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Rockwood Holdings, Inc. (NYSE:ROC)

Q1 2012 Earnings Call

April 25, 2012 11:00 am ET

Executives

Tim McKenna – Vice President, Investor Relations

Seifi Ghasemi – Chairman of the Board, Chief Executive Officer

Robert J. Zatta – Chief Financial Officer, Senior Vice President

Analysts

Silke Keuck – JPMorgan

Mike Harrison – First Analysis

John McNulty – Credit Suisse Securities

James Finnerty – Citigroup Global Markets

Jeffrey Stafford – Morningstar Research

Robert A. Koort – Goldman Sachs & Co.

Meryl Witmer – Eagle Capital Partners

David Begleiter – Deutsche Bank Securities Inc.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the 2012 First Quarter Conference Call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) And as a reminder this conference is being recorded.

I’ll now turn the conference over to Tim McKenna, Vice President, Investor Relations. Please go ahead, sir.

Tim McKenna

Cathy, good morning, welcome to Rockwood’s first quarter earnings conference call. Seifi Ghasemi, our Chairman and Chief Executive; and Bob Zatta, our Chief Financial Officer will give the formal presentation, after that we’ll have the Q&A session, and you can follow our slides on our website www.rocksp.com.

Before the call begins, I’ll read a short statement. The conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the business operations and financial conditions of Rockwood and its subsidiaries. Although Rockwood believes the expectations reflected in such statements are based upon reasonable assumption, there could be no assurance that its expectations will be realized. Forward-looking statements consist of all non-historical information, including statements referring to the prospects and future performance of Rockwood.

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

Seifollah Ghasemi

Thank you, very much, Tim, and good morning to everyone. Thank you for taking time from your busy schedules to join our conference call. As Tim mentioned, during our conference call we will refer to the presentation material we have posted on our website.

I am very pleased to report that Rockwood had another excellent set of results for the first quarter of 2012. we reported an adjusted EBITDA of $234.9 million, our highest ever. We also had a record adjusted EBITDA to sales margin of 25.8%. Our adjusted earnings per share was $1.23, which is 40% higher than the same quarter last year.

These results continue to demonstrate the strength of our portfolio of unique and highly specialized businesses that benefit from having a strong technology and global market position. The efforts of our 10,000 dedicated and motivated employees is also a big factor in our success. Their efforts to improve productivity and enhance customer service allows us to constantly improve our operating margins.

Now, please refer to our presentation material. On page 6, 7, and 8 we have delineated the highlights of our results. But I want to comment in more detail on each business unit. So please turn to page 9. This is the first time we are reporting the results of our Lithium business. We have during the years developed this business to be the flagship of Rockwood with excellent market position and real technology leadership. We have and will continue to strengthen our research and development activities and are investing heavily to expand our operations to meet the increasing demands of our customers.

We have said during the past years that this business has the potential of double digit growth. Our management team has delivered that growth in the past ten years and we expect that growth rate to continue in the future. Therefore, it is important for me to explain the reported growth of only 3.5% in constant currency terms in this quarter.

As you know, a byproduct of our Lithium production is potash which is sold as a fertilizer. In the past, we used to sell our potash exclusively in semi-finished form to a Chilean company. In 2011 we made a strategic decision to build our own finishing facility so that we will be able to sell the finished potash product directly to the market. We expect that this will eventually result in higher profitability for us.

Therefore, as of January 1, 2012, we have canceled our contract with the Chilean company and are in the process of establishing the infrastructure to sell products directly to the market. Since all of the required infrastructure was not in place, our sales of potash in the first quarter of 2012 was about $7 million, less than the comparable quarter last year. We expect to sell the potash produced and stored in the first quarter in the coming months.

If we exclude this potash sales, the rest of our lithium business grew by double digits in the first quarter. One other important item to mention is the sale to the lithium iron battery market, which will be the main engine of growth in the future. Our battery grade lithium sales in the first quarter of 2012 grew more than 100% versus first quarter of 2011.

Now, please refer to page 10, our surface treatment business with results you’re seeing for the first time to. This is another one of our key core businesses. We have seen this business develop very nicely in the past 8 years that we have owned it, with EBITDA margins improving from about 14% in 2005 to more than 20% today.

We are very much permitted to continue to grow this business and have invested in new plants in Brazil, Turkey, Mexico and India. We will also bring on its stream the world’s largest Surface Treatment facility in Michigan later this year.

