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Rockwood Holdings Inc. (NYSE:ROC)

F3Q11 Earnings Call

October 19, 2011 11:00 a.m. ET

Executives

Robert Zatta – Chief Financial officer

Timothy McKenna – Vice President of Investor Relations & Communications

Seifi Ghasemi – Chairman and Chief Executive Officer

Analysts

David Begleiter – Deutsche Bank AG

Silke Kueck-Valdes - JP Morgan Chase & Co

Edlain Rodriguez – Lazard Capital Markets

Mike Harrison – First Analysis

Robert Court – Goldman Sachs

James Finnerty – Citi

Richard Phelan – Deutsche Bank

Leo Larkin - S&P Capital

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Rockwood Holdings 2011 Third Quarter Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I'll now turn the conference over to Tim McKenna, Vice President, Investor Relations. Please go ahead, sir.

Timothy McKenna

Thank you, Kathy. Good morning and welcome to Rockwood’s Third Quarter Earnings Conference Call. Seifi Ghasemi, our Chairman and Chief Executive Officer; and Bob Zatta, Chief Financial Officer will give a formal presentation after which, we will have Q&A. Our slides are available on our website at rocksp.com.

Let me read the following statement before we begin. This conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, concerning the business operations and financial conditions of Rockwood Holdings and its subsidiaries. Although Rockwood believes the expectations reflected in such statements are based upon reasonable assumptions, there can be no assurance that its expectations will be realized.

Forward-looking statements consist of all non-historical information, including statements referring to the prospects and future performance of the Company. Actual results could differ materially from those projected in forward-looking statements due to numerous known and unknown risks and uncertainties including the risk factors described in our 10-K filings.

We do not undertake any obligation to publicly update forward-looking statement to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events.

Before we begin, I just want to have a quick reminder that Rockwood is holdings Investor Meetings in New York and Boston on November 1st, and 2nd, respectively a lot of you have responded to the invitation, those who haven’t contact us or somehow you missed the invitation, please send me a note.

And with that I will turn it over to Seifi.

Seifi Ghasemi

Thank you, Tim and good morning everyone. Welcome to our conference call and we definitely look forward to answering your questions. For our initial presentation as Tim mentioned, we will be referring to the material we have posted on our website. I am very pleased to report that by any metric you want to measure our performance, we have an excellent performance during the third quarter of 2011.

This quarter’s strong results are further confirmation of the fundamental strength of Rockwood’s unique portfolio of inorganic specialty chemical businesses.

The strength of our portfolio combined with our constant focus on productivity and cash generation enabled us to achieve a record EBITDA to sales margin of 24.1% in the quarter and we also generated $135 million of free cash in the quarter. We did have a strong continued growth, volume growth in our Lithium, Surface Treatment and Clay Additives businesses.

Pricing was up in all of our business sectors and everyone of our businesses had an improved performance versus last year in the quarter and year-to-date. Also please note that we have more than doubled our earning per share.

Now please go to page 6 of our presentation material. Sales were up 17.4% versus prior year, on a constant currency basis sales improved 10.4%. As mentioned before volumes continue to grow in our Lithium, Surface Treatment and Clay-based Additives businesses specially due to the business that we have every supply month for drilling natural gas.

Prices continue to be up in all of our business sectors specially Lithium and TiO2. Our adjusted EBITDA was up 41.3% versus last year and as I said before we achieved the record EBITDA margin of 24.1%. With EPS being more than 100% ahead of last year for the quarter and for the year and a significant amount of free cash of $135 million.

As a result of this strong generation of cash, our net debt to EBITDA ratio now stands at 1.67 times, which is well below a goal of two times that we had set for ourselves two years ago.

Now please turn to page 7. I have already talked about the key numbers, but again, I would like to draw your attention to the last line where you see their significant more than doubling of our EPS for the quarter and for the year.

Please turn to page 8, now. As usual we do breakdown our topline growth into individual pieces so that you can see where the growth is coming from. As you know we had significant increase in prices and therefore the 12.3% for the quarter and 10.1% ahead for the year.

We did benefit from exchange rates, but then, I am sure lot of people are focused are on the volumes. Our volumes for Lithium, Surface Treatment and Clay-based Additives are key business did grow, our Lithium business continued to grow at least 10% a year.

The volume decrease that you see there is no surprise, it is related to our Color Pigment business where we have significant exposure to the housing market in the United States. We have said for the past three years that we do not expect any improvement in volumes in that business for 2012 and 2013. So, on one should be surprised about the volume decline there.

The other area where volumes did decrease was our TiO2 business. That again is not a surprise to anybody who has been listening to us. We have always said that we are sold out of TiO2, therefore, in any one quarter, if we have to do repairs on our facilities and we do not produce then we don’t have material to sell. You should not look at that TiO2 business from the volume growth point of view, because we have always said that there will be no volume growth. We are sold out.

