Rockwood Holdings Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.30.13 | About: Rockwood Holdings, (ROC)

Rockwood Holdings (NYSE:ROC)

Q1 2013 Earnings Call

April 30, 2013 11:00 am ET

Executives

Nahla A. Azmy - Vice President of Investor Relations and Communications

Seifi Ghasemi - Executive Chairman, Chief Executive Officer, President, Chairman of Rockwood Specialties Group and Chief Executive Officer of Rockwood Specialties Group

Robert J. Zatta - Chief Financial Officer, Senior Vice President, Chief Financial Officer of Rockwood Specialties Group and Senior Vice President of Rockwood Specialties Group

Analysts

David L. Begleiter - Deutsche Bank AG, Research Division

Robert A. Koort - Goldman Sachs Group Inc., Research Division

Michael J. Harrison - First Analysis Securities Corporation, Research Division

John P. McNulty - Crédit Suisse AG, Research Division

Frank Longobardi

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Richard O'Reilly

Cooley May - Macquarie Research

James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division

James Finnerty

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Rockwood Holdings First Quarter 2013 Results Call. [Operator Instructions] And as a reminder, this conference is being recorded. I'll now turn the conference over to Nahla Azmy, Vice President, Investor Relations. Please go ahead.

Nahla A. Azmy

Thank you, Kathy. Good morning, everyone, and welcome to Rockwood's First Quarter 2013 Earnings Conference Call. Seifi Ghasemi, our Chairman and Chief Executive Officer; and Bob Zatta, our Chief Financial Officer, will provide a formal presentation, after which, we'll have a Q&A session. You can follow the presentation for our call on our website at rocksp.com.

During this call, we may make statements about our expectations or projections towards the future. All such statements are forward-looking statements. Although they reflect our current expectations, they involve known and unknown risks and uncertainties and are not guarantees of future performance. You should review our earnings release and Form 10-K, filed with the SEC for more information regarding factors that could cause actual results to differ materially from these projections or expectations. We do not plan to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, some of our comments will reference non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure is contained in our earnings release and on our website. So with that, I'll turn the call over to Seifi.

Seifi Ghasemi

Thank you very much, Nahla, and good morning to all of you, and thanks for taking time from your busy schedule to join our call today.

During my presentation, I will refer to the material we have posted on our website, and I'm sure, you have in front of you.

During the first quarter, the trading environments for our businesses were not as robust as we had expected. We achieved an overall sales growth of 2.8%, but that was mainly due to an acquisition in the middle of last year.

Our adjusted EBITDA for the quarter, excluding TiO2, was slightly ahead of last year, with an EBITDA to sales margin of 24%.

Our Lithium, Surface Treatment and Ceramic businesses performed per our expectations. Our TiO2 business continued to perform poorly as a result of significant erosion in pricing and higher raw material costs. I will comment on the performance of each business unit later on in this call.

During the first quarter, we acquired the remaining 39% interest in our TiO2 business from Kemira, allowing us to be in a position to control the strategic direction of that business to maximize shareholder value.

We also paid down approximately $509 million of debt, bought 1.5 million of our shares and increased our quarterly dividend to $0.40 a share from $0.35 a share.

Now let us refer to our presentation material. Pages 1 to 7 are self-explanatory, so please turn to Page 8. Here, we have broken down the details of our sales growth for further clarity. We always do that, and this is in line with our standard practice.

Pricing for all of our business units was higher, except for TiO2. To be more specific, pricing was down about $56 million in our TiO2 business, which is about 20%, while the price increase for our other businesses was up around $11 million or about 1.6%.

With respect to volumes, the increase is mainly due to a slight volume increase in Lithium, a significant growth due to an acquisition in mid-2012 in our TiO2 business, and a volume decrease in our Pigments and Additive business, due to a slowdown and drilling for natural gas and oil.

Now I will comment on the performance of each business unit, so please turn to Page 9. Our Lithium business continues to perform well. Sales increased by 4.2% in constant currency terms, and our talented and hard-working management team, through their continued focus on productivity and efficiency, improved their margins by 90 basis points to 39.6%.