Now, please turn to page 11, our performance additives business. This is a sector where we do have significant exposure for the construction market. As we have indicated for the past three years, we do not expect any significant growth in this sector until 2014. But as you know, our focused management team in this sector continues to do a good job in improving productivity, so that despite this stagnant demand, the EBITDA margin keeps improving, and it stands at 19.7% today.

We did announce that we will build a state-of-the-art Greenfield plant in Georgia to consolidate our operations in the United States. This plan is expected to be on stream in 2014.

Now please turn to page 12, our TiO2 business. First, it is important to note that our business in this sector consists of two parts. 70% TiO2 and 30% functional additives such as barium sulfate and zinc sulfide.

In addition our TiO2 business is mainly a very special grade of TiO2 used for making nylon fibers and specialty inks. In addition, our total capacity is only 4% of the total world market. Therefore, the performance of this business in this sector does not follow and is not an indication either of the performance of the overall commodity TiO2 business. We do have a unique a specialty business here as you tell from the profit margins we have in this sector, which is now more than 30%.

Now let’s talk about the volumes and pricing. Volumes are down versus a storng first quarter of last year by about 21%. This is mainly due to the fact that we saw our customers continue de-stock especially in the far east and also due to the fact that our focus on profitability rather than quantity of sales.

During this quarter, prices were around 24% higher than last year. But to give you more detail, it is important to focus on the performance of this business versus fourth quarter of 2011 that is sequentially. Sales for the first quarter of 2012 were more than 15% higher than fourth quarter of 2011. Therefore sale for the business is continuing to improve, and prices were up more than 3% sequentially.

I’d also like to make an additional statement with respect to our TiO2 business. We have in the past five years indicated that this business is not one of our core businesses in the long term. Therefore, we have now hired the investment banking firm Lazard to advice us on our strategic options such as sale or IPO of the business on the Frankfurt Stock Exchange.

Now, please turn to page 12, our Advanced Ceramic business. As you know, we had a particularly strong first quarter last year due to a significant increase in the sales of our ceramic (inaudible). So the comparison to past years might be misleading in terms of fundamental growth of this sector.

We did see in this quarter a drop in volumes in our electronic where we supply components for solar panel semiconductors, especially in Germany. But sales for our medical products are on track, and we expect continuous growth in this sector. Thanks to the ongoing efforts of our outstanding management team in this business, we continue to see improvement in our margins, which is now at 32%.

Now, please turn to page 14, where we give you the details of our sales variance for all of Rockwood. Pricing in general was up $75.5 million or 8.3% due to improvement in pricing in all of our business sectors, except ceramics. We have a negative variance of 3.1% due to currency translation, mainly due to weaker euro as compared to the dollar and as compared to last year. The volume variance is primarily due to our TiO2 business and potash sales as I explained earlier.

Now, I would like to turn the call over to Mr. Bob Zatta, our Chief Financial Officer, to go through the financials. And I will come back with some additional comments before we open the session for questions. Bob?

Robert J. Zatta

Thank you Seifi, and good morning to everyone. I am on page 16 of the presentation, this is our reported income statements for the first quarter of 2012. We reported net sales of $909.5 million for the quarter as compared with $914 million last year, a decrease of 0.5%.

Net sales were slightly lower, as lower volumes particularly in titanium dioxide and a decline in potash sales related to the marketing change Seifi mentioned, and the negative impact of currencies were partially offset by higher selling prices and higher volumes of lithium products. We reported gross profit for the first quarter of $342.8 million, or 37.7% of sales compared with the $321.1 million, or 35.1% of sales last year. The improvement in gross margin year-on-year was due to the higher pricing which more than offset raw material cost increases and lower fixed costs.

For the quarter, SG&A as a percent of sales was 19.5% down from 19.8% last year. We also had some restructuring and severance accruals in the quarter primarily related to the write-off of the trade name related to the separations of lithium and surface treatment businesses. This brings us to operating income of $151.5 million for the quarter, as a percent of sales, this is 16.7% of sales versus $15.3% last year.

The next major item is net interest expense, the composition of interest expense is shown at the bottom of the chart. Net interest expense was lower than the same period last year, primarily due to the prepayment of debt and lower interest rates as a result of the refinancing of our senior secured term loans in February of 2011.

In connection with the repayment of our outstanding senior subordinated notes in March this year, that were due in 2014 we recorded a charge of $9.7 million in the quarter comprised of redemption premiums of $6.7 million and the write-off of deferred financing costs of $3 million. This brings us the income from continuing operations before taxes, which is $120.3 million for the quarter. Against as the income tax provision is $30.6 million for the quarter, on an adjusted basis the effective tax rate for the quarter was 24.4%, the lower tax rate in the quarter is due to higher domestic profit before tax and the valuation allowance we have allows us to drop directly to earnings after-tax.