Improvement on the bottom line is going to come from change in product mix and the pricing. We continue to feel very strong about the pricing, I’ll comment about that later on.

But again, as I said, the quarter-by-quarter judging the volumes in those sectors is not the right way to look at our businesses and beside that when you look at years-to-date, you will see what has happened to the volumes overall.

Our core businesses where the future of Rockwood depends which is our specialty chemical sector with Lithium and Surface Treatment there we are having strong volume growth.

Now please turn to page 9 and page 10. In those two pages I am not going to spend any time on them because I will comment on individual business units, but I would like you to please note that everyone of the business sectors, everyone of them had an improved performance in the quarter and year-to-date.

Now please turn to page 11. Our specialty chemical sector which consist of our Lithium business and our Surface Treatment business. This sector continued to have its strong performance actually improving its margins. Our Lithium business continues to have strong growth and as you know we did increase the prices and we are very confident that those price increase are going to be accepted by the marketplace and actually it has been accepted by the marketplace.

In addition, our Surface Treatment business continues to do very well and they have been able to continue to increase prices in order to make up for any raw material price increases, therefore, maintaining margins. We continue to be very optimistic about this sector and we are sure that they will continue to do well.

On page 12, Performance Additives sector. This is a sector where we do have exposure to construction, we have mentioned that for the past three years, but what we are very proud of is that despite the fact that volumes are actually down, the margins at this sector is at 18.2%. Year-to-date the margin is 19%, on a business there are volumes are down about 40% from the peak in 2006 and 2007. Therefore, we consider this sector a potential, significant growth vehicle for Rockwood in 2014.

Now, please turn to page 13 on TiO2. I would like to remind everybody that we are specialty TiO2 producer. We do not make a lot of the commodity materials. So, when you look at our business, you have to look at the special characteristics of our business. As I said, volumes in this sector we are sold out and volumes might go up and down depending on our production and depending on the adjustment of inventory by our customers. But, we have told you that we expect the margins for this business to be – we will be able to bring it up to 25% to 30%, for the quarter we are close to 29.7% for this business.

As for the pricing, we continue to believe that the market is very tight for our products and therefore we expect pricing to improve, actually I can confirm that we expect that for the fourth quarter of this year, our prices will be at least 8% higher than they were in the third quarter of this year.

Our ceramic business continues to do well, enjoying the benefits of the significant strong performance in luxury cars in Germany and our unique position in the hip joints. The margins did improve this quarter and now it expands for the year at 32.2%, an outstanding performance by our business unit there.

At this point, I would like to turn it over to Mr. Bob Zatta, our Chief Financial Officer and after he is finished, we will be pleased to answer your questions. Bob?

Robert Zatta

Thank you, Seifi and good morning everyone. I’m on page 16 of the presentation. As you can see this is our reported income statement for the third quarter of the year and the first nine months of the year. Please note all the data in periods presented have AlphaGary treated as discontinued operations. Rockwood reported net sales of $940.9 million for the third quarter as compared with $801.2 million in the same period last year, an increase of 17.4%. For the first nine months of the year, net sales were $2.9 billion, an increase of 19.3% over last year.

We reported gross profit for the quarter of $331.5 million or 35.2% of sales as compared with $266 million or 33.2% of sales last year. For the first nine months gross profit as a percent of sales was 35% as this compares with 33.1% last year. The improvement in gross margin year-on-year in the quarter and for the full year was primarily due to volume growth and higher pricing which more than offsets raw material and other cost increases.

For the third quarter SG&A as a percentage of sales was 18.7% which is down from the 20.9% last year. And for the first nine months of the year, SG&A as a percent of sales was 18.8% down from 21% last year.

We also had some restructuring and severance accruals in the third quarter related to the continued streamlining of operations, this brings us the operating income of $151 million for the quarter and $450.6 million for the first nine months. For the quarter, this is 16% of sales versus 12.1% last year and for the nine months, it’s 15.8% versus 11.9%.

The next major item in the P&L is net interest expense. The composition of interest expense is shown at the bottom of the page, in the quarter net cash interest was $21.2 million, mark-to-market losses on interest rate swaps was $3.9 million and deferred financing costs were $1.2 million. Net interest expense was lower than the same period last year primarily due to the prepayment of debt and lower interest rates as a result of the refinancing of our senior secured term loans in February of 2011.

Also, the mark-to-market loss on the interest rate swaps was $3.9 million in the quarter as compared to mark-to-market gains last year of $1.2 million. As we have discussed in the past, the expected movement in interest rates impacts the fair market value calculation of the interest rate contracts. Since we do not use hedge accounting the change in the fair market value from one period to the next runs through the P&L.

