Rockwood Holdings Inc. Q4 2007 Earnings Call Transcript

| About: Rockwood Holdings, (ROC)

Rockwood Holdings Inc. (NYSE:ROC)

Q4 2007 Earnings Call

February 19, 2008 10:00 am ET

Executives

Seifi Ghasemi - Chairman & Chief Executive Officer

Timothy McKenna - Vice President, Investor Relations

Robert J. Zatta - Senior Vice President & CFO

Analysts

[Kostas Karithanos] - Goldman Sachs

[Surgay Nazmitah] - Lehman Brothers

David Begleiter - Deutsche Bank Securities

Michael Judd - Greenwich Consultants

Mark Gulley - Soleil Securities

Chris Shaw - UBS

William Matthews - Canyon Capital

Richard O’Reilly - Standard and Poor’s

Timothy McKenna

Good morning and welcome to Rockwood’s fourth quarter conference call. With us on the call as usual is Seifi Ghasemi, our chairman and chief executive and Bob Zatta, our chief financial officer who will present our results this morning. You can follow the presentation with the slides available on our website, www.rockwoodspecialties.com, and we’ll have a question and answer period following the presentation.

Before we begin I need to read the following statement. This conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the business operations and financial conditions of Rockwood Holdings, Inc. and its subsidiaries. Although Rockwood believes the expectation reflected in such forward-looking statements are based upon reasonable assumptions, there can be no assurance that the 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 the forward-looking statements due to numerous known and unknown risks and uncertainties including among other things risk factors described in our form 10-K on file with the Securities and Exchange Commission. We do not undertake any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. With that I’ll turn the call over to Seifi.

Seifi Ghasemi

Good morning everyone. This is Seifi Ghasemi. I would very much like to thank all of you for taking time from your busy schedule to join our conference call. I will follow for my presentation the material that we have posted on our website. Not the press release, but the presentation materials. If you’d be kind enough, I’d like you to go to page 6 of that presentation.

As you can see, I’m very, very pleased to report an excellent quarter and a very good year for Rockwood in 2007. In the fourth quarter we achieved a sales increase of 16.9% and an EBITDA increase of 20.6%. Even if you exclude the gain that we had from foreign exchange, our net sales was up 8.8% and our adjusted EBITDA was 11.3%. We generated a significant amount of free cash and as a result we have reduced our leverage ratio now total debt over EBITDA and net debt over EBITDA to about 3.56 ahead of our goal that we had set for ourselves. Our EBITDA was driven by the businesses that we have always been telling you will do well. There are specialty chemicals and advanced ceramic business. We did increase prices as we had planned. We improved productivity and as a result we’ve been able to achieve an EBITDA margin of 19.7% for the quarter. All in all, very good quarter.

If you go to page 7, I will not repeat all the numbers, but you’ll see that for all of 2007 sales are up 12.5%. EBITDA is up 18.6% and the most important thing is that we have achieved an EBITDA margin of 19.6% for the year which is a whole percentage point better than what we did in 2006 and our goal as we go forward is to maintain that margin for Rockwood.

On page 8 you again have the details of the numbers for the quarter and for the full year. I’ve already mentioned about the margins and the percentage increases. I’d like to point out to the earnings per share. Obviously the reported earnings per share is a lot because of the gain we had on electronics but adjusted earnings per share is $0.51 for the quarter and $1.87 for the whole year which is 33% improvement versus last year. In addition to all of this, we had a very strong year for generating cash. Bo b will go through the details of how we were able to generate more than $170 million of free cash after we have paid for capital expenditures, interest, and cash taxes. The key reason for our success and good performance, there are three key reasons. One, as we have always told you, Rockwood has a very diversified exposure to end markets so as a result weakness in one market like construction does not necessarily affect our total results. The second thing is that Rockwood, as we have said before, has a good geographic balance. 66% of our sales are outside the United States and obviously we benefited from that in 2007. The third reason is that the management team at Rockwood is very focused to take very quick action and make tactical and strategic moves to deal with a changing marketplace.

