost for the segment quarter. But as we said, our pricing more than covers that. So some of this strong performance in the first quarter was related to timing of that, but other case we see that happening and continuing throughout the balance of the year.

Brian Denyeau - Oppenheimer & Co.

Okay. And then looking at one that your biggest competitors and what are that obviously has gone bankrupt. Is there, I know there might not be that much opportunity on the mass market side, but what type of opportunities are you seeing on the dealer side, potentially dealers are 100% vested with them, is there opportunity to take share there?

Louis Massimo

We look at the opportunity being when our competitor of ours is having, is in bankruptcy, or is having importantly quick pathway have supply issues supporting their customer base. We see that is upside in opportunity as long as we have put our plans in place to support the market if there is a supply disruption.

So, we haven't seen it to-date. But we have guided our call, some concerned customers both all customers that we share with that competitor, and customers that we do not share with that customers. So, we have in place contingency plans to make sure that the market needs are met so that the consumer, when they're looking to treat their pools that if it's not in one store, they can find it somewhere else. So, we think there should be some opportunity. And we're not forecasting that in our second quarter or full year numbers. That would upside to that those opportunities.

Brian Denyeau - Oppenheimer & Co.

Okay. Yeah, I mean the way real case, it just provides upside. But last thing, as far as the FX on your updated sales guidance, how much FX is in that headwind?

Steven Giuliano

From a full year basis?

Brian Denyeau - Oppenheimer & Co.

From a full year basis.

Steven Giuliano

It's about roughly 4 or 5% on a full year basis, the FX.

Brian Denyeau - Oppenheimer & Co.

Okay. So --

Steven Giuliano

Bigger driver and the change in the forecast that was lower volumes.

Brian Denyeau - Oppenheimer & Co.

Okay. All right. Thanks. Great quarter.

Michael Campbell

Thank you.

Operator

And our next question comes from Christopher Butler with Sidoti and Company. Please go ahead.

Christopher Butler - Sidoti & Company, LLC

Hi. Good morning guys.

Michael Campbell

Hi, Chris.

Christopher Butler - Sidoti & Company, LLC

You had mentioned order patterns in the water products business. Is there any concern that some of the purchases in the first quarter were pulling some of the sales out of the second quarter? And similarly, with the dealers coming in a little bit more cautiously could we see something more backend loaded from that market?

Louis Massimo

Christ, you are nearly spot on. I mean break it down by, let's talk about the North American marketplace first. What we did see is in the mass channel, we did stronger order patterns across the board through March and then adjustment of their inventories into April. So, April actually from the mass side was slower. And so... but, we're seeing now and May an uptick to it. So I think, as you know I don't want to point any mass customers by name, but mass retailers have a January 31, first year-end and April 30th, is a key quarter date for them. So they, we saw our trend that we didn't see in the past were inventories were managing down to a level, and now May is being picked up.

On the dealer side, you basically saw the concern on inventory levels that, and we think that May and June, you're going to see their replenishment of those because they were very concerned. Then our well branded distribution, it was a strong April and a weak March. So, sooner or later we're all going to be smart enough to figure out why everybody has a different order pattern. But in totality, we did see a little bit of movement on into the first quarter, a little bit of softness in April, but we're seeing a rebound and strengthen in the water business than May so far.

And in Brazil, which is tallying though the end of their season, they had a fabulous April. So, it's a nice top mixed bag. So, but in total, I'm very pleased with the performance year-to-date so far.

Christopher Butler - Sidoti & Company, LLC

And I probably missed it from earlier on, but the synergies expected from Advantis to what 10 million and did you give us an idea of what you are able to capture in the first quarter from that?

Louis Massimo

We don't... we're not... we didn't quantify what actually came in the first quarter. But yes we are on track to deliver the 10 million, and a lot of that 10 million will be, we might say in the back by the second quarter because of course that's most of our selling and a lot of it is in the product costing side. So, but we're on track to deliver Advantis, the products distribution surface would actually have a negative impact on the first quarter because of the seasonality of it. But the 10 million of synergies, basically they are in the back, well, we will deliver on those.

Christopher Butler - Sidoti & Company, LLC

And shifting gears a little bit, I know that a number of companies in the petrochemical supply chain are especially hard hit with inventory destocking at the end of the fourth quarter, and rolling through the first quarter. Was that something that that was a significant impact for you and should we see a some improvement sequentially as we move into the second quarter?

Michael Campbell

I'm sorry Chris, what do you mean by getting hit with the destocking, in terms of their value of their inventory or the inventory of their customers destocking?

Christopher Butler - Sidoti & Company, LLC

Right. Well, your customers reducing volumes and instead of making their normal purchases from Arch.