This brings us the income from continuing operations before taxes, which is $122.2 million for the third quarter and $361.7 million for the first nine months of the year. Against this, the income tax provision is $34.4 million for the quarter. For the first nine months of the year the income tax provision is $101 million, on adjusted basis the effective tax rate for the quarter is in the 28% range.

We then show the income from discontinued operations and again on sale of discontinued operations which relate to the AlphaGary sale, and the adjustment for the net income attributable to the non-controlling interest in TiO2 and Timber joint ventures. This results in net income of $75.9 million for the third quarter and $348.4 million for the first nine months of the year.

Page 17 presents the reconciliation of net income to adjusted EBITDA. For the quarter beginning with net income of $75.9 million, we have added back the items which get us to pretax income from continuing operations of $122.2 million, then adding back interest expense in D&A brings us to a subtotal of $215.5. We then add several one time adjusting items, which brings us to adjusted EBITDA from continuing operations in the quarter of $226.9 million.

Page 18 provides a detailed reconciliation of net income in EPS from continuing operations on a reported basis to net income in EPS from continuing operations as adjusted. As you can see, the adjustments are shown on an after tax basis and include the same items already identified on the previous charts. This gives us an adjusted EPS of a $1.06 per share for the third quarter and $3.11 per share for the first nine months.

Page 19 provides a detailed reconciliation firstly between the income from continuing operations before tax of $122.2 million to the normalized as adjusted profit before tax which is a $137.5 million. And secondly, from the reported income tax provision of $34.4 million to the normalized tax charge of $38.9. This gives us an effective tax rate of 28% in the quarter. The slower effective tax rate is due to certain domestic income not tax effected due to a beneficial foreign exchange, earnings mix and evaluation allowance.

Page 20 provides a summary of our cash in debt position at September 30, 2011. As we discussed last time we pre-played $409 million of senior security debt and refinanced $850 million of senior security debt in February 2011 at a reduced interest rate from what we haven’t been. As you can see at September 30, our total debt was a $1,729.2 million and our total cash was $357.9 million resulting in net debt of $1,371.3 million. Total debt is down slightly versus June 30 due to the favorable impact of effects and debt repayments.

Page 21 shows a long term trend in Rockwood’s leverage ratio, we have included the pro forma calculation at December 31, 2010 to illustrate how we have continued to de-leverage the company in accordance with our plan.

Finally Page 22 presents our free cash flow as you can see, we generated free cash flow of $135 million in the third quarter which bring us to $208.1 million for the first nine months of the year and this is moving us inline with our full year free cash flow target, which is in the range of $300 million.

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

Seifi Ghasemi

Thank you very much, Bob. And with that we will be delighted to answer any questions that people have. Kathy?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from David Begleiter with Deutsche Bank, go ahead please.

David Begleiter – Deutsche Bank AG

Thank you, good morning.

Seifi Ghasemi

Good morning, David.

David Begleiter – Deutsche Bank AG

I think, just on TiO2 sales were down sequentially by about $13 million, but EBITDA was up sequentially by $11 million is that due to effects?

Seifi Ghasemi

No, not on – it is due to the fact that the prices are higher.

David Begleiter – Deutsche Bank AG

Was any effects impacted in TiO2?

Seifi Ghasemi

Very little, the effects rate for the quarter, in the second quarter was about 144 and in the third quarter it was about 141, 142. So, it was minor.

David Begleiter – Deutsche Bank AG

And so, the key quantify the impact of the downtime at the TiO2 plants in Q3 and we do expect TiO2 volumes to be up in Q4 versus Q3?

Seifi Ghasemi

I cannot speak about the volumes in quarter four David, because considering that it is getting to the end of the year and that people can start adjusting inventories and so I cannot make a prediction on that. We don’t expect it to be down, but it might be, I cannot expect that. But I did make a comment that we expect prices to be up at least 8%.

David Begleiter – Deutsche Bank AG

Just lastly, in terms of order trends, order books in your expectations for December, what’s your current thinking on how demand plays out this quarter?

Seifi Ghasemi

For all of Rockwood?

David Begleiter – Deutsche Bank AG

Yes.

Seifi Ghasemi

We are very optimistic for all of Rockwood, we think that we have some very good businesses that should continue to do well versus last year.

David Begleiter – Deutsche Bank AG

Thank you.

Seifi Ghasemi

Thank you, David.

Operator

We have a question from Silke Kueck with JP Morgan.

Silke Kueck-Valdes - JP Morgan Chase & Co

Good morning.

Seifi Ghasemi

Good morning, Silke.

