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Executives

Raj Gupta - Chairman, President and Chief Executive Officer

Jacques Croisetiere - Executive Vice President and ChiefFinancial Officer

Alan Barton - Executive Vice President and Regional Directorof the Americas

Pierre Brondeau - Executive Vice President, Business GroupExecutive, Electronic Materials and Specialty Materials

Analysts

Kevin McCarthy - Banc of America

Bob Koort - Goldman Sachs

Mike Sison - KeyBanc

David Begleiter - Deutsche Bank

P.J. Juvekar - Citigroup

Frank Mitsch - BB&T Capital

Don Carson - Merrill Lynch

Dimitri Silverstein - Longbow Research

Stephen Schwartz - First Analysis

Silka Koopf - JP Morgan

Rohm and Haas Company (ROH) Q3 2007 Earnings Call October 23, 2007 11:00 AM ET

Operator

Good day, everyone. Welcome to today’s Rohm and Haas CompanyThird Quarter Earnings Release Conference Call. Today’s call is being recorded.

At this time, I’d like to turn the call over to Mr. AndrewSandifer, Director of Investor Relations. Please go ahead, sir.

Andrew Sandifer

Good morning. This is Andrew Sandifer, Director of InvestorRelations, and I welcome you to our third quarter 2007 conference call. With metoday are Raj Gupta, Chairman, President and Chief Executive Officer; JacquesCroisetiere, Executive Vice President and Chief Financial Officer; Alan Barton,Executive Vice President and Regional Director of the Americas; and PierreBrondeau, Executive Vice President, Business Group Executive, ElectronicMaterials and Specialty Materials.

We will begin the teleconference momentarily. As is ournormal practice, after our prepared remarks, we will open the call to yourquestions.

Before we begin, let me remind you that some of what youhear today could constitute forward-looking statements subject to certain risksand uncertainties. Additional information is available in Rohm and Haas' 10-Kfiling with the Securities and Exchange Commission on February 28th, 2007, asupdated in our 8-K filing on July 11th, 2007. A copy of these filings may alsobe found through the investor portion of our website at www.rohmhaas.com.

Now let me turn the call over to Raj.

Raj Gupta

Thank you, Andrew. Good morning, everyone. Let me take a fewminutes to provide you a summary of the key drivers of our quarterlyperformance and then review progress against division 2010 strategy.

Third quarter results were strong across all businesses andregions except North America, with particularly solid growth coming fromrapidly developing economies and record performance of electronic chemicals.

As anticipated, sales and profits in North America wereadversely impacted by continued weakness in the US housing-related markets, butour diversified portfolio and global business presence out-tasked to capitalizeon strong demand for our products outside the United States, fueling a 14%increase in sales outside US compared to last year.

We are making excellent progress in implementing our vision2007 strategy, which is reflected in 7% increase in global sales growth thisyear and 23% increase in rapidly developing economies this quarter. We alsolaunched several new products and started up new manufacturing facilities inrapidly developing markets.

The impact of weaker US building and construction marketscombined with rising raw material, energy and freight costs as well asdisappointing operating performance of our Houston plant contributed tosignificant decline in earnings in North America.

The Houston problems are generally behind us, and we aretaking necessary pricing actions to mitigate the impact of sudden and largeincreases in raw materials. And we are well prepared to manage what we expectto be continued weakness in the US housing-related market over the next threeto five quarters.

So let me give you some more details. Sales were up 7% withhigh demand, representing 4%, currency 2%, and pricing 1%. We saw a veryhealthy growth rate across all regions except North America. Sales in Europewere up 8%. Asia Pacific grew at 21%, and Latin American sales were up 13%.

Sales in North America overall were flat year-over-year, areasonable performance given conditions in the US building and housing markets.Sales comparisons for our core businesses in North America continues toimprove.

Excluding Morton Salt, our sales in the region were 2%behind third quarter last year versus a decrease of 9% in the second -- firstquarter and 4% in the second quarter, which demonstrate continuedquarter-on-quarter improved comparisons, which we anticipated.

Rapidly developing economies, which include all countries inthe Latin American region, Central, Eastern Europe and Turkey and Asia Pacificregion excluding Japan, Australia and New Zealand, were up 23% on the quarter,reflecting our efforts to accelerate growth by building our sales, research andmanufacturing infrastructures in these geographies.

Profit margins in these countries also continued to improveand are tracking our expectations. Earnings as reported for the quarter were$0.61, which includes $0.26 for restructuring, asset impairment and one-timenon-cash pension charge. Earnings per share for the quarter excluding thesecharges were $0.87, which is comparable to the same period last year.

There were several unusual items during the quarter, whichwere essentially offsetting. The costs associated with the establishment of theEuropean headquarters, the anticipated dilution from Kodak acquisition and thedrop in other income versus prior year were offset by favorable tax onunderlying operations, favorable currencies and net impact of several smalleritems. Overall, the quality of earnings was excellent.

Third quarter results reflect strong earnings momentum forall businesses except the specialty materials. Electronic Materials Group hadrecord performance with earnings of $72 million, a 13% increase over the prioryear. Excluding the impact of Kodak light management films technology business,earnings increased 23%.

Earnings for Performance Materials excluding current andprior year restructuring charges increased 45%. Salt earnings doubled from $4million to $8 million, primarily from increased sales demand supported byproductivity initiatives.

The Specialty Materials Group, which primarily consists ofacrylic chain businesses, had solid 5% sales growth, with North America flatand the rest of the regions growing at strong rates.

Earnings for paint and coating materials and packaging andbuilding materials were essentially unchanged from a year ago, with NorthAmerica decline offset by gains in other regions. While primary materialsbusiness reported a 5% gain in sales, its profitability was adversely impactedby poor operating performance at our Houston facility and higher raw materialcosts as well as lower third-party selling prices.

While Houston plant experienced unplanned operating issuesassociated with the major scheduled maintenance turnaround in the first twoquarters of this year along with unrelated issues in this quarter, the goodnews is that the facility has returned to more normal level of operatingperformance since early September.

