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Rockwood Holdings (NYSE:ROC)

Q4 2013 Earnings Call

March 03, 2014 10:00 am ET

Executives

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

Seifollah 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, Principal Accounting Officer, Senior Vice President, Chief Financial Officer of Rockwood Specialties Group and Senior Vice President of Rockwood Specialties Group

Analysts

Neal Sangani - Goldman Sachs Group Inc., Research Division

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

John P. McNulty - Crédit Suisse AG, Research Division

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

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

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Keith M. Kitagawa - HSBC, Research Division

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

Richard O'Reilly

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Rockwood Holdings 2013 Fourth Quarter Conference Call. [Operator Instructions] And as a reminder, this call is being recorded. I'd now like to turn the conference over to Nahla Azmy. Please go ahead.

Nahla A. Azmy

Thank you, Linda. Good morning, everyone, and welcome to Rockwood's Fourth Quarter 2013 Earnings Conference Call.

Seifi Ghasemi, our Chairman and CEO; and Bob Zatta, our CFO, will provide a formal presentation, after which we will 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 for 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.

And so with that, I'd like to turn the call over to Seifi.

Seifollah Ghasemi

Thank you very much, Nahla. And good morning to everyone, and thank you for taking time from your busy schedule to participate in our call today. We do appreciate your interest in our company.

I am very pleased to report that Rockwood had an excellent set of results in our core businesses in the fourth quarter and all of 2013. The details are in our press release, and I will comment on them as we move forward. But before we get into the details, it is necessary to review and reflect on the significant changes in our portfolio in 2013 and explain the strategic intent behind our decision to execute a major transformation of our company.

In the last 9 years as a public company, we have, on a consistent basis, said that the only strategic goal we have at Rockwood is to maximize shareholder value. This is the guiding principle, which drives everything we do. Our job is to make money for our shareholders. We believe that, in the long term, what matters is the increase in the per share value of our stock and not overall size or growth. I want to emphasize this point since it is the core of our strategic thinking. We act to increase the per share value of our stock and are not enamored with building an empire and running a bigger company. So it is this fundamental principle of focusing on increasing the per share value of the stock that led us to the strategic decision to sell 60%, yes, 60% of our company and focus on our 2 core businesses. We publicly announced the key elements of our strategy a year ago in January of 2013 and set a target of executing it in 2 years. Today, a year later, we have delivered on all elements of that strategy well ahead of plan.

At this point, please refer to Page 5 of our presentation material. In January of 2013, we said that we will sell our Advanced Ceramics business. That was done. We closed on that deal in late August of 2013. We said we will sell our Clay-based Additives business. That was done, and we closed on that deal in October. We said that we will sell our TiO2 business and a few other businesses. We have entered into a definitive agreement with Huntsman Corporation for the purchase of those assets. And obviously, that transaction is being reviewed by the European Union and being expected to close in the first half of this year.

We said we are going to buy back $400 million of shares. We did that. That was completed at an average price of about $63 a share. We said we are going to pay down $600 million of debt. We actually paid down $1.4 billion of debt, since we have received a lot of cash from the sale of assets. We said that we will maintain our dividend yield. That was done. We increased our dividend last year. And we said that we want to accumulate a significant amount of cash on hand so that we have a lot of options for capital allocation and corporate activities. Well, as of right now, we have $1.5 billion of cash on hand, and we expect that number to increase to $2.5 billion once we close the sales of our TiO2 business.

So in summary, we have executed every element of our announced strategic transformation by selling 7 noncore businesses for $3.9 billion. We are now focused on 2 great businesses, Lithium and Surface Treatment, with a very strong balance sheet that gives us many options to create further value for our shareholders. Please note that today, although Rockwood is 60% smaller in terms of sales, the per share value of our stock is 60% higher than a year ago. We believe that is the true measure of the value we have created for our shareholders.

At this point, in response to questions from our prospective shareholders, it is appropriate to mention that in addition to having a coherent long-term strategy, on a day-to-day basis, we run the company to drive cash generation. We believe that cash flow, and not reported earnings, is what drives long-term value. So on a day-to-day basis, to generate more cash, we are focused on organic growth, driving productivity, increasing prices to cover our cost increases and are very focused on proper and targeted allocation of capital. Capital allocation is one of, if not the most, important job of any CEO, and we are very, very disciplined on that.

Now let me comment on our 2 core businesses and their performance. First, our Lithium business. As most of you are aware, Rockwood Lithium is the largest fully integrated lithium company in the world. We own or have access to vast lithium reserves in 3 continents: North America, South America and Australia. We have processing facilities in North America, South America, Europe and Asia, which puts us in a unique position to serve the needs of our global customers. We have been in the lithium business for 90 years, yes, 90 years. As a result, our fundamental knowledge of this business is very deep, with many patents and significant know-how.