Silke Kueck-Valdes - JP Morgan Chase & Co

I think, I will also start with TiO2. So, I guess, my memory is right, I think, you maybe, you make something like, maybe like 210,000 tons of TiO2. And if your plant was out, I don’t know, let’s say two weeks, but maybe that’s like, you know, 9,000 tons of production, I mean that your volumes sequentially may have been down 17% and your price mix was up in the similar fashion. So, is it like the right order of magnitude to think about or is that too big?

Seifi Ghasemi

No, it is the right order of magnitude to think about.

Silke Kueck-Valdes - JP Morgan Chase & Co

Okay, that’s helpful. Secondly, the 8% price increase in TiO2 from the fourth quarter to third quarter, how much of that is price and how much of that is mix?

Seifi Ghasemi

All of it is price.

Silke Kueck-Valdes - JP Morgan Chase & Co

All of it is price?

Seifi Ghasemi

The mix, I don’t know because we have to wait and see how the quarter shapes up, but the price we know because we have increased the price and we have announced it.

Silke Kueck-Valdes - JP Morgan Chase & Co

And my last TiO2 question is. You know, can you talk, there were some one time adjustment that were made to TiO2 EBITDA in the quarter, what did that relate to, like something like $3 million or $4 million and where do you stand in terms of exploring the sale of the asset?

Seifi Ghasemi

It’s okay, I obviously cannot, you know, get to a specific about the assets of what we are going to do, we have said, we are looking at our strategic options. There are special charges that you see is that from an accounting point of view, we have to accrue for expenses that we think might happen in the future. So that is – those $3.4 million is accrual for what we think we might expand in exploring our options.

Silke Kueck-Valdes - JP Morgan Chase & Co

And, can I ask one question on the ceramics business now I will get back into queue. So, you highlighted that there were still, you know, maybe 10% growth in Lithium, there was some growth in the Clay-based Additives business. How did the ceramics business do overall and if there are any growth in the medical side versus the industrial side?

Seifi Ghasemi

Ceramics business is okay, continues to grow its medical side on an average apart 8% to 10% as we have said before. And the other thing that ceramic is benefiting is that their luxury car market in Germany is very strong and you know, we have exposure to that so we are benefiting from that that’s why you see that their margins are high.

Silke Kueck-Valdes - JP Morgan Chase & Co

Thanks very much, I’ll get back into queue.

Seifi Ghasemi

Thank you, Silke.

Operator

We’ll go to Edlain Rodriguez with Lazard Capital Markets.

Edlain Rodriguez – Lazard Capital Markets

Good morning, Seifi.

Seifi Ghasemi

Good morning.

Edlain Rodriguez – Lazard Capital Markets

Quick question for you. I mean, the market is clearly concerned about volume growth going forward, like how much visibility do you have of course the portfolio, is it 30 days, 45 days is it longer than that?

Seifi Ghasemi

Can you just educate me, what is the market concerned about volume growth in what area?

Edlain Rodriguez – Lazard Capital Markets

For the whole economy, I mean going forward, I mean that’s why, you know, we have seen, we’re actually in the market insofar. So, they’re good there, they have definitely concern there. I’m just trying to get a sense of how much visibility do you have in your portfolio, because you don’t seem to be seeing any softness at all in any of your businesses?

Seifi Ghasemi

We believe, we have about 60 to 90 days visibility and that’s why we feel good about the quarter. In terms of volumes, I think, people are focusing on the wrong thing, volumes in TiO2 are not going to grow because they are sold out. And volumes in our construction business, which is exposed to the US is not going to grow and probably it will go down because nobody is building houses.

The key areas of Rockwood that are our core businesses is our Lithium and our Surface Treatment business and those businesses are growing as we have expected in our ceramic business. So, I think if people are concerned about volume growth, they don’t understand Rockwood’s portfolio, despite us explaining that for five years.

Edlain Rodriguez – Lazard Capital Markets

That makes sense. Another quick question, I mean, you have talked about using your strong free cash flow for debt pay down and investment in organic growth, can you talk little bit about your plans and strategies of what you’re doing in terms of organic growth?

Seifi Ghasemi

Organic growth, we are investing significantly in our Lithium business most of our CapEx is going there, we are investing heavily in our, we’ll be investing in our rest of our businesses Surface Treatment, Clay-based Additives, we just finished a plan there to make additional amount of the amount that is used for during natural gas.

So, we have good organic growth and we are investing heavily in those. But in addition, having done all of that we still have free cash, that free cash we will use to further reduce debt. We have said, we have $550 million of bonds that we issued in 2004, the interest rate on those is average of about 7.5, we fully intend to pay down those bonds. Right now we have $350 million of cash, once the cash gets to about 500, 550 we will use that in order to pay those bonds out and significantly reduce our interest charge.

