Rohm and Haas Company Q3 2007 Earnings Call Transcript

Rohm and Haas Company (ROH)

Q3 2007 Earnings Call

October 23, 2007 11:00 am ET

Executives

Raj Gupta - Chairman, President and Chief Executive Officer

Jacques Croisetiere - Executive Vice President and Chief Financial Officer

Alan Barton - Executive Vice President and Regional Director of the Americas

Pierre Brondeau - Executive Vice President, Business Group Executive, 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

Presentation

Operator

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

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

Andrew Sandifer

Good morning. This is Andrew Sandifer, Director of Investor Relations, and I welcome you to our third quarter 2007 conference call. With me today are Raj Gupta, Chairman, President and Chief Executive Officer; Jacques Croisetiere, Executive Vice President and Chief Financial Officer; Alan Barton, Executive Vice President and Regional Director of the Americas; and Pierre Brondeau, Executive Vice President, Business Group Executive, Electronic Materials and Specialty Materials.

We will begin the teleconference momentarily. As is our normal practice, after our prepared remarks, we will open the call to your questions.

Before we begin, let me remind you that some of what you hear today could constitute forward-looking statements subject to certain risks and uncertainties. Additional information is available in Rohm and Haas' 10-K filing with the Securities and Exchange Commission on February 28th, 2007, as updated in our 8-K filing on July 11th, 2007. A copy of these filings may also be 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 few minutes to provide you a summary of the key drivers of our quarterly performance and then review progress against division 2010 strategy.

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

As anticipated, sales and profits in North America were adversely impacted by continued weakness in the US housing-related markets, but our diversified portfolio and global business presence out-tasked to capitalize on 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 vision 2007 strategy, which is reflected in 7% increase in global sales growth this year and 23% increase in rapidly developing economies this quarter. We also launched several new products and started up new manufacturing facilities in rapidly developing markets.

The impact of weaker US building and construction markets combined with rising raw material, energy and freight costs as well as disappointing operating performance of our Houston plant contributed to significant decline in earnings in North America.

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

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

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

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

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

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

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

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

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

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

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

While Houston plant experienced unplanned operating issues associated with the major scheduled maintenance turnaround in the first two quarters of this year along with unrelated issues in this quarter, the good news is that the facility has returned to more normal level of operating performance since early September.

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

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

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

We continued to explore strategic options for the Salt business, 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 it will take longer than anticipated.

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

In a rapidly developing economy, we launched formal operations of joint venture Ginhas in China, enabling us to become the first multinational company with significant footprint in plastic additives manufacturing in China.

We celebrated the inauguration of our second State-of-the-Art Emulsions Facility in India, making Rohm and Haas India, one of the fastest and largest growing producer of environmentally friendly advanced emulsion and additives for paint and coatings and other water-based polymer industries.

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

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

In terms of efficiency and operational excellence, we have begun to see the financial and operating benefits of 21st century manufacturing initiative, 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, increased productivity, and higher online efficiency in the plants that have implemented this so far. While this initiative so far has focused on our US plant, we have aggressive rollout schedule for 2008, which will encompass more sites across the region.

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

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

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

Jacques Croisetiere

Thank you, Raj. Let me begin with more details on our share repurchase program, then provide a few additional details on our financial results. Our share repurchase, we continue to repurchase shares this quarter under our prior program. The December 2004 authorization to repurchase up to $1 billion of common stock. During the quarter, we use $107 million to purchase 3.1 million shares at an average cost per share of approximately $56.86.

As of September 30, we had repurchased approximately 20.2 million 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 of Directors authorized in July of this year a new two billion share repurchase program, which we are implementing in two phases. We completed the first stage with the execution of the one billion accelerated share repurchase agreement, which further reduced our share count by 16.2 million shares, and which was haunted by new debt.

With the addition of this debt, our debt-to-capital ratio increased to approximately 53%. We expect the accelerated share repurchase program to increase earnings per share by $0.02 in 2007, representing full-year and backup line to $0.13 per share.