Michael Campbell

Well, I think that we saw in a number of our businesses, including wood protection and coatings, and Louis alluded to this in the dealer segment of HTH water, is that you're seeing smaller customers being very cautious managing their inventories. And therefore, placing more frequent and smaller volume orders, we do believe though that the destocking the customers we're going through is now behind us. And so that any increase in their demand will be reflected pretty quickly in demand to us.

Christopher Butler - Sidoti & Company, LLC

I appreciate your time.

Michael Campbell

Thanks Chris.

Operator

And our next question comes from Ivan Marcuse with KeyBanc Capital. Please state your question.

Ivan Marcuse - KeyBanc Capital Markets

Hi, guys. How are you doing?

Michael Campbell

Hi Irvin. How are you?

Ivan Marcuse - KeyBanc Capital Markets

Doing well.

Michael Campbell

Good.

Ivan Marcuse - KeyBanc Capital Markets

A real quick on the industrial and the... wood industrial coatings. How much of the loss is responsible for, was in wood protection? Was that breakeven or is meeting with most of your industrial coatings?

Michael Campbell

No, we're actually, wood protection in comparative terms had a tougher quarter. And so I think it's now more evenly split between the two of them.

Ivan Marcuse - KeyBanc Capital Markets

Okay, great. And then quick molly, on the corporate expense line, the 8 to 9 million that's a pretty good run rate going forward.

Steven Giuliano

Yes. Yes, I think you will look at that going forward 8 to $9 million a quarter, much more static this year than it was last year.

Ivan Marcuse - KeyBanc Capital Markets

All right, great. And then is there any movement, last question on the acquisition or divesture?

Michael Campbell

We are working full out on pursuing strategic alternatives for non-core businesses so we have nothing to announce.

Ivan Marcuse - KeyBanc Capital Markets

Great. Hey, nice quarter. And I'll talk to you later.

Steven Giuliano

Thank you.

Michael Campbell

Thank you.

Operator

Our next question comes from Stan Whitehall (ph) with Wellboutden & Co. (ph). Please state your question.

Unidentified Analyst

Good morning, guys.

Michael Campbell

Good morning.

Unidentified Analyst

I was wondering if at all you could breakout the effects of foreign exchange or your currency on a segment basis for the quarter we just past.

Michael Campbell

I am sure, Steve can.

Steven Giuliano

Yeah. Most recent for their first quarter, I mean had a negative impact on order roughly 12%, okay. And then we're going down biocides and PCI at, it had a personal care at about 3%, protection and coating was roughly 10%.

Louis Massimo

On the sales line.

Steven Giuliano

I am going through sales, sorry.

Unidentified Analyst

No, that's right.

Steven Giuliano

Isn't that what you're looking for?

Unidentified Analyst

Yes. You don't really have much of that in urethanes?

Steven Giuliano

Correct. Yes.

Unidentified Analyst

Okay. And I guess in the personal care business, something how much do you attribute the loss of volumes to destocking by your customers?

Louis Massimo

In the first quarter it was, you saw the order patterns and then we were managing inventories. And towards the end of the quarter and into April, the order flows in pretty solid. So they did do a lot of concerned and managing inventories in the early part of the quarter. But the second half of, from a personal care ingredients adjusting it on the anti-dandruff side, it was just demand, weaker demand across the globe for one of our major customers.

Unidentified Analyst

Right.

Louis Massimo

So it wasn't the inventory play, it was demand. But on the personal care ingredients side, it was managing inventories and that we're seeing that recover nicely.

Unidentified Analyst

Okay. And I guess I had one question I had, was kind of broader question against wood protection coatings, urethanes. I mean due to construction markets, are we starting to see a bottom here or you think there could be a little further we could go?

Michael Campbell

Well, I think there is always a little further we can go and we're not psychic in terms of our ability to foresee the future. I can tell you that it seems as though it has stabilized. We're seeing new housing units stabilizing in the mid-3,000 unit range. New housing inventory is down dramatically from where it was at the beginning of the year.

The National Association of Home Builders, which actually has been a pretty good forecast of what's going to happen, is forecasting an upturn by the end of the year. We saw some improvement in construction spending that was reported yesterday. So, if you take a look at the T leases, there is a reason to feel that we're very close to bottom and things might turn up at the end of the year. But we're not including that in our forecast. We are assuming that we stay here in the doldrums for the remainder of the year.

Unidentified Analyst

Right, right. Okay. That's all I have for now.

Michael Campbell

Thanks very much.

Unidentified Analyst

Thanks.

Operator

And our next question comes from Saul Ludwig with KeyBanc. Please state your question.

Saul Ludwig - KeyBanc Capital Markets

Hey, good morning, guys.

Michael Campbell

Hi, Saul. How were you?

