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Rockwood Holdings (NYSE:ROC)

Q2 2014 Earnings Call

August 06, 2014 11:00 am ET

Executives

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

Robert J. Zatta - Acting Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer

Analysts

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

Robert Betz

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

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

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

Neal P. Sangani - Goldman Sachs Group Inc., Research Division

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

Richard O'Reilly

Rosemarie J. Morbelli - G. Research, Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Rockwood Holdings 2014 Second 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 and Communications. Please go ahead.

Nahla A. Azmy

Thank you, Cathy. Good morning, everyone, and welcome to Rockwood's second quarter 2014 earnings conference call.

Robert J. Zatta, our Chief Executive Officer and Chief Financial Officer, 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.

As an initial matter, we would like to note that our discussion today may include statements regarding the proposed merger between Rockwood and Albemarle Corporation. Certain statements regarding this transaction, as well as certain statements related to our expectations or projections for the future may constitute forward-looking statements within the meaning of the federal securities laws. 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.

You should also note that this communication does not constitute an offer to sell or solicitation of an offer to buy any securities or solicitation of any vote or approval. In connection with the proposed transaction with Albemarle, Albemarle will file with the SEC a Registration Statement on Form S-4 that will include a preliminary joint proxy statement/prospectus regarding the proposed transaction.

You should review these and other materials filed with the SEC carefully, as they will include important information regarding the proposed transaction.

Rockwood, Albemarle, their respective directors, executive officers and certain other persons may be deemed to be participants in those solicitation or proxies in favor of the proposed transaction. Information regarding Rockwood's directors and executive officers is available in the proxy statement filed with the SEC by Rockwood on March 28, 2014, and additional information will be contained in the joint proxy statement/prospectus and other relevant materials to be filed with the SEC when they become available.

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 this call's presentation.

With that, I'd like to turn the call over to Bob.

Robert J. Zatta

Thanks, Nahla,, and good morning, everyone. Thank you for participating in our second quarter earnings conference call. Please note, all of my comments this morning will relate to our continuing businesses.

Rockwood's second quarter has been, to say the least, an eventful quarter for the company. In my prepared comments, I will first provide an overview of our business units' performance and a summary of Rockwood's financial results, followed by some comments on the announced merger with Albemarle. After that, we will open it up to Q&A.

Turning to Page 6 of our presentation, I am very pleased to report that Rockwood had strong results for the second quarter of 2014. Both of our businesses are performing in line with our expectations, despite some sluggish economic conditions in some sectors. Net sales were up 4.1% versus last year, driven by strong performance in our Surface Treatment business and significantly higher sales in our battery-grade Lithium business. Sales have been negatively affected by significantly lower potash sales, and you are all familiar with this situation, and also lower sales of organometallics, which is primarily butyllithium, as a result of a major customer developing their own synthesis compound and moving away from our product.

In terms of adjusted EBITDA, we were up 3%, driven by higher sales, slight offset by the higher SG&A incurred in order to position ourselves for future growth. Our adjusted EPS was up 59% versus the same period last year.

If you would, please turn to Page 8, as Page 7 is self-explanatory.

Page 8 is our Lithium business. The quarter was impacted by 3 major events. First, sales and adjusted EBITDA have been negatively impacted by lower potash sales. We have discussed this in the past and have highlighted this on the page. Second, we recorded lower butyllithium sales. I mentioned this already but it had a meaningful impact in the quarter. And third, on a very positive note, we have included about 1 month of adjusted EBITDA from our 49% share of Talison, which was about $3 million. Now there's a lot of activity within the global lithium business, and Rockwood is doing very well. Our plants are running at or near capacity in terms of lithium carbonate equivalents production and so we are not chasing lower price volume in Asia. As a result, we have continued to maintain very strong EBITDA margins. Importantly, and I would like to stress this, the future of our Lithium business is in the battery-grade growth. In the second quarter, those battery-grade products were up more than 20% versus last year and close to 25% on a year-to-date basis. Plus, I am sure everyone saw the news from Panasonic and Tesla this past week, regarding their growth plans. Given such meaningful progress, and with our strong management team and uniquely positioned portfolio of resources, we continue to be confident in the performance of this business for the long term.

Now please turn to Page 9, our Surface Treatment business. Our Surface Treatment business continues to roll with very impressive sales and adjusted EBITDA growth. The EBITDA margin in the quarter and year-to-date is meaningfully ahead of last year. We have a terrific management team in place and I am very confident this business can continue to deliver strong results as we move forward.