Let me now give you an update on the Vision 2010implementation. Almost exactly one year after introducing our Vision 2010 strategy,we are making excellent progress in achieving and in many cases exceeding ourmilestones.

As I mentioned earlier, there were several factors this yearthat limited our ability to realize the full benefits of this progress.Overall, we are both pleased with our progress to date and energized by ourprospects for the future.

Here are a few highlights on the last quarter. In terms ofportfolio, we strengthened it by building our Flat Panel Display Technologiesbusiness to announce formation of majority joint venture with SKC Incorporatedin Korea. We exited a digital imaging business line.

We continued to explore strategic options for the Saltbusiness, while we had intended to finalize the path forward for this business.By the end this year, turmoil in the financial markets makes it likely that itwill take longer than anticipated.

Our decision and timing will be governed by our commitmentto maximize value for our shareholders. Meanwhile, the business continues tomake excellent progress and is delivering very strong results.

In a rapidly developing economy, we launched formaloperations of joint venture Ginhas in China, enabling us to become the firstmultinational company with significant footprint in plastic additivesmanufacturing in China.

We celebrated the inauguration of our secondState-of-the-Art Emulsions Facility in India, making Rohm and Haas India, oneof the fastest and largest growing producer of environmentally friendlyadvanced emulsion and additives for paint and coatings and other water-basedpolymer industries.

RDE or The rapidly developing economy has become a growingcomponent of our total sales in each subsequent quarter reaching 26% of totalsales in third quarter of this year. In terms of innovation, we announced thelaunch of a locally developed new generation flexible acrylic polymer designedspecifically for the Chinese coatings market.

We also launched an additive that broadens the usability ofpolylactic acid, bio-based plastic by making them stronger without sacrificingclarity and greatly improving the performance of the green packaging material.

In terms of efficiency and operational excellence, we havebegun to see the financial and operating benefits of 21st century manufacturinginitiative, which has focused on streamlining activities and accountability,work processes, and integrated data management in our manufacturing plants.

The results have been lowering operating costs, increasedproductivity, and higher online efficiency in the plants that have implementedthis so far. While this initiative so far has focused on our US plant, we haveaggressive rollout schedule for 2008, which will encompass more sites acrossthe region.

In terms of talent enhancement, we created the role of chiefmarketing officer in order to accelerate the organic growth across all ourbusinesses. We've appointed Ruby Chandy as Vice President and chief marketingofficer. She brings a wealth of experience in marketing and business managementto Rohm and Haas, having worked in leading science and technology-basedcompanies.

Supplementing our Vision 2007 strategy, we completed $1billion accelerated share buyback program announced last quarter, which isexpected to result in the yearend shares outstanding of approximately 196million.

Now let me turn it over to Jacques who will --.

Jacques Croisetiere

Thank you, Raj. Let me begin with more details on our sharerepurchase program, then provide a few additional details on our financialresults. Our share repurchase, we continue to repurchase shares this quarterunder our prior program. The December 2004 authorization to repurchase up to $1billion of common stock. During the quarter, we use $107 million to purchase3.1 million shares at an average cost per share of approximately $56.86.

As of September 30, we had repurchased approximately 20.2million shares at a cost of approximately $1 billion under the 2004 program,and this program is now completed. As Raj touched on earlier, our Board ofDirectors authorized in July of this year a new two billion share repurchaseprogram, which we are implementing in two phases. We completed the first stagewith the execution of the one billion accelerated share repurchase agreement,which further reduced our share count by 16.2 million shares, and which washaunted by new debt.

With the addition of this debt, our debt-to-capital ratioincreased to approximately 53%. We expect the accelerated share repurchaseprogram to increase earnings per share by $0.02 in 2007, representing full-yearand backup line to $0.13 per share.

We plan to utilize the remaining $1 billion authorizationover 2008-2010 with the timing of the purchases depended upon marketconditions, and it will be funded from available cash.

These programs serve as a compliment to our vision 2010strategy and have succeeded in substantially decreasing our number ofoutstanding shares. In fact, at yearend, we expect to have reduced our share by11% versus yearend 2006 to approximately 196 million shares.

Changing subject, currency now had favorable impact of 2% onthe top line or $47 million. This translated into favorable impact onoperations of $6 million after tax or $0.03 per share in earnings.

Interest expense for the quarter was $30 million, up 43%from the same period in 2006, attributable to the issuance of new debt to fundthe $1 billion share accelerated repurchase program as well as higher interestrates in the quarter.

Other income for the quarter was $3 million compared to $17million in the prior-year period. The decrease was mostly attributable to adecrease in interest and investment income as well as a reduction of gains fromthe sales of fixed asset in prior year.

Income tax expense, we recorded a provision for income taxexpense of $36 million for the third quarter of 2007, reflecting an effectivetax rate from continuing operations of 21.4%, compared to 26.4% effective ratein 2006. Excluding restructuring, unusual items, and discontinued operation,the effective tax rate on underlying operations was 25.5%, compared to 29.1% inthe prior year period.

For the nine months ending September 30, we recorded aprovision for income tax of $168 million, reflecting an effective tax rate of25.5%, compared to 28% in the prior-year period.

Once again, excluding restructuring unusual items anddiscontinued operations, the effective tax rate for the nine-month endingSeptember 30, on underlying operation was 26.5%, compared to 29.5% for the sameperiod a year ago. The decrease in the underlying tax rate is primarily due tothe lower taxes on foreign earnings. Going forward, we now believe ourlong-term sustainable tax rate is approximately 27%.

Cash flow for the nine months ended September 30 was $519million, trailing the prior-year period by $92 million, which was principallydue to year-over-year reduction in net earnings.

The cash flow we generate from operating activities istypically concentrated in the second half of the year due to working capitalpatterns in some of our core businesses, as well as the timing of certain annualpayments such as employee bonuses and interests on debt, as well as, propertytaxes.