In the rest of our world, rest of our businesses our adjusted tax rate was 28%, which is consistent with prior quarters. Please note as I had mentioned on our previous call, we will most likely have to reverse the valuation allowance later this year, and that could potentially raise the effective tax rate by about three percentage points. We’ll talk more about that when the time comes.

We then show net income attributable to the non-controlling interest in the TiO2 in Kemira joint ventures, this result in net income of $75.8 million for the first quarter. And then turning to page 17, we presents the reconciliation of net income to adjusted EBITDA.

For the quarter beginning with net income of $75.8 million, we’ve added back items which get us to pre-tax income from continuing operations of $120.3 million, then adding back interest expense and D&A brings us to a subtotal of $206.6 million. We then have several one-time adjusting items which bring to adjusted EBITDA in the quarter of $234.9. Page 18, provides a detailed reconciliation of net income and EPS from continuing operations on a reported basis. The net income and EPS from continuing operations as adjusted. As you can see, the adjustments are shown on an after-tax basis, and includes the same items already identified on the previous charts. This gives us an adjusted EPS of $1.23 per share for the first quarter.

Page 19 provides the detailed reconciliation, firstly between the income from continuing operations before tax of $150 million to the normalized as adjusted profit before tax which is $108.1 million. And secondly, from reported income tax provision of $30.6 million to the normalized tax charge of that $36.6. This gives us an effective tax rate of about 24.4% in the quarter as I previously mentioned.

Page 20 provides a summary of our cash and debt position at March 31, 2012. As we discussed before, we issued a new tranche loan under our existing senior secured credit facility in the amount of $350 million, and use the proceeds plus cash on hand to redeem all of our outstanding senior subordinated notes, consisting of a euro denominated note in the amount of $250 million and a U.S. dollar denominated note in the amount of $200 million, unpaid accrued and unpaid interest and applicable redemption premiums.

Page 21 shows the long-term trend in Rockwood’s leverage ratio. We have continued to deleverage the company in accordance with our plan. And then finally page 22 presents our free cash flow as you can see, there was an outflow of $18 million in the first quarter, and this was primarily related to increased capital expenditures for our strategic growth programs and how you're working capital particularly in the TiO2 business.

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

Seifollah Ghasemi

Thank you very much, Bob. In summary, we did have an excellent first quarter and that is why it we continue to be optimistic about the performance of our businesses for the balance of the year.

Our Lithium business should see double digit growth and our new state-of-the-art facility for the production of lithium hydroxide in North Carolina should start commercial production in June.

Our ceramic hip joint business should continue its growth especially in the light of the recent health concerns about metal-to-metal hip joints. Our surface treatment businesses should continue to grow in the U.S. and the BRIC countries benefiting from our new production facilities.

So at this time, we will be delighted to answer any questions that you might have. Cathy?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Silke Keuck with JPMorgan. Go ahead, please.

Silke Keuck – JPMorgan

Good morning. How are you?

Seifollah Ghasemi

Good morning, Silke. We are fine and you?

Silke Keuck – JPMorgan

I’m doing okay. Can you quantify how large the lithium-ion battery piece is at this point, it’s like $100 million is it smaller or bigger than that?

Seifollah Ghasemi

Silke, we have indicated that our – we have approximately a business that – I’m a little bit hesitant because we usually don’t give those numbers out. But in order to answer your questions order of magnitude that business for us today on an annual basis is approximately $30 million and we expect that to grow significantly.

Silke Keuck – JPMorgan

So it’s $30 million battery grade related to automobiles or for all battery grade, I mean there is battery grade for electronics, and there is battery grade, I guess for auto batteries?

Seifollah Ghasemi

Battery grade for all lithium-ion applications.

Silke Keuck – JPMorgan

Okay. And the expansion, the lithium expansion you’re planning in Chile, does that involve any increase in flow rate for lithium probably pumping more (inaudible) out of the ground, or is it just that you have capabilities to process different grades of lithium?

Seifollah Ghasemi

Yeah, the new plants in Chile will produce lithium carbonate, and increase our capacity based on the flow rates that we have permit to do, which means that we do not need any additional permit to do what we plan to do.

Silke Keuck – JPMorgan

Okay. But your – in fact increasing production, you’re increasing the amount of lithium you’ve taken out of the solars?