Now I go to page 9 [inaudible] our standard practice break down for you the growth in sales to what we achieved from pricing, currency, and volume. So you’ll see that for the fourth quarter total growth was 16.9%. 2.6% was pricing, 8.1% was currency, and volume and mix was 6.2%. Obviously you have the numbers for the full year. Very much in line with our targets.

On page 10 you have again the sales and EBITDA numbers for the different business units. Rather than taking the time on this page, I would like to make specific comments on each one of the business units. You will see that all in all we obviously had a very good performance so if I may, I will go to page 12 to start talking about our specialty chemical sector. This sector continues to grow and we have promised two years ago. The fourth quarter sales are up 21.5%; for the year, sales are up 17.9%. Our profitability for the quarter is up 25% and for the year 26.9%. Our business is continuing to benefit fro very strong volume and pricing in our [region] business and our surface treatment business did very well in 2007 on back of increased prices and increased volumes in most of the markets that they offer, especially in Europe. We continue to be optimistic about the performance of this business unit.

Our performance additives business performed very well versus last year. Sales for the quarter was up 23.9% and for the year it was up 8.7%. Our adjusted EBITDA was up 14.9% and for the year 17.5%. The key reason is that we did as we have discussed last year implement the price increases to compensate with the higher raw material costs and copper costs that we had incurred in 2006 and 2007. In addition to that, high volumes in our overseas applications for our clay-based additives helped the performance of this business. This business did suffer volume losses because of the slow down in the US housing sector but overall because of the actions that we have taken, our bottom line results are positive.

If I may now go on page 15, our titanium business. Our titanium business sales were up 6.3% on the quarter and 8% for the year but if you adjust for currency gain, sales were actually down 5% but we were able to maintain our profitability close to the way it has been before. We had mentioned to you that this business is under pressure because of the strong euro. American manufacturers of titanium can export materials to Europe and put pressure on pricing and sales making a reasonable profit. That situation still continues but although the business will be under pressure next year. [We expect that the extra actions we have taken will keep our margins and our profitability in this business.]

Page 16, our advanced ceramic business continued to do very well. Fourth quarter sales are up 13%, for the full year 16% and profitability was up 20.5% for the quarter and 22% for the year. The business continues to do well because of our improvement in our profitability in our putting tool business. Our medical products business is doing well. In addition the business has been very successful in implementing productivity programs that continues to benefit us. We continue to be optimistic about performance of this sector also.

Page 17, our specialty compound business continued to do well. You’ll see the numbers and this is despite the slow down in the construction in the United States. We had made an acquisition for this business that is proving to be very accretive and we are enjoying the benefits of the synergies with this business.

On page 18 we have for the sake of completeness included the results of our electronic business but as you know we sold this business to the OM Group at the end of 2007 so it is now a discontinued operation but overall the business did fine.

At this point I would like to turn this presentation over to Mr. Bob Zatta who will give you all the details of our financial performance and then I will come back to summarize.

Robert J. Zatta

Thank you Seifi and good morning everyone. I am on page 20 of the presentation. As Seifi has mentioned already, we did have strong results in the fourth quarter and full year both in continuing operations and including discontinued operations. We did benefit from foreign exchange but as Seifi has said, even excluding that benefit, we had sales growth of almost 9% and EBITDA growth of more than 11% in the fourth quarter and for the full year we had sales growth of 6.5% and EBITDA growth of 11.8% from continuing operations. The bottom half of page 20 provides the fourth quarter and full year net income and EPS on a reported and as adjusted basis. I will get into the details of that much more in a couple of charts. Pages 21 and page 22 provide results by segment for the quarter and year. As Seifi has covered this already, please turn to page 23 of the presentation.