We expect 2007, cash from operating activities to be in therange of $900 million to $1 billion. Maintaining strong operating cash flowthrough earnings and working capital management continues to be an importantobjective.

Capital spending of $276 million through the first ninemonths of 2007 is $40 million above the prior-year period. Probably due toexpected spend for a greater number of growth-related projects.

These growth projects include the purchase of a defectanalysis tools for our electronic materials group, the construction of newemulsion production facilities in Mexico and in India, the expansion ofcapacity for several businesses in China, Italy and India, and spending in flatpanel display business related to the Kodak acquisition.

We expect our capital expenditures this year to beapproximately $450 million, slightly higher than depreciation expense.

Raj, I will now turn it back to you.

Raj Gupta

Thanks, Jacques. And let me now turn to our full-yearoutlook. We anticipated 2007 to be a transition year for Rohm and Haas. As wemanage through the weakness in the US building and construction market, dealwith higher raw material, energy and freight costs, absorb the cost related toestablishment of the European headquarters, and the impact of less thansatisfactory operating performance of the Houston plant. All the whilepositioning ourselves for stronger earnings growth trajectory in 2008 and beyond.

Our efforts so far were further challenged by the steadyescalation of key raw materials throughout this year. Now, as we speak, we areseeing dramatic increases with no seasonal easing in key raw materials as wehad previously anticipated. We now expect to see an increase in the total rawmaterial costs for Q4 on the order of $50 million pretax versus prior year sameperiod, and $35 million for the third quarter of this year.

As you can imagine, this increase in cost will have animpact on the expected earnings for this quarter and full-year 2007, despiteour urgent and necessary action to close this gap and to increase the pricing.As you know, we announced yesterday our intention to increase pricing in the 5%to 15% range, effective November 1 of this year. As a consequence, we are notproviding earnings guidance at this time.

Let me, however, share some perspective on our full-yearperformance. Let me begin with a sales line. We anticipate a very healthy topline growth for 2007 of roughly 7% for the year. Yielding annual sales in the$8.8 billion.

For electronic materials, we expect full-year sales growthin the 8% range, excluding the impact of new flat panel display units,electronic material sales would grow approximately 6% this year with almost 10%year-on-year growth in the second half of this year.

For the specialty materials growth, we anticipate full-yeargrowth of 4% to 5% with continued strong growth outside of North America, verysimilar to what we have seen in the first three quarters of this year. Forperformance materials, we continue to expect a 5% growth rate in sales for thisyear. For salt, we expect full-year sales growth of approximately 20% withcontinued improvement in operating performance.

Overall, we expect fourth quarter revenue to increase in the8% to 10% range compared to last year, without counting any impact ofadditional price centers that we might get. On a regional basis, we expectNorth American sales to be up slightly for the year those chemical sales they areexpected to be down 4%.

The Europe is anticipating to continue to have a modestgrowth rate, Asia Pacific sales growth is expected to continue accelerating, aswe approach the yearend. And the sales in, Latin America is expected to remainpretty strong.

Growth in the rapidly developing economy should be in the20% range, and we expect the percent of total company sales derived from thesecountries to increase to 25.0% of the total up from 20% last year.

We expect our selling, administrative and research expensesto be lower than in 2006, between 15% and 16% for the full year. We anticipateour full year tax rate to be close to 26%. I should note that this tax rate issomewhat below the 27%. We now believe is the sustainable tax rate for the longterm.

The pricing initiatives, along with many of the actions thatwe have taken this year, those positioned Rohm and Haas for a strongacceleration in earnings in 2008 and beyond. I appreciate your continuedinterest in Rohm and Haas Company. And we'll, now turn the call back to Andrewto open for question and answers.

Andrew Sandifer

Thank you, Raj. Can you please open the line and explain theprocedure for callers, who would like to ask a question?

Question-and-Answer Session

Operator

I would be happy to do that. (Operator Instructions) And ourfirst question will go to Kevin McCarthy at Banc of America. Please go ahead.

Kevin McCarthy - Banc of America

Yes, good morning, Raj. You alluded to raw material pricepressure, cost pressure rather of $35 million versus 3Q. Can you address thesources of that? Also comment on the price increase announcement yesterday, howmuch you might expect to recover in the quarter. And trends entering '08 withregard to raw materials, please?

Raj Gupta

Kevin, to give you an idea, the $35 million increase fromthe third quarter to fourth quarter is very broad based. So it's reallypropylene in some part of it. Acetone is a significant part of it. WAM issome part of it. Tin is some part of it, and methanol is part of it. These fiveor six raw materials are very broad based.

Typically, what we have seen in the past is a propylenerelated elements, but this quarter we have seen pretty much across the board.

In terms of pricing, clearly we are moving as fast -- thisis, I would say that, I think, the reason we kind of suspended the guidance’sthis is a development of the last two or three weeks. And the number is amoving target.

So we wanted to take our time to see some degree of suretyabout how much of what we felt was force majeure related increases versuswhat’s fundamentally driving the cost increases in raw materials. And ourbelief today is that oil holding around 85 to 90, that beef costs are real tostay.

So, we've been patient in absorbing some of the costincreases through this -- the early part of this year, but we have really nochoice, but to move the pricing at this point in time. And we are moving iturgently, effective November 1st, and we are going to have some effective placein November, some of it in place in December. But our target is that, we willclose this gap as much as possible, if not all of it by the end of this year.

Kevin McCarthy - Banc of America

Okay. That’s helpful. And then shifting gears to salt, Rajit sounds like the timeline of strategic action will be somewhat attenuatedthere into ’08, but can you give us an update on some of the restructuring andprofit improvement initiatives that you have in place for that business.

Raj Gupta

I think I'll have Jack, comment on that. I think, clearlythe numbers you we've seen in the last few quarters in terms of margins. So,are showing good decent top-line growth, good pricing mix, as well as theimpact of the efficiency initiatives. Jacques?