Edlain Rodriguez – Lazard Capital Markets

Okay, thank you.

Seifi Ghasemi

Thank you.

Operator

And next we have Mike Harrison with First Analysis.

Mike Harrison – First Analysis

Hi, Seifi. Since you just mention the 2014 notes, I wanted to ask you, I’m sure you are aware that coal premium on those notes does decline in November, but it doesn’t go away completely until November 2012 if I’m not mistaken, so it is just a matter of getting past that November 15 decline in the coal price and that’s when we see pay those notes off or try to refinance those?

Seifi Ghasemi

Mike, in order to pay down those debts we need $550 million. We don’t have $550 million, right now. So, whenever we get to $550, we will pay that and then we will also obviously make a calculation whether this saving on interest is worthwhile paying the company. We expect that we would be in that position sometime next year.

Mike Harrison – First Analysis

All right, and then, if I could ask a question on Lithium. When should we expect to see some additional volume out of silver peak and if you could comment on where you are overall in terms of capacity utilization?

Seifi Ghasemi

We have made a commitment to the industry that we will supply Lithium in order to meet the demands of the industry. So, we continually invest whether it’s in silver peak or in, actually in order to increase our capacity to meet those requirements. As you know, we are also building a plant in North Carolina and also in Germany in order to meet those requirements. In terms of supply demand, you know Lithium is a specialty product. The price of Lithium is more determined by demand and by supply so.

Mike Harrison – First Analysis

And, I was also wondering if you could comment on the outlook for the battery market for Lithium near term particularly as we hear some, I guess, may be mixed signals out of the electronics industry, some of them seemed to be very cautious, but then, you hear a number like $4 million new iPhones sold in three days. How do you think about the battery market in your term?

Seifi Ghasemi

Mike the fact that you see a slowdown in the electronic business that is correct. We are seeing some of the effects of that in our ceramic business, where we have some exposure to electronics. But that is more than compensated in terms of Lithium by the increased demand in power tools and by the demand which is beginning to materialize little by little for batteries for electric cars. So, as a result overall our Lithium business continues to grow and we are actually very bullish about them.

Mike Harrison – First Analysis

Right. And then, last question for now. In the TiO2 business, you kind of mentioned the couple of times that volume is going to be impacted related to customer inventory adjustments. One of your customers recently noted that they were seeing some customer inventory take down. So, is your commentary related to something that you’re seeing currently or something that you saw in Q3. I guess, just how should we take on one hand your commentary that, you’re sold out and demand remains strong with oh! demand is going to be contingent on what are customer inventories look like?

Seifi Ghasemi

Mike, my comment on that is there are things that I know and there are things that obviously we don’t have a crystal ball. I have no idea to predict what our customers will do in the fourth quarter. We know what they did in the third quarter, we don’t know what they are going to do in the fourth quarter. What we do know is what we are going to charge for our product, that’s why I said that we expect the prices to be up 8%. In terms of volumes quarter-by-quarter what they do, whether they would adjust things in this last quarter, I don’t know. But, at the end of the day Mike, as you know better than anybody else, the effect of those things in the Rockwood’s bottom line is insignificant. I mean, we are spending a lot of time talking about TiO2 volumes and everybody forgets about the fact that our EBITDA was $70 million more than the same quarter last year. And they have had 41% increase in EBITDA. I mean, I have no problem talking about TiO2, but at the end of the day that is, doesn’t drive our numbers really.

Mike Harrison – First Analysis

Understood, thanks very much.

Seifi Ghasemi

Thank you.

Operator

Our next question comes from John McNulty with Credit Suisse.

Unidentified Analyst

Yeah, hi, this is Lina (ph) concerning in for John.

Seifi Ghasemi

Hi, how are you?

Unidentified Analyst

Just a few quick questions. First on TiO2 again. How should we think about sequentially Ti or cost and looking to 2012, how should we think about Ti or supply and cost of the business?

Seifi Ghasemi

I think, as I said, we continue to believe that there is a supply demand imbalance in the products that we make, it is very difficult for people to build new TiO2 plant to supply the market. Therefore we believe that the market is going to be tight and as a result we will be able to continue to increase prices into quarter, fourth quarter of this year. For 2012, we’ve always said that we expect that our TiO2 business will have a margin of 25% to 30% and that’s what we expect at this time.

Unidentified Analyst

Okay, thank you. And then also just in the medical portion of Advanced Ceramics, I mean, how should we think about the penetration of ceramic, on ceramic hip replacements, where we are currently and where you expect to be in 2012 and the profitability of that portion of the business versus the entire business as a whole?

