Rockwood Holdings' CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: Rockwood Holdings, (ROC)

Rockwood Holdings, Inc. (NYSE:ROC)

Q4 2011 Earnings Conference Call

February 21, 2012, 11:00 a.m. ET

Executives

Tim McKenna - VP, IR

Seifi Ghasemi - Chairman and CEO

Bob Zatta - SVP and CFO

Analysts

Silke Keuck - JPMorgan

David Begleiter - Deutsche Bank

Mike Harrison - First Analysis

John McNulty - Credit Suisse

Chris Shaw - Monness, Crespi, Hardt & Company

Mack Fuller - GSO Capital Partners

Bob Koort - Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing by and welcome to the 2011 Full-Year and Fourth Quarter Conference Call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session; instructions will be given at that time. (Operator Instructions) As a reminder this conference is being recorded.

I’d now like to turn the conference over to our host, Mr. Tim McKenna, Vice President of Investor Relations. Please go ahead.

Tim McKenna

Thank you. Good morning, welcome to our fourth quarter and full-year conference call. Seifi Ghasemi, Chairman and Chief Executive; and Bob Zatta, Chief Financial Officer will give a formal presentation after which we will have Q&A session. Our slides for this call are available on our website www.rocksp.com.

Before I begin the call, I’m going to read a short statement. The conference call may contain 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 forward-looking statements are based upon reasonable assumption, there is 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 Rockwood.

Actual results could differ materially from those projected in our forward-looking statements, due to numerous known and unknown risks and uncertainties, including the risk factors described in our 10-K and other filings with the SEC. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events.

That’s all I have and now I will turn it over to Seifi Ghasemi.

Seifi Ghasemi

Thanks Tim, and good morning. Thank you for taking the time from your busy schedule to listen to our presentation. During our discussion we will be referring to the material we have posted on our website rocksp.com.

I’m very pleased to report that Rockwood had an excellent performance in 2011. In line with our commitment to create shareholder value, we more than doubled our earnings to $4.02 per share. We are a specialty chemical company with unique products and services. We are focused on maintaining our high profit margins. Therefore, we are proud that we delivered an adjusted EBITDA margin of 23.5% of sales in 2011 compared to 19.9% in 2010. Even in the fourth quarter, despite the seasonal downturn in volumes in general and a significant decrease in volumes in our TiO2 business due to destocking by our customers, we still delivered an adjusted EBITDA margin of 24% of sales.

Now, please refer to Page 8 of our presentation material. Sales for the quarter were up by 2% and for the year they were up by 15%. Later on the presentation I will give you the breakdown of sales growth in terms of pricing, foreign exchange, and volumes.

Our adjusted EBITDA margin, as you will note on line 3, was a record high of 23.5% for 2011. We are very focused in maintaining this kind of margin as we move forward. And as you will note on the last line of Page 8, earnings per share was $0.91 for the quarter and $4.02 for the year, both of them increased more than 100% over the corresponding values for last year. We are very proud of this accomplishment, which is the result of excellent performance by our business units and prudent restructuring of our balance sheet to reduce interest cost.

Now, please refer to Page 9. We have broken down the components of our sales growth. To give you further clarity into the numbers, I want to disclose some additional information. Please focus on the fourth quarter column on the left hand side of Page 9. Of the $74.5 million of pricing variance, about 49.5 million of it is due to price increases in our TiO2 business and 25 million is in the other sectors. As for the volume and mix for the quarter, almost all of the negative variance is in our TiO2 business which experienced about 25% drop in volumes due to seasonal trends and destocking by our customers.

Now please focus on the right side of Page 9 on the full-year results. Of the $303.3 million of positive price variance about 210 million of it is related to our TiO2 business and 93 million is related to all of our other businesses. As for the $38.2 million of positive volume variance, we had a negative variance of 85 million for the full-year for our TiO2 business and a positive variance of $120 million for all of our other businesses. I hope that this additional information would be helpful in your analysis of our performance.