Page 23 provides Rockwood’s fourth quarter and full year income statement. You can see operating income of $90.5 million in the fourth quarter which is 11% of sales and $382 million for the full year which is 12% of sales. Directly below operating income are the line items composing interest expense. For the quarter, interest expense totals $59.5 million and this was made up of cash interest of $40.1 million and non-cash deferred financing costs of $2.3 million combined this totals the $42.7 million. Then you have the $16.8 million non-cash impact of the mark to market adjustment on our interest rate swaps which convert variable rates to fixed rate debt. As interest rate expectations have declined, we have recorded a mark to market interest expense adjustment of $16.8 million on those swapped contracts. The $16.8 million plus the $42.7 million equals the $59.5 million of total net interest expense recorded on our income statement.

Directly below interest expense you have the FX loss of $3.5 million resulting from the mark to market adjustment of our euro-denominated debt. Following that is the income tax position of $7.7 million in the quarter for a reported tax rate of 28%. This rate is artificially low in the quarter, due mostly to several special items. The first is a tax accounting rule which requires us to allocate between continuing and discontinued operations certain operating losses of our US entities and thus results in a lower tax provision for our continuing operations. Second, our statutory tax rate reductions in Germany, Italy, and the UK which have resulted in a reduction to the accumulated tax provision in those countries in the fourth quarter. Although the impact in the fourth quarter is greater than the ongoing effect, these tax rate reductions will obviously help us lower our overall affected tax rate beginning in 2008. Thirdly, we were able to record a one-time reduction in our UK tax position due to the favorable resolution of a review of our UK capitalization structure. Taken together, these adjustments plus several other year end items return our fourth quarter tax rate to approximately 39% normalized rate. For the full year our reported tax rate is 41% and normalized is 41.7%.

Page 24 presents the reconciliation of net income to adjusted EBITDA. Beginning with the fourth quarter, net income of $119.1 million we have deducted income from discontinued operations, the tax provision of $7.7 million, minority interest of $1.7 million, interest expense of $60.6 million, interest income of $1.1 million, and depreciation and amortization of $59.3 million bringing us to the subtotal of $146.4 million. Beyond that we have made several one-time adjustments which are consistent with our normal practice. The biggest of these are the $3.5 million FX loss mentioned on the previous chart, $4.9 million non-recurring costs associated with the color pigments Elementis acquisition which is mostly the reversal of the inventory write up and $2.9 million of restructuring charges. This brings us to adjusted EBITDA for continuing operations in the fourth quarter of $159.2 million. We also show the fourth quarter EBITDA from electronics which brings us to the total EBITDA of $189.5 million. Then using the same approach for the full year results and adjusted EBITDA from continuing operations of $517.9 million and $553.2 million if we add back electronics.

Turning to page 25, page 25 provides the details on our earnings per share. The reconciles reported net income in EPS to adjusted net income in EPS. For the fourth quarter we have reduced the reported net income of $119.1 million by the gain on the sale of this continued operations, the mark to market impact of interest rate swaps, the FX lost on debt, the impact of the tax rate changes I mentioned earlier, as well as the tax allegation from discontinued operations, and several other items resulting in as adjusted net income of $39.4 million and EPS of $0.51. For the full year this becomes net income of $143 million and EPS of $1.87 per share.

Page 26 shows our actual cash and debt position at year end 2007. As you can see, we had net debt of $2.231 billion with a net debt leverage ration of 3.56 times. Page 27 shows our continuous progress in improving our net debt leverage ration in line with our targets and expectations.

Finally, page 28 shows our free cash flow for the quarter and full year. You can see that for the full year we generated free cash flow of $174 million which was in line with our expectations. This is a very strong result and translates to free cash flow yields of about 8%.

With that, Seifi, I will turn it back to you.

Seifi Ghasemi

Thank you very much, Bob. I would just like to go to page 30 please. As we move forward, we are committed to perform against the long term goals that we had delineated for you two years ago. That is, we are committed to grow our top line by 8%. We are committed to improved productivity. We are committed to maintain our margins of more than 19%. We expect 19.7% for 2008. Those have been our goals and we are determined to execute against those goals. On page 31 we have given you some of the key metrics for 2008 of things that we can predict which are our expected depreciation and amortization interest expenses, minority interest, tax rate, share count, and all of that to give you a guideline for estimating our performance in 2008.