Seifi Ghasemi

I think that the penetration of the ceramic hip joints is going to be favorable because I’m sure you’ve heard a lot about the discussions related to metal to metal and the issues related to that product. Therefore, the replacement for metal to metal is ceramic to ceramic, which is the product that we make. So, we are very optimistic about the penetration and in terms of the, you know, that’s what this is. So, we think that the growth will continue to be as it has been or maybe even better and in terms of the margins obviously that business has a good margin and the average margin in medical is higher than the margin for the rest of the business.

Unidentified Analyst

Okay, sounds great. Thank you.

Seifi Ghasemi

Thank you.

Operator

Next, we have Robert Court with Goldman Sachs.

Robert Court – Goldman Sachs

Thank you, good morning guys.

Seifi Ghasemi

Good morning Bob, how are you?

Robert Court – Goldman Sachs

Good. Seifi, I want to go back to Rod’s earlier question and you know, acknowledge that you know, you don’t see a volume issue out there. I guess, the question surrounds the trends in volume. I think if we went back to the fourth quarter of a year ago and to present we saw something like a 12% volume gain at 10%, 2% and on this quarter 2% erosion and so I think the question becomes beyond the construction business that you rightfully point out remains weak. But, I think that’s only 10 or 12% in your company and there must be decelerating volumes across the rest of the business, so maybe you can just give us a little more granular information about where businesses are in terms of sequential or accelerating or decelerating and give us some confidence that, you know, outside of that one end market we should start to see better volume comparisons. I know you are going to get us some tough comps with those double digit volume gains in the second half of last year. So, can you give us some more data to become confident that you can keep up, you know, some level single digit volume growth – mid single digit volume growth in the future?

Seifi Ghasemi

First of all, you are asking a very good question. When you look at our volume growth year-to-year, as you know, in 2010, I think, it was continuation of 2010 first quarter was very weak so when we had a first quarter of 2011 year-to-year it looked pretty good. As you move forward and 2010 volumes increased so year-to-year comparison is obviously going to be not as favorable as it was. The comment that I can make for sure is that we have, Rockwood has the Lithium business that business is growing 10% or better and we feel very strongly that, that will continue into 2013, 2014 and might even get better. We have our Surface Treatment business where obviously at the end of the day, we are subject to industrial production and industrial growth. But our growth in that business has been better than industrial production, because we are gaining market share. So, I am pretty confident about our Surface Treatment business. So that takes cares of our specialty chemical sector, which is more so rocked (ph). Then when we come to ceramic, our ceramic hip joint is going to continue grow and then the rest of the business we do have exposure to luxury car manufacturing in Germany.

As long as that is going strong, which it is very going very strong then it should be okay, if it significantly decreases then it will be effective. But, most of the profitability in our ceramic business comes from the hip joint. So that, it means that business should continue to do well. Then we get to our Performance Additive sector.

Our Performance Additive sector, the one area which is our Clay-based Additives related to drilling of the oil wells that is growing very rapidly. Four years ago, that business was about $10 million a years, now it is almost a $70 million a year business for us. We just finished a new plan. So, that part of the business will continue to grow.

The rest of the business is subject to obviously the housing market. And our Color Pigment is subject to the housing market and there it is very – we are not optimistic about that as we have said for either 2012 or probably 2013. But that doesn’t mean that we think that’s not a good business and we might actually invest in that business, because we think it has future growth.

Robert Court – Goldman Sachs

Great, that’s helpful and Seifi can you talk, maybe a little bit about the regional trends, I know, sometimes here investor concerns about the exposure to Europe. I know, you talked in the past about much that as export business. But can you tell us how trends are regionally for your businesses?

Seifi Ghasemi

Sure. I mean in the United States, our businesses overall is doing better than what you read in the paper. So, we haven’t seen any significant slowdown at least for our businesses. As far as Europe, you are absolutely right that most of our exposure in Europe is not European customers. It is exports mainly out of Germany, which continues to stay as strong and we haven’t seen any indications of any slowdown.

Robert Court – Goldman Sachs

And one last one, if I might, you know you have mentioned that the gap to your covenants is extremely wide that there is no issues around credit or liquidity. Is there any chance you could conceive of returning some capital to shareholders at some point?

Seifi Ghasemi

Bob, the number one use of our cash as you know is for organic growth and then the second one is that we obviously have excess cash. We are very focused on paying down the bonds, once we pay down the bonds and they we still have some more cash, we will obliviously seriously, seriously consider paying the debit, sure.

Robert Court – Goldman Sachs

Thanks.

Seifi Ghasemi

Thank you very much.

Operator

Thank you. Our next question is from James Finnerty with Citi.

James Finnerty – Citi

Hi, good morning. Just a couple of debt questions, one being on the fact that your debt to EBITDA is below two times that your interest rates stepped down on the bank debt?