Now I want to make specific comments about each one of our business units. So, please turn to Page 12 of our presentation material. Our specialty chemicals sector includes our lithium and surface treatment businesses. Both of these businesses had an excellent year. We continue to grow volumes, increase prices and improve productivity. This is why the adjusted EBITDA margin for the business improved from 25.4% to 26.1%. We continue to be optimistic about the future of these businesses and expect further improvement in the results as we move forward.

Now please turn to Page 13. Despite the depressed state of construction activity in both the United States and Europe, our talented and focused management team in this sector managed to improve profitability by improving productivity and increase prices as a result of providing superior service to our customers. Margins improved to 18.4% for the year. As we have stated before, we do not expect much volume growth in this sector in 2012. But we believe we will be able to hold our margins by increasing prices to offset any raw material prices and other cost increases.

Now please turn to Page 14, our TiO2 business. A year ago, we mentioned at our conference call that we expect the adjusted EBITDA margin of this sector to improve to more than 25%. As you will note, we have achieved 27.7% for all of 2011. But let us focus on the fourth quarter results for this sector. Volumes were down by about 25% due to seasonal downturn and expected significant destocking by our customers, but we were able to increase prices by 9.5% compared to the fourth quarter of 2011 and that is why despite the low volumes we achieved an excellent margin of 33% for the quarter. We continue to believe that as we move forward, the supply-demand situation for the products that we make will become very high and as a result we continue to be optimistic about the performance of this sector.

Now please turn to Page 15 our advanced ceramics business. This business continues to do well. Our management team in this sector continues to improve productivity and improve margins. As you will note, adjusted EBITDA margins for the year improved to 31.4% of sales. We continue to be optimistic about the performance of this business, which is based on the unique position we have in the medical sector, our market leadership position, and the strength of our experienced management team in this sector.

At this point I’d like to turn it over to Mr. Bob Zatta, our Chief Financial Officer to give you more details about our financial performance. Bob?

Bob Zatta

Thank you, Seifi and good morning everyone. I am on Page 17 of the presentation. This is our reported income statement for the fourth quarter and full-year of 2011.

As you can see, Rockwood reported net sales of 814.4 million for the fourth quarter as compared with 798.3 million in the same period last year, which is an increase of 2%. For the full-year net sales were 3.7 billion with increase of 15% over last year. The reported gross profit for the quarter of 291.1 million, 35.7% of sales this compares with 250 million or 31.3% of sales last year. For the full-year, gross profit as a percent of sales was 35.1% as compared to 32.6%. The improvement in gross margin year-on-year in the quarter and the full-year was primarily due to the higher pricing which more than offset raw material cost increases.

For the fourth quarter, SG&A as a percent of sales was 20.6%, down from 20.8% last year. For the full-year, SG&A as a percent of sales was 19.2%, down from 20.9% last year. The full-year percent increase was 5.7% and was driven primarily by foreign exchange and some higher selling costs and R&D in support of our volume growth. We also had some restructuring and severance accruals in the fourth quarter related to the continuing streamlining of operations and this brings us to operating income of 116.7 million for the quarter and 567.3 million for the full-year. For the quarter, this is 14.3% of sales versus 9.1% of last year and for the full-year, it is 15.5% of sales versus 11.2%.

The next major item is net interest expense. The composition of interest expense is shown at the bottom of the page. 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. This brings us to income from continuing operations before taxes, which is 94.4 million for the fourth quarter and 456.1 million for the full-year. Against this, the income tax provision is 23.4 million for the quarter. For the full-year, the income tax provision is 124.4 million.

On an adjusted basis, the effective tax rate of the quarter is about 24%, lower than prior quarters and really due to the normal true up of tax reserves at year-end as well as the mix by country of our earnings.

We then show the income from discontinued operations and the gain on sale of discontinued operations which relates to the AlphaGary sale and the adjustment of the net income attributable to the non-controlling interests in the TiO2 and timber joint ventures. This results in net income of 62.9 million for the fourth quarter and 411.3 million for the full-year.