Sales in battery products during the first quarter were lower than of last year, due to a well-known global slowdown in PC -- personal computer shipments. We continue to be optimistic about the performance of this business, and believe that for all of 2013, we will be achieved -- able to achieve a total sales growth of approximately 8% to 10% for the whole year versus last year.

We are making very good progress toward the construction of our state-of-the-art lithium carbonate plant in Chile and expect the plant to come on a stream during the first half of 2014.

Now, please turn to Page 10 to discuss our Surface Treatment business. Sales were slightly down versus first quarter last year, mainly due to lower volumes in general industry in Europe, steel, coil and cold forming applications.

Sales in the Auto sector, they're firm and per our expectations. Due to continued focus by our excellent management team in this sector despite the slight decrease in sales, we were able to increase our margins from 21% to 21.4%.

We continue to believe that this business will perform well during 2013.

Now, please turn to Page 11. Our Performance Additives sector sales were down more than 9% versus last year, mainly due to a slowdown in oil and natural gas drilling in North America. In addition, construction activity in Europe was very weak, as you would expect.

Despite the significant decrease in sales, effort to control costs were effective, resulting in an improvement in margins of 50 basis points from 19.7% to 20.2%. We do expect the performance of this sector to improve in the coming quarters, aided by increased activity in U.S. remodeling and construction.

Now please turn to Page 12, our TiO2 business. Considering the performance of this business, I would like to share some additional data with you, as related to volume and pricing.

On a pro forma basis, our volumes were higher by 7% versus first quarter of last year. That if the normalize for the acquisition that we had made, we still had -- we had a 7% increase in volume of sales.

In this quarter, volumes were 40% higher than the fourth quarter of last year. So on a sequential basis, we saw a 40% increase in volumes. Therefore, we are seeing an increase in sales, as we expected, which is helping us reduce our inventories. But unfortunately, the pricing environment has been very difficult. Average selling prices are about 20% lower than first quarter of last year, and almost 8% lower than the fourth quarter of 2012.

We have been running our facilities at around 60% to 70% capacity to reduce inventory. We have more to do, and that is why in the fourth -- in the second quarter of this year, we will continue to run the plants at very low levels to control inventory. But as a result of doing that, we will end up with significant additional fixed-cost absorption. And as a result, we expect a much lower level of profitability in the business during the second quarter.

The second quarter performance of the business will be very challenged. However, with demand for our products improving, which will result in a better pricing environment and the expected decrease in raw material prices, we are actually optimistic about the overall performance of our TiO2 business in the second half of 2013.

Now please turn to Page 13. Our Advanced Ceramic business continues to perform well. Our medical business is expanding at a rapid pace, and as a result, our overall margins continue to improve, which is now at 32.5%.

Our experienced management team in this sector has identified several additional areas of growth opportunities, both in medical and other areas, and we are already investing in some of these projects. During the first quarter, we approved a EUR 45 million expansion of our facilities to produce additional ceramic hip joints to ensure that we will have capacity to keep up with the accelerating demand.

At this point, I would like to turn the call over to Mr. Bob Zatta, our Senior Vice President and Chief Financial Officer, to give you the details of our financial performance. After that, I will come back with a summary statement, and then we will open the call for questions. Bob?

Robert J. Zatta

Okay. Thank you, Seifi, and good morning, everyone. I'm on Page 15 of the presentation. This is our reported income statement for the first quarter of 2013.

As Seifi indicated, we reported sales of $934.6 million for the quarter. This compares with $909.5 million in the same period last year or an increase of 2.8%.

Sales were up in the quarter, primarily due to the volume impact of the TiO2 crenox acquisition in July -- last year, partially offset by lower TiO2 selling prices and softer year-on-year volume in Performance Additives, especially in the clay-based additives oilfield business due to the lower drilling activity.

We reported gross profit of $273.8 million or 29.3% of sales for the first quarter, as compared with $342.8 million or 37.7% of sales in the same period last year. The decline in the quarterly gross margin year-on-year is due primarily to our TiO2 pigment segment, lower selling prices and lower production levels to reduce inventory, combined with higher raw material costs to reduce gross profit.

Between gross profit and operating income, we had SG&A expenses of $180 million or 19.3% of sales, up slightly from $177.1 million or 19.5% of sales in the same period of last year.