Seifi Ghasemi

Interest rate stepped down by 25 basis or will step down by 25 basis points on the term loan, yes.

James Finnerty – Citi

And that’s starting as of September 30th, going forward. Okay. And just with regard to your comments on the bonds, is it safe to assume that you are paying the bonds down and that’s 100% likelihood or would there be a chance that you would look to refinance the portion of the bonds?

Seifi Ghasemi

I think there is almost a 100% chance that we will pay down the bonds.

James Finnerty – Citi

Okay, great. Thank you very much.

Seifi Ghasemi

Thank you.

Operator

And we have David Begleiter again with Deutsche Bank.

David Begleiter – Deutsche Bank AG

Hi Seifi, just on the Lithium price increase you announced back in July 1st or effective July 1st. Did you realize the full portion of the 20%, did SQN (ph) follow and is there potential rates prices further in 2012?

Seifi Ghasemi

David, I mean, about our competitors, what they do I cannot comment on that. But, what I can say is that we believe that the 20% price increase that we have increased will be accepted by all of our customers, as you know we’re not getting the benefit of that right away because it takes time to the contract and so on to make it effective. But, we expect the full effect of that to be in 2012. And with respect to further price increases obviously that’s subject to market conditions. We would evaluate that in January and decide what we want to do.

David Begleiter – Deutsche Bank AG

And just on the decline in the Color Pigment business versus last year, I guess, there was some unusual strength in that business, can you comment on how difficult the comp was unlike to this quarter’s volume decline?

Seifi Ghasemi

That business is obviously very seasonal, David as you know very well depending on weather conditions and all of that. So, the third quarter of this year versus third quarter of last quarter, we had some strength, it was lower then that. I can assure you, that we have not lost any market share, it is all related to overall supply demand for the product in the marketplace.

David Begleiter – Deutsche Bank AG

Thank you very much.

Seifi Ghasemi

Thank you.

Operator

Our next question is from (inaudible).

Unidentified Analyst

Good morning guys, just have couple questions on Lithium business. First of all, on the previous question, could you comment how much out of the 20% price announcement, how much was realized in the quarter?

Seifi Ghasemi

Not very much, small amount.

Unidentified Analyst

Do you expect the rest of it to be realized in the fourth quarter then?

Seifi Ghasemi

No, as I said the effect – most of the effect will be in 2012.

Unidentified Analyst

Okay, thanks. And could you comment on the inventorial level in the channel for lithium or any concerns there?

Seifi Ghasemi

I’m sorry, any –

Unidentified Analyst

Any concerns about the inventorial levels in the lithium channel?

Seifi Ghasemi

No, they are not.

Unidentified analyst

Great, thank you.

Seifi Ghasemi

Thank you, sir.

Operator

Your next question is from Richard Phelan with Deutsche Bank.

Richard Phelan – Deutsche Bank

Good morning. Very quick question, how much of the revolver is available to LC or guarantees at September 30th.

Seifi Ghasemi

100% of it, we haven’t used the revolver at all.

Richard Phelan – Deutsche Bank

No LCs or guarantees or anything?

Seifi Ghasemi

We have about 30 million of LCs.

Richard Phelan – Deutsche Bank

Okay.

Seifi Ghasemi

You are talking about letters of credit, right?

Richard Phelan – Deutsche Bank

Yes.

Seifi Ghasemi

Yeah, about 30 million of LC, yeah.

Richard Phelan – Deutsche Bank

Okay, wonderful. Thank you.

Seifi Ghasemi

Thank you.

Operator

Your next is Mike Harrison with First Analysis.

Mike Harrison – First Analysis

Hi, just a couple of follow up questions Seifi. First of all, your commentary on luxury auto sales, maybe doesn’t quite square with what I was recently reading about Mercedes sales into China which has been a very important end market for them. And the commentary there was that the massive is kind of 40% to 50% growth rates we’ve been seeing or coming back down to earth and I don’t know if that’s more a factor just tough comps or if it is a deeper sign that maybe demand and kind of newly minted millionaires in China is starting to come to an end. What are you hearing from your European auto customers about their business in China and can you maybe comment a little bit aside from your expectation that your sales to luxury auto is going to be strong, you know, do you – how sustainable do you think that is long term?

Seifi Ghasemi

Mike, you know, the question that you are asking is obviously very general question. What I do know is what we see in the next 30 to 90 days in terms of orders from our customers in Germany for our products that remains strong. What is going to happen in 2012, you know, that’s anybody’s guess, I can’t guess it, you know, in terms of what is going to be the demand for Mercedes in China or any other place that’s something that, no we are not experts in predicting that.