Page 10 of the presentation is our reported income statement for the second quarter and first 6 months of 2014. Please note, the businesses we sold in 2013 are reflected in discontinued operations. We reported sales of $362.3 million for the quarter as compared with $347.9 million in the same period last year, an increase of 4.1%. As I noted earlier, sales were up versus last year, primarily due to higher volumes and selling prices in most Surface Treatment markets, as well as for lithium battery applications, partially offset by lower sales of butyllithium and potash.

We reported gross profit of $163 million or 45% of sales for the second quarter. The higher sales volume noted above had a favorable effect on gross margin in the current-year quarter. SG&A expense was higher in the second 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 second quarter, we reported operating income of $53.7 million, which was 14.8% of sales. Next major item is net interest expense. Net interest expense decreased from the prior-year quarter due to the repayment of all of the outstanding borrowings under the senior secured credit facility in September 2013. With regard to income taxes, we recorded an income tax provision of $12.3 million on income from continuing operations of $46.4 million for the second quarter. On an adjusted basis, the effective tax rate for the second quarter was 9.2%. Our effective tax rate in the quarter on an adjusted basis benefited from the releases of some tax reserves, which had been on our books for a number of years and for which the statute of limitations has expired in the quarter.

Turning to Page 11. Page 11 presents the reconciliation of net income to adjusted EBITDA. This page shows income from continuing operations of $46.4 million, adding back interest expense and D&A brings us to a subtotal of $85.9 million. We then add several onetime adjusting items, which brings us to the adjusted EBITDA from continuing operations of $88.7 million.

Page 12 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 $0.62 per share for the second quarter.

Finally, Page 13 shows our free cash flow. As you can see, there was an inflow of $4.4 million in the second quarter. Now this schedule includes discontinued operations and reflects CapEx spend for the new color pigments plant and growth CapEx to support our capacity expansion of LCEs in Chile. Just considering free cash flow from continuing operations, our free cash flow on a year-to-date basis is actually very strong.

Now in summary, if you would please turn to Page 15 of the presentation. We always like to compare our actions to what we have told you, and that is what you see on Page 15. We are proud of all of our accomplishments, however, it is clear that the main event is the merger of Rockwood and Albemarle, which we announced on July 15.

The combination of these 2 companies creates 1 of the world's, if not the world's, premiere specialty chemical company. It brings together businesses with market-leading positions, cross high-margin -- 4 high-margin businesses and with excellent long-term growth prospects. And most importantly, as we said in our earnings press release, by merging with Albemarle, we are achieving an attractive price for our shareholders while participating in the future growth of this premiere specialty chemicals company.

And with that, I'm happy to answer any questions. Cathy?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from Bob Koort with Goldman Sachs.

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

Bob, 2 questions I have for you. One, you mentioned that the free cash flow from continuing ops looks much more robust than the reported. Can you give us some more granular detail on that? And then secondly, I think you had mentioned most of your Lithium businesses were operating at pretty full rates. Could you talk about where the Talison assets are operating and what the path towards higher rates there would be?

Robert J. Zatta

Absolutely. As far as the free cash flow is concerned, probably 1/2 of the CapEx that we spent in the quarter was related to the discontinued operations. Mostly against the plant that we're building in Augusta, Georgia. If you look at just the continuing operations on a year-to-date basis, our free cash flow was probably around $25 million. So -- and that includes what we're spending for the facility down in Chile. So it's pretty much in line or right in line with what we had been expecting for those businesses. As far as our capacity is concerned, a couple of points. First of all, as you know, we have the new hydroxide facility in Kings Mountain, which we are operating at this point. We do have upside capacity in that facility. And obviously, as the demand for lithium hydroxide grows next year, we'll be able to support some of that growth. We have the facility in Chile, which is coming onboard for lithium carbonate, which will probably start up in mid-time 2015. And then it will probably take about 3 years to ramp up to, let's say, full capacity. As far as the operation in Talison is concerned, they are running at -- they have excess capacity at this point in terms of what they've currently got in place. They've put additional capacity in about -- I think it was about 2 years ago. And -- but of course, at this point, in order for us to take full advantage of that, in terms of the ore coming out -- or the lithium concentrate coming out of that facility, we would want to look at expanding our lithium hydroxide capacity from the ore.