Jack Croisetiere

Yes, Kevin. We have several initiatives, and the largest oneis obviously in our plant, in our manufacturing organization. We've launchedthat. More than a year ago and it has brought some benefit this year already.We also launched a sales effectiveness we look our initiative last year bothfrom a gratuity standpoint, but also sales, calling, what have you in that,also has been quite effective.

We're planning the launch of -- believe it or not newproducts in salt. We have pilot programs in place right now, and that's alsoproving to be quite positive. So, we have a significant number of initiativesthat we have launched. Seven, of them actually that or -- are being implementedright now. And they're all beneficial to the EBITDA performance of thatbusiness.

Raj Gupta

And as we get normal fourth quarter salt season, we expectEBITDA in the $200 million range or salt business in 2007.

Kevin McCarthy - Banc of America

Okay. That's helpful. Thank you very much.

Raj Gupta

Thank you.

Operator

We'll go next to Bob Cord at Goldman Sachs.

Bob Koort - Goldman Sachs

Thanks. Raj, I was wondering, you know, you've battled,confronted these raw material demons for about five or six years now. Andpresumably we get pretty nimble about accommodating those.

Do you characterize this as a pretty broad-based problemgoing into the fourth quarter? Are these supply disruptions in those key rawmaterials, or what's made it different than sort of the standard slugging itout over the last couple of years as energy prices have climbed?

Raj Gupta

Well, let me give you a perspective from my side, and then Imight invite Head of Procurement, Neil Carr, who has just started to join heretoday to give his thoughts on it as well. I think the big increases in rawmaterials took place in '04-'05. We were very proactive. We were able to moreor less recover most of those cost increases.

And in case the monomers took advantage of the shortagesthat we had in '05-'06. Clearly, we expected the monomer to -- the balance tocome down, which it has. And it's not surprising, and we anticipated it.

When we started this year, our assumption was oil would bein the mid-60s range, and the raw materials full year '07 would be similar to'06. The reality has been that for the first nine months of this year, we haveabsorbed close to $18 million of increase in the raw materials in '07 and stilldelivered very good performance.

Our anticipation was that coming into the later part thisyear, close to the hurricane season, that we will see some moderation in termsof the raw material costs. Unfortunately, what happened are two events.

One is oil spiked up to close to 90, and looks like, youknow, depending on the predictions, going to stay there. And even after thehurricane season, there was some force majeures announced in certain parts ofthe supply chain for raw materials.

And so I think what we are seeing today is our belief isthat it's -- some of it's based on fundamentals, a good part, and some of it'sreally taking advantage of the shortages and force majeure of a certain productline. So I think, you know, we were very proactive the last time, and it'sclear that we need to be proactive at this point as well in terms of moving ourpricing.

Bob Koort - Goldman Sachs

Okay. So I might switch topics real briefly. You've made aneffort to get deeper into the LCD markets. And one of those focal point hasbeen the films market. And, you know, the big gorilla in that business had somenot-so-exciting things to say about pricing pressure and competitive dynamicsin film.

So has anything transpired that would alter your view of theattractiveness of that business?

Raj Gupta

A great question, and I'll have Pierre respond to it. I meanclearly, our view has not changed. We anticipated some of what we are seeingunfold here. But our positioning is different. I'll let Pierre describe it toyou.

Pierre Brondeau

Yes. I think it is not -- it is not a big surprise. We knowthat a significant part of the film market will be challenged from a pricingstandpoint because of the entrance of competitors.

I think what will be key to our success will be thepositioning of our business using SKC strength in Kodak technology to move intothe higher end of the products which are used for film for plasma and LCD.

So it is not changing anything to the direction or theattractiveness we believe this market has for us. It's just a matter of makingsure we do position our product in exactly the way we were forecasting to do byleveraging the strength of the two companies we have acquired.

Bob Koort - Goldman Sachs

Thank you.

Operator

We'll go next to Mike Sison at KeyBanc. Please go ahead.

Mike Sison - KeyBanc

Hey, guys. You know, in electronics, you had a nice pickup.It looks like the fourth quarter is looking like a pretty good pickup. Youknow, any feel -- you know, last year you sort of saw the same sequenceimprovement. Everything has got stuck in inventories. And then in the firsthalf of '07, things sort of had to tweak down a little bit.

Do you guys have any sense of, you know, is this stuffselling? Do you think there could be another inventory build hanging the firsthalf of '08 or is this a pretty nice, you know, solid recovery overall?

Raj Gupta

You know, I'll have Pierre answer in more detail. Butgenerally, I would say for the first three weeks in October, sales have beenpretty strong across all businesses and in electronics in the double-digit ratein October.

So Pierre, I mean, you know, I think -- I don't thinksequentially we are expecting a big change. But year-on-year, we're expecting avery good growth rate in the low teens year-on-year.

Pierre Brondeau

Yes. I think what is happening right now is pretty much whatwe have been anticipating for the last four or five quarters. If you rememberlast year, the first half of the year, first half of 2006 was very, very strongwith growth rate we had not seen in a long time. And then we started to seethings slowing down in the second half of the year and continuing into thebeginning of this year.

And that was the intent to re-correction, which took place,which we were expecting to see getting to an end by the middle of this yearwith all of the growth for 2007 being based on the growth of the industry inthe second half of the year.

So it's pretty much unfolding as we were forecasting. Couldwe have a downturn in 2008 or an inventory correction? At this stage today, wedo not have any signal that we could be facing a slowdown of the industrymoving into 2008.

Of course, it will very much depends upon how fast deviceare moving off the shelves for the yearend. And performance in November andDecember will be critical, but today we do not have any signal of a slowdown.It's pretty healthy with good level of inventory.

Mike Sison - KeyBanc

Right. Thank you. Then, you know, Raj, real quick, back tothe raw materials situation. The percent of the impact that is going up that isrelated to force majeure -related activity, I mean, would it be fair to saythat if you're getting a shortage in those materials are going up, that yourmaterial going out to your customers in short and those should be fairly easyto a degree to raise prices?

Raj Gupta

Well, I think our belief still is unless, you know,otherwise that global demand still remains strong.