Mike Harrison – First Analysis

It sounds like you have your concerns about growth rates in that market as well?

Seifi Ghasemi

Well, I’m, not sure where you are going with that, I mean, do I have a concern that luxury cars with be sold in China, I don’t know.

Mike Harrison – First Analysis

All right. And then maybe just a question for Bob, kind of looking at where the tax rate came out this quarter is 28% probably a good number for the fourth quarter and what about 2012?

Robert Zatta

Yeah, I think, for the fourth quarter 28 is fine you know, we haven’t really finalized or even gotten that for into 2012 yet, Mike. I don’t know anything on the horizon that’s going to go change it materially. But, I will let you know if we come up with anything.

Mike Harrison – First Analysis

All right, I think, I’m allowing 30% for next year is that probably a little bit too high at this point?

Robert Zatta

I think for purposes of planning that’s what I would use, and that’s what we do use. But we obviously we have to work through the whole P&L and there is a lot of work that has to get done in the next couple of months on that subject.

Mike Harrison – First Analysis

Sure, and then subject to the commentary on both obliviously the debt balance could be coming down and your rate and some other debts is coming is a little bit lower, any kind of initial guidance on where 2012 interest expense could shake out and maybe at the very least where Q4, should Q4 be lower in terms of interest expense then Q3?

Robert Zatta

Yeah, Q4 will be a little bit lower in interest expense but not much it’s probably, cash interest will probably be about $21 million.

Mike Harrison – First Analysis

Okay.

Robert Zatta

For next year you know, we are probably working at cash interest in the range of $80 million to $85 million and that makes no assumption by the way of any kind of debt repayment or anything.

Mike Harrison – First Analysis

All right got it, thanks very much.

Operator

We will go back to Silke Kueck with JP Morgan.

Silke Kueck-Valdes - JP Morgan Chase & Co

Will there will be any tailwind from lower copper prices next year?

Seifi Ghasemi

It’s okay. Copper price is now, is a very insignificant part of our cost. Because that whole sector which is our Timber business in a year makes about $14 million, $15 million of EBITDA, copper is $2 million, $3 million for that. So, it’s not going to affect the results of Rockwood significant, it’s kind of not much of an issue.

Silke Kueck-Valdes - JP Morgan Chase & Co

And. I also have couple of follow up question just on demand, because some of the staff that one read just looks not as you know, optimistic as your outlook, meaning, like when I read, you know, the J&J press release, you listen to the conference call instead of talk about how they owned hip joint sales or you know, down in the US this quarter and I think that maybe looks like a flatted on outlook going forward. You listen to Black & Decker who is worried about some of their hand tools sales in North America. So the, you know, things may not be falling off a cliff, but it seems that they are certainly slowing.

Seifi Ghasemi

Silke, I can only comment on Rockwood and what we see in the rest of the world and I guess that’s why you guys do what you do that you take all of that into consideration. I am not an economist and we don’t have exposure to all of the businesses in the world and I don’t want to quote from the newspapers. All I can tell you is what we see on Rockwood and our businesses.

Silke Kueck-Valdes - JP Morgan Chase & Co

So, your base assumption is that the businesses should continue to grow maybe not as strong as it did in the first half of 2011, but at some rate?

Seifi Ghasemi

As I said, I think our Lithium business, our Clay business and our Surface Treatment business will continue to grow, yes.

Silke Kueck-Valdes - JP Morgan Chase & Co

Out of the strength, okay. Thanks very much.

Seifi Ghasemi

Thank you.

Operator

And our next question is from Leo Larkin with S&P Capital.

Leo Larkin - S&P Capital

Good morning, guys. Could you just give guidance for CapEx for 2012 and depreciation?

Seifi Ghasemi

CapEx for 2012 will be in the order of somewhere between $200 million or $250 million and our depreciation, the headline depreciation is approximately $260 million - $270 million. But, you have to realize that out of that about $70 million - $80 million is amortization. So, the real depreciation is probably around $180 million and $190 million, so we are investing more than depreciation which means that we are having good organic growth.

Leo Larkin - S&P Capital

Thank you.

Seifi Ghasemi

Thank you.

Operator

(Operator Instructions) We have no one else in queue, Mr. Ghasemi.

Seifi Ghasemi

Well, we like to thank everybody for the time they gave us and the good questions and we look forward to talking to them next quarter. Thank you.

Operator

Thank you, and ladies and gentlemen, this conference will be available for replay after 1 pm today till midnight November 2. You may access the AT&T executive playback service at any time by dialing 1800-475-6701 and entering the access code 216735, international callers dial 320-365-3844 using the same access code 216735. That does conclude our conference for today, thank you for your participation and for AT&T Executive Teleconference, you may now disconnect.

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