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

Bob, would you ever find a location for that lithium hydroxide plant? And is there -- do you sense there's some advantage in building it in the U.S. if there's a big U.S. demand opportunity?

Robert J. Zatta

We have not, at this point, made any decision on that. And I think as we've talked in the past, we're looking at all of the factors, including what kind of governmental support we can get, the logistics involved of where the location would be. I mean, we've considered the U.S., we've considered Australia, we're considering Germany. Pretty much anywhere in the world that makes sense to us, we're looking into. And our teams -- our Lithium teams are actively engaged in that right now. To answer your specific question, if it made sense in the U.S. because the big demand was there, clearly, that would make a lot of sense to us as well, but we haven't made any decisions on this at this point.

Operator

Our next question will come from John McNulty with Credit Suisse.

Robert Betz

This is Rob Betz in for John. Just a quick question on the Albemarle deal. Have there been any discussions around the value of the transaction or structure of the deal, given that the total price of the deal has slid with Albemarle's stock dipping? I think the price, as it stands now, only represents a single-digit premium for Rockwood shareholders, relative to where the stock was trading before the deal was announced. So I wanted to see if you had some color there?

Robert J. Zatta

Yes we, at this point, we have not and we have no intention of having any conversations in that regard.

Robert Betz

Okay. And then just a follow-up, have you seen any other interest from other buyers who could potentially come in and put a competing offer for the company? Or if not, is that a possibility going forward?

Robert J. Zatta

Whether it's a possibility or not, I have no idea. We're very happy with the transaction that we have and we're working real hard to get that done.

Operator

We have a question now from Silke Kueck with JPMorgan.

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

What was behind the strength in the Surface Treatment coatings business? And who else outside of Henkel do you compete with?

Robert J. Zatta

I mean, the business, the Surface Treatment business, the strength really came from the 3 areas that you'd expect: volume, price and the inclusion of our joint venture from India. And of the growth that we recorded in that business, which was about just under 11%, it was kind of 1/3, 1/3, 1/3. It was across the board. Our aerospace business is doing very well. We have excellent results, for example, with Airbus. And we have added another aerospace customer this past year, which is kicking into our numbers. So the -- but generally speaking, it's kind of across the board. Henkel is obviously our big competitor and -- but around the world, there's a lot of small players, and we're very effective in competing, whether it's in Asia or whether it's in Latin America or whether it's in Europe or wherever.

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

Who would you say your second and third largest competitors are in that space?

Robert J. Zatta

Well, probably, I would guess, PPG maybe and then also the Japanese company, Nhihon -- no, what was it? Nippon Paint. Right.

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

Nippon, okay. Secondly, are there any other tax reserves that can be unwound. There was this low tax rate in the quarter. Are there more tax reserves and can you quantify them or are those -- will those benefit Albemarle down the road?

Robert J. Zatta

Well, as far as tax reserves are concerned, I mean, like, we kind of -- our philosophy is, is that we want to manage the whole P&L. So every single quarter, every single day of the week, our tax people are looking at what we have. I mean, and this is an example of it. I mean, these are long and hard discussions to kind of find these things, to work on them, to make sure that we've got our act together. And it's not the kind of thing that you can predict easily. But it's something that we do all the time. And I would guess that as time passes, we'll continue to find opportunities.

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

Are there still any existing NOLs that somehow will be unwound with the pending transaction with Albemarle?

Robert J. Zatta

I don't think so.

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

And just a question or clarification on the CapEx. Did you say that, so far, you spent something like $45 million on building the color pigments plant in Augusta?

Robert J. Zatta

As far as the plant in Augusta is concerned, on a year-to-date basis, we've spent about $40 million. And that's probably the bulk of what we spent on that facility.

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

And how much more is there to go?

Robert J. Zatta

I'd have to check on that, but I mean, it's probably -- I don't know, maybe another $20 million or so.

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

And my last question, is there an easy way to discern the equity income from Talison somewhere in your income statement because, like, the consolidated income statement shows like $2.4 million and probably there were some adjustments to it, like, how does one identify what's...