In addition, we also have restructuring and other severance charges of $7.1 million in the first quarter. This brings us to operating income of $86.7 million for the quarter. As a percent of sales, this is 9.3% of sales versus 16.7% last year.

The next major item is net interest expense. The composition of interest expense is shown at the bottom of the page. Net interest expense increased in the first quarter, due to the issuance of the $1.25 billion unsecured senior notes in September of 2012. Please note, as I had mentioned previously, that interest has been accrued on the senior notes since September of 2012, but the first interest payment was not scheduled or has not been scheduled until April 15 of this year.

In the first quarter of 2013, we repaid all of our outstanding borrowings under the TiO2 facility agreement. In conjunction with this payment -- prepayment, we recorded a charge of $17.6 million for the right off of the first financing costs related to the TiO2 facility agreement.

In addition, we recorded a charge of $15.3 million for foreign exchange losses related to intercompany euro-denominated loans put in place to fund the TiO2 debt repayment, as well as intercompany loans for tax planning. This is a noncash charge. There's no economic impact. And obviously, you can change from quarter-to-quarter based on foreign exchange rate movements.

This brings us to income before taxes, which is $24.9 million for the quarter. Again, there was an income tax provision of $8 million for the first quarter. On an adjusted basis, the effective tax rate for the first quarter is about 28%.

We then show a net loss of $2 million in the first quarter, attributable to the noncontrolling interest in the TiO2 and timber joint ventures. The change in the quarter from the prior year was primarily related to lower earnings in our TiO2 venture, and the acquisition of our TiO2 venture partners' 39% interest in February.

This results in net income of $18.9 million for the first quarter.

Page 16 presents a reconciliation of net income to adjusted EBITDA. For the first quarter, beginning with net income of $18.9 million, we have detected a net loss attributable to noncontrolling interest and income tax provision, which gets us to pre-tax income of $24.9 million. Then, adding back interest expense and D&A, brings us to us a subtotal of $120.9 million. We then have several onetime adjusting items, which brings us to adjusted EBITDA in the first quarter of $168.2 million.

Turning to Page 17. Page 17 provides a detailed reconciliation of net income and EPS on a reported basis to net income and EPS as adjusted. As you can see, the adjustments are shown on an after-tax basis and include the same items already identified on the previous charts. This gives us an adjusted EPS of $0.68 per share for the first quarter.

Page 18 provides a detailed reconciliation between income before tax and noncontrolling interest of $24.9 million to the normalized as adjusted profit before tax, which is $72.4 million; and secondly, from the reported tax provision of $8 million to the normalized tax provision of $20.1 million. This gives us an effective tax rate of about 28% in the first quarter.

The effective tax rate of 28% is about 4 percentage points higher than the same period last year. This is due to 2 reasons: First, on a minor basis, our foreign income in lower tax countries was lower this year than last year, but most importantly, it was majorly driven by the fact that last year, as you know, we reversed the U.S. valuation allowance. And as I have mentioned in the past, this increases our effective tax rate about 3 to 4 percentage points. So that's really the difference between the 2 years.

Page 19 provides a summary of our cash and debt position at March 31, 2013. As noted above, we repaid all of the outstanding borrowings under the TiO2 facility agreement. And on Page 20 shows a long term trend in Rockwood's leverage ratio, and we have continued to deliver as a company in accordance to our plan.

Page 21 presents our free cash flow. As you can see, there was an outflow of $5.5 million in the first quarter. This is an improvement versus the first quarter of last year, and is primarily driven by a significant lower use of cash for working capital.

We expect free cash flow for the first half of this year to be about equal to last year, but with much stronger free cash flow generation in the second half of the year, as we will see a significant reduction in working capital. And with that, Seifi, I'll turn it back to you.

Seifi Ghasemi

Thank you very much, Bob. And now, I would like you to please refer to Page 23.

As you recall, in January of this year, we had an investor conference, and at that conference, we made a commitment to do a few things, and I'd just like to give you an update on that.

The first thing was that we announced a share buyback program of about $400 million. Up to now, we have bought 1.45 million shares, and we are committed to see this project completed during the year. So we are -- we will continue with the share buyback program.