Turning to Page 18, Page 18 presents the reconciliation of net income to adjusted EBITDA. For the quarter, beginning with net income of 62.9 million, we have added back items which get us to pre-tax income from continuing operations of 94.4 million, then adding back interest expense and D&A brings us to a subtotal of 183.5 million. We then have several one-time adjusting items which brings us to adjusted EBITDA from continuing operations in the quarter of 195.7. In the quarter, we had several non-recurring items, the two most important were firstly, severance costs associated with restructuring within our Chemetall business unit and secondly within the systems and organization establishment we have included a non-recurring costs associated with restructuring a very unfavorable contract which dates back to just before we formed the Sachtleben joint venture.

Page 19 provides a detailed reconciliation of net income and EPS from continuing operations on a reported basis, to net income an 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 $0.91 per share for the fourth quarter and $4.02 per share for the full-year.

Page 20 provides a detailed reconciliation, firstly between the income from continuing operations before taxes of 94.4 million to the normalized as adjusted profit before tax which is 108.1 million. Secondly, from the reporting income tax provision of 23.4 million to the normalized tax charge of 25.5. This gives us the effective tax rate of 24% in the quarter as I previously mentioned.

Page 21 provides a summary of our cash and debt position at December 31, 2011. As you can see at December 31, our total debt was 1,687.7 million and our total cash was 321.5 million resulting in net debt of 1,366.2. Total debt is down slightly versus September 30th due to the favorable impact of FX and normal debt amortizations. As we have announced, we are in the process of issuing a new tranche loan under our existing senior credit facility in the amount of 350 million and we intend to use the proceeds as well as some cash on hand to redeem the 524 million of senior sub notes. We expect the new bank financing to close within the next several days and we will immediately commence the redemption process which should take about 30 days. This transaction will save us about $30 million in cash interest for full-year or $0.25 per share and will save us 22 million or about $0.18 in 2012.

Page 22 shows the long-term trend of Rockwood’s leverage ratio. We get continue to deleverage the company in accordance with our plan.

And finally page 23 presents our free cash flow. As you can see there was an outflow of just under a million in the fourth quarter primarily related to increase CapEx. For the full-year we generated free cash of 207.2 million.

And now before I turn the presentation back over the Seifi, I’d like to provide you with some additional data for use in your 2012 financial modeling. I’d like to start first with depreciation and amortization for 2012 using an assumption of 1.30 euro to the dollar rate we have 275 million of D&A, it’s about 206 million of depreciation and about 68, 69 million of amortization. We expect our cash interest to be about 61 million. We expect our tax rate to be in the 26 to 28% range. I’ll come back to that in a second. And we expect our share count to be 80 million shares. Our CapEx, we’re looking at somewhere in the 380 to 400 million range. And finally our free cash flow we estimate to be around 300 to 350 million. On the tax rate it's important to point out that we have benefited this year from an improving domestic earnings position with our businesses.

As you know, we have a valuation allowance in place, which has given us a tax benefit and especially in the fourth quarter it helped us. As we continue to generate positive earnings, the accounting rules will require us to review our valuation allowance and it's entirely possible that during 2012 we will have to reverse that. We will obviously talk about it when the time comes. But if we do that, it will have a slightly negative impact on our tax rate putting us from somewhere in the 28 to 30% range to around 29 to 31%, and again as I say we will talk about that as and when that occurs.

With that Seifi, I’ll turn it back to you.

Seifi Ghasemi

Thank you, Bob. Before we start taking questions, a few words about how we see 2012, based on the information that we have as of right now. Our businesses have started 2012 on a strong note and our January results were better than our expectations. Although one-month performance is not sufficient to judge the whole year, we do remain confident and optimistic about the performance of our businesses in 2012.

We will continue to focus on our key objective of increasing shareholder value, which is a result of improvement in earnings per share and productivity. In addition, we are committed to an excellent and on-time execution of all the major expansion projects we have announced.

Now, we will be more than happy to answer any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Silke Keuck from JPMorgan. Please go ahead.

Silke Keuck - JPMorgan

I have a question on TiO2 and one on specialty chemicals. For TiO2, can you just aggregate how much slag versus ilmenite Rockwood purchases, just in very rough terms, and what percentage of the work contracts may be renegotiated in 2012?

