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Rockwood Holdings (NYSE:ROC)

Q1 2014 Earnings Call

May 07, 2014 12:00 pm ET

Executives

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

Seifollah Ghasemi - Executive Chairman, Chief Executive Officer and President

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

Analysts

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

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

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

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

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

Rosemarie J. Morbelli - G. Research, Inc.

Alex Heidbreder

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Rockwood Holdings 2014 First Quarter Conference 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 2014 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 from our call -- 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 that 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.

Seifollah Ghasemi

Thanks, Nahla, and good morning to everyone. Thank you for taking time from your busy schedule to participate in our call today. We appreciate your interest in our company very much. Please note that all of the comments that I'm going to make are going to be related to our continuing operations, continuing businesses of Surface Treatment and Lithium.

I'm very pleased to report that Rockwood had a strong set of results for the first quarter of 2014. Actually, sales for the first quarter of this year is the -- sales are the highest, first quarter sales for these businesses in our history. Both of our businesses are moving forward despite slow economic growth and certain weaknesses in some of the industrial sectors.

Now please turn over to Page 5 of the presentation material that we have posted on our website. Net sales were up 5.2% versus last year, driven by very strong performance in our Surface Treatment business in both volumes and prices, and also significantly higher volumes in lithium carbonate and lithium hydroxide. I will make some comments about that later on. The sales have been negatively impacted by significantly lower potash sales, that where you are all aware of that situation, and also lower volumes from our organometallic, which is butyllithium sales as a result that some of our customers have decided to move away from that product.

In terms of adjusted EBITDA, we were up 4.4%, again because of the higher sales, and negatively impacted because of the additional raw material costs and some specific conscious decision that we have made in increasing SG&A in order to position ourselves for future growth. Our adjusted earnings per share was 48% higher than the same period last year.

At this point in time, I'd like you to now go to Page 8, because Page 7 is self-explanatory. On Page 8, our Lithium business. You'll notice that we have -- sales looks like as if they're dropping, and the margins are impacted. But that is mainly, fundamentally due to significantly lower potash sales. Again this quarter, for the past case -- for the sake of clarity, we decided to break down our lithium sector sales to lithium excluding potash and potash. As you'll see, our base Lithium business actually did grow by 5%, and that is despite the fact that sectors like glass and aluminum and other industrial applications are not growing very much. The key driver for the future, and I like to stress that, the future of our Lithium business is in battery-grade growth. And in that battery-grade products in the first quarter, we had a growth of close to 30% versus last year. So we remain very bullish about the performance of this business in the long term as we go forward.

In addition, in this sector, I would like to point out that with respect to our acquisition of Talison, we have obtained unconditional approval from the German government. And the only other approval that we are waiting for is the approval from the Australian authorities where they are having that acquisition and their consideration.

Now please turn to Page 9. Our Surface Treatment business continues to power ahead with impressive gains in sales and improved margins. As I have said before, we have a great management team which is leading this business, and we are very confident about the performance of this business as we move forward. I will make some comments about this later on.

At this point, I would like to turn over the presentation to Mr. Bob Zatta, our Chief Financial Officer, to explain the numbers to you. But I will come back with the specific comments about the balance of 2014, some thoughts on our performance in 2015, and some comments about our strategy. So with that, Bob?

Robert J. Zatta

Thank you, Seifi, and good morning or good afternoon, everyone. I'm on Page 11 of the presentation, our reported income statement for the first quarter of 2014. Please note the businesses we sold during 2013 are reflected in discontinued operations.

We reported sales of $354.5 million for the quarter as compared with $337.1 million in the same period last year, an increase of 5.2%. As Seifi has mentioned, sales were up versus last year primarily due to higher volumes in most Surface Treatment markets as well as in some lithium applications, partially offset by the lower potash sales.

We reported gross profit of $161.9 million or 45.7% of sales for the quarter, as compared with $153.1 million or 45.4% of sales in the same period last year. The higher sales volumes noted above had a favorable effect on gross margin in the current quarter.

SG&A expense was higher in the first quarter of 2014 versus last year, primarily due to some higher salary expense in Surface Treatment on business growth and additional D&A on manufacturing sites not included in discontinued operations.