Number two, we had an estimated dividend yield in the range of 2.8% to 3.2%. That's what the -- promise that we will do. And as a result of that, since the share price had gone up, we increased our quarterly dividend from $0.35 to $0.40 in order to follow-up with that commitment.

We said that we will pay about $600 million of debt during the year. We have already paid down about $510 million, $512 million, as Bob already mentioned.

The fourth point was that we made a commitment that we will find an exit for our TiO2 business during 2013. We are still committed to that goal, and we are confident that we will be able to make that happen in 2013.

So with that, I would like to now open the session for any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first quarter will come from David Begleiter with Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Seifi, in Europe, are you seeing any signs of either stabilization or even improvement in some of your industrial end markets?

Seifi Ghasemi

We see stable conditions in the U.S. and weak conditions in Europe and a little bit of weak conditions in Asia Pacific. So we're not seeing any kind of significant improvement, no.

David L. Begleiter - Deutsche Bank AG, Research Division

Fair enough. And just on the TiO2 sale, say given the challenging conditions of this business, have you thought about either delaying the sale until things do stabilize and show improvement to get better value for this asset?

Seifi Ghasemi

David, we have said that our -- with the business, if we do not get the valuation that we want, as we have said, we will spin it off to the shareholders. So that process is underway, and we will do that. In terms of the valuation, anybody who's going to looking at buying that business cannot possibly be looking at the performance quarter by quarter, because you have to look at it on a long-term basis, David. And I'm sure that if there are any buyers, they are sophisticated enough to understand that.

David L. Begleiter - Deutsche Bank AG, Research Division

And last, for Bob. Bob, in case of the buybacks, Q2, Q3, Q4, is that evenly spaced? Or any insights to that?

Seifi Ghasemi

On that front, David, we are going to do the buyback on an opportunistic basis, and you know how these things are done. So we are committed to do the buyback, but we don't want to kind of pre-announce how we're going to do it.

Operator

We will go next to Robert Koort with Goldman Sachs.

Robert A. Koort - Goldman Sachs Group Inc., Research Division

You mentioned in the comments some weakness in a couple of Lithium products, and I'm curious, some of those tend to have pretty stable end markets. So is there something adverse going on in those end markets? Do you think maybe people are pre-buying ahead of price hikes, and what's your confidence in the forward look?

Seifi Ghasemi

Bob, the Lithium market, the one specific area that I mentioned was that our battery products, lithium sales was growing at around 40%, 50% last year, as you know. That growth has slowed down to about 10% as a result of the slowdown in PC shipments and consumer products and all that. That's the only area that I wanted to mentioned, because that is -- we believe that, that is going to stabilize and that is why I wanted to make sure I make the comment that for the whole year, we still expect that business to grow about 8% to 10%. There is a little bit of weakness in our butyllithium sales, because as you know better than anybody else, Bob, there is a slowdown in the polymer business worldwide, and that is where most of our butyllithium is used.

Robert A. Koort - Goldman Sachs Group Inc., Research Division

Got it. And then on TiO2, I guess, I would have thought from a seasonal standpoint, the first quarter will be the weakest as you ramp up to seasonal trends in the second quarter. But I think you intimated that things will be a little tougher in the second quarter. Is that a function of your less coatings-intensive customer base from the rest of the industry?

Seifi Ghasemi

No, Bob. I did -- our volumes are growing, Bob. Our volumes versus last year, on a pro forma basis, up 7% versus the first quarter is up versus the last quarter of last year is up 40%. We expect the volumes to go up -- our sales volume to improve in the second quarter. What I wanted to make sure that we convey is that since we are running the plants at significantly lower rates in order to further reduce the inventory on hand, that will have a negative effect on the EBITDA, and therefore, we will have a poor EBITDA result. But the sales are continuing to improve. So from that point of view, you're exactly right.

Robert A. Koort - Goldman Sachs Group Inc., Research Division

I'm sorry, Seifi. Just so I am clear, so your -- you'll run your plants at lower rates in the second quarter than the first quarter?

Seifi Ghasemi

Yes, probably yes.