Seifi Ghasemi

We use approximately half ilmenite and half slag. In terms of the contracts, we have negotiated all of our contracts for 2012 for volumes. So, there is no issue there but the prices as you know are going to be determined quarter-by-quarter.

Silke Keuck - JPMorgan

Helpful. And secondly, I was wondering whether you can explore the meeting of the special lithium operating contracts in Chile, how and when that may have any effect on the royalty rates that you may pay and whether you in fact, you expect any new lithium entrance in Chile or whether you don’t?

Seifi Ghasemi

Silke, the issue of the Government of Chile making other lithium reserves other than Salar de Atacama available to other people has been an open issue for a long time. I think that mining minister made a presentation about a year and half ago in Washington, basically laying out the terms that they have formally announced. So what they have announced is a formal announcement of what has been talked about for a long time. This is a (inaudible). We welcome additional competition, that’s not an issue. The volumes are going to go up so much that there is plenty of room for everybody to participate in. We have been in the business of lithium, as you know for more than 125 years. We have a very strong position technologically and market-wise and we believe that it is going to take a long time for people to really get into the business. So, as I have always said, just having a piece of land and drilling a hole in the ground does not make you a lithium company. You need to have the technology to develop it, to make the product, to distribute it, you have customers’ confidence. So, we are not concerned about that at all. It's quite honestly for us, it’s a non-issue.

Operator

And our next question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.

David Begleiter - Deutsche Bank

Seifi, just on TiO2, what will your ore cost be up in 2012 as to 2011, and do you expect TiO2 EBITDA to be up in 2012 versus 2011 for you guys.

Seifi Ghasemi

In terms of ore cost in 2012 versus 2011, it's difficult to say that right now David, because as I said the prices are adjusted every quarter. We feel very comfortable about ore prices for the first quarter, because we know what they are and there is no surprise there. In terms of the other two quarters, we have to see and as you know if the ore prices go up more than we expect and readjust our prices to make up for that. As for your other question, we usually don't like to make forward-looking statements, but we do as sitting over here, we do expect that our EBITDA in 2012 for TiO2 would be higher than it is in 2011.

David Begleiter - Deutsche Bank

And just on lithium, can you detail your lithium price increase as you realized in Q4, expectations for 2012 for lithium carbonate pricing versus 2011?

Seifi Ghasemi

As you know David, we announced price increase for lithium carbonate in July of 20%. We have achieved that and we expect to see the benefits of that year-to-year in 2011 and obviously fourth quarter prices were higher than before. So, what you are going to do in 2012 that depends on obviously the market conditions and obviously my lawyer is sitting here, we don’t want to make any predictions about prices.

David Begleiter - Deutsche Bank

And just remind us again Seifi, your lithium expansion plans in Chile going forward?

Seifi Ghasemi

Sure. We have several expansion plans for our lithium business. When they are all completed by 2014, we will have doubled our capacity. They consist of building a state-of-the-art lithium hydroxide plant in North Carolina. That plant will come on stream in June of this year. We are very excited about that. In addition, we are expanding our brine operations in Nevada. That will be completed by the end of the year and then we’re going to have a major expansion of our plant near Antofagasta in Chile. We are going to expand our capacity by about 20,000 metric tons with an investment of about $140 million. We expect that project to be finished by the end of 2013.

Operator

And our next question comes from the line of Mike Harrison with First Analysis. Please go ahead.

Mike Harrison - First Analysis

First question I have is specific to your lithium rights in Chile. If I do the math correctly, it looks to me like by the time you get to your doubled lithium capacity, you may be have another 10 to 15 years worth of lithium brine volumes to be able to take out of the Atacama. How do you see that playing out over time? Do you expect that you can renegotiate and just get additional rights through additional lithium; you think that the government is going to make it more difficult and want to extract additional cash from you when that time comes to renegotiate those rights?