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

These programs serve as a compliment to our vision 2010 strategy and have succeeded in substantially decreasing our number of outstanding shares. In fact, at yearend, we expect to have reduced our share by 11% versus yearend 2006 to approximately 196 million shares.

Changing subject, currency now had favorable impact of 2% on the top line or $47 million. This translated into favorable impact on operations 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 fund the $1 billion share accelerated repurchase program as well as higher interest rates in the quarter.

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

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

For the nine months ending September 30, we recorded a provision for income tax of $168 million, reflecting an effective tax rate of 25.5%, compared to 28% in the prior-year period.

Once again, excluding restructuring unusual items and discontinued operations, the effective tax rate for the nine-month ending September 30, on underlying operation was 26.5%, compared to 29.5% for the same period a year ago. The decrease in the underlying tax rate is primarily due to the lower taxes on foreign earnings. Going forward, we now believe our long-term sustainable tax rate is approximately 27%.

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

The cash flow we generate from operating activities is typically concentrated in the second half of the year due to working capital patterns in some of our core businesses, as well as the timing of certain annual payments such as employee bonuses and interests on debt, as well as, property taxes.

We expect 2007, cash from operating activities to be in the range of $900 million to $1 billion. Maintaining strong operating cash flow through earnings and working capital management continues to be an important objective.

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

These growth projects include the purchase of a defect analysis tools for our electronic materials group, the construction of new emulsion production facilities in Mexico and in India, the expansion of capacity for several businesses in China, Italy and India, and spending in flat panel display business related to the Kodak acquisition.

We expect our capital expenditures this year to be approximately $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-year outlook. We anticipated 2007 to be a transition year for Rohm and Haas. As we manage through the weakness in the US building and construction market, deal with higher raw material, energy and freight costs, absorb the cost related to establishment of the European headquarters, and the impact of less than satisfactory operating performance of the Houston plant. All the while positioning ourselves for stronger earnings growth trajectory in 2008 and beyond.

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

As you can imagine, this increase in cost will have an impact on the expected earnings for this quarter and full-year 2007, despite our 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 not providing earnings guidance at this time.

Let me, however, share some perspective on our full-year performance. Let me begin with a sales line. We anticipate a very healthy top line 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 growth in 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-year growth of 4% to 5% with continued strong growth outside of North America, very similar to what we have seen in the first three quarters of this year. For performance materials, we continue to expect a 5% growth rate in sales for this year. For salt, we expect full-year sales growth of approximately 20% with continued improvement in operating performance.

Overall, we expect fourth quarter revenue to increase in the 8% to 10% range compared to last year, without counting any impact of additional price centers that we might get. On a regional basis, we expect North American sales to be up slightly for the year those chemical sales they are expected to be down 4%.

The Europe is anticipating to continue to have a modest growth rate, Asia Pacific sales growth is expected to continue accelerating, as we approach the yearend. And the sales in, Latin America is expected to remain pretty strong.

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

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

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

Andrew Sandifer

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

Question-and-Answer Session

Operator

I would be happy to do that. (Operator Instructions) And our first 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 price pressure, cost pressure rather of $35 million versus 3Q. Can you address the sources of that? Also comment on the price increase announcement yesterday, how much you might expect to recover in the quarter. And trends entering '08 with regard to raw materials, please?

Raj Gupta

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

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

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

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

So, we've been patient in absorbing some of the cost increases through this -- the early part of this year, but we have really no choice, but to move the pricing at this point in time. And we are moving it urgently, effective November 1st, and we are going to have some effective place in November, some of it in place in December. But our target is that, we will close 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, Raj it sounds like the timeline of strategic action will be somewhat attenuated there into ’08, but can you give us an update on some of the restructuring and profit improvement initiatives that you have in place for that business.

Raj Gupta

I think I'll have Jack, comment on that. I think, clearly the 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 the impact of the efficiency initiatives. Jacques?