In the first quarter, we reported operating income of $49.2 million, which was 13.9% of sales. The next major item is net interest expense. Net interest expense decreased from the prior year quarter due to the repayment of all outstanding borrowings under the senior secured credit facility in September of 2013.

With regard to income taxes, we recorded an income tax provision of $12.8 million on income from continuing operations of $34.5 million for the first quarter. On an adjusted basis, the effective tax rate for the first quarter was 26.3%.

Turning to Page 12. Page 12 presents the reconciliation of net income to adjusted EBITDA. This page shows income from continuing operations of $34.5 million. Adding back interest expense and D&A brings us to a subtotal of $73.9 million. We then have several one-time items, which brings us to adjusted EBITDA from continuing operations of $80.8 million.

Page 13 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 from continuing operations of $0.43 per share for the first quarter.

Page 14 provides the detailed reconciliation between income from continuing operations before tax and noncontrolling interest of $34.5 million, with a normalized as adjusted profit before tax which is $43.7 million, and secondly, from the reported tax provision of $12.8 million to the normalized tax provision of $11.5 million. This gives us the adjusted effective tax rate of 26.3% in the first quarter as I previously mentioned.

Page 15 provides a summary of our cash and debt position at March 31, 2014, and Page 16 shows the long-term trend in Rockwood's leverage ratio.

And finally, Page 17 presents free cash flow for the quarter, which is a net outflow of $50.5 million for the quarter. This schedule, of course, includes discontinued operations, as such. CapEx includes the new color pigments plant in Georgia for continuing operations. CapEx at about $40 million is flat versus last year.

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

Seifollah Ghasemi

Thank you very much, Bob. Now would you please turn to Page 19 of our presentations? We always like to kind of compare our actions to what we have promised you. That's what you see on Page 19. As you know, we bought about $400 million of shares last year at around $64 a share. We said that we were going to launch a new $500 million initiative to buy shares. We have done that. We have put a 10b5-1 program in place. And as of last Friday, we have bought 1.7 million shares at an average price of $71.95 per share.

The second one is that we said that we will maintain our dividend. We actually have continued to declare a 45% -- $0.45 a share of dividend, which is about a 2.5% yield on our stock.

We promised that we will complete the acquisition of Talison. That process is underway. As I told you, we have got an unconditional approval from the German government, and the Australian authorities are considering our application as we speak.

We expect to close on the TiO2 acquisition. I am very confident of that. I have full confidence in my friend, Mr. Peter Huntsman, CEO of Huntsman, that he is committed to getting this thing done. And we are jointly working together with the European Commission to address their concerns. But I think both of us remain confident, and I think he said that on his call that he would be able to complete this acquisition in a timely manner.

We have promised to deliver the targeted adjusted EBITDA margins, and we are on track for doing that. I feel pretty good that we will do that for 2014.

And then the other one is allocate excess cash that we have on hand, which is going to be substantial, close to $2 billion. $1.5 billion to $2 billion depending on how much share we have bought, on the strategic options which will add value to our shareholders, which means either acquisitions or returning to our shareholders in the form of share buyback.

So please go to Page 20. This is a page that you have seen many times. It, in summary, delineates our strategy. There is no change. We are consistent. We are going to execute this strategy as we have laid it out for you.

So now I would like to make some comments about the balance of 2014 where we are very confident that our continued operations will have a strong performance, especially our Surface Treatment business. We expect continued high single-digit or maybe even double-digit growth and margins of 22% to 23%. We expect demand for battery-grade lithium to grow -- to continue to grow by 20% to 30% a year. And if there is any positive change in the potash prices, we will see a significant positive impact in our Lithium business.

Now at this time, I would like to point out that 2014 is a transition year for Rockwood as we complete the significant strategic transformation of the company. We closed on the businesses that we have sold, and the volumes that we are buying and start to develop -- to deploy. And then we will start to deploy the significant amount of cash that we have on hand in order to create value for our shareholders.