We have, by far, the largest research and development staff and facilities of anyone in this business. Our scientists have been the pioneers in developing most of the technologies employed in lithium extraction and processing, and they are constantly developing new products, processes and services for our customers.

Ten years ago, we told our investors that we believe, based on fundamental geopolitical trends related to the world's dependence on oil as the only fuel to power our transportation sector and a massive move toward mobile communication devices, energy storage will emerge as the major industry of the future, with potential to develop into a huge industry that will change the world.

The most efficient mechanism to store energy is the lithium ion batteries, and these lithium ion batteries can only operate if they have lithium in them. Therefore, developing and investing in our Lithium business was the right thing to do in the long term. We made that decision 10 years ago with the full expectation that this is a very long-term play that would probably benefit us 15 years later; that is, in 2017 or later.

We have been very clear with our investors since we went public in 2005 that we do not expect a significant breakthrough in our financial performance in this business until 2017 or later. Developing and investing in our Lithium business has been, and is today, a long-term play for Rockwood based on the vision of what the future might be. Obviously, the developments in the last year, and especially in the last few years, is giving a significant amount of credibility to that vision, and we are very pleased to see that.

We are committed to invest in this business ahead of demand. We have done that, and we have seen the benefits of that, the best example of that being the construction of our high-purity lithium hydroxide plant in North Carolina. As you will see from the numbers we will discuss in a minute, our business is doing very well today, but I want to mention again that the expected real step change in the performance of our Lithium business, the so-called inflection point, will occur in 2017 or later, when the inevitable trend toward electric cars, energy storage for wind and solar power and further developments in mobile communication will begin to materialize on a very large scale. We believe in that future, and we are committed to be ready to meet these demands.

Now please turn to Page 10 of our presentation. The numbers on this page make it look like our Lithium business did not grow in 2013. That is not the case. As most of you are aware, when we produce lithium from brine concentrate in Chile, a byproduct of the process is potash that we then sell as a fertilizer. In a typical year, we produce about 100,000 tons of potash. The sales and profit margins of potash are included in the results we report for our Lithium business since they are an integral part of that operation.

Last quarter, to give the investors more information and because of the dramatic drop in the price and volume of potash, we did break down the details between Lithium applications and potash. That did demonstrate the significant growth of our Lithium business. We have decided not to do that again since it became obvious that we were disclosing too much information and too much competitive information, which unfortunately was misused by our competitors against us, so we are not going to do that again. But I can say that in the fourth quarter, overall, our Lithium applications for all applications of lithium grew about 6% with an EBITDA margin of about 39%. But another statistic that I want to give you is that, for all of 2013, the volume of sales of our lithium carbonate and lithium hydroxide together grew more than 20%. So all these thing grew more than 20%, excluding potash. That is why we are very optimistic about the business as we go forward.

In addition, during 2013, we successfully brought on-stream our state-of-the-art, high-purity lithium hydroxide plant in North Carolina. This plant produces lithium hydroxide of a quality that no one else can match. We expect this plant to be fully loaded in 2014, well ahead of our original plan. In addition, we are making good progress in the construction of our high-purity, battery-grade lithium carbonate plant in Chile. We expect to begin commercial sales from this 20,000-ton-per-year plant in 2015, and we do have the permits in place to run that plant at full capacity in 2015 if we decide to do that.

In late 2013, we also signed a definitive agreement to buy 49% of Talison Lithium Company in Australia. That company was valued at a total for enterprise value of more than $1 billion. This transaction is being reviewed by antitrust authorities, and we expect to close on this transaction in the first half of 2014.

Now please turn to Page 11, our great Surface Treatment business. This business continues to perform very well. In this business, we provide chemicals and technical services for treating the surface of metals before they are coated and painted. We are one of the leaders in this industry, with about 27% market share worldwide. We have an excellent, dedicated and talented management team with manufacturing facilities around the world to serve our global customers. We are totally focused on providing outstanding customer service. That is the key to our success, outstanding customer service. And we constantly develop new products and services for our customers.

The numbers on Page 11 demonstrate the strength and growth of this business. EBITDA for the quarter, as you see, was up by 20% versus last year. We expect this business to continue to do well in 2014, with top line growth up in the high single digits and EBITDA margins maintained at 22% to 23%.

At this point, I will turn the call over to Mr. Bob Zatta, our Senior Vice President and Chief Financial Officer. After his comments, I will come back with some additional observations, and then we will be happy to take your questions. Bob?

Robert J. Zatta

Thank you, Seifi, and good morning to everyone. Please turn to Page 13 of the presentation, which is our reported income statement for the fourth quarter and full year of 2013. Please note, the businesses we sold during 2013 are reflected in discontinued operations.