Mike Sison - KeyBanc

Right.

Raj Gupta

Oil is in the $85 to $90 range. I mean, you know, we atleast, our belief is that there will be some impact of force majeure in theincreases we are seeing. It's hard to quantify how much is based onfundamentals versus force majeure. I believe that most of it, a good part of itis probably based on the fundamentals.

Mike Sison - KeyBanc

Okay. And last question, when you look -- when you head into2008, you know, you've accomplished a lot. It sounds like in terms of sort ofthe components in the 2010 Vision plan here in '07, can you give us a littlecolor where you feel confident in terms of organic sales growth next year.Meaning you've made changes to move overseas.

Do you think you're on track to sort of meet that 3% to 5%volume growth goal next year based on what you've accomplished the year? Youknow, knowing that demand in North America for paints is probably still goingto be weak?

Raj Gupta

Well, I think in terms of things we hope will not repeat,which are internal to Rohm and Haas obviously European headquarters cost about$0.15 or $0.17 -- $0.15,$0.16, this year, which we know is not going to getrepeated next year. Houston altogether cost about $0.18 for the first threequarters this year.

We hope that that is not -- will be repeated. So we havewhat I call a tailwind of about $0.30, $0.35 from '07 to '08. That's internalinitiatives that we have done. Ongoing cost reduction initiatives andrestructurings that we have announced. So we have a lot of what I call internalfactors driving it.

You talk about the topline growth, I think we expectelectronics and our rapidly developing economies to show very similar growthrate to this year. Western Europe, which has been strong this year, maymoderate a little bit. And we hope the US decline will not be as steep as thisyear.

So I think if I take all this together, and a lot of theeconomy remains in good shape, we are to see good momentum on the real growthof Rohm and Haas in 2008 versus 2007. And this year frankly won't be too baddespite the fact that the US has declined 1% or 2% for the full year overalland still see real growth of 3% to 4%.

Mike Sison - KeyBanc

Right. Thank you.

Raj Gupta

Thanks.

Operator

We'll go next to David Begleiter at Deutsche Bank.

David Begleiter - Deutsche Bank

Thank you. Raj, have you seen any signs of slowing in Europein the last few weeks?

Raj Gupta

You know, it was a similar pattern in the US. I would saythe last week, 10 days in both Europe and US in September looked like there wasa falloff. On the other hand, as I mentioned earlier, that the first threeweeks in October are strong pretty much across all regions and all businesses.

So it's hard to tell right now, David, is how much of someof the things we see here are inventory changes and adjustments that peoplemake on short basis or not. But to answer your question, I think -- I think yeswe saw some slowdown in the late part of September, both in the US and Europe.But October has started off pretty strong.

David Begleiter - Deutsche Bank

And Raj, on the Kodak business, which lost $7 million in thequarter, is that run rate the same for Q4, and what's the run rate for 2008 forthat business?

Raj Gupta

We give you a very high level number. When we announcedKodak, we said in 2007, we would be losing roughly $0.01 a share a month. Thatwas our run rate. I think once we complete our SKC venture, we said combinedbusiness of SKC and Kodak would be break even in 2008.

That's really our assumption, and we have no reason tochange that. So the profits from the SKC joint venture will offset the lossesfrom Kodak. And Kodak's sales are ramping up very, very well. I mean, I don'tknow if that's -- that's still a fair picture or not.

Jacques Croisetiere

Yes. It's a fair picture. And for us the most important isto bring the two acquisitions together to -- to improve the financialperformance of Kodak. But yes, the product from Kodak got well received in themarkets. And these are key issue for us, it's expansion to Asia based on SKCpolicies from manufacturing.

David Begleiter - Deutsche Bank

So could we get a clear update on copper slurries,qualifications and growth in that business?

Raj Gupta

Sure. I think we -- we are still exactly on track. In termsof -- in term of wins, we do have to date 17 wins in copper slurry for 1999leader and 65-millimeter. We have solid, four major evaluations which we arelooking quite good for 45 nanometers. So you remember going from 10 to 15%,your slurry was a target to get to 20% by 2009 -- and the product keeps on meetingneeds of the consumer.

David Begleiter - Deutsche Bank

Thank you very much.

Raj Gupta

Thank you.

Operator

Our next question will go to P.J. Juvekar at Citi. Please goahead.

P.J. Juvekar - Citigroup

Yes. Hi. Again, I want to go back to flat panels and basedon what Pierre said. As you move Kodak technology into SKC manufacturing, whatare your margin expectations today? Can you give us the baseline operatingmargin?

Raj Gupta

I think what we said, Pierre summarized it very well that in'08, we expect our revenues to be over $300 million combined SKC and Kodak. Andthe profit from that -- our share of profit from SKC would offset the lossesfrom continuing from -- on this Kodak as long as we continue to operate throughthe pilot plant. But in 2009, we expect this business to be accretive toearnings. And over next couple of years, for this to be a very healthy marginbusiness for us.

P.J. Juvekar - Citigroup

Okay. I can follow up later. I was hoping to get someoperating margin numbers. But I will come back to you on that.

Jacques Croisetiere

The only thing and if really -- what we're expecting if weposition this business for 2010 as we say, we do expect this business by thento -- with margins, which are in the same range that what we have forElectronic Material business as a whole, now you have to take into account, ofcourse, that we have a 51% ownership of the company.

So not all SKC profit will be considered to Rohm and Haas.But profit of each of the business will be in the range by 2010 of electricalmaterials.

Raj Gupta

We really say on 100% consolidated base and we expectafter-tax margins in the 12% to 15% range by 2010.

P.J. Juvekar - Citigroup

Great. Okay. And then second question is on paint andcoating and primarymaterials. If you draw a box around those two businesses and look at themtogether, and now your raw material prices are going up but volumes are down,now -- and you're raising prices in an environment where volumes are down, howis that dynamic going to play out? Can you just give us some idea?