So we look at -- therefore, it is appropriate to look at the 2014 as I said as a transition year, but then take a preliminary look at 2015. So when we look at 2015, we have the benefit of the following significant effects -- significant events. Number one, we will continue to have a strong organic growth in both of our businesses. Number two, we will have the ability to sell from our lithium -- from battery-grade lithium from our new plant in Chile, which will be on the stream then. Number three, we will have the full benefit of the consolidation of the results of our Talison acquisition. And number four, by 2015, we've got -- we will have the benefit of the full deployment of the more than $1.5 billion of cash that we have. So when you consider all of the items that I have mentioned above, and based on what we know today, we expect to see a growth of more than 50% in Rockwood's earnings per share in 2015.

So with that said, I'll be more than happy now to answer any questions that you have. Kathy?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Robert Koort with Goldman Sachs.

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

I was wondering if you could tell me -- you mentioned the carbonate and hydroxide sales are quite strong. Give us a sense of where your product portfolio is today on the battery markets and electric vehicles? And then as you talked about some of the growth that's in front of you, where that might grow to over the next 2 or 3 years?

Seifollah Ghasemi

Bob, our battery-grade lithium sales right now are approximately $70 million a year. We expect that to grow 30% a year, if not more, as we go forward. So that is a specific number. I hope it addresses the question that you wanted to ask.

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

Yes. And also with the carbonate expansion down in Chile, are you going to get into a position where you're going to need to add meaningfully more hydroxide capacity? And if so, where would that be put in?

Seifollah Ghasemi

The demand for hydroxide is obviously going to be dependent on what kind technologies people use for making their batteries for cars. As you know, right now, Tesla has decided to go with -- currently, they are using lithium hydroxide. We have several -- we obviously can expand our facility in North Carolina. We have plans to take that into consideration. And then the second thing is that in the long term, as you know, we can go from spodumene from Talison directly to lithium hydroxide at very competitive costs. And therefore, you should expect us that we would build plans to convert this spodumene to both lithium carbonate and lithium hydroxide depending on what we expect the demands will be.

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

And sorry, just last -- to follow up on that last point, Seifi. Does that mean the hydroxide plant would be in Australia, or would you export the spodumene somewhere else?

Seifollah Ghasemi

Bob, once we complete the acquisition of Talison, we are going to undertake a study to decide where is the best location for the mineral conversion plant, whether it should be in Australia, in China, in Germany or in the United States. We have to take a lot of items into consideration in terms of transportation costs, the cost of building the plant, the cost of raw materials, the cost of electricity and most important, probably the subsidies that different governments are willing to give us to build the plant in a specific country or in a specific state. So we will take all of that into consideration, and then we will make an announcement within this year about what we are going to do.

Operator

Our next question is from James Sheehan with SunTrust.

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

Just wondering on your pricing outlook for lithium, I think you're expecting prices to be a little bit lower this year. Is that all going to be in potash, or is there some contribution of that from the butyllithium side? What is your expectation? Do you still think there's stable pricing in carbonate and hydroxide?

Seifollah Ghasemi

Jim, I usually do not comment on pricing. But since you asked, I don't want to kind of dance around it too much. Fundamentally, the weakness in pricing that we see in the lithium sector is all due to potash. The carbonate and hydroxide prices have been stable and butyllithium.

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

Great. And in organometallics, butyllithium, can you just give us a sense for how much of your sales are in that product? When you expect the demand to stabilize? I think one of your competitors believes that some of that demand will come back into ag at some point. Are you hearing the same thing?

Seifollah Ghasemi

Yes, we expect -- I don't -- we do not give the specific sales of our butyllithium business because of competitive reasons. But we do -- we definitely agree with their statement that we made that some of the losses, because people have moved away from butyllithium, is on the process of coming back. So we are actually optimistic about that.

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

About how much did your sales in butyllithium decline in this quarter?

Seifollah Ghasemi

Jim, we don't really want to disclose that. Because you know, there are not that many people in this game, and we don't want to give too much information away.

Operator

Then we'll go next to Silke Kueck with JPMorgan.

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

Have a couple of questions about Talison. Can you talk about what annualized EBITDA you expect from Talison? And how much of that will be on the joint venture post potash contribution from Rockwood?