Operator

We have a question from Mike Harrison with First Analysis.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Just in terms of the weaker lithium volumes in the battery markets, it sounds like you think that's pretty much market-driven. Is it your belief that you're maintaining share in battery products? And are you currently sold out of lithium carbonate?

Seifi Ghasemi

Mike, Rockwood is not going to lose market share in lithium to anybody. We are the lowest-cost producer of lithium carbonate and lithium hydroxide. And as a result, there is no way that we will lose market share. So the lower sales in battery products is the general market. We absolutely are not losing market share.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

And in terms of the new lithium carbonate facility in LaNegra, is the -- that the first half of '14, is that timing a little bit faster than you would expected? And, I guess, what's driving you to accelerate that if that is the case?

Seifi Ghasemi

The fact that we are sold out, Mike, as you mentioned before, we do need the product and therefore, we would like to bring the plant on a stream to in order to make sure that we supply our customers.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

And can you talk a little bit, Seifi, about how the LaNegra plant and the modifications you're making there, how does that change your mix of higher purity lithium carbonate?

Seifi Ghasemi

Well, it actually will -- the whole new plant, the 20,000 tons of capacity that we are bringing on, is the higher purity material. So it significantly enhances our ability to supply that market.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

All right. Just in terms of the portfolio moves that you've been contemplating. You've kind of suggested that the process remains underway. Can you just maybe give any details on how the process is going with respect to not just TiO2, but Ceramics and Performance Additives? And can you also address the reports that you'd be planning to sell TiO2 and Performance Additives as a combined entity to a single buyer?

Seifi Ghasemi

Mike, on that one, I want to be very cautious about any kind of a public statements on the processes that we are running, because we are doing a lot of things that have not gotten to the stage that one is able to make a public statement, and I'd like to keep it that way. But I do want to say that with respect to your last statement, our intention -- sales or no sales, we are, and we have already taken action to put our TiO2 business and our Performance Additive business together. And we have already announced that we have a new president running that combined business. Mr. Andy Ross will be in charge of our TiO2 and Performance Additives business. The reason that we are doing that is that because between those 2 businesses, there is significant amount of synergy, and we were not able to do this because Kemira used to own a minority share in TiO2. Now that they are out, we can do that, so we have 2 kinds of synergies. One is the combined business as SG&A synergies, but then, in addition to that, it has commercial synergies, because a lot of times, the buyers are the same for both products. And as a result, by having more of a complete offering of different products, we can begin to increase our market share. So there is significant upside by having those 2 businesses together. We have already done that, and that process is underway and we think that enhances the value of those businesses.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

All right. Last question I had, similarly along the lines of portfolio changes. Clearly, it would be a positive if you could deploy cash that you received on some attractive bolt-on acquisitions in Lithium or Surface Treatment. Can you talk a little bit about your acquisition pipeline, and maybe how likely it might be that we could see an acquisition before year end?

Seifi Ghasemi

We believe that there are significant opportunities in those 2 businesses. Whether we will do anything during this year, I don't think so, Mike. But in the long-term, there are great opportunities there. As -- you witnessed that last year when we were going to buy Talison, but there are opportunities there. But whether we will do anything this year, I doubt that.

Operator

You're next question is from John McNulty with Credit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

Just a couple of quick questions. On TiO2, in terms of where your inventory levels are, relative to the kind of what a normal level would be, where are you percentage-wise?

Seifi Ghasemi

We are about 1.5 month too high.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, so when you're destocking, you should be done at some point -- or done through the destocking phase at some point in the second quarter?

Seifi Ghasemi

Yes. We definitely, by the end of second quarter, will be at or below where we usually want to be.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, perfect. And then with regard to Performance Chemicals or -- excuse me, Performance Additives, you would put out, I guess, last year, at your Investor Day, there was a talk of a 300-basis-point improvement in the margins year-over-year. Are you still on track to be doing that? And also maybe if you can add a little bit of color as to where your confidence is in some of the U.S. construction markets starting to improve, that would be great.