Saul Ludwig - KeyBanc Capital Markets

Great, thanks. Hey, how much, you said, Advantis actually had a loss in the quarter. You have a big increase in the water profits. How much did Advantis lose?

Steven Giuliano

Well, it lost $2 million in the quarter.

Saul Ludwig - KeyBanc Capital Markets

All right.

Steven Giuliano

But that's consistent with historical patterns. I think under lost approximately the same amount of money, a little bit more than that I would say under Rockwood Holdings.

Saul Ludwig - KeyBanc Capital Markets

And relative to pricing, what was your unit price increase in Europe, your continuing businesses in water treatment this year versus last year?

Steven Giuliano

Let me disclose at the beginning of the year, is our global price increases were on approximately 15%.

Saul Ludwig - KeyBanc Capital Markets

15%. And what would you say was your unit raw material cost increase in the quarter?

Steven Giuliano

We don't disclose that.

Saul Ludwig - KeyBanc Capital Markets

Well, if you think about your improved margin, how much of that would be due to... would you have maybe a 400,500 basis points variable margin improvement? In other words I'm trying to understand what drove the magnitude of the margin improvement? And is, it's just talking about pricing and raw materials that spread, is that sustainable certainly through the third quarter, fourth quarter, you have new contracts. But is the... whatever you had in the first quarter in terms of variable margin, is that sustainable as we go through the second and third quarters?

Steven Giuliano

Well, as Mike said in prepared remarks, the lower first quarter had a 300 basis point improvement on fleet tax, but for the year we're all projecting a 100 basis point improvement for the full year. So, if that just answers that no 300 basis points is not sustainable, but a 100 is. And it is a combination of pricing. And because we are seeing high raw material costs, what we are projecting some compared to the beginning of the year when we said that we're going to... water business will be about $600 million in sales with a operating margins equivalent to last year which was I think 13%. Now we're being in the 14% range because we are seeing some favorability on our freight and distribution as our surcharges for last year that we ate and did not pass on to our customers, those are going away. So that will be able to recover the cost from a past year.

Saul Ludwig - KeyBanc Capital Markets

Well, as to get the 300 basis point improvement in the first quarter, if you would have segregate your cost into two buckets, variable cost and fixed cost, I would assume that your fixed cost as a percentage of revenue and probably actually increased because you have certain fixed cost that are there and that the variable margin could have increased dramatically or maybe 4, 5, 600 basis points. And I'm just wondering if that variable margin is sustainable. I understand that there is certain cost that you didn't have, that they were deferred until later quarters, I understand that. But I'm just trying to get the distinguishing difference between the variable margin and call up the fixed cost as a percentage of sales, which will go... which will come a little higher we go through the year.

Louis Massimo

Saul, we don't break that out. I will tell that some of the benefit in the first quarter is because of you would remember from last year, we were shipping product to our international locations for, because they were unable to produce. So the North American what I called mothership and child I thin we're shipping products to both South Africa and Brazil and we are incurring freights to count these.

Saul Ludwig - KeyBanc Capital Markets

That's your fixed cost that I'm referring to.

Louis Massimo

No. That's not fixed, well, that freight is not fixed. Freight is variable.

Saul Ludwig - KeyBanc Capital Markets

Okay.

Louis Massimo

Okay. So therefore that's going away. And that's a part of the benefits of now that we do have that those plants running. Yes, you are right. In the second half of the year, we are going to see the benefits of higher volumes in South Africa and Brazil being able to produce locally. So, the average unit cost from a fixed cost basis will be going down for those two areas. And because they represent about 20% of our sales, you're going to see the benefit on it. So the --

Saul Ludwig

What I'm trying to understand is, why your margins for the year won't be better than what you're talking about. When you, that here point you just mentioned, the favorable price cost, the improved volume, the Advantis synergies, all of those things would come into play. I wonder, are you being too conservative in your 100 basis point improvement for the year?

Louis Massimo

Well, I hope you are right and I'm wrong.

Saul Ludwig

Okay. Thank you very much.

Michael Campbell

Thanks Saul.

Operator

Our next question comes form Robert Felice with Gabelli and Company. Please state your question.

Robert Felice - Gabelli & Company

Hey, guys. I apologize if my questions are already been asked. I thing I'm on the call a bit late here. I guess first, I was hoping you can discuss the integration of Advantis, how that process is coming along and how synergy realization is progressing?

Louis Massimo

First of all, the integration is doing quite well. Basically, I'm not going to say it's over until its over, but it's basically for not mostly done. And the synergies attracting nicely. Early on the call, the question was asked, why are we still comfortable with the 10 million and synergies, and yes we are and most of that will be in the back through the second half and first half of the year. So things are doing well, both on cost synergies and some of the sales synergies that with new product introductions into that, with the combination of two groups. So it's been pretty good.