Robert J. Zatta

Yes, I can actually give you the specific numbers on that, if you'd like. We recorded, let's call it adjusted EBITDA of $2.9 million, right, and then there was an inventory step-up reversal of $2.7 million. And that's just part of the accounting for the acquisition. And then there was a couple of minor items in terms of interest income and D&A, and that kind of nets down to a very small number on our reported results for the quarter. In terms of how we have tracked it as an adjusted EBITDA item, the $2.9 million is what's included in the Lithium EBITDA number. Now in the future, this will be something that we will continue to disclose and when you get away from the noise of the acquisition, it will become cleaner in terms of just what the EBITDA number is.

Operator

Then we'll go next to James Sheehan with SunTrust.

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

Just wondering on -- your outlook for Surface Treatment margins seem to be a little bit lower in the second half than in the first half. What's driving that?

Robert J. Zatta

No, there's really nothing specific. I mean, we picked up the -- the sales growth was pretty good and it really depends upon the mix of the business. But I mean my sense is, for this business, EBITDA margins between somewhere in the range of 22% to 24%, and it can fluctuate from 1 period to the other, is kind of about what we should expect. It's just a question of how much of what product we sold to which customer in any given period of time, that's all.

Operator

Our next question is from Mike Harrison with First Analysis.

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

Just going back to the question on Talison. Is there any way that you can walk through what the quarterly sales, operating income and EBITDA run rates were, so that we can maybe calibrate for the going-forward periods?

Robert J. Zatta

I mean, what I can tell you, rather than go through all of it -- because I think from a quarterly standpoint, the numbers are probably reasonably consistent. There's not going to be a huge amount of quarterly variances and so on. And obviously, we want to be careful about what we disclose here because we're a 49% joint venture in another company and so it's a little bit -- we need to be a little bit careful about what we talk about. But what we have said and what we continue to maintain is that, on a full-year basis, for 100% of Talison, their sales should be in the $175 million to $180 million range and their EBITDA should be in the $75 million to $80 million range. So that's what we've said before. I think Seifi has said that on previous calls. And as far as I can tell, based on what we've seen so far this year, we're very much on track to hitting those numbers.

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

Okay. And then looking at the -- your Lithium business, it looks like the potash business, the sales picked up a little bit relative to Q1. How much did that contribute to the better margin that we saw quarter-on-quarter?

Robert J. Zatta

The real better margin quarter-on-quarter was probably due -- well, not probably, it was due to the inclusion of the EBITDA coming in from Talison, right? If you take that out -- because we don't have in that number the sales. And the reason for that, of course, is that the accountants don't worry too much about adjusted EBITDA because it's a non-GAAP measure but they get very nervous about when you start putting things into sales because it's a GAAP measure. And I mean that's fair disclosure. If you take out the Talison EBITDA, you're probably looking at a margin in the quarter which is pretty much right on top of what we had in the first quarter.

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

Okay, okay. And then in terms of the lower butyllithium volumes -- and I understand the dynamics there, but just curious what the supply and demand balance looks like globally for that product right now. Are you guys running a pretty low capacity utilization? And I believe you have 3 butyllithium production sites. Does it make sense to idle one of those?

Robert J. Zatta

We clearly need to look at. I mean, it really -- I mean, we mentioned this in the first quarter but quite honestly, the effect took place in the second quarter. So it was a fairly big impact for us this quarter. And it's -- and again, I mean, I don't need to go into the details, but it was 1 customer who used it for ag purposes, that they have their own compound that they made. And it's a big company and this kind of stuff happens all the time. I mean, the other parts of our business, the synthetic rubber and the other synthesis activities are doing extremely well and growing nicely. Clearly, with this customer coming out, we definitely have capacity and our guys are working real hard on replacing that business. The growth is still very good for the businesses, and by 2015 we should be back where we want to be.

Operator

We'll go next to John Butik[ph] with Lorem Ipsum.

Unknown Analyst

It's actually John Sekridge[ph] instead of John. Just a couple of question, if I could. First off, there's been a lot of discussions in the news from Tesla about building it's Gigafactory and wanting to source raw materials, including lithium, out of the U.S. So can you maybe help us understand who else would be able to supply the volume of lithium, if it isn't you guys, out of the U.S.? And then, I've got 2 follow-on questions.