We reported sales of $347 million for the fourth quarter, and this compares with $322 million in the same period last year, or an increase of 7.8%. Sales were up versus last year, primarily due to higher volumes in Surface Treatment, as well as in Lithium applications, partially offset, as Seifi noted, by lower potash sales. We reported gross profit of $154.7 million or 44.6% of sales for the fourth quarter as compared with $140.8 million or 43.7% of sales in the same period last year. The higher sales volumes noted above had a favorable effect on gross margin in the current year quarter.

SG&A expense was higher in the fourth quarter of 2013 versus last year due to more incentive compensation, some pension contributions in Germany and higher D&A related to accelerated depreciation on facilities retained as part of our sale of the TiO2 and other businesses. In the fourth quarter, we reported operating income of $44.1 million, which was 12.7% of sales. With regard to income taxes, we recorded an income tax benefit of $10.8 million on income from continuing operations of $4 million for the fourth quarter. This tax benefit results from the continuing operations versus discontinued operations accounting treatment of intercompany interest expense and other charges. Under discontinued operations accounting, these expenses were recharged back to continue operations in the U.S. and Germany. This change resulted in pretax losses in the U.S. and Germany, 2 of our highest tax rate countries, in the quarter for our continuing operations and, therefore, resulted in a tax provision benefit. On an adjusted basis, the effective tax rate for the fourth quarter was 4.4%.

As discussed earlier, we have presented a number of businesses as discontinued operations. In the fourth quarter, the loss from discontinued operations net of taxes of $19.9 million includes the recognition of an expected loss on the sale of the TiO2 and other businesses, primarily from pension-related losses recorded in comprehensive income that will be recognized upon the sale. This is partially offset by higher earnings for the TiO2 pigments business. The gain on sale of discontinued operations net of taxes of $506.7 million is the gain from the sale of the Clay-based Additives business, which concluded in this quarter.

Page 14 presents the reconciliation of net income to adjusted EBITDA. For the fourth quarter, beginning with net income of $499.8 million, we have added net income attributable to noncontrolling interest, an income tax benefit loss from discontinued operations and a gain on sale of discontinued operations, which gets us to income from continuing operations, before taxes, of $4 million. Then, adding back interest expense and D&A brings us to a subtotal of $43.9 million. We then have several onetime adjusting items, which brings us to adjusted EBITDA from continuing operations of $78.2 million and total adjusted EBITDA of $104.2 million.

Page 15 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 aftertax basis and include the same items already identified on the previous charts. This gives us an adjusted EPS from continuing operations of $0.53 per share for the fourth quarter and $1.59 per share for the full year.

Page 16 provides a detailed reconciliation between income from continuing operations before tax and noncontrolling interest of $4 million to the normalized as-adjusted profit before tax, which is $41.3 million; and secondly, from the reported tax benefit of $10.8 million to the normalized tax provision of $1.8 million. This gives us an effective tax rate of 4.4% in the fourth quarter. The adjustment for the foreign exchange loss shown on the chart relates to a noncash transaction impact -- translation impact, as we are holding U.S. dollars in a euro-denominated entity.

Page 17 provides a summary of our cash and debt position at December 31, 2013. The decrease in our leverage ratio in the quarter was driven by the proceeds received from the sale of the Clay-based Additives business in the fourth quarter.

Page 18 shows the long-term trend in Rockwood's leverage ratio. We have continued to deleverage the company in accordance with our plan. And then finally, Page 19 presents our free cash flow. As you can see, we generated free cash flow of $32 million in the fourth quarter and $113 million for the full year.

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

Seifollah Ghasemi

Thank you very much, Bob. You have now heard about what we have accomplished in 2013, but I'm sure the question in our shareholders' mind is that, "Well, I have enjoyed the past. What are you going to do for me in the future?" so we have to look forward and explain our plans for the future.

Please turn to Page 21 of our presentation. Here, we have delineated for you, on a high-level basis, in terms of what we intend to do as we go forward. We are -- obviously, continue to be absolutely focused on driving our top line based on organic growth. Fortunately, both of our businesses have significant organic growth potential, so we will make investment to take full advantage of that.

Then, we are going to allocate the significant amount of cash that we have in not only promoting organic growth, but obviously, looking at acquisitions that are accretive, create value and meets Rockwood's strategic criteria, like the acquisition that we made with Talison, which meets the criteria that I have put in here. We are focused on companies or businesses that have leading market share, number one; and number two, adjusted EBITDA of 25%; global leader; unlimited exposure to oil-based raw materials, like our 2 core businesses.