Seifollah Ghasemi

Silke, there is a lot more than just quietly pump out of the ground because it also depends on how we run the solars and the efficiency of the solar and the rate of recovery. So this is very comfortable that we can double our production in Chile with what we have.

Silke Keuck – JPMorgan

Okay, may I try one last one, I’ll get back into queue. Can you talk again about what the restructuring charge relates to, I think it was somewhere like $40 million in the quarter. And I think you’ve spent $40 million in restructuring expenses for all of 2011. So what does this relate to and in which segment are you restructuring, and what are cost savings you expect?

Seifollah Ghasemi

I’ll have Bob answer that.

Robert J. Zatta

Yeah, I mean basically we had two charges in the quarter that I mentioned, the first one was related to the refinancing that we did on the senior sub notes. And then the second one, I think the one you’re referring to is related to the fact that we have separated our lithium and surface treatment businesses, and as a part of that we had to take a hit to our intangible assets because of the value that has been assigned to the chemical name associated with lithium business. So it’s a non-cash charge, and if you look at the intangible assets, you can see how that number is going to impact it.

Seifollah Ghasemi

That’s most of it, it’s just – as you know, Silke, we have changed the name of our Lithium business to Rockwood Lithium, and obviously then we had bought the business some value was assigned to the name Chemetall. We are not going to use the Chemetall – not to use the name Chemetall. So the accountants are saying, you have to write-off that. That is a non-cash charge, it’s just one side of the book to another side of the book.

Silke Keuck – JPMorgan

Okay. Thanks. I’ll get back into queue.

Seifollah Ghasemi

Thank you.

Operator

Thank you. Then we’ll go next to Mike Harrison with First Analysis.

Mike Harrison – First Analysis

Hi, good morning.

Seifollah Ghasemi

Good morning. How are you?

Mike Harrison – First Analysis

Doing well. Thank you. Seifi, I wanted to ask you about the TiO2 strategic options process, I understand you’ve secured somebody to look into that for you. Did they have any kind of a mandate in terms of the timing of that process, and is it reasonable to assume that, that process would be complete by year-end?

Seifi Ghasemi

We said that we have hired them to take a look at our strategic options, and I guess once they go through the details they would give us a sense of our options and timing. If we are talking about IPO, it obviously depends on the IPO market, and so and so. I don’t want to put a timing on it, Mike. But what we did want to tell you is that, we haven’t started the process.

Mike Harrison – First Analysis

Got it, all right. And on lithium with FMC going through with some disruption related to their capacity expansion in Argentina, are you guys seeing some temporary increases in lithium volumes that we might see go away once FMC is up and running with the new capacity?

Seifollah Ghasemi

I do not expect that because the market is growing pretty rapidly. As I told you, the demand for our product in first quarter was up 100% for battery grade. So I think that the market the growth should be able to observe that.

Mike Harrison – First Analysis

And the $30 million annual battery grade materials number that you provide for silicon, it sounds a little – it’s a lot smaller than I would have expected. Is that – does that not capture all of the materials that you end up supplying into lithium ion batteries?

Seifollah Ghasemi

I shouldn’t have given that number out, because now you are going to grill me. Our lithium business, you see the size of that, it consist of lithium carbonate, lithium hydroxide, butyllithium and specialties and all of that. The numbers that I gave you is specifically related to battery grade lithium for high-end batteries. That is what it is related, because that is the specific area that is going to grow. I mean it doesn’t include lithium carbonate that goes into melting aluminum or things like that and it doesn’t include low-end batteries, it is for high-end batteries.

Mike Harrison – First Analysis

If we included the lower-end battery spend that number would be…

Seifollah Ghasemi

Higher.

Mike Harrison – First Analysis

Substantially higher, okay. I was hoping that you could talk a little bit about what you’re seeing in the European automotive sector and maybe the broader European and German in particular industrial market as it relates to volumes in surface treatment and also in ceramics?

Seifollah Ghasemi

As you know, our exposure to auto in Germany is specifically on the high-end vehicles, and that market is continuing strongly and they do not see any see sign of slowdown. As far as Germany in total, our businesses are doing well there because most of the economy in Germany is driven by what Germany exports rather than what internal consumption is or orders from other countries in Europe for products from Germany. So as a result our businesses are doing fine, and we expect them to continue to do fine.

Mike Harrison – First Analysis

All right. And the last one I have now on TiO2, I think a lot of us might have been expecting to see higher raw material costs hit you in the first quarter for slag and for illuminate. Did the costs just not raise as much as you might have expected or did pricing more than offset the higher cost or is it maybe a case where we’re still seeing lower cost material flowing through the P&L and maybe we’ll see a sequential margin decline next quarter in that business?