Jack Croisetiere

Yes, Kevin. We have several initiatives, and the largest one is obviously in our plant, in our manufacturing organization. We've launched that. 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 both from 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 new products in salt. We have pilot programs in place right now, and that's also proving to be quite positive. So, we have a significant number of initiatives that we have launched. Seven, of them actually that or -- are being implemented right now. And they're all beneficial to the EBITDA performance of that business.

Raj Gupta

And as we get normal fourth quarter salt season, we expect EBITDA 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. And presumably we get pretty nimble about accommodating those.

Do you characterize this as a pretty broad-based problem going into the fourth quarter? Are these supply disruptions in those key raw materials, or what's made it different than sort of the standard slugging it out 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 I might invite Head of Procurement, Neil Carr, who has just started to join here today to give his thoughts on it as well. I think the big increases in raw materials took place in '04-'05. We were very proactive. We were able to more or less recover most of those cost increases.

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

When we started this year, our assumption was oil would be in 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 have absorbed close to $18 million of increase in the raw materials in '07 and still delivered very good performance.

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

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

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

Bob Koort - Goldman Sachs

Okay. So I might switch topics real briefly. You've made an effort to get deeper into the LCD markets. And one of those focal point has been the films market. And, you know, the big gorilla in that business had some not-so-exciting things to say about pricing pressure and competitive dynamics in film.

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

Raj Gupta

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

Pierre Brondeau

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

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

So it is not changing anything to the direction or the attractiveness we believe this market has for us. It's just a matter of making sure we do position our product in exactly the way we were forecasting to do by leveraging 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. You know, any feel -- you know, last year you sort of saw the same sequence improvement. Everything has got stuck in inventories. And then in the first half of '07, things sort of had to tweak down a little bit.

Do you guys have any sense of, you know, is this stuff selling? Do you think there could be another inventory build hanging the first half 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. But generally, I would say for the first three weeks in October, sales have been pretty strong across all businesses and in electronics in the double-digit rate in October.

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

Pierre Brondeau

Yes. I think what is happening right now is pretty much what we have been anticipating for the last four or five quarters. If you remember last year, the first half of the year, first half of 2006 was very, very strong with growth rate we had not seen in a long time. And then we started to see things slowing down in the second half of the year and continuing into the beginning 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 year with all of the growth for 2007 being based on the growth of the industry in the second half of the year.

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

Of course, it will very much depends upon how fast device are moving off the shelves for the yearend. And performance in November and December 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 to the raw materials situation. The percent of the impact that is going up that is related to force majeure -related activity, I mean, would it be fair to say that if you're getting a shortage in those materials are going up, that your material going out to your customers in short and those should be fairly easy to 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 at least, our belief is that there will be some impact of force majeure in the increases we are seeing. It's hard to quantify how much is based on fundamentals versus force majeure. I believe that most of it, a good part of it is probably based on the fundamentals.

Mike Sison - KeyBanc

Okay. And last question, when you look -- when you head into 2008, you know, you've accomplished a lot. It sounds like in terms of sort of the components in the 2010 Vision plan here in '07, can you give us a little color 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? You know, knowing that demand in North America for paints is probably still going to 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 get repeated next year. Houston altogether cost about $0.18 for the first three quarters this year.

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

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

So I think if I take all this together, and a lot of the economy remains in good shape, we are to see good momentum on the real growth of Rohm and Haas in 2008 versus 2007. And this year frankly won't be too bad despite the fact that the US has declined 1% or 2% for the full year overall and 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 Europe in the last few weeks?

Raj Gupta

You know, it was a similar pattern in the US. I would say the last week, 10 days in both Europe and US in September looked like there was a falloff. On the other hand, as I mentioned earlier, that the first three weeks 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 some of the things we see here are inventory changes and adjustments that people make on short basis or not. But to answer your question, I think -- I think yes we 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 the quarter, is that run rate the same for Q4, and what's the run rate for 2008 for that business?