Raj Gupta

Well, I think first of all globally, the volumes aregrowing. Okay. And second thing is, every producer of these building blocks arefacing exactly the same pressures that we have. And I think, again, if you lookat the ripple effect of these cost increases by the time it hits the consumers,it's a relatively modest number.

And I think the supply chain did figure out a way of movingit step by step over some period of time. And I think we have to kind ofreadjust all of us in the supply chain to a $90-barrel oil and the high pricesof raw materials. And I think it has to work its way through. I -- I thinkthat's really what our premise is, you know, that at the end of the day,consumer doesn't see much of an inflationary impact, but the channel has towork its way.

P.J. Juvekar - Citi

Right. Right. So what are the operating rates and accruallike, because I'm trying to find out who has the operating -- who has thepricing power in the segment, in the chain.

Raj Gupta

Well, I mean, our pricing power doesn't come from monomer,it really comes from our polymers positioning. And I think that's really wherewe are working. And you know, in terms of the building blocks itself, with theerosion of pricing of the product, I think now it’s reaching at a point that wewill also see a movement in the pricing of the acrylic monomers and MMA aswell.

P.J. Juvekar - Citi

Okay. Thank you.

Raj Gupta

So it’s really is cost-push more than demand supply at thispoint.

Operator

And our next question comes to Frank Mitsch at BB&TCapital.

Frank Mitsch - BB&T Capital

Good morning. I was curious with respect to the impact ofraw materials in the third quarter. You did a good job, Raj. Outlining what youthought the impact would be in the fourth quarter, but what of the actualimpact of higher raw materials of both sequentially in year-over-year in thethird quarter?

Raj Gupta

I would say the big negative impact of raw material were --selling prices in 2007 have been pretty flat compared to 2006. I'm talkingabout the polymer business. There's obviously a decline in the pricing of themonomers.

So I think in the big gap we had was in the first and secondquarter. And there was some expectation that there will be moderation in thethird quarter and fourth quarter would decline a little.

So were still -- fit for the nine months to date, we were inthe whole by $80 million, of which about 15 or 20 was in the third quarter.

Jacques Croisetiere

Now, that's material alone. We had -- freight…

Raj Gupta

Yeah. This is just raw materials. This does not includefreight, which also has gone up.

Frank Mitsch - BB&T Capital

I see. Okay. Because it looked like, you know, your priceswere up year-over-year, $15 million, which sound like it's not that similar towhat your raws were up year-over-year.

Raj Gupta

No. But I think the pricing is up in areas other than thepolymers.

Frank Mitsch - BB&T Capital

Okay. So you're still getting squeezed obviously on thatside.

Raj Gupta

Absolutely. No, I think the acrylic chain polymer monomer.You know, as I said, we were absorbing those deltas throughout this year inanticipation there will be moderation in the Q4 after the post-hurricane seasonwas over, but I think the spike in the oil prices has really changed theequation here. And then obviously some noise effective - noise force majeure isjust complicated.

Frank Mitsch - BB&T Capital

Okay. I understand your comments with respect to looking atstrategic options on salt side. So it looks like this business will be a partof Rohm and Haas for the near-term at a minimum. And here we are sitting inshort sleeve shirts in late October.

You know, what's -- you reported a nice third quarter Iguess due to from some pre-buying. Are you -- how concerned are you that thefourth quarter may be more problematic for the salt market?

Raj Gupta

Your guess is as good as mine. I think if you look at themix and the cost structure and some of the things that Jacques described, weare very well positioned in terms of the upside. We are just counting as usualon the fourth quarter and the first quarter normal season.

Jacques Croisetiere

The profit improvement in the business doesn't come frompre-buying. It maybe improvement in the industrial and consumer segments of thebusiness and overall productivity in the entire business.

So, you know, one-third is going to be what it is. We can'tpredict that. But when we look at longer period of time, you know, five to tenyears, it follows a cycle. And the ice control business does grow by 2% a yearover that period. So unfortunately, we don't control that very well yet.

Frank Mitsch - BB&T Capital

Great. So it's internal improvements that led to the thirdquarter upside year-over-year. Okay.

Raj Gupta

Absolutely.

Jacques Croisetiere

Product mix, is pricing, and it's and it's efficiency. Yeah.Okay.

Frank Mitsch - BB&T Capital

All right. Thank you.

Raj Gupta

Thanks.

Operator

And our next question goes to Don Carson at Merrill Lynch.

Don Carson - Merrill Lynch

Thank you. Raj, wanted to follow-up on Europe. I know youwere asked the question before, but looking at your volume or demand growthnumbers, you're only up 1% year-over-year in the quarter, down from 4% lastquarter.

You know, we've seen stories anecdotally about constructionslowing in Europe. Just wondering if you can talk about what was behind that 1%growth and why you're still optimistic on growth in Europe?

Raj Gupta

I think, we said we certainly saw some slowdown in Germany.Paint has been slow most of this year. The rest of the region, you know, iscertainly the first half of the year, we were seeing 4, 5% and in the thirdquarter we saw only 1% growth. Some of it’s timing issues.

But I think as I said earlier that in October, we haveseemed to be back again on the same rate of real growth, about 3% to 5% inEurope, as well.

Don Carson - Merrill Lynch

Okay.

Raj Gupta

Yeah.

Don Carson - Merrill Lynch

And then I know that some of the companies involved in thereading recent coatings industry consolidation have talked about how they'vebeen able to arbitrage down at the lowest prices that their coating supplierswere charging either company.

What impact if any, do you see this having on your businessgoing forward? And how does it affect your ability to raise prices and recoversome of these raw material costs?

Raj Gupta

I think that's a pretty good question. Obviously this isgood news and bad news. Right? And the bad news is, to consolidate there isobviously some Harmonization of pricing. On the other hand, as they consolidateand look for synergies, I think we as a company bring a lot of attributes,which are unique. One is having 30-plus plants around the world.

Their ability to standardized the product line, get thelogistics right? So there's a lot of other costs in the supply chain, which Ithink given our infrastructure, given our network in terms of supporting newproduct development and other things and helping these customers really getmore efficient, we have more to bring than any other supplier in this space.