Seifi Ghasemi

Well Mike, as you said, we have plenty of time to deal with this thing because we have significant amount of reserves on the ground as it is right now. But as you would expect, we would try to negotiate with the government of Chile for extension of the rights to 2014, 2015. That is a process that we would expect us that we would follow and we believe that considering that we are the premier supplier of lithium to the world and the government of Chile would want to see their lithium extracted and sold and as a result have an income that we shouldn’t have any difficulty with that.

Mike Harrison - First Analysis

It’s not something that keeps you up at night then?

Seifi Ghasemi

No Mike.

Mike Harrison - First Analysis

Alright. With respect to the TiO2 customer destocking, looking at the balance sheet your inventories were up about $65 million compared to the end of the third quarter. How much of that inventory increase was related to higher TiO2 stockpiles and how quickly you think you can work those stockpiles down?

Seifi Ghasemi

Mike, as usual you ask very, very good question. That’s an excellent question and usually we don’t give the details, but we will give the details since you asked the question. Out of about 65, $66 million of additional inventory build for all of Rockwood about 45 million of it was in our TiO2 business. Now, you say, why is that? When you look at our situation as of the end of September, our inventories were extremely low, less than a month, which is not appropriate. We have built that inventory because our plants run very well and in addition because of the destocking. At the end of December, we have ended up with about two months of inventory, which is the minimum that we would like to keep in that business.

In addition, as you know, we have to take our plants down for the annual maintenance; we usually do that in the second quarter. Therefore, we would like to have a higher inventory on hand for when we do that. So, our inventory build in TiO2 right now has got into the normal level and it's not unusual at all and at the end of September it was just way too low that in case we had any kind of a hiccup with the plan, we would have been in trouble supplying our customers, but now we’re in a better position to do that.

Mike Harrison - First Analysis

Then last question for now is on the ceramics business. We’ve seen really some moderation in the organic growth rates there. Obviously, you had some very strong comps in the prior year, but can you talk a little bit about the volume trends you’ve been seeing across your ceramics end markets particularly in medical?

Seifi Ghasemi

Mike, there is nothing to be concerned about that. You make a very good observation about the fact that when you compare year-to-year we had particularly a strong fourth quarter last year in that business. So, we continue to be confident that our medical business is going to grow 8 to 9% a year, there is no issue there.

Operator

And our next question comes from the line of John McNulty with Credit Suisse. Please go ahead.

John McNulty - Credit Suisse

Just a few quick questions. With regard to your CapEx it looks like it's taking a pretty decent hike up in 2012 with all these new projects, is that a good long-term kind of level as well or should we see it kind of drop back down to the 250 give or take a little bit range in 2013 and beyond?

Seifi Ghasemi

You obviously make a very good point, our CapEx expenditure in 2012 will be in the range 380 to 400 million. That is as a result of the investments in lithium and the investment as you know in surface treatment and our new plants for our color pigments. That number is high for us normal. Normally, our CapEx is around 5.5 to 6% of our sales, so I expect that 400 to come down in the future years to the range of around 240, 250 million.

John McNulty - Credit Suisse

Okay. Great. And then tied to the cash flow side of things, it looks like even with the higher CapEx you’re going to still see somewhere in the neighborhood of $250 million of free cash. Your balance sheet is in really strong shape right now and especially what looks to be some refinancing going on. What are your other uses for cash and how should we think about that throughout the rest of 2012?

Seifi Ghasemi

I think in 2012 as Bob mentioned, we expect to generate about 300, $350 million of free cash after the capital expenditure. As you know, we want to put our cash to use to something that generates the greatest amount of value for our shareholders. Obviously the number one that is to fund organic growth, which we are doing, but if we have any additional cash left, we still have options to reduce our debt, but then the other thing that we should consider, we will consider, I don’t want to get ahead of ourselves, but it would be to pay a dividend to our or start paying a dividend to our shareholders.

John McNulty - Credit Suisse

Okay. Great. And then just on the TiO2 side, you had massive destocking, are we close to or at the end of that and how should we think about the demand environment and with that demand can you get through enough price to offset some of these rising raw materials?

Seifi Ghasemi

We believe we can John and the destocking was something that we expected. We talked about it in the last quarter. Whether it will start significant pickup in the first quarter or it will be more in the second quarter and third quarter we have to see. But in general, as I said, for 2012 we are still very confident about our TiO2 business.