But again, in closing, before we take the questions, I would like to say that I continue to be optimistic about the future of Rockwood because of three core strengths. First, very diversified exposure to end markets, number two, very good geographic balance by having 66% of our sales outside the United States, and number three, very focused, hard working management team who will take quick action to deal with any changes in the marketplace.

Thank you again, and at this time we will be more than happy to take any questions that you might have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of [Kostas Karithanos] with Goldman Sachs. Please go ahead.

[Kostas Karithanos] - Goldman Sachs

Good morning. Congratulations. Saifei, two quick questions. As you made your budgets for 2008, what are your assumptions for EU? Are you predicting any slow down on the horizon?

Seifi Ghasemi

We expect not a spectacular performance in EU. Kind of our plans are based on the fact that the economic activity in the European Union will be about maybe GDP of 1%, 1.5%.

[Kostas Karithanos] - Goldman Sachs

Okay and second question, if I remember correctly, and again correct if not, you increased prices for [inaudible] once a year to offset the copper costs. What are your plans for prices in 2008?

Seifi Ghasemi

We have already set our prices for 2008 and they have already [bought the cover] for 2008 so there is no risk there.

[Kostas Karithanos] - Goldman Sachs

Okay and finally a quick one if I can squeeze. Where are some of your organic growth opportunities that you will be using cash for in the near future?

Seifi Ghasemi

Our capital expenditure as we have reported to you is around $200 million a year. That is the money that we spend in order to promote organic growth in our specialty chemical business, in our advanced ceramic business, and in sections of our performance additive business. Those are our core businesses and we have been spending money to promote organic growth in all of those areas.

[Kostas Karithanos] - Goldman Sachs

Thanks a lot.

Operator

We will go next to [Surgay Nazmitah] with Lehman Brothers. Please go ahead.

[Surgay Nazmitah] - Lehman Brothers

Good morning. Just a follow up question on cash. Your free cash flow this year is expected to be about $225 million, that’s post CapEx. If you think about relative priorities beyond CapEx, what would those be?

Seifi Ghasemi

That’s a very good question. We do have $250 million of cash in hand and we expect to generate more than $200 million in 2008. Our priorities as we’ve previously said is number one organic growth. Number two is both on acquisitions. We will still have a lot of opportunities. We think actually that with the economic downturn asset prices have gone down. We are not facing as much competition from private equity as before. As a result we think it’s an opportunity to put our cash in use and to do some additional both on acquisitions which would be helpful.

[Surgay Nazmitah] - Lehman Brothers

Just to clarify, you’re comfortable with your debt level at this point, right?

Seifi Ghasemi

I think that we had set a goal for ourselves of taking our net [inaudible] EBITDA to 3.5. We are already there so that’s a correct statement.

[Surgay Nazmitah] - Lehman Brothers

Okay and lastly on leasing business, can I talk about the capacity increase for ’07 and ’08 and what kind of batteries do you see as a long term driver for this business? Hybrid cars and others?

Seifi Ghasemi

The demand for our lithium business in general is growing on the back of energy storage which obviously includes all kinds of secondary and primary batteries. The hybrid cars will be one of those. But don’t forget that the lithium business is also growing because we had invested in what we always call organic metallic in pharmaceuticals. That section of our specialty business is growing. Our [view to] lithium business is growing. Overall we are sold out in lithium and we do not plan any immediate expansions in 2008.

[Surgay Nazmitah] - Lehman Brothers

Okay, congratulations for good results again.

Operator

We will go next to Mike Harrison with First Analysis. Please go ahead.

Michael Harrison - First Analysis Corp.

Good morning, gentlemen. In the ceramic segment you had a medical customer, this was a couple months ago, receive a warning from the FDA regarding their ceramic hip joints that you provide components for. I assume that you’ve looked into this quite a bit but have you reached any conclusions on the impact that this might have on your medical ceramics business going forward?