And that's really rare. We are focused on how can we givethem what they need and be able to position ourselves strongly with a largershare.

Don Carson - Merrill Lynch

And final question, on the new product side, you talkedabout how sales were up strongly for AgroFresh and advanced materials, upcollectively 25%, can you talk about the dollar contribution from this categoryis now, and where you would expect that to go next year?

Raj Gupta

I think, combined sales of the two businesses is roughly inthe $100 billion range. And they are both highly profitable businesses. In caseof AgroFresh, clearly we are investing a good part of profit into this newlaunch of the product line.

So the bottom line impact of Invinca is -- sorry, AgroFreshis modest, but I think these businesses, we expect certainly the AgroFreshassuming Invinca really turns out to be as good a success as we think it is inthe HARVESTA program.

We still expect to see 25% to 30% revenue growth goingforward. And the funding of Invinca will depend on what steps we take nextyear. So I would say this business will continue materially to the bottom lineof Rohm and Haas, as you know going forward.

And, you know, advanced materials is a relatively smallbusiness, good growth, 15%, 20% a year, very good margin. But that's not goingto be a big business.

Don Carson - Merrill Lynch

Okay. Thank you.

Operator

And we'll go next to Dimitri Silverstein at LongbowResearch.

Dimitri Silverstein - Longbow Research

Good morning, Raj. A couple of questions. You talked about,you know, the pricing increases being affected November 1st andbasically giving you two months to try to get them. Yet you sounded veryconfident or somewhat confident that you're going to get to a run rate of fullrealization by the end of the year

Did I understand what you said correctly, or is there goingto be some more work to do in 2008 to recapture these -- to capture thispricing?

Raj Gupta

Our goal is that we do enough between now and the end of theyear to offset all of it. So you enter 2008 with no gap. That's our objective.Given the fact we're already one month behind the 8-ball here starting inNovember 1st, we clearly will only see some recovery of the total increasesthat we have seen already in place.

Dimitri Silverstein - Longbow Research

If some of your peers and competitors in markets were tryingto raise prices followed the increase might be even later, I mean is this anindustry-wide effort, or are you going to be leading the price increase andyou're hoping others will join?

Raj Gupta

I can't speak for others, I think whatever you see is whatwe see. But what we know for sure, that everybody's seeing price, costincreases similar to ours.

Dimitri Silverstein - Longbow Research

Okay.

Raj Gupta

And this is -- we are pretty well attuned and then, we knowwhere these materials are going. And we are a large buyer of many, many ofthese materials. So we have good visibility as to what's driving these costincreases.

Dimitri Silverstein - Longbow Research

Okay. Your performance materials division, quietly herebeing the smaller or one of the smaller divisions obviously have had very goodmargin performance throughout the year. It looks like the year-over-year deltain margins actually is expanding as the year unfolds. Can you provide a littlemore detail on kind a what's driving that and what should we expect from thebusiness going forward and what the main drivers will be of the strongperformance?

Raj Gupta

I think that's a great question. We don't usually talk aboutthat business. It's a very good business. It's really made up of four pieces inthere ion exchange business which is going from strength-to-strength findingnew applications and growing both the top line with very high margins.

The second one is the biocide business, which is doingextremely well. I think some of the price erosion that took place has stopped.Some of the growth that's coming in, and some of the regulatory expenses thatwe were involved in and funded it, that's behind us, for Europe and US.

They'll be seeing a tremendous amount of both top linegrowth and margin expansion in biocide business. Sodium Borohydride business isa steady performer, not a great growth business, a very decent margins.

And finally, a powder coating that's turning around comparedto the significant losses two years ago until now. So, you take a combinationof all of these, we believe that this business certainly it's one of the leastcyclical businesses in the Rohm and Haas portfolio.

It has growth potential between 5% and 6% top line. Not verydependent other than powder coatings on the petrochemical, raw material, andtoday is one of the highest margin businesses we have today in the mid-20'srange.

Dimitri Silverstein - Longbow Research

Okay.

Raj Gupta

And I think this business is really the neat littlebusiness, which is finally getting traction on multiple fronts.

Dimitri Silverstein - Longbow Research

So can we continue to expect margins to expand goingforward?

Raj Gupta

A little, I mean, they're very healthy altogether. Certainlythere's room for improvement in powder coatings and there is some incrementalimprovement in biocide and other places. So, I think most important it isreally not cyclical, not petrochemical dependent. Good growth rates with thepositioning of the products that we have.

Dimitri Silverstein - Longbow Research

Okay. And then the final question, given the large delta andother income in the third quarter versus third quarter last year, could yougive us some idea of what we should expect from that line item in the fourthquarter and in 2008?

Raj Gupta

I'll have Jacques answer this because I know we won't haveinterest income and we won’t have -- we don't plan ahead for real estatetransactions and other kind of runup kind of item.

Jacques Croisetiere

Yes. What we had there last year -- is that long list ofunusual items. That's why it moved from 17 to 3. You know, you should considerdouble-digit in that line anymore - anything between $3 to $5 million is whatwe should expect as a normal run rate.

Unless we have unusual items, we always look at divestingassets, but this is indicative of unusual. As a run rate there $3 to $5 millionwould be most appropriate.

Dimitri Silverstein - Longbow Research

Okay. Thank you, Jacques.

Operator

And we'll go next to Stephen Schwartz at First Analysis.

Stephen Schwartz - First Analysis

Good morning.

Raj Gupta

Good morning.

Stephen Schwartz - First Analysis

Looking at electronic materials, if I look at the EBITDAmargin adjusted, it's still pretty strong, but it came off a little bit fromlast quarter.

And if I remember correctly, in last quarter's call, wethought that second quarter EBITDA margin might hold going forward. Can youtalk a little about what's happening there?

Raj Gupta

Right. Well, let me give you the overall numbers and -- excludingKodak, revenues were up 10%, and earnings were up 22%. And so I think, theleverage in the earnings is in that 2.5 times increase in the revenue line.