Seifi Ghasemi

John, I hope you see that we are trying to be -- we are delivering on the margins, because the margin for Performance Additives right now is at 20.2%. Last quarter, it was about, I think, 14%, 15%. So we are moving that, and I have always said that when U.S. construction comes back to the levels of about 1.5 million to 2 million houses a year, the margins in that business will be around 28%. So that is on its way. In terms of the housing activity in the United States, we have not -- there a lot of headlines about -- that we have read, but we have not yet seen a material impact on our business. We expect that to happen in the second half.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, great. And then just one last question, if you're comfortable on it. On the strategic alternatives that you're looking at for some of your businesses, can you comment as to what the different tax implications might be for some of these assets if they vary dramatically from one to the next and how we should think about that?

Seifi Ghasemi

I think you should think that for all of the businesses, the tax leakage would not be significant.

John P. McNulty - Crédit Suisse AG, Research Division

And why is that? It's just because they are -- a number of them are pretty old assets that you've had for a while. So how -- what are kind of maybe the things that prevent some of that leakage?

Seifi Ghasemi

But those assets are -- because we have been doing acquisitions and so on, have a pretty high tax basis.

Robert J. Zatta

Yes. I mean the only piece that's -- John, the only piece that you'd be referring to here would be in Performance Additives, probably our clay additives business and our Color Pigments business. Color Pigments, actually, has a pretty high basis and don't forget, we also have a lot of U.S. NOLs. So as we look at the tax model, I mean, there's a lot of different scenarios in terms of where the cash is and how you allocate it. At this point in time, it would be all guesswork. But as Seifi said, we're not seeing any tax leakage on any of this.

Operator

Then we'll go next to Frank Longobardi with Alcentra.

Frank Longobardi

Sorry, I thought I withdrew my questions from the queue as John's question about the inventory was my primary one. But my secondary question, I guess, you did say 40% sequential improvement on your TiO2 from a volume perspective, is that right? 40%?

Seifi Ghasemi

That is correct. First quarter, we sold 40% more products than we did in the fourth quarter of last year.

Frank Longobardi

Okay. And is that -- that's a like for like basis in terms of...

Seifi Ghasemi

Exactly. That is pro forma. That is like to like basis. Yes, sir.

Frank Longobardi

Okay. So just comparing your sequential improvement in volumes versus some of your competitors, it just seems -- that's pretty dramatic versus some of the other competitors. Is that a function of some of the end markets that you serve? I mean, that's a -- seems like a pretty dramatic increase sequentially.

Seifi Ghasemi

Well, I think it's a consequence that we decided that we wanted to recoup some of the market share we had lost.

Frank Longobardi

So you did that, do you think you lowered your prices more so than some of your competitors to do that or...?

Seifi Ghasemi

Well, we did the standard thing. I think before we didn't have the capacity. We have the capacity. We want to load up our plant, so you kind of balance between volume and price, right?

Operator

We have a question from Silke Kueck with JPMorgan.

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

So Huntsman said on its call that they're also exploring strategic options for its TiO2 business, and I couldn't tell if they're trying to buy or to sell. Do you have any view on that?

Seifi Ghasemi

No, I don't. I mean, you have to ask them.

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Okay. The benefit from the transaction of buying the German plant was something like $26 million in sales, I think for the quarter. Is that about right?

Seifi Ghasemi

Order of magnitude, you're right.

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Order of magnitude. And did you get any incremental operating profits or any incremental EBITDA?

Seifi Ghasemi

No, we did not, because that plant is a turnaround story. We have always said that. We have bought that plant for the long-term. It's -- we need to do things in order to improve the profitability of that plant, but it did not contribute to the bottom line, no.

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

In Surface Treatment, it seems like you gained -- I thought the business performed much better than I would have thought in the wake of the European auto markets. So it seems that you're continuing to gain market share. Well, that's how I read that.

Seifi Ghasemi

No, Silke. I think -- I don't think we want to claim that, what we want to claim is the fact that the specific auto plants that we serve did well. You see, if you look at the general numbers for auto sales in Europe and so on, if we were serving -- serving anything to, I don't know, for example, Fiat. We would have had a decline because sales for those kind of cars are going down. But we are on the very high-end lines, and those high-end lines for specific models of Mercedes, for specific models of Audi, for specific models of -- we are just on the right lines, and that is why we didn't -- we did well. And as I said, you know this very well. We have a specific, sophisticated model, where we can predict our business for 3 months. And we can say right now that for the next 3 months, we think we will be doing fine.