Seifi Ghasemi

Mike, we have looked into that situation as you would expect us in detail. We are fully aware of that. There is no significant impact, actually no impact on Rockwood and we continue to supply that specific supplier that you mentioned with the material so we don’t see any impact on our business.

Michael Harrison - First Analysis Corp.

Okay and if I could, another question on ceramics. Excluding currency, your sales were only up 1.5%. You mentioned that volumes were up in cutting tools and medical. Can you talk about what was happening with pricing and with volumes in other parts of that business assuming that that 1.5% number also does include a benefit from a bolt on acquisition that you did last year.

Seifi Ghasemi

The key weaknesses in that business are electronics and the pricing of the automotive sector.

Michael Harrison - First Analysis Corp.

Okay and then a couple of questions on the timber treatment business. Can you give us some more details on the EcoVance product that you’re rolling out? Specifically I’m interested in what kind of a price point that will have relative to ACQ and other competing products and how the margins compare to ACQ?

On that one, as you know we have approval from the EPA and we are in the process of introducing that into the marketplace. We are very excited about that. We have always said that the real effect of that material in Rockwood would be in 2009 and 2010. In terms of pricing of that product, the way we are pricing it is that we are telling the customers t hat if they use that product their cost of treating wood would not change because you know you use different amounts of it and so on so if you’re saying that you are using ACQ and it costs you $X per housing cubic feet to treat your wood if you use the new product it would not cost you more, but then theoretically we would make more money because we would have a higher margin in that product.

Michael Harrison - First Analysis Corp.

So does it actually take less of the EcoVance product then? Kind of a pounds per board feet than it does ACQ?

Seifi Ghasemi

I’d rather not go into the details of describing that. What we are telling the customers is that the cost of treating wood would not change.

Michael Harrison - First Analysis Corp.

Okay and then last question is maybe for Bob. The special item that you called out as a foreign exchange loss on debt, can you explain what that is and why it’s being called out and maybe where it’s hitting in the P&L?

Robert J. Zatta

It’s basically the FX gain or loss on the euro denominated debt that we have and as you know it’s a non-cash item and with the exchange rate that we have. We typically will identify how much that is and show it accordingly.

Michael Harrison - First Analysis Corp.

Is this the first time you’ve called that out though as a special item?

Robert J. Zatta

We’ve done this every quarter we’ve ever reported.

Michael Harrison - First Analysis Corp.

Okay, maybe I’ll follow up with you later.

Robert J. Zatta

It’s in the other income and expense category.

Seifi Ghasemi

We have been consistent about this, Mike. I mean sometimes it’s positive, sometimes it’s negative, depending on how the exchange rate moves, but as it’s a non-cash, non-recurring item, we have typically done that.

Michael Harrison - First Analysis Corp.

All right. Thanks very much.

Operator

Thank you. Our next question is from David Begleiter with Deutsche Bank. Go ahead please.

David Begleiter - Deutsche Bank Securities

Thank you. Good morning, Seifi. On Lithium, Seifi, what’s your expectation for pricing in 2008?

Seifi Ghasemi

Our expectation is that prices will continue to go up.

David Begleiter - Deutsche Bank Securities

Is double digits a good forecast?

Seifi Ghasemi

Well I don’t want to be that specific because that’s kind of difficult to predict but I think that. it’s not appropriate for me on a conference call to make predictions about specific price increases, but we are sold out of our lithium products and we expect that prices for all of our lithium products will continue to grow, to increase.

David Begleiter - Deutsche Bank Securities

Understood, and just on [key IO2], anything you can do in that business to alleviate the pressure from the strong euro?

Seifi Ghasemi

Yes, we are doing several things in order to address that. Some of it is tactical which is short term in our facilities in terms of productivity and the kind of things that management does in order to deal with that kind of pressure. We are doing that. We are also involved in some strategic moves that I am not at liberty to talk about right now.

David Begleiter - Deutsche Bank Securities

Understood, and just on the hit from US housing and construction, can you quantify that impact in either Q4 and/or 2007 within your businesses?