Now some people say, "Well, it's very difficult to find those kind of businesses. And you -- if you find them, they will be too expensive." Well, if that is the case, then we wouldn't do the acquisitions, and what we would do is allocate the capital to buy back shares. We have already announced that we will buy $500 million of shares as we go forward, and we are going to maintain our dividend. So that is the priorities for the cash.

To give you a little bit more detail, please turn to Page 22. Specifically, in 2014, we will launch a new $500 million share repurchase. That number might go up, depending on what other options we have with the cash. We will maintain our dividends. We will complete the acquisition of the 49% in Talison. We will close on the TiO2 sales. We are determined to deliver a targeted adjusted EBITDA margin for the company of 25% or higher. And, as I said, we will look for accretive acquisitions that meet our criteria. And otherwise, we will just increase the amount of shares that we want to buy.

So at this point, in summary, as we move forward, our goal continues to be to deliver long-term value for our shareholders by being the best specialty chemical company in the world. That is our goal. With 2 great businesses as our -- in our core portfolio, an expected $2.5 billion of cash on hand and continuous support of our talented and dedicated employees, I am optimistic about the short-term and especially the long-term performance of our company.

Now we will be more than happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will go to Robert Koort with Goldman Sachs.

Neal Sangani - Goldman Sachs Group Inc., Research Division

This is actually Neal Sangani on for Bob. Tesla is getting a lot of headline for a very large battery investment. Can you give us a sense of how large you think that opportunity might be from a lithium standpoint and how you'll need to position further investment to take advantage?

Seifollah Ghasemi

First of all, with what -- Tesla has publicly announced that they are building a plant to build -- to supply 500,000 cars. That would require approximately 25,000, I repeat, 25,000 short tons of lithium carbonate or lithium hydroxide for that facility. We have always stated this is very good for us because the plant will be in the U.S. We are the best positioned of anybody to supply that plant. And our goal, obviously, is to supply all of it. That's what we will strive for, but we will get -- we will, for sure, look for getting our fair market share of that. We will be in a very position to supply that plant.

Neal Sangani - Goldman Sachs Group Inc., Research Division

And you talked about some of high-purity investments you're making in carbonate in Chile and hydroxide, the plant in North Carolina. Can you give us a sense of how broad the supplier base is for some of these materials on the competitive front, and who really meets the threshold for going into electric vehicles?

Seifollah Ghasemi

Well, I -- we have a habit of not commenting on the capabilities of our competitors. I don't think I would want to go there. I'd just like to stress that there is a lot of know-how and a significant difference between the lithium carbonate or lithium hydroxide that we use for making glass or putting it in grease, as compared to putting it in a battery that is going to be guaranteed 100,000 miles by a manufacturer. So that is why we are very focused on these high-technology products.

Operator

And in our next question, we'll go to the line of James Sheehan with SunTrust.

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

Seifi, I was just wondering, regarding your comments on the step change occurring in 2017, I think you used to refer to this as occurring a little earlier. Have you changed your thinking about the timing of the inflection point?

Seifollah Ghasemi

Well, Jim, I've been talking for sure with you on your last call, and even on the trip and so on, that this thing is 2016, 2017, 2018. It is very difficult to call the exact time. You see, our Lithium business is going to grow 10% to 15%, you know that. The inflection point that I'm talking about, then it is going to start growing 30% a year, and that is very difficult to predict because it depends -- Tesla right now has announced that they are going to build a plant. Fine. But what are the other car manufacturers are going to do? Are they just going to sit on their thumbs and say, well, they're going to watch Tesla take market share away from them, or are they going to announce building plants? So it is -- all depends on the reaction of the market and all that. It's very difficult to time it. But one thing that we are sure is that it's going to happen. So I choose my words carefully about 2017, but it could be 2016.

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

Fair enough. And also, on the Talison deal, is the close of that transaction taking longer than you expected? And if so, what do you think is taking a longer time frame?

Seifollah Ghasemi

It is taking longer than we expected because I think last time, when we talked about this thing, we said first quarter. The reason that it is taking longer is because, I think, it's a complex deal. There is a lot of focus on lithium and all of that, and the authorities are appropriately taking longer to review these things. We have no issue with that. We are not worried about that. We don't have any problem with that. It's just a matter of making sure that we provide information. Also, please don't forget that we announced this deal right before Christmas, so there was the whole holiday season that delayed this.

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

Great. And then just for Lithium growth expectations in 2014, are you expecting that to be up in the low single digits, or is it more closer to flat?

Seifollah Ghasemi

I think that, worldwide, the demand for lithium products will probably grow by 15% to 20%. The issue for Rockwood is going to be, can we actually supply it? Because we are getting close to being sold out, and that's why we want to bring the new plant onstream, but that plant is not going to come onstream until 2015. So our business will grow, but if it will grow 15% or not, we have to see.