Seifollah Ghasemi

As of right now, order of magnitude, we expect the U.S. dollar EBITDA of Talison to be between $80 million to $85 million in 2014 and more than $100 million in 2015. As with respect to the debt, currently, the way the deal is structured, once the deal closes, there will be no debt on the joint venture. It will all be equity contribution. We might decide to put debt on it later on in consultation with our partners. But as of right now when the deal closes, Talison will have no debt.

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

Okay. And can you remind us what the D&A is from the joint venture?

Seifollah Ghasemi

Order of magnitude, about $10 million to $15 million.

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

Okay. that's helpful. Secondly, on lithium, the -- is the right way to think about the 8 million in lost sales from potash, is the right way to think about it as being all profit, since it's sort of like a by-product? Or is there really any costs tied to it?

Seifollah Ghasemi

You're right about -- almost 85% of it is profit, yes.

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

Okay. Can you talk about the magnitude about like the raw material headwinds that you're seeing? And is that in -- is that like phosphoric acid or tin or what's that related to?

Seifollah Ghasemi

The total amount of raw material headwinds that we had for both of our business in total is only about $1 million, and it is just a lot of odds and ends about different things. It's not material.

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

Okay. That's helpful. And lastly, I was wondering how much of the growth in Surface Treatment was volume versus price? Was it like half-half or was it a different split?

Seifollah Ghasemi

About 70% was volume and about 30% was price.

Operator

Our next question is from Alex Yefremov with Bank of America.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

I have a follow-up on butyllithium situation. Did you see all the sort of demand decline from your ag customer in this quarter? Or will there be additional step down as we go through the year?

Seifollah Ghasemi

Our ag customer reduced their volumes in the first quarter, and they are not going to be buying anything during the balance of the year. So we saw some of that this quarter, and we will see some more of that as we go forward. But I would like to say that there are other demands that are filling up the slack. So you shouldn't think about the fact that suddenly, our butyllithium sales will drop. That will not be the case.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

All -- one of your competitors is talking about increased production after having production issues earlier. As a result of that, do you see any shifts in the market share either upstream or downstream in lithium?

Seifollah Ghasemi

No, we don't see significant change in market share. No.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Great. And maybe could you talk about battery-grade lithium competition? Is there a differentiation between Rockwood FMC and maybe Chinese suppliers? Is this -- to what degree is this a commodity or a specialty market?

Seifollah Ghasemi

We would like to think that it is a specialty market, and we are not the only ones who can make this product. I think other people can. The question is that we obviously try to do our best to convince the customers that our product is of a higher purity. And I think we will have -- we do have an advantage in our lithium hydroxide plant in North Carolina. And I think once our new plant comes on the stream, we will be able to make a product which will be a little bit unique. But I think everybody else is trying to do the same thing in order to meet the requirements of the industry.

Operator

We have a question from Mike Harrison with First Analysis.

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

Was wondering if you could address the changes in the Talison joint venture. You're now looking at less EPS accretion with the new structure, but also about $400 million less cash going out the door. Can you talk about how you view the investment there under the old and the new structure? And how might your strategy have kind of shifted now that you have some additional cash available?

Seifollah Ghasemi

Thanks for the question, Mike. Fundamentally, the deal has not changed fundamentally. The prices that we are going to pay is still the same, and the structure is 49% us, 51% our partners. The only thing that has changed is how we are financing this thing. Before, there was a thought that we would give a loan to the joint venture, so that our partners will have the money to actually buy the shares from CIC. But our partners were successful in raising the money, not borrowing it, but raising equity against their own company in China in the public market. So once they did that, they didn't need the cash. We didn't want to put in if they had the cash. So we decided to do an all-cash deal. So for us, the difference is -- I mean, the structure of the deal is the same. And then the difference with us is that rather than having, as I said, $400, $500 of money loaned to Talison, now we have that. And if you do the math if they use that to buy shares, it's a lot more accretive than having -- getting 6% or 7% interest rate on that loan. So as a result of that, I think in the long run, we are actually better off doing what we've done. And in the future, if we ever decide that it is advantageous for the joint venture to have some debt, we can always do that. But at this point in time, considering all the cash we have, we are not that interested in going and borrowing money. So the economics are actually better, Mike.