Robert J. Zatta

Sure. I mean, well, first of all, right now and as far as we know, Tesla -- and we obviously sell through Panasonic, so that's the guy who they're getting their stuff from, is focused on lithium hydroxide, all right? Some people use lithium carbonate, they're using lithium hydroxide. We produce lithium hydroxide at a new facility that we built specifically for this purpose in Kings Mountain. Now for that one, we get our lithium carbonate that we use to -- because we produce it from carbonate, we get it from our operation in Silver Peak, Nevada. We could get it from Chile but for now, we're getting it from Silver Peak. And we have -- we have, like, I think about 5,000 metric tons of capacity in that location. And so we clearly can provide, as they build their business and as they demand more, we can certainly participate in that growth. Frankly, the only other people they could get it from, I mean, in the short term, besides us, would probably be Chinese suppliers. And if they get it from Chinese suppliers, that's great, to some degree, because we're selling the lithium concentrate from Talison to those Chinese suppliers. And so we will benefit indirectly and support them that way. I mean, it's possible that other companies like FMC could ramp up production. I mean, I don't really want to comment on what they may or may not do, but that's kind of what it comes down to.

Unknown Analyst

Okay. And then secondly, when I look at your business, you guys have been executing great. Your margins are really solid and the guidance you've given -- and I know one other question kind of came up about it, it seems to me that you're kind of guiding conservatively, so like rather than plus or minus, you keep saying minus but the business kind of keeps coming in better. As a shareholder, we're just trying to understand a little bit, given how well you're executing and given the growth in the business and, frankly, given how Albemarle hasn't been executing, can you maybe just walk us through why you think selling the company at such a low premium is justified?

Robert J. Zatta

Sure. Let me take the very last part of your question first because I think it's kind of important to point out that we, Rockwood, kind of embarked on a program about 18 months ago, whereby we divested our noncore businesses and we focused on our Lithium and Surface Treatment business. We executed that strategy. I think we did a great job in terms of executing it. And I think we've got good prices for the businesses that we sold. And we were able to buy back some shares and we paid down some debt. We've invested in our core businesses. And so I think we did all the right things and, quite honestly, we were very well rewarded, and so were our shareholders rewarded, by that program. And our share price is, quite honestly, has done very, very, very well if you look at it over the last 18 months. I mean, I think in 2013, our share price was up something like 47%, 48% compared to a strong market, but we were way above the market. And from a training multiple standpoint, our multiple has ratcheted way, way up compared to anybody. And so when we did the deal with Albemarle, even though somebody could argue that, while the price premium wasn't that high, the fact of the matter is, is that the margin we achieved for the business, built on what we had accomplished over the last 18 months and what that meant for share price, I think was very, very excellent. So we felt it was a really good transaction from a shareholder perspective standpoint. As far as why it makes sense, given that we've been executing, I mean, the fact of the matter is, is that we have 2 great businesses and we spent a lot of time in diligence. This was all reciprocal, by the way, and management presentations with the Albemarle folks. And we think we got very comfortable with the potential for those businesses, the catalyst business, the bromine business, and what they can do with it. And we actually think that, in many ways, the combination of these businesses creates such a powerful specialty chemical company that it has great -- it will have great appeal for investors in terms of wanting to invest in the space, and the growth rates of these businesses over the next years should be quite spectacular. You know you'll have a bigger company, you'll have more resources, you'll have -- just everything will be better. And our view was, is that we couldn't think of a better way to have our businesses benefit and go into the future than in combination with these people. I mean, this doesn't happen overnight. We spent a lot of time looking at this and all this will come out in the proxy and with what Nahla was talking about earlier, when all of that stuff gets filed, there'll be tons of detail. But we're pretty excited about the potential for this thing.

Operator

We have a follow-up from Bob Koort with Goldman Sachs.

Neal P. Sangani - Goldman Sachs Group Inc., Research Division

It's actually Neal Sangani with a follow-up. I'm curious on the plans for Tesla and Panasonic. Are they going to stick with this lithium hydroxide battery or is that still a variable you're going to wait on before you make a decision on where you build the hydroxide plant or whether you build that or carbonate?

Robert J. Zatta

We have -- we are heavily, actively engaged with both Tesla and with Panasonic on where they're going and what they're planning on doing. I mean, as far as we know, as far as we're concerned, lithium hydroxide is where they're going, and that is what we're focused on. The new facility that we build is going to be built to -- getting back to what I said before about the right place, from a logistical standpoint, government sub -- all those factors still weigh in there. But to the degree that it makes sense, it will be -- so that from a logistical standpoint, it supports the Tesla story. I mean, Tesla is a very important component in the whole electric vehicle thing. And we think supporting them and developing with them is extremely important for the long-term future of this.