Seifi Ghasemi

We have always said that our total exposure to construction in the United States is about $250 million a year of sale. Out of that about half of it is housing so it’s about $124 million of sales exposure. So if you assume that that sector has been down let’s say 20% so that is an exposure in sales on an annual basis of about $25 million, which at 20% will hit us in the bottom line of about $6 million or $7 million and that is our exposure. Obviously we’ve suffered from some of that in fourth quarter but you see that even with that, that sector did okay because again this goes back to the diversity of our portfolio there.

David Begleiter - Deutsche Bank Securities

Thank you very much.

Operator

Next we have Mike Judge with Greenwich Consultants. Please go ahead.

Michael Judd - Greenwich Consultants

Congratulations also on a good quarter. My question is on the acquisition side. What are some of the things that you are looking at? Obviously like you’ve said you’ve got a nice diversity of various types of businesses. Which businesses are you looking to to add onto and what types of things are you looking at?

Seifi Ghasemi

Mike first of all thanks for your comments about our performance. Secondly, we are right now after the portfolio moves that we made by selling the group [inaudible] and selling the electronics. We are focused on three sectors which is our specialty chemicals, pigments and additives, and advanced materials. We are right now looking at acquisitions for all of those three segments. There are possibilities in our specialty chemicals, not so much in the lithium business because of our market share but in our surface treatment there are opportunities. We are looking at opportunities in performance additives and we are looking up at our advanced ceramic. So those three sectors are the sectors that we are focused on and we will continue to make acquisitions in those sectors.

Michael Judd - Greenwich Consultants

Okay thank you and then just lastly, last year I guess in the December time frame or I guess most companies who are renegotiating contracts for the following year, you’ve obviously gone through the process of negotiating your annual contracts with suppliers and customers for 2008 and I’m just wondering if you could give us any update in terms of any significant changes.

Seifi Ghasemi

There hasn’t been any significant changes but I can report that there hasn’t been any significant negatives either. We continue to benefit from the good position that the customers, we have good products, and they are willing to renew their contracts and also they understand about some of our costs on a raw material basis and they have got an appropriate price for that so I’m actually very pleased with the results.

Michael Judd - Greenwich Consultants

Thanks for the help.

Operator

We have a question from Mark Gulley with Soleil Securities. Go ahead please.

Mark Gulley - Soleil Securities

Good morning guys. A couple questions. I also wanted to explore the pricing opportunity. If I take a look at the price increase for the full year, slide 9, it’s about $81 million. If I take a look at the businesses where I think you had pricing flexibility I would identify maybe a couple and when I calculate, Robert and Seifi, is that in those areas where you would seem to have pricing flexibility your prices might have been up low double digits. That would be in the lithium area and the timber treatment area. Is that about right?

Seifi Ghasemi

That is about right.

Mark Gulley - Soleil Securities

Okay. Further, it would appear as if there wasn’t a whole lot of cost push in those areas on a year-over-year basis. I look at the copper price slide and try to eyeball the average for the two years. It doesn’t look like that much so is it fair to say that $80 million or thereabouts of pricing pretty much dealt with the bottom line?

Seifi Ghasemi

No, that’s not fair. Our raw materials prices in 2007 increased by almost $60 million so out of that $80 million that you’re talking about, we benefited on the bottom line by maybe about $18 million or $19 million.

Mark Gulley - Soleil Securities

Got it. That’s very helpful. Secondly, is it possible, Seifi, you’re a little bit too modest on EBITDA margins? After all, you had a nice boost this year. I don’t see any terrific negatives that would pull you down in ’08 so is it possible you’re being a little bit too modest there?

Seifi Ghasemi

You mean as far as predicting 19.7% for next year?

Mark Gulley - Soleil Securities

Correct.

Seifi Ghasemi

Considering all of the headwinds that everybody is facing, I thought you would tell us that it would be optimistic about that but I don’t think we are being too pessimistic. There might be a possibility that we’d be able to do better than that which obviously we will try but we have gotten right now at 19.6%, probably one of the best performing specialty chemical companies in the world.