Seifollah Ghasemi

Mike, you know our business very well. It’s a combination of all three of things that you said. It’s a combination of prices compenstating for higher cost, the cost are not high they were and we’re selling a sub part of the inventory, which was made from lower products. So it’s a combination of all three of them.

Mike Harrison – First Analysis

And as far as a sequential margin decline is something in the 30% EBITDA margin range, a reasonable estimate for the next quarter?

Seifollah Ghasemi

Mike, we have always said that our goal was to get the TiO2 business to a EBITDA margin of at least 25%. So I think that we will be able to deliver that, whether it’s going to be 28% or 30% or 32% in the next quarter, we have to see.

Mike Harrison – First Analysis

All right. Thanks very much, Seifi.

Seifollah Ghasemi

Thank you, Mike.

Operator

Our next question is from John McNulty with Credit Suisse.

John McNulty – Credit Suisse Securities

Yeah. Good morning. Just a couple of quick questions. With regard to the potash business that was essentially, I guess put on hold or put on the side while you are setting up the logistics for this. Can you walk us through the profitability of that type of a business because I guess my understanding is it’s pretty much just a derivative of your lithium production. So it doesn’t sound like there will necessarily be a lot of processing costs or anything like that. So how should we think about the profitability of that? And also in terms of the timing of when those sales start to come to the market, how should we think about the ramp up as to when you get the logistics in place?

Seifollah Ghasemi

First of all, good morning, John.

John McNulty – Credit Suisse Securities

Good morning.

Seifollah Ghasemi

That’s obviously a very good question. John, in potash we have disclosed that we sell approximately 150,000 to 175,000 tons of potash in a year. You obviously know what the market prices are, either selling well below the market price because the product was semi finished. We decided to finish that, put to facilities and that’s what we are going to do. And the potash as you know is something that doesn’t go back. So what we have made and not sold in the first quarter, we will sell it in the future. But in the future, I like to just stress that potash doesn’t go back.

So we are going to sell it when we think we can get the right price for it. So it’s very difficult to tell you how fast we will sell it, we will be very judicious in terms of when and how we sell that. The other thing is that in terms of profitability, obviously, it depends on how much of the cost you allocate to lithium, how much cost you allocate to potash. There is processing cost involved in terms of finishing the product, but the profitability is obviously very good.

John McNulty – Credit Suisse Securities

Okay.

Seifollah Ghasemi

I don’t want to give you a percentage.

John McNulty – Credit Suisse Securities

Great, thanks for the color on that. Second question, your balance sheet continues to get stronger, you’re generating – you should be generating some pretty solid cash flow throughout the year. In terms of uses of potash going forward, I guess how should we think about that, is there a possibility of maybe a dividend later on this year or share repurchase announcement or something like that?

Seifollah Ghasemi

Well, John, we have always said that, number one priority of our cash goes to get our leverage to around 1.5 times EBITDA, which – we are there already. The second thing was to invest in organic growth, which is what we’re doing in a big way and you’re well aware of the details. So after we do all of that and we still have some additional cash, then obviously, it would be appropriate that we would consider paying a dividend. We have not made a decision on that, we have not even discussed it at the Board level, but that would be a reasonable conclusion that at some point in time, when we feel comfortable with the cash. And we also feel comfortable about worldwide events that there is not going to be any kind of a discontinuity then we would give that serious consideration charge.

John McNulty – Credit Suisse Securities

Great. And then, I guess one last question just on the TiO2 front because there are so many moving parts between raw and pricing and even volumes. I guess how sequentially should we be thinking about the second quarter versus the first quarter in terms of operating income or EBITDA?

Seifollah Ghasemi

John, I think – the one think that I can tell you is that second quarter we will make more money than we did in the second quarter of last year. And because the reason I wanted to compare it to the second quarter of last year is because we do shutdown our plants in the second quarter for maintenance. So we always see an effect in the second quarter because we will shutdown the plants and there is obviously fixed cost absorption. So I’d like you to think that in the second quarter of this year we will make more money in TiO2 than second quarter of last year.

John McNulty – Credit Suisse Securities

Got it, okay. That’s great thanks very much.

Seifollah Ghasemi

Thank you.

Operator

Okay, then we’ll go next to James Finnerty with Citi.

James Finnerty – Citigroup Global Markets

Hi, just wanted to confirm on the potential sale of the business or the IPO, the proceeds would not be required to payback debt right? Your option to do with the proceeds as you seek that?