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

That's how it appeared to me as well, and the return is more attractive but glad to hear you echo that. And then specifical to butyllithium pricing, you commented that it's stable. And I generally think of that as being more stable, something that's contracted with your customers on more or less an annual basis. But as you look forward and maybe see some declines in demand with stable supply, or assuming stable supply, is it fair for us to assume that pricing could see some pressure as we look out, 1 year from now? Or do you expect to maintain?

Seifollah Ghasemi

We actually expect the prices to go up as we go forward. We do not expect any decline in pricing.

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

And then a question on the Surface Treatment side. You guys have identified aluminum finishing as an area where you could potentially get bigger. And seeing more automakers looking at aluminum body panels, obviously, there's an interesting opportunity there. Can you talk about whether you are capturing some new business in aluminum finishing? Do you currently have a full product line, or would you need an acquisition to kind of

[Audio Gap]

Seifollah Ghasemi

Mike, the part that I can comment is that we are doing very well in terms of supplying the material needed for making aluminum wheels for cars, which is becoming very popular. As you know, a lot of the high-end cars have aluminum wheels. As far as the body of the cars, it is not significant for us right now. So there is not very much to talk about it right now.

Operator

And we have a follow-up from Silke Kueck with JPMorgan.

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

I'd like -- 2 more questions. The -- like the one difficulty was something like thinking about -- like the 50% earnings growth for 2015, just curious like what the base is in 2014. And because I looked at my model, and to some extent, people already understood that there is significant income that would come in the event that the joint venture with Talison closes, and in the event that you sell the TiO2 business and there's cash available to buy back shares. And like to me the question really is like how bad would the results be in '14 to get to -- or what would the number be in '15 or what is the base in '14? Because to some extent, the -- or at least in my opinion, I already expected a fair amount of earnings growth into '15 because I already assumed that the Talison results would be baked in and I already assumed a fairly aggressive share buyback. And so some of the questions that came out in the call I think have to do with trying to understand what the Lithium business, including potash, will look like for the remainder of the year. I was wondering whether you have like a thought on that.

Seifollah Ghasemi

Okay, there is no mystery here. You guys are analysts. You publish your numbers. Right now, there is a number published in terms of what Rockwood was actually expected to do in 2014. And the number, if I believe I'm right, is in order of the $22.30. We think that is a reasonable number. So if you want to think, that is the basis, yes. That would be the basis, and then you would get increase later on. I mean, those are public numbers. I'm not -- Rockwood doesn't give forecast and I'm not giving you a forecast. I'm just saying if you want to have a basis, that basis does exist.

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

The basis of $2.20?

Seifollah Ghasemi

Look at your own forecast and look at the other people's forecasts. You don't want me to repeat that for you, right?

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

Right. My own forecast is like moving lower.

Seifollah Ghasemi

Probably in that case -- in that case, we will do better than 50% based on your forecast.

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

The second question is, is there like a Plan B in the event that the sale of the TiO2 asset somewhat gets like just mucked up in the regulatory process and it doesn't -- let's say like it came close this year or it's delayed or something has to structurally change. Is there like a Plan B?

Seifollah Ghasemi

The Plan B is the fact that, first of all, we are very confident that it will happen. If it doesn't happen, we are already running the business. We will continue running the business, and then we will look at our options. That business -- the good thing -- the good news about that business, okay, is that the results are a lot better than they were last year. You kind of -- we kind of disclosed the results. And those businesses are having an EBITDA run rate in the first quarter of close to $50 million. That comes on an annual basis of around $200 million. That is a very attractive business for the kind of price that Huntsman is paying us. So I think they have a very great deal of incentive to close the deal. And if they don't, we are not going to be left with assets that are impaired or anything. If anything, the results will become even better. So then we will deal with it in that way.

Operator

Our next question is from Rosemarie Morbelli with Gabelli & Company.

Rosemarie J. Morbelli - G. Research, Inc.

Seifi, looking at butyllithium, if I am pronouncing that right...