Operator

And our next question, we'll go to John McNulty with Crédit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

A couple of questions on Lithium. And with regard to the Chilean facility that you're bringing up, I know originally, you had expected that it would take about 3 to 4 years to kind of fully load the plant. Is that still your expectation, or is that something that may be coming a little bit sooner or a little bit later, for that matter?

Seifollah Ghasemi

Well, John, it goes back to the comment that I made before. We are expected -- that plant is expected to come commercially onstream in 2015. Our original plan was that we will be able to load that in 3 to 4 years. Right now, if you ask me, I think it will be loaded faster than that.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, fair enough. And then with regard to -- you've just given your outlook, I guess, for lithium demand over the next year or so. How should we be thinking about pricing? We know that there's been a reasonable amount of capacity that's come on, but you're also talking about some pretty robust demand. So when you think about lithium carbonate pricing and then maybe some of the downstream areas, maybe not being overly specific, but can you give us your thoughts on how we should be thinking about pricing in '14?

Seifollah Ghasemi

John, I would love to answer that, but I have my Chief Legal Officer, Mr. Tom Riordan, sitting across from me, and he is kind of waiving his finger and says, "No comment on pricing." So my apologies on that.

John P. McNulty - Crédit Suisse AG, Research Division

Fair enough. And then maybe one last question. With regard to the $500 million buyback that you have outstanding, is that something that you can actually work down or work on in 2014 before decisions are made or regulatory approvals on Talison, or is that something that's going to really have to be a back half of the year type buyback?

Seifollah Ghasemi

The $500 million buyback is something that we can do at any time. It's just a matter of putting it in place and making it happen, John.

Operator

And next, we will go to the line of Silke Kueck-Valdes with JPMorgan.

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

So a couple of questions. In the joint venture with Tianqi, can you remind us where you need approval? Because this is essentially a U.S. company trying to joint venture with a Chinese company for an Australian asset. So does that mean you need approval in U.S., in China and in Australia? And what's still missing?

Seifollah Ghasemi

Silke, I cannot comment -- and I've been asked not to comment in which geographies or countries we have applied for approval. That's...

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

Why?

Seifollah Ghasemi

Because that's inappropriate for us to get ahead of the authorities in terms of what we are talking about and whom we are talking to. They don't want us to comment on that. But I think you can figure it out, Silke.

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

Right, okay. And you haven't gotten approval anywhere, I take it?

Seifollah Ghasemi

Yes. Well, we are confident we will get approval, but I can't tell you which countries we have applied. Sorry.

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

Okay. That sounds fair. In terms of the -- maybe I'll try one more lithium question. In terms of the Tesla plant, which is I guess not going to be built for like -- yes, it seems like its 2 or 3 out until it's being built. 25,000 short tons of lithium is 50 million pounds, which would mean like 100 pounds of lithium per battery. And my recollection was that number was going to be worked down to something that was lower than that. But is 100 pounds per -- of lithium per car battery the way to think, or -- because it seems a high number, but maybe that's what it is.

Seifollah Ghasemi

Well, currently, if you look at the Tesla S, it is more than that in the battery for that because it depends on the range. And in addition to that, when you are talking about the capacity of a lithium carbonate plant, hand it -- I mean, there is a yield from what you put in. You always have the scrap, you always have the -- do you know what I mean? If the car needs 100 pounds, you need to put in a little bit more into the factory because there is always rejections and all of that. So order of magnitude, I believe our number of 25,000 short tons is appropriate.

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

Okay. I have one question on the potash byproduct sales. And I know you can't provide a lot of details, but my memory is that the prices fell something like 25%, like they fell like $100 a ton from whatever it was, $470 to -- I don't know, $350 a ton. And why are your potash sales down 68%? Is it that there was also a volume component? And I was curious, what were like the peak volumes of potash that you ever sold since inception?

Seifollah Ghasemi

Well, first of all, there is a volume, too. And the other thing I think we have said publicly that, when the prices are very low, we are not too anxious to sell a lot of potash because potash is something that we can store. So we don't sell it when the price is low, and we wait until the price comes up. The prices have been -- you know the potash story better than anybody else, and you know what has happened there. So we choose when we sell. So in the numbers, there is a significant impact because of the volumes. In terms of the peak amount of potash that we have ever sold is around 145,000 tons, but that was because -- that's not what we produce every year, but that was because we hadn't sold, and then we sold more in the year following that. And the potash prices, I'm sure you remember, there was a time they were at $900 or $800 a ton.

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

Yes, I remember that.

Seifollah Ghasemi

Yes, well, we look forward to those days again. That was very good.

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

Yes, it may take a little while, but -- I mean, I understand the answer. I had one last question on Surface Treatment, the coatings. Is Rockwood continuing to gain some share? Because the numbers are really extraordinary, and I was wondering whether that's the case and whether you were saying, if you gain share, that you -- whether you're gaining it from smaller competitors or from your larger competitors?