Raj Gupta

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

That's really our assumption, and we have no reason to change that. So the profits from the SKC joint venture will offset the losses from Kodak. And Kodak's sales are ramping up very, very well. I mean, I don't know 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 is to bring the two acquisitions together to -- to improve the financial performance of Kodak. But yes, the product from Kodak got well received in the markets. And these are key issue for us, it's expansion to Asia based on SKC policies 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 terms of -- in term of wins, we do have to date 17 wins in copper slurry for 1999 leader and 65-millimeter. We have solid, four major evaluations which we are looking 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 meeting needs 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 go ahead.

P.J. Juvekar - Citigroup

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

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. And the profit from that -- our share of profit from SKC would offset the losses from continuing from -- on this Kodak as long as we continue to operate through the pilot plant. But in 2009, we expect this business to be accretive to earnings. And over next couple of years, for this to be a very healthy margin business for us.

P.J. Juvekar - Citigroup

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

Jacques Croisetiere

The only thing and if really -- what we're expecting if we position this business for 2010 as we say, we do expect this business by then to -- with margins, which are in the same range that what we have for Electronic Material business as a whole, now you have to take into account, of course, 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 electrical materials.

Raj Gupta

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

P.J. Juvekar - Citigroup

Great. Okay. And then second question is on paint and coating and primary materials. If you draw a box around those two businesses and look at them together, 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, how is that dynamic going to play out? Can you just give us some idea?

Raj Gupta

Well, I think first of all globally, the volumes are growing. Okay. And second thing is, every producer of these building blocks are facing exactly the same pressures that we have. And I think, again, if you look at 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 moving it step by step over some period of time. And I think we have to kind of readjust all of us in the supply chain to a $90-barrel oil and the high prices of raw materials. And I think it has to work its way through. I -- I think that'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 to work its way.

P.J. Juvekar - Citi

Right. Right. So what are the operating rates and accrual like, because I'm trying to find out who has the operating -- who has the pricing 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 where we are working. And you know, in terms of the building blocks itself, with the erosion of pricing of the product, I think now it’s reaching at a point that we will also see a movement in the pricing of the acrylic monomers and MMA as well.

P.J. Juvekar - Citi

Okay. Thank you.

Raj Gupta

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

Operator

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

Frank Mitsch - BB&T Capital

Good morning. I was curious with respect to the impact of raw materials in the third quarter. You did a good job, Raj. Outlining what you thought the impact would be in the fourth quarter, but what of the actual impact of higher raw materials of both sequentially in year-over-year in the third 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 talking about the polymer business. There's obviously a decline in the pricing of the monomers.

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

So were still -- fit for the nine months to date, we were in the 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 include freight, which also has gone up.

Frank Mitsch - BB&T Capital

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

Raj Gupta

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

Frank Mitsch - BB&T Capital

Okay. So you're still getting squeezed obviously on that side.

Raj Gupta

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

Frank Mitsch - BB&T Capital

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

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

Raj Gupta

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

Jacques Croisetiere

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

So, you know, one-third is going to be what it is. We can't predict that. But when we look at longer period of time, you know, five to ten years, it follows a cycle. And the ice control business does grow by 2% a year over 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 third quarter 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 you were asked the question before, but looking at your volume or demand growth numbers, you're only up 1% year-over-year in the quarter, down from 4% last quarter.

You know, we've seen stories anecdotally about construction slowing 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, is certainly the first half of the year, we were seeing 4, 5% and in the third quarter we saw only 1% growth. Some of it’s timing issues.

But I think as I said earlier that in October, we have seemed to be back again on the same rate of real growth, about 3% to 5% in Europe, 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 the reading recent coatings industry consolidation have talked about how they've been able to arbitrage down at the lowest prices that their coating suppliers were charging either company.