Seifollah Ghasemi

Yes.

Rosemarie J. Morbelli - G. Research, Inc.

What is behind the customer not choosing it any longer? Are there any environmental issues? Is it that the product is not performing according to plan? And what are the uses which are going to offset some of that shortfall?

Seifollah Ghasemi

Okay. You see our butyllithium product, what we call organometallics, has 2 significant applications. One is for making synthetic rubber. And the other one is to -- that it is used as a material for synthesis, whether it is in making drugs like Lipitor, or whether it is making fungicides and biocides for the agricultural application. The synthetic rubber business is growing. There's no question about that. Our applications for pharmaceuticals are growing. There's no doubt. In terms of the agricultural applications, we had one specific customer who developed their own synthesis compound. So it is not that there's anything wrong with the product. It is just that they can make their stuff themselves cheaper than buying it from us. So it's only economic consideration on the part of the customer. Besides that, I mean, I'm getting asked a lot of question, but believe me, this is not a big deal for our business. It's not a huge amount of volume. We are just disclosing it so that you know, but it's not a significant part of our business.

Rosemarie J. Morbelli - G. Research, Inc.

Okay. No, that is very helpful to me at least. And then looking at your numbers regarding the benefit from Talison in 2015, were you're giving us numbers for your 49% share, or was it what is expected...

Seifollah Ghasemi

No. That was the total. Our percentage will be 49% of that.

Operator

Our next follow-up is from James Sheehan with SunTrust.

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

I was just wondering if you can give us some color on the new plant in Chile. How quickly do you expect it to ramp up to full operating rates?

Seifollah Ghasemi

Jim, we have always said about 3 years.

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

3 years.

Seifollah Ghasemi

Yes, starting in 2015.

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

Okay. And then with respect to your potash sales, were your potash sales in the second quarter of '13 significantly higher or lower than they were in the first quarter of '13?

Seifollah Ghasemi

Yes, they're higher, but they were not significantly higher. Potash has been a miserable business continuously, so -- we had higher sales, but it wasn't significantly higher. Actually, second quarter sales of potash, to be exact, in 2013 was less than the first quarter of 2013.

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

Great. And in terms of your Surface Treatment business in Europe, looks like you're seeing good demand trends there. I was wondering if you could talk about the overall industrial markets in Europe. Do you see those strengthening over time? It seems like a lot of companies in the sector are talking about strength in Europe. And I was just wondering if you could add some color on that?

Seifollah Ghasemi

Yes, we would support that statement. We are seeing good developments especially, in Germany and obviously the other sector is doing very well, where we are -- especially the luxury sector and we are benefiting from that.

Operator

We'll go back to Alex Yefremov with Bank of America.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Seifi, just wanted to follow up on your expectation of 50% growth in EPS in 2015. What kind of cash deployment do you expect for the forecast? Do you expect that the full use of proceeds that you get from the Huntsman deal in the form of buybacks or M&A? Or that's not included in there?

Seifollah Ghasemi

No. What I am assuming on that is that we would -- whatever proceeds that we have from the sale of our TiO2 and the rest of the business to Huntsman that we would receive the cash sometime this year, and we would deploy that cash either in forms of acquisition, which would be accretive, or in form of share buyback. So I'm assuming that we would -- you see we have always told you, Alex, that we will find a use for the money by October, November. We can't -- we are not going to sit on top of $1.5 billion of cash doing nothing with it. So we will either buy back shares or we will do an acquisition. Either one will be accretive to 2015.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Great. And a quick follow-up, if I may, on Gigafactory. Have you had any discussions with your customers or anyone else in the industry on this opportunity?

Seifollah Ghasemi

Yes, Alex, I do not want to comment on that, if you don't mind.

Operator

We do have -- someone just queued up. Alex Heidbreder with Millennium.

Alex Heidbreder

Can I -- I want to understand a little better the flow of materials from Australia now versus in the future. Do you have the right to get 49% of the offtake? Or is the current supply going to continue flowing to all the Chinese conversion factories for now, and then you only take basically new production from the expansion in the future?