Seifollah Ghasemi

That is correct.

James Finnerty – Citigroup Global Markets

And longer term, given where your leverage is and given where your ratings have gone to, would you be looking to move to an unsecured capital structure at some point and transfer over into the investment grade space?

Seifollah Ghasemi

We are already, all of our debts right now is kind of the bank debt, and we would like to get investment grade too. Did I answer your question or?

James Finnerty – Citigroup Global Markets

Yeah, yeah, excellent.

Seifollah Ghasemi

Fairly.

James Finnerty – Citigroup Global Markets

Thank you.

Seifollah Ghasemi

Thank you.

Operator

Okay, then our next question is from Jeffrey Stafford with Morningstar.

Jeffrey Stafford – Morningstar Research

Hi, good morning, thanks so much for taking my question. I think in the past you had talked about potential debottlenecking projects for TiO2 may be coming online in 2012 and 2013. Are those plans still under work or has that changed considering your potential move to may be the [investor] IPO of the business?

Seifollah Ghasemi

Yeah, the debottling options that I had mentioned are not safe; it’s not going to increase our capacity by 20,000 tons. The de-bottling options related to about 4,000 or 5,000 in our plants, those projects are underway and there will be no change on them. We are committed to the TiO2 business. The TiO2 business is a good business and as long as we own it, we will treat it as if we are going to own it for a long-term. So we are totally committed to, we are not starting any changes because we hire somebody to tell us what our options are. So we will do what we have said we are going to do.

Jeffrey Stafford – Morningstar Research

Great. That’s all I have.

Seifollah Ghasemi

Thank you, sir.

Operator

We will then go next to Bob Koort with Goldman Sachs.

Robert A. Koort – Goldman Sachs & Co.

Thanks. Good morning, guys.

Seifollah Ghasemi

Good morning, Bob. How are you today?

Robert A. Koort – Goldman Sachs & Co.

I’m doing well. Seifi, I’m just curious when at the Board level and you had this decision around in separating this TiO2 business, is there a firm conviction that the value of Rockwood in aggregate is being punished or penalized because of that asset today?

Seifollah Ghasemi

No. Quite honestly that is what everybody is telling us. Because everybody is saying that as long as you own the TiO2 business, Rockwood will continue to be undervalued. We are very frustrated with the multiples that you we’re trading at which is 6.5, 7 times EBITDA as compared to our peers where we think business is as good, it’s not better than theirs. There we’re trading at 8.5, 9, 9.5 times. When we talk to investors, when we talk to our advisors everybody says that that is because peoples perception of TiO2 is that it is a commodity business and all of that.

Our TiO2 business is not a commodity business, it’s a specialty business, but I guess we have got into the stage that we figured out, and maybe if we separate the business then things will change that. I mean you are very right in your statement sir.

Robert A. Koort – Goldman Sachs & Co.

And you guys have spent $3 million or $4 million at the end of last year working on some TiO2 strategy. Can you just describe what was different there versus actually hiring a bank?

Seifollah Ghasemi

That was a lot of internal works that we’re doing and we were unofficially working with some people, but now we have decided to formally sign an engagement letter and get the people working.

Robert A. Koort – Goldman Sachs & Co.

Got it. And I would characterize your view on the construction related markets; it maybe a bit more somber than we are hearing from others who maybe have a larger vested interest. So are you just being conservative or there a few rays of, just glimmers of light out there or do you really think it’s not going to get much better for another 18 or 24 months?

Seifollah Ghasemi

Bob, I’m being conservative, yes.

Robert A. Koort – Goldman Sachs & Co.

Got you. And then the last one, can you give us some sense around the electric vehicle initiatives. How do you feel the moment is from a macro basis there, it seems like when I talk to investors, there was a lot more enthusiasm and excitement six to eight quarters ago; and just curious from somebody that’s on the ground, in the battlefield working on those projects and platforms; has there been any change in moment?

Seifollah Ghasemi

For the positive from what we see.

Robert A. Koort – Goldman Sachs & Co.

Terrific. Thanks, Seifi.

Seifollah Ghasemi

Thank you, Bob.

Operator

And we now have a question from Meryl Witmer with Eagle Capital.

Meryl Witmer – Eagle Capital Partners

Hi, thanks for taking my question. You have several capital spending projects that are in process, you have the lithium hydroxide in North Carolina, Surface Treatment facility and then the expansion of the lithium carbonate production in Chile. I’m wondering if there is a expected return that we should pencil in several years out or is this spending, replacing facilities that are just too old. How should we think about that, because it’s about matter of money going out the door?