Seifollah Ghasemi

Well, thank you, first of all, for the comment about the business. The business is doing very well. We believe we are gaining market share because we are providing outstanding service, and it is across the board.

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

Okay. Can I squeeze in one more? Because like -- one other question that crossed my mind is that, like, I was wondering like what gives you confidence that the TiO2 sale to Huntsman is going through? Is it just a matter of convincing the regulators to look at the market on a global basis rather than a regional basis? Because it's like this hump -- there's like this hangup in Europe, given that the market in Europe has whatever it may be, 1.5 million tons, and Rockwood and Huntsman probably make up half of that market, so it's easier to look at the global market. And do you think this is something that will get done in the first half of the year or the second half of the year?

Seifollah Ghasemi

It gives me confidence because, number one, the U.S. government has approved this. That says a lot about the transaction, that there is nothing to structurally reject. In terms of in Europe, please keep in mind that there is -- they're talking about 5 different businesses. They have to review these things, and it took them more than 30 days. So there is nothing unusual about that, and we fully expected this thing. And the other reason that it gives me confidence is because, as you know, it is appropriate that the acquirer takes the lead in the negotiations. So Huntsman is taking the lead. I have a great deal of confidence and admiration for Mr. Peter Huntsman, their Chief Executive. I'm sure he'll get it done.

Operator

And next, we will go to the line of Mike Harrison with First Analysis.

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

Your press release, Seifi, noted a mix shift away from organometallics as one of the trends that we should consider in your lithium outlook. Is that just as we see faster growth in carbonate, in hydroxide and slower growth in organometallics? Or is there something going on where customers are beginning to deselect lithium organometallics for some reason?

Seifollah Ghasemi

Mike, that's an excellent question. We will elaborate on this thing a little bit more in our 10-K when we file it. We sell organometallics for many different applications. In those applications, the customers -- some of our customers have developed processes that they can make their product without the use of the organometallic. They can replace our product. And therefore, what we are telling the investors ahead of the time that, that is a possibility so that, if it happens, it wouldn't be a surprise. We are not 100% sure that it will happen, but we are kind of being cautious and giving you the -- giving you warning that, that might happen. That would -- if that happened, that would affect, specifically, our butyllithium sales.

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

All right. And if I think of butyllithium as going into a number of different end markets, polymerization, pharmaceuticals, agricultural, is there a specific market? And just help us maybe ballpark what portion of butyllithium could be affected. Is it half? Is it much less than that?

Seifollah Ghasemi

It is much less than that, but it is -- and it is in the agricultural application, if it happens.

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

Okay, all right. And then you commented that you think you have permits in place for the additional carbonate production out of Chile. I understand that it was the carbonate plant and carbonate production that was the pinch point in your production and keeping you in a sold-out position right now. But as we think long term, and you've obviously been very focused on the long-term growth of this business, when do we reach a point where you are going to need to get additional permits to pump additional brine in the Atacama? Is that something that's 2 years away? Is it 5 or 10 beyond that? Help us think about that.

Seifollah Ghasemi

Well, Mike, you know our Lithium business very well, and you and I have talked about this thing many times. We are committed to always be ahead of demand, as you know. Therefore, we constantly apply for appropriate permits to allow us to produce more all around the world. Therefore, we have applied with the government of Chile to get the rights for pumping additional brine out of the ground to give us ability to significantly increase production. Our application is asking for us to be able to produce more than 3x what we are producing right now. Those -- the reason we have done that is that those applications take 2 years, 3 years, 5 years to be reviewed because they have environmental impact. So that is not new that we have applied for that, and we are in the process of getting those approvals. So there is nothing new there. In terms of our ability to run the new plant, Mike, the new plant comes onstream in 2015, and we have the permits to run that facility because we are already running another facility. The facility that we have and we have built is for battery-grade products, which are the growth area. As you know, Lithium applications for grease or making glass or making ceramics is not going to -- is going to grow 2% or 3%. The real place where you're going to get growth is high-purity lithium carbonate and high-purity lithium hydroxide that is going to go into these applications with cars and the significant energy storage and in communication. So that is what we have built the plant for, and we will be able to ramp up production there. So that's where we are, Mike. I hope I answered your question.

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

You did. Let me just ask one more. On Surface Treatment, the outlook calls for high single-digit growth in that business. First of all, how much of that high single-digit growth comes from the consolidation of the India joint venture? And I think -- also -- go ahead.