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

Raj Gupta

I think that's a pretty good question. Obviously this is good news and bad news. Right? And the bad news is, to consolidate there is obviously some Harmonization of pricing. On the other hand, as they consolidate and 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 the logistics right? So there's a lot of other costs in the supply chain, which I think given our infrastructure, given our network in terms of supporting new product development and other things and helping these customers really get more 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 give them what they need and be able to position ourselves strongly with a larger share.

Don Carson - Merrill Lynch

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

Raj Gupta

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

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

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

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

Don Carson - Merrill Lynch

Okay. Thank you.

Operator

And we'll go next to Dimitri Silverstein at Longbow Research.

Dimitri Silverstein - Longbow Research

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

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

Raj Gupta

Our goal is that we do enough between now and the end of the year 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 in November 1st, we clearly will only see some recovery of the total increases that we have seen already in place.

Dimitri Silverstein - Longbow Research

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

Raj Gupta

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

Dimitri Silverstein - Longbow Research

Okay.

Raj Gupta

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

Dimitri Silverstein - Longbow Research

Okay. Your performance materials division, quietly here being the smaller or one of the smaller divisions obviously have had very good margin performance throughout the year. It looks like the year-over-year delta in margins actually is expanding as the year unfolds. Can you provide a little more detail on kind a what's driving that and what should we expect from the business going forward and what the main drivers will be of the strong performance?

Raj Gupta

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

The second one is the biocide business, which is doing extremely 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 that we were involved in and funded it, that's behind us, for Europe and US.

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

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

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

Dimitri Silverstein - Longbow Research

Okay.

Raj Gupta

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

Dimitri Silverstein - Longbow Research

So can we continue to expect margins to expand going forward?

Raj Gupta

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

Dimitri Silverstein - Longbow Research

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

Raj Gupta

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

Jacques Croisetiere

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

Unless we have unusual items, we always look at divesting assets, but this is indicative of unusual. As a run rate there $3 to $5 million would 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 EBITDA margin adjusted, it's still pretty strong, but it came off a little bit from last quarter.

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

Raj Gupta

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

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

Stephen Schwartz - First Analysis

Okay. You know, once SKC closes, do we expect that to erode margin a bit in 2008? Because, I think if I remember correctly from that conference 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're looking for is earnings expansion, not margin expansion over the short term.

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

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

Stephen Schwartz - First Analysis

Yes.

Raj Gupta

But, quite frankly we're after EPS improvement. The business has achieved a run rate of EBITDA margin that is very odd. And we're focusing on 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 rate and revenue in 2008 will be a continuation of expansion of the margins. One to three ratio of earnings, one to 2.5. I think SKC plus Kodak, as we said in 2008, would be a break-even situation in terms of earnings. So overall dilution, 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 a number 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 rate excluding that expense? Because it looks like you guys -- you noted it in the release, 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 the European 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 quarter S&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 $0.15 for the full year, that is all on the S&A line that comes from the European headquarter. 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 profit and not the S&A line in term of year-over-year change to better our substantial.

Stephen Schwartz - First Analysis

Okay. And then, just one last one, quick with some housekeeping here. Do you guys have available the volume comp for fourth quarter of 2006 for paints? And for packaging? I have it under the old segment detail. 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 would publish quarterly results. We'll make sure you get it.

Stephen Schwartz - First Analysis

Okay. So yes, volume for paints and packaging. Great. Thank you, 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 just have a few question of clarification. The $42 million pension charge this quarter, why is that non-cash? Wouldn't that amount be payable over some period of time, and how long is that period?

Jacques Croisetiere

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

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

Silka Koopf - JP Morgan

Okay. Secondly, can you quantify, you know, how much profits were 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 demand is 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 possible for us.

Silka Koopf - JP Morgan

And as a last question, the impact from operating difficulties 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 any closing comments, sir.

Andrew Sandifer

Great. Thanks. As a close, let me remind you that we'll be holding our first investor Analyst Day in several years on Wednesday, November 28, 2007, at the Millennium Broadway Hotel in New York City.

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

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

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

Operator

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

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