Seifollah Ghasemi

First of all, good morning, Meryl.

Meryl Witmer – Eagle Capital Partners

Hi.

Seifollah Ghasemi

That’s a very good question. The investments that we have made in aggregate on the projects that you are talking about and including the $128 million we’re going to spend on building a plant in Georgia for our color pigment business. The return on those projects are close to 25%. So they are all very accretive.

Meryl Witmer – Eagle Capital Partners

Okay, now that’s fantastic news. And is that – when you look at that number, is that an EBITDA on investment or tax return?

Seifollah Ghasemi

It’s the EBITDA on investment.

Meryl Witmer – Eagle Capital Partners

Okay, great. Thank you very much. Great quarter.

Seifollah Ghasemi

Thank you. Thank you very much.

Operator

Your next question is from David Begleiter with Deutsche Bank.

David Begleiter – Deutsche Bank Securities Inc.

Good morning, Seifi.

Seifollah Ghasemi

Good morning, David. How are you?

David Begleiter – Deutsche Bank Securities Inc.

Good, thank you. Looking at TiO2 and potential sale, looking a tax basis, are the asset in the 10-K of about $903 million, is that your proxy for the tax basis of this business?

Seifollah Ghasemi

David, maybe we had structured this business, the tax leakage would be minimum.

David Begleiter – Deutsche Bank Securities Inc.

Very good. And I don’t want to discuses use of proceeds too much, but is there either way, either a sale or IPO for some cash to be returned to Rockwood for other purposes, i.e. would you lever up in IPO to take cash out before an offering?

Seifollah Ghasemi

That’s an option.

David Begleiter – Deutsche Bank Securities Inc.

Very good. And then looking at surface treatment business itself, how much hard did the margins go, it had a lot of improvement in the last six, seven years, is there a mid 20 potential in this business going forward?

Seifollah Ghasemi

David, that’s an excellent question because when we bought this business everybody was convinced that there is no way that you can push the EBITDA margin on that business beyond 14%, 15%, because you are supplying to this people and all of that. It has got into 20%. I can guarantee you that the goal of us and our management team is to get those margins to as high as possible, and some of that can happen, bit product mix change and all of that, but I do not want to get added myself, and say that we will do a lot better than 20%, because 20% considering for that business is a pretty good margin when you compare it our competitors. But we constantly work on improving margins, the new plants will help, but somewhere around 20%, 22% would be a number that we would like to say.

David Begleiter – Deutsche Bank Securities Inc.

Looking at the new plant in Michigan for that business, can you size potential revenue from that plant, and how long it will take to be loaded?

Seifollah Ghasemi

Yeah, we think the plant will be loaded very quickly, because one of the purposes of that plant was to shutdown some of our existing plants and get the cost benefit. So I expect that plant to be loaded pretty quickly.

David Begleiter – Deutsche Bank Securities Inc.

Very good. And just lastly on the TiO2 business, can you breakout the margin for the barium sulfate and zinc sulfide businesses, are they higher of lower than the core TiO2 business?

Seifollah Ghasemi

They are about the same. Right now they are a little bit lower than TiO2, but not too much.

David Begleiter – Deutsche Bank Securities Inc.

Thank you very much.

Seifollah Ghasemi

Thank you, David.

Operator

And we have Mike Harrison with First Analysis.

Mike Harrison – First Analysis

Hi, just a couple of little follow-up questions related to ceramics. First of all on the electronic side, you’ve referred to the use of ceramic materials for solar production. I was wondering what specifically are you making for them, and how much of ceramic segment sales would that application account for?

Seifollah Ghasemi

First of all Mike, what we make for them is that – when you have many solar panels, obviously solar panels generate electricity. Then you have to manage that electricity to semiconductors, right? Those semiconductors are mounted, they are high power semiconductors and they are mounted on a ceramic piece because that’s the only way you can – that’s the only material that takes the temperature. That is what we are providing there, and we saw a drop on that, because as you know there was a significant confusion in Germany about what they want to do about solar. And going forward, there was significant drop in volumes for the people who supply that, therefore, it affected our business. That is specifically what we do for them.

In terms of giving you a number, I’d rather not do that. But it’s not a huge part of our business, but it did affect our business quite a bit.

Mike Harrison – First Analysis

In terms of that market going forward, then as you alluded, a lot of that photovoltaic production has shifted out of Germany, out of Europe and into Asia. Are you able to serve those Asian markets through your facilities in Germany, or are you expecting that you will continue to maybe lose volume if your customers are declining in Germany, and you’re not taking up or commence in Asia?