Mark Gulley - Soleil Securities

Then lastly for Robert I think, you’re justifiably proud of your free cash flow but are there any debt instruments that switch over to cash pay in the next couple of years where that free cash flow today might be a little bit artificially boosted or maybe answer the question more generally. If we’re sitting here one or two years from now and these instruments have switched to cash pay, what would that reduce your free cash flow by?

Robert J. Zatta

We actually have no debt instruments that would switch to cash pay. Everything that we’ve got is normal bonds or term debt which is pay as you go interest. The other thing I would say to you is that in terms of our amortizations, we don’t really have any major amortizations coming up until at least well out to 2012. For the next couple of years it’s relatively modest amount of amortizations in the kind of $70 million range which is what we’ve been experiencing the last several years so there’s really no fundamental change occurring in our debt structure that’s going to cause us to have any big outflow of cash in terms of our debt position.

Mark Gulley - Soleil Securities

Okay, that’s very helpful, thank you.

Operator

We will go next to Chris Shaw with UBS. Go ahead, please.

Chris Shaw - UBS

Hey, good morning guys. I want to follow up on something that Mark had. If you’re looking for 3% productivity gain in ’08 and flat margins, is that a 3% assumption of rising costs?

Seifi Ghasemi

Chris for some reason you are coming in very interrupted and there is a static so we couldn’t really hear your question, sorry about that.

Robert J. Zatta

Could you repeat that, Chris?

Chris Shaw - UBS

Yes, can you hear me now?

Seifi Ghasemi

We can hear you much better now.

Chris Shaw - UBS

Okay, sorry. I was just trying to follow up on Mark for a second, that if you have a 3% productivity gain for next year and flat margins, does that suggest you think your costs are going to go up 3%?

Seifi Ghasemi

Yes.

Chris Shaw - UBS

Okay and then I was curious, how much contribution was there from Elementis in the specialty chemical segment this quarter?

Robert J. Zatta

Very, very little. Insignificant amount.

Chris Shaw - UBS

When did that close again?

Robert J. Zatta

We had it for the full quarter. Since the end of August.

Chris Shaw - UBS

All right and then also, the pigments, the iron oxide pigment business, is that... You’ve mentioned I think in the write off that it wouldn’t be here because of construction in the US market but I got the feeling that was a little more commercially exposed then residential versus the timber part.

Seifi Ghasemi

It’s about 50-50.

Chris Shaw - UBS

It is also 50-50?

Seifi Ghasemi

Yes, it is.

Chris Shaw - UBS

Okay. That explains that and then I guess just finally I think in your surface treatment comment you spoke of strength in the Europe auto and industrial market which was a little surprising. Is that specific to surface treatment you think or is the overall European market still strong in auto and industrial? What are you guys seeing there right now?

Seifi Ghasemi

It’s due to something that we don’t want to brag about too much but we have gained market share.

Chris Shaw - UBS

Oh, that’s a good answer t hen. That’s good then and is all my questions. Thanks guys.

Operator

Your next question is from William Matthews with Canyon Capital. Go ahead, please.

William Matthews - Canyon Capital

Hey guys. I’m trying to understand the 5% organic growth guidance, if maybe you could give us a break out. How much more weakness can we see related to North American construction and potentially weakness in the TI02 business? So you’ve gone through the North American a little bit but I’m trying to understand, is 5% an aggregate, what kind of weakness does that imply in performance additives and titanium dioxide?

Seifi Ghasemi

Thank you for asking the question because it gives me the opportunity to make one thing very clear. The numbers that we have over there for you are not guidance. We don’t give guidance. The numbers over there are the goals that we have set for Rockwood for the long term. So some years it could be more, some years it will be less. I just want to make sure that we are very clear on that.