John McNulty - Credit Suisse

Okay. Great. And then just one last question, if I may, on the TiO2 front, I know there’s been talks that you had in the past about it being a non-core asset. Can you give us an update as to your thoughts on that right now and maybe how we should be thinking about that business over the next year or so?

Seifi Ghasemi

John, we haven’t changed our point of view. We have talked about this for the last five years. We do not consider TiO2 to be in the same class of businesses like lithium or surface treatment business. So we have said it is non-core, but we continue to work in order to increase the value of that business, and then in terms of what we want to do with it, as you would expect, we would continually evaluate our options about what we want to do with the business.

Operator

And our next question comes from the line of Chris Shaw with Monness, Crespi. Please go ahead.

Chris Shaw - Monness, Crespi, Hardt & Company

I have a quick one on TiO2. Was the inventory destocking exclusively in the rutile or do you also see in the anatase. Were they both down during the quarter?

Seifi Ghasemi

It was mainly in the rutile commodity side. We did not see significant destocking on the anatase that we make for nylon fibers.

Chris Shaw - Monness, Crespi, Hardt & Company

Okay, and then you spoke about the business performance so far, I guess through January. It was I guess ahead of plan for most business. Any color around that? Can you break them out the segments, which ones are ahead of plan or they all are?

Seifi Ghasemi

Chris, my lawyer is really jumping up and down. I cannot do that, but I made the general statement that our January results were better than expectation. Let’s leave it at that.

Chris Shaw - Monness, Crespi, Hardt & Company

Okay, fair enough. And then finally, it looked like SG&A and some corporate costs were fairly low for the quarter. Was that better product is that seasonality or does that relate to the lower volumes through the quarter or did you guys make a conscious effort to take down some costs?

Seifi Ghasemi

I think our corporate costs, we always are very careful about corporate costs, making sure that we don’t spend money that we don’t have to. There wasn’t any particular change. Some of that is seasonal. I think it was just timing for us. There was nothing in particular that we could point to say it was this or that.

Operator

(Operator Instructions) And we will go to a follow-up question from Mike Harrison with First Analysis. Please go ahead.

Mike Harrison - First Analysis

Couple of other questions on lithium front. First of all, what kind of volume strength or weakness did you see in lithium salt volumes, lithium chloride and carbonate during the quarter?

Seifi Ghasemi

It continues to be strong. We have not seen any change in the trend. We have always said that excluding any demand for lithium-ion batteries for electric cars, that business will grow 8 to 10% and the trend is continuing. Nothing major, but we are beginning to see some demand for electric cars in a noticeable way.

Mike Harrison - First Analysis

As I’m sure you’re aware, Seifi, FMC earlier this year began to kind of shift some of their volumes away from commodities and toward lithium specialties ahead of their planned capacity expansion. Is that a place where you’re picking up some of the lithium carbonate volumes?

Seifi Ghasemi

Chris, we’re committed to supply all of our customers. So we were not kind of saying these customers are not good and these customers are good. We are focused on supplying the whole customer base, which is very good, very loyal to us and we are committed to serve their requirements.

Mike Harrison - First Analysis

Again, in terms of the battery market overall; obviously we’ve seen some destocking activity in consumer electronics broadly. I have to imagine that some of that was hitting the battery market. Have you seen an impact on your sales of lithium into batteries? And if you have, do you think any inventory reduction in consumer electronics or in the battery supply chain has run its course or do you think maybe there is still some excess inventory in the channel right now?

Seifi Ghasemi

My comment would be that quite honestly we haven’t seen anything noticeable that is worthwhile talking about.

Mike Harrison - First Analysis

Okay. And then last question is on the surface treatment side. I was hoping that you could walk through your key end markets specifically in Europe and discuss what you are seeing in automotive, coil coating, aerospace, general industrial. And then maybe discuss a little bit whether any weakness that you are seeing in Europe, are we seeing that be offset by emerging market growth or maybe kind of geographically what’s going on in surface treatment as well?