Seifollah Ghasemi

Mike, what we supply there is a very high quality material, very few people in the world can make that. So I expect, another one I expect those volumes to come back in Germany in another two or three quarters and secondly on a worldwide basis, we are in a premier position.

Mike Harrison – First Analysis

All right. And then just looking at the margins in the lithium and the surface treatment segments kind of building on David’s question, those were both up year-over-year, but can you tell us, maybe give us a little of context, were those both record levels for margins?

Seifollah Ghasemi

In our surface treatment business, it was the highest, yes, it was record. In lithium, it’s not backward, but it’s not far from direct.

Mike Harrison – First Analysis

Okay. And may be a question for Bob, a couple questions for Bob, it looks like some of the specialty chemical segment sales ended up being reclassified into the corporate and other. What product lines were those and can you give us a sense of may be what the margin structure looks like for that business.

Robert J. Zatta

What we did basically was took the metal sulfides business out of specialty chemical. And actually that business now is reporting in corporate, so that’s why we made that change. It never was really a part of either of those two businesses, it was always managed separately, and reported that way. In 2011 and we’ll eventually disclose this is our (inaudible) anyway. So in 2011 the sales for metal sulfides was about a $138 million and the EBITDA was about $28 million. And that’s a very steady state business, its selling prices are driven from the London Metal Exchange, tin prices that type of things, so when prices go up or prices go down for the raw material, our selling prices go up or down. Our customer base is very steady and there is not a lot of other costs really associated with the little selling costs.

Seifollah Ghasemi

And that business Mike is, margins are between 20% to 25% depending on the year. And what we make there is various special materials which are used in breaking that [tax] for costs right.

Robert J. Zatta

And we have a premium market position on that.

Mike Harrison – First Analysis

And does the reclassification there just reflect that it doesn’t sit very well anywhere else or does it reflect that you view that business as non-core.

Robert J. Zatta

No, it’s, okay go ahead Seifi.

Seifollah Ghasemi

Usually when you have a business reporting to corporate means that is non-core, yes it is non-core for us.

Mike Harrison – First Analysis

All right. And then Bob, just in terms of the tax rate guidance going forward, I think we’re kind of at a 27% to 29% range for the year, and then you reported 24%, understand what’s going on with the valuation allowance, but can you give us any sense of where the tax, what a good number is for the tax rate?

Robert J. Zatta

Yeah. I mean, I had said at the last call the range of about 26% to 28%, and again that it would be 2 to 3 percentage points higher when we reverse the valuation allowance, which is something we’ll be obligated to do based on the accounting rule. I would think, until then we should probably be in the 25% range, because our all of our other businesses outside the U.S., average around 28%, that really doesn’t change more than a couple of tens of a percentage point from quarter-to-quarter.

But at the U.S. businesses, we generate more profits in the U.S., until we reverse the valuation allowance we’re getting the benefit of it, and that’s why you saw the lower rate via this quarter. So I would think around 25% would be a good number to work with in the next couple of quarters.

Mike Harrison – First Analysis

Okay. And in the interest expense relative to the 20-ish million, ex the special charges this quarter, does that drop to, I mean should we just subtract?

Robert J. Zatta

We basically are expecting about $61 million full-year cash interest for 2012.

Mike Harrison – First Analysis

And does the, there was always another like an amortization type non-cash interest expense. Does that...

Robert J. Zatta

No, the deferred financing charge is still, and I think in the first quarter we reported something like $1.3 million and that’s probably a pretty good number going forward to reach for the – because it’s related to the refinancing that we’ve just done last year and earlier this year. So we took some off as a result of the bonds, but we put some more back on, it’s just sort of strength that it came out to be the same number as it was last quarter, but that’s just what the figure will be.

Mike Harrison – First Analysis

Got it, thank you very much.

Seifollah Ghasemi

Thank you, Mike.

Operator

Thank you. (Operator Instructions) Okay, Mr. Ghasemi, we have no one else in queue.

Seifollah Ghasemi

Well, thank you very much, and thank you to everybody on the call. Thanks for taking the time, and we look forward to talking to you in another three months. All the best, thank you.

Operator

Thank you. And ladies and gentlemen, this conference will be available for replay after 1 PM today through midnight, Wednesday, May 9. You may access the AT&T Executive Playback service at any time by dialing 1-800-475-6701, and entering the access code 242666. International callers dial 320-365-3844 using the same access code, 242666.

Now it does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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