Neal P. Sangani - Goldman Sachs Group Inc., Research Division

And just a broader question on them supplying batteries to other auto OEMs or auto OEMs potentially developing their own electric vehicle batteries, do you have any preliminary thoughts or any insight into what you're seeing based on your discussions with them or other potential suppliers on what the endgame for this electric vehicle revolution might be?

Robert J. Zatta

Well I don't know that I have any specific insights. I mean, this is something which is developing, and we've always said it's going to take a long time. I mean, it's not going to happen -- I mean, look, I mean they're talking about ramping from 30,000 to 100,000 vehicles next year. I mean, there's 85 million vehicles produced in the world. So I mean, not to downplay it, but the fact of the matter is, is that it's not going to happen overnight. This is going to develop over a period of time. And from our perspective, what we want to do is to be the lithium provider of choice so that we have the -- and we spent the last several years, a long time, developing resource that we have. What we do in Chile, getting involved with Talison, this was a fundamental step in terms of being able to be the lithium provider in terms of all these applications. Now we're working on some of our capacity activities and so we'll continue in that regard. And as things develop, we want to make sure that we have our share of everything that's happening.

Operator

And we have a question now from Chris Shaw with Monness, Crespi.

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

You guys know yet who might be, from Rockwood, appointed to the Albemarle board?

Robert J. Zatta

From what I understand, we have 11 board members. I believe 3 of them will come from Rockwood and, quite honestly, Chris, all that stuff will be disclosed when all these filings are disclosed. That's as far as I can say or will say.

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

Okay. And then this might be a stupid question but I was just -- so the butyllithium sales are down and I guess it's -- maybe your lithium capacity is running at close to full capacity. How does that work -- I mean, is the -- you said you wanted to find, I guess, new customers for the butyllithium as well but can you not shift sort of the lithium -- I don't know enough about how the -- I guess, what -- can you not shift the butyllithium to somehow -- I know it's a different product but, I guess, the lithium that goes into the butyllithium to sort of the battery-grade side right away or is it just completely apples and oranges?

Robert J. Zatta

Yes, it's kind of apples and oranges because we start with the brine and in this case, we start with the brine in Chile. And then we get into this technical-grade lithium chloride. And the lithium grade chloride is what goes into the lithium metal and the lithium metal is what eventually winds up in the butyllithium. So it's kind of a different chain in the process and so our issue is not -- if we ship from one to the other -- because I mean, it's really about the hydroxide and that type of thing. So in the short term, we're not really missing anything at this point.

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

Okay, I know you sort of answered the board question but is there anything you know that would preclude Seifi from being able to be on the Albemarle board?

Robert J. Zatta

Honestly, I am not going to -- I'm not going to talk about any of that stuff. All of that is in the hands of the lawyers and everybody else with these filings, and that's...

Operator

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

Richard O'Reilly

On the Surface Treatment business, can you talk about how different geographies are doing? Because traditionally, you're big in Europe and Germany. I mean, are you seeing it in the U.S.? Can you talk more about on a global basis?

Robert J. Zatta

Yes, I mean, what I could tell you is, is that -- and I would say that while we are big in Europe and so on, our Surface Treatment business is really a global business. We have a big operation in the United States. We just built that new facility in Michigan. They're probably running at, I don't know, about 80%, 85% of capacity at this point. We have an operation in Mexico. We have an operation in Brazil that we built a few years ago. We have operations throughout Asia. We have operations in Turkey. And we just bought out the other half of our Indian joint venture. And so -- what the strategy has been, and continues to be, we go where our customers are. So if we have a facility in Mexico, it's because we have customers in Mexico, not -- we don't go to Mexico and say, "Let's see what we can figure out." So what I would say is, is that as you look at the global economy and you look at automobile production, you look at aerospace production, you look at general industrial production, our trends basically follow and mimic those end markets. There's no magic to it, that's just the way it is. Now where we have benefited is by moving into these markets, like I said, and quite honestly, take -- doing a better job than what the local competitors have been doing and getting that business. So as I think our Indian operation, not only did we -- were we able to benefit from including them in our full sales, but we think that there's big growth opportunities there. So our growth rate is not just a function of, let's say, GDP or general industrial production and it's pretty much solid everywhere we are. I can't say that while we're down in North America but we're up in Germany or any of those kinds of things, I wouldn't say that.