So, if there is erosion, which would give you prettyconsistent margins maybe a fraction one way or the other, that's just a productmix in a given quarter.

Stephen Schwartz - First Analysis

Okay. You know, once SKC closes, do we expect that to erodemargin a bit in 2008? Because, I think if I remember correctly from thatconference call, their margin is notably less than what you run at.

Raj Gupta

Yes. We think it will and we've planned for that. What we'relooking for is earnings expansion, not margin expansion over the short term.

Now, as we go through 2008, then we will see marginexpanding again. But 2008 is going to be a year of adjustment.

If you're looking at EBITDA margin expansion, you shouldconsider that we will maintain margin and going then to 2009 and 2010 continueto expenditure margin.

Stephen Schwartz - First Analysis

Yes.

Raj Gupta

But, quite frankly we're after EPS improvement. The businesshas achieved a run rate of EBITDA margin that is very odd. And we're focusingon accelerating earning rather than expanding margin at this point.

: I think just to support, what John is saying,overall the core business will -- if it’s the high single digits growth rateand revenue in 2008 will be a continuation of expansion of the margins. One tothree ratio of earnings, one to 2.5. I think SKC plus Kodak, as we said in2008, would be a break-even situation in terms of earnings. So overalldilution, but I think the core business is electronics with that kind of growth-- top line growth but still continue to see modest expansion in the margins.

Stephen Schwartz - First Analysis

Okay. Then taking a look at SG&A, did you give out anumber for what you spent this quarter on the Euro headquarters?

Jacques Croisetiere

No, we did not.

Raj Gupta

But it's - it’s about $0.03 cent per share.

Jacques Croisetiere

About $0.03 per share.

Stephen Schwartz - First Analysis

Okay. And you know, what is -- is this your new run rateexcluding that expense? Because it looks like you guys -- you noted it in therelease, but it looks like you shaved off quite a bit from your expenses here.

Raj Gupta

About...

Stephen Schwartz - First Analysis

In SG&A. So going forward...

Jacques Croisetiere

Are you saying that for the third quarter excluding theEuropean quarter as the run rate?

Stephen Schwartz - First Analysis

No.

Jacques Croisetiere

I think the third quarter had a few items adjusted there,mainly valuable compensation, for instance that impacted the third quarterS&A line. So I would not consider Q3 as the run rate for S&A.

Stephen Schwartz - First Analysis

But if we exclude the Euro headquarters...

Jacques Croisetiere

If you...

Stephen Schwartz - First Analysis

If we back that out, are we...

Jacques Croisetiere

Let me tell you. I mean, in 2007, you could exclude $0.15for the full year, that is all on the S&A line that comes from the Europeanheadquarter. And we also said that we had about an equivalent around $0.16,$0.17 that came from our operating issue at Houston -- and that's gross profitand not the S&A line in term of year-over-year change to better oursubstantial.

Stephen Schwartz - First Analysis

Okay. And then, just one last one, quick with somehousekeeping here. Do you guys have available the volume comp for fourthquarter of 2006 for paints? And for packaging? I have it under the old segmentdetail. I don't have it under the...

Jacques Croisetiere

I am sure that.

Raj Gupta

Andrew would follow up. But I think we thought we wouldpublish quarterly results. We'll make sure you get it.

Stephen Schwartz - First Analysis

Okay. So yes, volume for paints and packaging. Great. Thankyou, gentlemen.

Raj Gupta

Thank you.

Andrew Sandifer

I think we have time for one more quick question.

Operator

And next question come from Jeff Zekauskas at JP Morgan.

Silka Koopf - JP Morgan

Good afternoon. This is Silka Koopf for Jeff. I also justhave a few question of clarification. The $42 million pension charge thisquarter, why is that non-cash? Wouldn't that amount be payable over some periodof time, and how long is that period?

Jacques Croisetiere

So first of all, this amount would be payable assuming thatwe do not reverse the decision at this point. It would be payable from thepension trust, not from the company's cash flow.

The pension plan of Rohm and Haas Company is over-funded. Soeven if we were to pay this $42 million after-tax, it would not trigger a cashrequirement - cash contribution requirement to the pension trust. Since it'salready over-funded.

Silka Koopf - JP Morgan

Okay. Secondly, can you quantify, you know, how much profitswere hurt in the quarter by those slowdown in the domestic housing market?

Jacques Croisetiere

Well, that's difficult to quantify precisely to that market.We do not discuss regional profitability but sales, you notice that or demandis down 2% in North America. Obviously, mainly driven by the housing sector,but we don't discuss profitability at the market level. That would not be possiblefor us.

Silka Koopf - JP Morgan

And as a last question, the impact from operatingdifficulties at the Houston plant for the quarter, was that $0.9 a share or…

Jacques Croisetiere

No. It was $0.5.

Raj Gupta

$0.5 a share for the quarter.

Jacques Croisetiere

18 for the year. $0.5 for the quarter.

Silka Koopf - JP Morgan

Okay. That's helpful. Thank you very much.

Raj Gupta

Thank you.

Jacques Croisetiere

You're very welcome.

Operator

And Mr. Sandifer, I would turn it back to you for anyclosing comments, sir.

Andrew Sandifer

Great. Thanks. As a close, let me remind you that we'll beholding our first investor Analyst Day in several years on Wednesday, November28, 2007, at the Millennium Broadway Hotel in New York City.

The program will begin with lunch at noon and will concludeby 6:30 pm. The event will provide an opportunity for rich interaction withexecutive and operating management, a detailed review of the company's progressin implementing Vision 2010 and its future outlook, as well as a series ofinformal briefings on a number of key, new technology and business efforts.

Look for final details on the investor Analyst Day in thenext few weeks.

Thank you for your participation today and for yourcontinued interest in Rohm and Haas.

Operator

Thank you. That does conclude the call. Again, we appreciateyour participation. At this time you may disconnect. Thank you.

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