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Okay. And then just a handful of housekeeping questions. So your share count didn't really move, even though you bought back 1.5 million shares. Did you buy them all back at month's end or is that dilution from option exercises or...

Seifi Ghasemi

Silke, when we do that share count for the quarter, that is an average share count for the quarter. So when we buy 1.5 million shares at a certain point in time, it doesn't really move the quarter that much, because it's an average. But for the next quarter, you're definitely going to see 1.5 million less shares, minus any additional shares that we will buy in the second quarter. But that gets diluted because of the average.

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Okay. Second, is your -- is the Viance joint venture operating at a loss or at a profit level?

Seifi Ghasemi

The Dow joint venture?

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Yes.

Seifi Ghasemi

That is operating at a very nice profit, and the business is doing very well.

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Okay, and lastly, your interest payments was a prepayment of a debt. Should that be going down to something like $25 million a quarter?

Seifi Ghasemi

I'd like to have Bob answer that.

Robert J. Zatta

Yes. The answer is -- to that, yes, it will be down to about $25 million in the quarter, beginning in the second quarter.

Operator

Your next question is from Aleksey Yefremov with Bank of America.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

I just wanted to follow-up on Titanium Dioxide. Seifi, it sounds like, if I got it correctly, relatively weak EBITDA is partly a function of lower utilization rates. Would it be possible to quantify that fixed cost absorption? In other words, if you were running your plants according to your current sales volumes, if you didn't have to destock, what would your EBITDA have been in Q1?

Seifi Ghasemi

We have probably been about $15 million to $20 million higher. The fixed-cost absorption is huge.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

$15 million to $20 million higher. And then, is it fair to say...

Seifi Ghasemi

Sorry. Alex, that's why we say that we are optimistic about the second half, because once we get our inventory down to the levels we want and the raw material prices are stabilized, that business -- don't forget that, that business in 2011 made $256 million of profit. That's $60 million a quarter -- $65 million a quarter.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Do you think you would need to raise prices to get back to that level from current level of profitability? Or the volume recovery and lack of destocking would be enough?

Seifi Ghasemi

Volume recovery will do that because now we have an additional plant, and as a result, that will do it.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

And just a follow-up on that. What is your outlook for raw material costs in TiO2 for second quarter and second half, if you could?

Seifi Ghasemi

It will continue to decrease. We already know that in the second quarter, they are coming down. And we expect them to continue to come down as long as the prices are down. There is a direct correlation between them.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Great. And maybe last one on Lithium. What is the level of lithium carbonate pricing now compared to the beginning of the year? Roughly, have prices been stable? Or increased or declined for the industry?

Seifi Ghasemi

In our investor conference, Dr. Haber made a presentation about our Lithium business. We are very specific to say that we expect lithium prices to be stable for 1 or 2 years. That is our prediction, that we will not have a significant price increase in lithium during this year and probably next year.

Operator

Our next question is from Richard O'Reilly with Revere Associates.

Richard O'Reilly

Just a few quick ones. I think on your opening comments about volumes, I think you indicated that Lithium was up volume-wise, but that's hard to -- hard to see that in the press release. Are you talking about Lithium per se? Or overall, which includes the potash products?

Seifi Ghasemi

It includes the potash.

Richard O'Reilly

Okay. And potash, that's a coproduct. So are those sales because your production rose or just the timing of the sale of potash?

Seifi Ghasemi

Timing.

Richard O'Reilly

Timing. Okay. Second thing, on your outlook comments for the TiO2 pigment business, are you thinking sequentially earnings will be down, not just year-over-year?

Seifi Ghasemi

Yes, I think, sequentially, they will be down too. Year-to-year, they will be down significantly, but I also think that sequentially, it will go down because of fixed cost absorption.

Cooley May - Macquarie Research

Correct. You think they'll go below, break even or?

Seifi Ghasemi

It's possible.

Richard O'Reilly

It's possible. Okay. Third question, you may not answer this, but to follow-up a comment about what Huntsman said today, and there's been an analyst report about maybe the largest titanium producer could do something. What other -- what have other companies -- do you know any other companies that have talked about wanting to go to a dance and find partners, if I can say it like that?