Seifi Ghasemi

Our surface treatment business, as you know, we have a significant presence in Europe, mainly in Germany. That business has been very strong for us and it continues to be strong. You hear a lot about what's going on in Europe, but our surface treatment business in Germany actually has been doing very well. The strength on that is based on a very strong luxury market sector out of Germany, which is the primary area that we are focused on for surface treatment business. In addition, our aerospace part of that sector is doing well. As far as North America, our volumes are growing by about 10% where we are seeing very good growth and as far as other parts of the world, as you know Mike we built a new plant in Mexico, a new plant in Turkey and a new plant in Brazil. All of those plants are excellent investments and has given us the opportunity to take advantage of the growth in those growth markets.

Operator

And our next question comes from the line of Mack Fuller, GSO Capital Partners. Please go ahead.

Mack Fuller - GSO Capital Partners

Actually just (inaudible) off of that last question about Europe, outside of the surface treatment business and TiO2, is there other significant exposure to Europe and if so kind of how should we think about that for this year?

Seifi Ghasemi

Other than those we do not have any significant exposure in Europe. Our so called performance additives sector where we are supplying color pigment and stuff which is related to construction, that sector has been slow, it has been slow for several years. And it is obviously as you would expect particularly slow in areas in southern Europe which we do not have a lot of exposure too.

Operator

And our next question comes from the line of Bob Koort with Goldman Sachs. Please go ahead.

Bob Koort - Goldman Sachs

Maybe for Bob Zatta, a couple of questions out of his comments. One, I think you mentioned there was a legacy unfavorable TiO2. Was that a supply contract which just at a price that didn’t mark-to-market? And then what are the specifics on the Chemetall restructuring? Seifi, you gave a pretty encouraging comment about demand trends there, so what needed to be restructured?

Bob Zatta

It was a supply contract that was entered in right before the JV was formed, which quite honestly was, as we looked at it after the JV was formed, we were not happy with. So it's been a long-term discussion to kind of get it reversed. There was a cost associated with doing it, which is what's reflected in our results, but over the next several years it will be very beneficial to us. So there's a future benefit attached to it. So that's what that is.

As far as Chemetall is concerned, you are absolutely right and the reason why we have restructured the business is because going forward and beginning with the first quarter of 2012, we’re going to start reporting our Chemetall business separately. We’re going to have the surface treatment business and the fine chemical business broken out. So we will have more visibility, you will have more visibility into the numbers. But in order for us to do that there were things that we had to do from a managerial standpoint as well as from a tax management standpoint, and again the benefits of that will be forthcoming in the future time, so that's really what that was all about.

Bob Koort - Goldman Sachs

Okay. Terrific. And on the free cash flow expectations as you go through this year, can you give us a sense of how big of a benefit working capital adjustments might be after the big draw down in cash last year?

Bob Zatta

I don’t think there’s going to be a huge benefit because as Seifi pointed out, on TiO2 we are probably getting back to where we want to be at this point. The rest of the buildup in the fourth quarter was pretty much not that significant. I would think that working capital for 2012 at least in the numbers I’m working with, could be anywhere from 50 to $70 million unfavorable. Not a huge number, but on a normal basis, that’s about what I would expect to see. Obviously, we’re benefiting a lot from the change in cash interest as well as an increase in EBITDA.

Bob Koort - Goldman Sachs

Okay. And last one from me. Can you just remind us the size of your potash revenue base, and in that way, we can sort of consider what might happen to that benefit as you’re paying as you go into 2012?

Bob Zatta

Bob, the potash business that we have now is approximately 150 to 170,000 metric tons a year.

Operator

And there are no further questions at this time.

Seifi Ghasemi

Well, in that case, I’d like to thank everybody for taking the time to be on our call. We appreciate that and we look forward to talking to everybody in a few months.

Operator

Ladies and gentlemen, this conference will be available for replay after 1:00 p.m. today through March 5th at midnight. You may access the AT&T executive replay system at any time by dialing 1-800-475-6701 and entering the access code 229199. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 229199. 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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