Seifollah Ghasemi

We have the right to 49% of the total production at any time. If the plant is producing equivalent of 50,000 tons of lithium carbonate today, we have the right tomorrow -- once the deal closes, we will have the right to half of that.

Alex Heidbreder

And so the current run rate production is around 50, and what's the capacity?

Seifollah Ghasemi

Capacity is around 100.

Alex Heidbreder

And the -- that's from the expansion. The expansion is complete?

Seifollah Ghasemi

The expansion was complete a year ago.

Alex Heidbreder

And so as of now before you close on the JV, the 50 right now is basically all going to China, right? There's some technical grade going...

Seifollah Ghasemi

That is correct.

Alex Heidbreder

And do you -- I guess how much do you envision that ramping up? Just how much material do you expect to take from that over the next 1 or 2 years after closing?

Seifollah Ghasemi

50% of the production. Once we've done -- once -- we need to build the mineral conversion plant to take that, but we will have the right to half of it.

Alex Heidbreder

No, no, I understand you have the right to half of it, but I guess -- I'm saying what kind of volumes you actually expect to take the first year or 2 after closing?

Seifollah Ghasemi

It obviously depends on the growth of the market. To be very specific, if we decide to build a mineral conversion plant tomorrow morning, it will take us about 3.5, 4 years to build that, right?

Alex Heidbreder

Yes.

Seifollah Ghasemi

So that would be at the time that we will take the stuff from there.

Alex Heidbreder

That's what I'm trying to understand. So the first couple of years until your own conversion plant is ready, for the most part, you're going to be participating in EBITDA, but not necessarily -- the production is going to continue to flow to the current plants in China?

Seifollah Ghasemi

Exactly, exactly. Which is not a bad thing because China is growing leaps and bounds.

Alex Heidbreder

Yes, and there is nothing wrong with that EBITDA, EBITDA for now.

Seifollah Ghasemi

That's right. Thank you.

Alex Heidbreder

And then the next -- well, hold on, one follow-up. And then...

Seifollah Ghasemi

Sure.

Alex Heidbreder

In terms of -- there's a new solution mine coming online in Argentina this year. And I guess someone earlier asked you about the market share changing at all or not changing at all. But I mean, won't there be some accommodation for these -- this new tonnage coming from ore recovering [ph]?

Seifollah Ghasemi

Well, these people, when they come onstream, if there is demand, I guess they will participate in the growth. The one thing is that Rockwood is not going to lose market share.

Alex Heidbreder

Okay, I mean you're going to be -- I mean, Toyota was selling it. And so, I imagine Toyota has -- Toyota Tsusho has a pretty good sales force and network. So I mean, they're going to be able to sell some tonnage. The only question is price, and is it all on -- is it all growth? Or is it replacing some current tons and so...

Seifollah Ghasemi

Well I don't want to make any -- too many comments about competitors and so on. But I think it would be worthwhile to check the fact that you just told me about who is going to be selling it. There a lot of names but the names that you mentioned is not the auto company, so you might want to check that. And the second thing is...

Alex Heidbreder

No. Toyota has the sales contract for the whole amount. Toyota is marketing the whole amount.

Seifollah Ghasemi

Yes. But is it the Toyota motor company or is it the Toyota Tsusho, which is their trading company?

Alex Heidbreder

Yes. The Toyota trading company.

Seifollah Ghasemi

Okay. But I just said, I don't want to make any comments about that. The fact of the matter is that we have a very low cost base as you know, and therefore, we are committed to maintain our market share.

Alex Heidbreder

And just one last question. Right -- I think understand right now Rockwood is -- not Rockwood. FMC is buying a little bit of material from you guys as their base lithium production expansion is still kind of in the works. Is that right?

Seifollah Ghasemi

I have no comment on that.

Operator

And Mr. Ghasemi we have no further questions in queue.

Seifollah Ghasemi

Well, in that case, I'd like to thank everybody for your good questions and participation in our call, and look forward to talk to you in about 3 months. Thank you, again and have a great 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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Source: Rockwood Holdings' (ROC) CEO Seifollah Ghasemi on Q1 2014 Results - Earnings Call Transcript
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