Seifi Ghasemi

I think you said it correctly at the beginning that I think I might not answer that question.

Operator

[Operator Instructions] We do have a follow-up from Mike Harrison with First Analysis.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Just a couple of additional ones. First of all, on Performance Additives, can you give us a sense of the year-over-year decline in the clay-based additives business, either on a dollar basis or percentage?

Seifi Ghasemi

You really want that detail, Mike?

Michael J. Harrison - First Analysis Securities Corporation, Research Division

I think it helps triangulate what the segment's doing.

Seifi Ghasemi

Yes. We usually don't give that numbers down, but volume-wise, it was probably more than $8 million on clay-based.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

And then, was pricing stable? Or is pricing falling as well?

Seifi Ghasemi

No, pricing is stable. Pricing, as I've said in my comments, Mike, every single one of our sectors in the first quarter had a price increase, other than TiO2.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Okay. And then you talked about plans to expand the medical ceramics facility. I think that's the first expansion we've heard about in Ceramics since you built a second facility which was intended to ensure better supply security. What's driving the decision to expand now? You mentioned it was EUR 45 million. I guess, if you could just put that in context of what kind of percentage expansion it is, and when do you expect it to be up and running?

Seifi Ghasemi

Mike, that's a good question. You see, when you're talking about the hip joint business, when you expand. You can't just expand 5%, you have to put in significant expansion. So when we expanded about 8 years ago, we basically, significantly, more than doubled the capacity, and gradually, during the years, we got sold out. Right now, we are sold out on what we can make on hip joints. Therefore, it is essential that we very quickly expand our facilities. We have done some incremental expansion. And now, this is a major commitment to significantly expand in order to increase our capacity by about 30%, 40%. That business is growing very nicely, better than we thought.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

And will the new -- will the expanded facility be able to produce other medical components like knee or shoulder components? Or is it only hip joint components?

Seifi Ghasemi

No, it will be -- well, it's mainly designed for hip joints, but some of the machining and so on can also be used for knee joints.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Okay, and just a last question on butyllithium, and the weakness you're seeing in polymerization catalysts. What's the outlook on that business? Is it if China improves, that business should improve? Or is it a globally-driven business? I just don't have a great sense for kind of what your customers' market drivers are in polymerization catalysts.

Seifi Ghasemi

Mike, we think it's a global phenomenon. And we think that, that weakness will continue for a while.

Operator

And we have a question from James Sheehan with SunTrust Robinson Humphrey.

James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division

I just have a question on your TiO2 margins. I'm used to thinking of your margins in that business at a trough level as being someone closer to the mid-teens. And obviously, they are lower now because of unique circumstances. Could you just provide a little color on -- are the margins lower in the commodity parts of that business versus specialty? And are you expecting to get back to a mid-teens type of level in the second half of the year?

Seifi Ghasemi

Jim, you're very correct in your observations. Last time that there was a trough in TiO2, we maintained a margin of about 14%, and everybody else was losing money. That was because our business was a lot more focused on our specialties. Right now, we have expanded into more of the commodity, especially with the new plant that we have bought. Therefore, the margins have come down lower than we did last time. Plus the fact that the downturn in TiO2 now is actually more severe than it was in 2009, especially in terms of pricing. Our specialty products have held up the pricing, so the main issue is on the commodity site. We expect that when we come back, we would get back to somewhere between 15% to 20%, yes.

James Finnerty

Great. And could you also just update us on the progress you're making on the Color Pigments expansion in Georgia? Is that process on hold now due to the sale process? Or your moving forward?

Seifi Ghasemi

That process is going forward. We're on a schedule, and they are digging the ground and finalizing the engineering. We haven't slowed that plant down at all.

James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division

When do you expect that to be completed?

Seifi Ghasemi

Is expected to be completed at the end of 2014.

Operator

Mr. Ghasemi, we have no further questions. Please go ahead with any closing remarks.

Seifi Ghasemi

Well, I would just like to thank everybody for staying on the call and asking some very good, relevant questions. We appreciate that, and we look forward to talking to you for -- when we announce our second quarter results. Thanks, again, and have a wonderful day.

Operator

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

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