Richard O'Reilly

Would you say you're seeing a benefit from reshoring or the return of manufacturing to the U.S. You think you're seeing any of that?

Robert J. Zatta

Well, again, I wouldn't say in the U.S. we could sit here right now and say that we're seeing that because it's probably way too premature for that. But I guess, what I am saying is, is that as economic activity continues to grow, wherever it is in the world, we're there and we will participate and take advantage of that.

Richard O'Reilly

Second question, a quick -- ask you to repeat something. I missed -- what did you say the battery -- lithium battery sales volumes were up year-over-year?

Robert J. Zatta

Battery sales, the battery-grade sales in the second quarter were up a little more than 20% year-over-year. And on a year-to-date basis, they were up about 25%.

Operator

And next, we have Rosemarie Morbelli with Gabelli & Company.

Rosemarie J. Morbelli - G. Research, Inc.

I was wondering, on the general industrial side, Bob, is there some kind of a lag between your operations and when they're actually translated into new equipment? Because when we talk to other companies, whether it is coatings or not, general industrial has not really picked up, and yet you have strong business on the Surface Treatment side.

Robert J. Zatta

No. I mean, I -- the way our business operates, we're kind of right there with the manufacturer. So as their business goes, it's instantaneous as far as we're concerned. And we have the good fortune in terms of managing our mix of customers. For example, we're heavily focused on the German automobile manufacturers. Less so, much less so on the North American manufacturers. And as those guys have done really well expanding their operations around the world and posting good sales growth, we have participated in that. So I would say that there's no big lag or anything between what we do and what they do because we're pretty much right on top of what they are doing.

Rosemarie J. Morbelli - G. Research, Inc.

Okay, that's very helpful. And I was wondering, on the organometallics side, is that a similar type of product line, I mean, similar to Albemarle and Chemtura, meaning that they go into catalysts or is it something totally different?

Robert J. Zatta

Listen, I am obviously not a chemist, but my understanding is...

Rosemarie J. Morbelli - G. Research, Inc.

Neither am I.

Robert J. Zatta

Right. My understanding is that there are similarities there and it's something that needs to be explored further.

Rosemarie J. Morbelli - G. Research, Inc.

So there was comment about the fact that there is excess capacity on the organometallics going into catalysts. So this is not where you are at the moment?

Robert J. Zatta

Right.

Operator

[Operator Instructions] And we'll go next to James Sheehan with SunTrust.

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

Bob, last quarter, Seifi offered an outlook of 50% earnings growth and a portion of that depended on share buybacks and things. I was just wondering if you could update your thoughts on the earnings growth of the 2 base businesses, obviously, without -- just organically.

Robert J. Zatta

Yes, I remember that from -- with Seifi because I probably prepared that schedule for him. The businesses, organically, I think -- let's go with the top line. I mean, Surface Treatment, obviously, had a great quarter. In more normal terms, you're probably looking at a business that should be growing somewhere in the 5% to 8% range. And as far as our Lithium business is concerned, we've said that, that business, excluding any uptick from electric vehicles, is going to be in the 5.5% to 8% range. Obviously, we've got to get beyond the potash and the butyllithium thing. We think we can deal with the butyllithium thing by next year. So that's the kind of top line growth we would expect from those businesses. In our business, the whole name of the game is sales growth because once you get past the sales growth, we don't have a lot of raw material fluctuations, there's not a lot of SG&A or other kinds of things. So that should just translate pretty much from that down to the earnings growth. So I mean, my sense is, is that I'm very optimistic what these businesses can do next year.

Operator

Mr. Zatta, that does conclude our Q&A session. Please go ahead with any closing remarks.

Robert J. Zatta

Thank you, Cathy. And again, thank you, all, for joining our call. I just want to reiterate what I was saying during my prepared remarks, as well as in my -- in the Q&A session. We are very pleased with the solid performance that Rockwood continues to deliver. And we have great expectations that they will continue to deliver those results well into the future, with all of the potential opportunities that we discussed. And we're very, very excited about the transaction with Albemarle. We think we're going to create, really, a top-notch premiere specialty chemical company and one that, for many, many years to come, I think people are going to be extremely pleased with. So thank you, all, very much and talk to you next time.

Operator

Thank you, then, 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 Robert Zatta on Q2 2014 Results - Earnings Call Transcript
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