We also just finished and completed in the first quarter our sales force rationalization where we better align the branded distribution and dealer distribution, dealer business together where they are more effective together in servicing the marketplace. So things are going very well.

Robert Felice - Gabelli & Company

Okay. And then I guess, secondly, if I'm not mistaken, Arch's raw material contract with Olin is up for renewal in 2009. And I know that previous contract was based on the look back of what chlorine prices or rather ECU prices were over the previous 12 month period. Given the volatility around those costs, and the contract renegotiation, how should we think about Arch's price cost gap for 2009 or the price cost variance for 2009? And to what extent is this dynamic baked into the guidance?

Louis Massimo

Well, only, the easy one first, the 100% of dynamic is baked into the forecast and part of the reason that we maintain our prices with our customers, but we factored in higher deploying costs from America, kicking into segment third quarter, and based on projections in the fourth quarter. So, it's all baked in there. And we're comfortable with the 100 basis point improvement. Our operating margins prior question I believe that higher than that, but I'm comfortable with my 100 basis point improvement.

Robert Felice - Gabelli & Company

And in terms of the contract renegotiation with Olin?

Louis Massimo

That's our contract is, it gets reset. I think it's now a six months versus a year. What Olin, who is the very good supplier to us, allowed us to do is that we basically locked in a lot of our cost during our, the six months lock-in where we had our highest production levels. So, that when we're doing our pricing with our customers in the December-November, December-January which I disclose to you in February, we know basically the majority of our cost for the seasonal part of this influence.

Robert Felice - Gabelli & Company

Okay. So, I guess two dynamics there. First, it sounds like the contractors already been reset, renegotiated?

Louis Massimo

That was last year.

Robert Felice - Gabelli & Company

Okay. And then second if I'm understanding this correctly, the contract now resets twice annually, but you have the bulk of your product produced already for the upcoming season, prior to resetting of the, the second resetting of the contract. Is that correct?

Louis Massimo

Yeah. Actually, these are determined in the majority, because we, yes. So, we are... it's not like we're half way through the season and we have 25% and with that it can be reset. The majority of our needs we know. And then we have the tail end and what we produce in the, I would say the third quarter would be on a new pricing I could say. The only real exposure or risk you might have where we could have a disconnect between our pricing and our cost that would be in the third quarter. And then we would be able, then we know those costs going into the next season as we go forward.

Robert Felice - Gabelli & Company

Okay. And then lastly, and again I apologize if this question has been asked, I was hoping you can discuss competitive dynamics across HTH in light of some of the financial troubles of your largest competitor there?

Louis Massimo

Yeah. I'll be glad to go over there again. Basically, when you have a competitor having financial difficulties, one of the biggest concerns is the supply disruption to the marketplace so that the consumer to treat their poll it's going to have access to the product. And so, while we haven't directly seen any supply disruptions, we are getting calls, both customers that we share and customers who we have basically on service right now. And put in place contingency plans if that event does occur so that we can properly service to marketplace, because it's not a disruption of any sort is not a good thing just for the marketplace in total, because the consumer you can have a search that it enhance meet the demand.

So right now, everything is smooth. We're putting everything in place. And as we said it's earlier that our forecast for the year does not assume any incremental volume from supply disruptions from any of our competitors.

Robert Felice - Gabelli & Company

And Louis that was actually going to be my next questions. So you caught that one before I asked it.

Louis Massimo

I always try to say hi to you. And I've been unsuccessful.

Robert Felice - Gabelli & Company

Thanks for taking my questions.

Michael Campbell

Thanks Rob.

Operator

: And our next question is a follow-up from Ivan Marcuse with KeyBanc. Please state your question.

Ivan Marcuse - KeyBanc Capital Markets

: Hey thanks. All my questions have been answered.

Michael Campbell

Thanks, Ivan.

Ivan Marcuse - KeyBanc Capital Markets

Yeah.

Michael Campbell

Thank you, operator. Let me make a few closing comments. We're all very well aware that this is in extremely challenging environment for all companies and that's certainly includes Arch.

Despite depressed global markets, our business fundamentals however remain strong. And we are positioned well to achieve another solid year of performance in the phase of these very difficult macro economic conditions. Bolstered by the recent completion of the new $100 million term loan facility, we have sufficient liquidity and flexibility.

We remain confident about Arch's future. And I can assure you that the entire Arch management team is committed toward a goal of delivering strong top-line and bottom-line results. That's all for now. Thanks again for your participation and the opportunity to provide you with this update. Have a good day.

Operator

All parties may now disconnect.

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Source: Arch Chemicals Q1 2009 Earnings Call Transcript
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