Seifollah Ghasemi

For next year, not much because that was done this year, and it is in this year's numbers. It is in 2013 numbers. The 9% growth is mainly organic growth and maybe 1 or 2 small acquisitions. Our business is doing very well there, Mike. And the fundamental reasons for that is manufacturing is coming back in the U.S., and we have developed a very good position in the U.S. with some of the acquisitions we did 3 or 4 years ago. The second thing is that we did invest, as you know, in the emerging markets. We built a plant in Mexico, we built a plant in Brazil, we built a plant in Turkey, we built a plant in India. And all of these growing -- emerging markets are growing, and we have the brandest and the newest plant. Therefore, we are getting a significantly higher market share. I've always told you, many times, that this is a great business. It's a huge cash generator, and we are going to do well with it, and we are proving that.

Operator

Next, we will go to the line of Alex Yefremov with BoA.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Seifi, I wanted to ask a little bit more about demand for lithium. Can you tell us what is driving that demand for carbonate and hydroxide in 2013 and your positive outlook in '14? And if this is demand for batteries, maybe you could tell us whether this is primarily electronics at this point or transportation as well?

Seifollah Ghasemi

I think it's a combination of 3 things. Number one, mobile communications, and that has -- there was a cycle. It has come back. That is helping that. The second thing is that you are seeing a turnaround in the fundamental underlying industrial businesses, like glass, like ceramics because the main day-to-day applications that were very down because of the economic downturn, those applications are coming up, so that is helping. The third thing is don't underestimate the so-called hand tools, the drills and all of that. You go to Home Depot, you see all of those stuff in display, and now they are having lithium ion batteries. That is also helping. And then in addition to that, there is an element of the cars, which is beginning to play. So the combination of all of those factors is driving the growth.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

So is it fair to assume that majority of your new lithium hydroxide plant will go to non-car applications?

Seifollah Ghasemi

No. Our new plant that we built in North Carolina produces high-purity lithium hydroxide. Most of that is going into making batteries for a car that is very popular today.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

I was hoping maybe you could give us some update on Talison's operations, either in terms of sales, EBITDA or production growth and also [indiscernible] pricing?

Seifollah Ghasemi

Well, on that -- those ones, I can't make any comments, quite honestly. Since we haven't closed, I think it would be inappropriate. But I can tell you that their volumes are growing about 15% to 20%, but...

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

So your outlook has not changed since the announcement, I guess. Is that fair to say?

Seifollah Ghasemi

Right.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

And a final question, if I may. I guess, the sector of lithium demand that hasn't been talked a lot about came into the limelight recently, grid storage. Could you tell us your thoughts on this opportunity, whether Rockwood is looking at that and how big it could potentially be?

Seifollah Ghasemi

Alex, you and I have talked about this. I actually -- this is my humble opinion, I think the grid storage potential could actually be bigger than cars. Because when you start thinking about the direction that we are going, I mean, wind and solar are not really that practical unless you can store the energy when the wind blows or store the energy when the sun is out. Otherwise, you cannot have a continuous supply of electricity. That and also this load-balancing, there are huge projects that are being talked about, I think lithium ion batteries have a very good chance to be a significant player on that. And I believe that a lot of people that you are going to talk to will start talking about grid storage being a significant potential for the future. We certainly believe that.

Operator

Next, we will go to the line of Keith Kitagawa with HSBC.

Keith M. Kitagawa - HSBC, Research Division

Seifi, can you -- I don't know if you mentioned, but in your targets for your acquisitions, are you -- do you have a preference between Lithium or Surface Treatments?

Seifollah Ghasemi

We love both of the businesses.

Keith M. Kitagawa - HSBC, Research Division

Okay. And then going on to your use of cash, you basically said that if you weren't able to find an acquisition candidate that kind of met your financial targets, you'd use all the money to buy back stock. Have you -- does that mean that you're going to -- you're content running with like a high 3x, 4x gross leverage number, and you won't take out any of the notes?

Seifollah Ghasemi

We might take out the notes. I think that is a good possibility.

Operator

All right. Next we'll go to the line of Chris Shaw with Monness, Crespi.

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

Just to follow up on the last question -- or one of the last questions, the -- you were still considering acquisitions in the lithium space. I was just curious, it doesn't seem like a lot of opportunity's still out there. You guys have fairly -- have good market share, so I -- is there really that much out there in the lithium space still that you could do?

Seifollah Ghasemi

Chris, you and I have talked about this a lot. There are -- but I -- it's really difficult to talk about it, considering there are not that many and anything that I say will be kind of misinterpreted. So let me just say there are opportunities, okay?

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

That was all I was really looking for on that. And then, I remember if you said it or not, but on the buyback, I know you didn't do any in the fourth quarter, but was there -- I mean, can you say whether you've done any to-date, in the first quarter, of the new authorization?

Seifollah Ghasemi

Chris, as you know, with the share buyback, we can only buy back shares when we are not in possession of material nonpublic information. During the fourth quarter, we were in possession of material nonpublic information because we were trying to buy Talison, so we couldn't do anything. And today, I mean, we have to get to a state -- we are always doing something at Rockwood, as you know, and we are always involved in something. So it's very difficult to find windows where you can actually put in place a share buyback program. But we will find those windows, and we will put it in place.

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay. And I'm just curious, like I don't know how much is sort of like I actually don't know what was really up, but in the whole Tesla battery factory announcements, I thought there was some talk about recycling the batteries and just -- I don't know much about the recycling of potential lithium at all, whether it's recycling of full battery or the metal material within it. Do you guys know much about that, I mean, how advanced that is?

Seifollah Ghasemi

Well, the recycling of the batteries, I believe, will be a very big business in 2035 and 2040, when we have 100 million cars running around with lithium ion batteries. We, as a company, have started developing the technologies for recycling big batteries. We got a grant from the German government, and we have built a pilot plant in Germany, which is already onstream, and we are experimenting with that. We are trying to be ahead of the game and develop those technologies because in time, when we there is enough of these batteries around, there could be an opportunity for recycling and recovering the lithium.

Operator

And next, we will go to the line of Richard O'Reilly with Revere Associates.

Richard O'Reilly

I'm looking at your corporate line there, and there's 2 small businesses there. Can you tell us what the status of those are?

Seifollah Ghasemi

They are -- as you characterized them, they are small, so we don't really like to talk about them that much. They are 2 very small businesses. They report to my friend, Mr. Bob Zatta, our Chief Financial Officer. And they are doing very well. One of them is a very small business for wafer reclaim, which is less than $20 million of sales. And the other one is a metal sulfide business, where we make the high-purity materials for the brakes for the cars. Those are good cash-generation businesses, and the fact that we have them in Others and reporting to our CFO also tells you about what we think of them in terms of going forward, which means that if we can sell them, we will sell them.

Richard O'Reilly

Okay, fine. Okay, great. Also, the currency impact, I guess it shows up mostly in the corporate line. So if you didn't have those businesses there, currency would be almost neutral for the company overall?

Seifollah Ghasemi

Overall, currency is not an issue for Rockwood. Yes.

Richard O'Reilly

Okay, fine. A third question. This is a wiseguy-type question, so go with me here. You talk about wanting to make acquisitions with EBITDA margins of over 25%, and Ceramics had fitted that bill. Why didn't Ceramics fit versus what you're looking for, if you understand what I'm trying to get at?

Seifollah Ghasemi

You are asking a very good question, my friend, which was, "Ceramic had EBITDA margin of 32%, why did you sell it?" The fundamental reason we sold it was because, now I can tell it, we were concerned about the liability exposure because we are putting hip joint, goes in people's bodies. And when you have things in people's bodies, there's a lot of lawyers who are running around trying to sue you, and we don't like to be in that position.

Operator

And next, we will go to the line of John McNulty with Crédit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

That's an interesting segue, but...

Seifollah Ghasemi

John, you know I hate to be talking about this thing, knowing that there are 2 of them in your body. I apologize for that, but I had say what I had to say.

John P. McNulty - Crédit Suisse AG, Research Division

Absolutely. So just 2 quick questions. With -- now that you've cleaned up -- you've sold off a bunch of businesses, you have a big load of cash, you've talked about we're you're putting that cash. Can you remind us what your comfort level is with regard to leverage and kind of what you think a proper -- based on kind of Rockwood's growth opportunities and structure of its business, what the proper kind of leverage ratio would be going forward?

Seifollah Ghasemi

John, we have always said that we will be more than comfortable with something like 1.5x to 2x.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, perfect. And then one last question. On the Surface Treatment margin, year-over-year, you had a pretty solid improvement, both on the quarter and for the year. And I guess, can you walk us through the few things that may have driven that and then kind of how we should be thinking about those going forward, whether it's the operating leverage or mix or -- I know you had shifted some plants around, so, I guess, how should we think about kind of breakdown of where those improvements came from?

Seifollah Ghasemi

The improvements in margins came from -- number one, obviously, when we grow the top line, the incremental contribution is more than the 22%, 23%, John. So that obviously helps the margin. And the second thing is that we have been very diligent about pricing to make sure that we increase prices to recover raw material costs. Those are the 2 -- and the other one is that our people are very good about productivity, so -- and then another one is that we are having a very good growth opportunities in our aerospace application, and that one, inherently, has a higher margin.

Okay, it seems like there is no more questions in there, right?

Operator

[indiscernible] questions at this time.

Seifollah Ghasemi

Okay. Well, in that case, I just want to thank everybody for being on the call. We appreciate it and look forward to talking to you next time. All the best. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.

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