In terms of organic growth in 2008, there is obviously weakness in the construction in the US. I have already mentioned about how much our exposure is to that which is not a lot but we expect to grow volumes based on introduction of new products and based on gradual market share in some of our businesses. So sometimes even if the GDP is not growing, we would grow faster than GDP. Overall our portfolio has the potential of organic growth of 1 ½ times GDP in the areas that we operate. You’ll see for example in some quarters our organic growth is significantly higher than GDP’s but that’s with nature of some of our products but overall I just want to make sure that you see on that page when we say 5% organic growth, 2% acquisitions, that’s the 8% goal we have set for Rockwood. Some years the 5% will be less and the acquisitions will be more and vice versa.

William Matthews - Canyon Capital

That’s great, thank you.

Operator

Thank you. (Operator Instructions) We do have a follow up from Mike Harrison with First Analysis. Go ahead please.

Michael Harrison - First Analysis Corp.

Hi, just a clarification question. Did you say that there was no significant impact from Elementis on the top line?

Seifi Ghasemi

On the earnings line.

Michael Harrison - First Analysis Corp.

On the earnings line.

Seifi Ghasemi

On the bottom line.

Michael Harrison - First Analysis Corp.

Can you tell me what the impact was on the top line?

Seifi Ghasemi

On the top line we have told you that Elementis had sales of about $175 million a year so if you divide it by four the top line would be about $35 million or $40 million.

Michael Harrison - First Analysis Corp.

And that was in line with what you saw?

Seifi Ghasemi

Yes.

Michael Harrison - First Analysis Corp.

Okay and then a question on the lithium business. I was wondering if you could give us an update, Seifi, on how the introduction of the direct chloride process is rolling out at your production facilities?

Seifi Ghasemi

Mike, you know a little bit too much about our business, I thought that we were trying to keep that very quiet because that’s obviously a significant competitive advantage that we didn’t want to talk about.

Michael Harrison - First Analysis Corp.

It was something that you mentioned at your analyst day so I thought --

Seifi Ghasemi

Congratulations, well you know very well we are obviously benefiting from that. That is helping us improve the margin in our lithium business because it’s reducing our costs. It has been a very smooth and very successful transition and I congratulate the technical team and all the business to be able to pull that off. That is a significant competitive advantage that we have now.

Michael Harrison - First Analysis Corp.

Thanks very much.

Operator

We also have a follow up from [Kostas Karithanos]. Please go ahead.

[Kostas Karithanos] - Goldman Sachs

Two quick questions if I may. One, I don’t know if you touched on it, titanium dioxide, are you still trying to pursue other assets? And the second question that I have is if you can please give us a little bit more color on those productivity programs that you are implementing in 2008? Thanks.

Seifi Ghasemi

Sure. In pursuing other assets, I don’t think it’s appropriate for me to kind of make a comment. If we do anything, we’ll let you know. As far as the productivity programs, there are significant productivity programs that our people have put in place. Number one is in terms of the yield, in terms of output of the plant or the unit of raw material that you put in, you improve the yield, you improve your costs. The second thing is that they have taken action in reducing significant SG&A. They have had to unfortunately had to lay off some people in the facility. Watching every penny of the cost. People have done a very good job to maintain our business. We are having a business that is operating at the margin of close to 19% versus the rest of the industry which is basically losing money right now. So those are the kind of things we have done.

Operator

Was that all, Mr. [Karithanos]?

[Kostas Karithanos] - Goldman Sachs

Thanks.

Operator

Thank you. We also have a follow up from Mark Gulley. Please go ahead.

Mark Gulley - Soleil Securities

I want to follow up on the question I had regarding pricing. You know in ’07 with respect to those key areas, would your expectation be you can enjoy double digit price increase again this year in lithium and in the timber treatment area?

Seifi Ghasemi

I think I mentioned that we do not expect double digit price increases in those areas. If you look at last year, I think one of the gentlemen who asked the question went through that, that if you really do the calculation you’ll see that we enjoyed price increases in those sectors that you are mentioning less than double digits last year and we expect that it would be in the high teens but not double digits.

Mark Gulley - Soleil Securities

It sounds like you’re sold out on lithium and yet you alluded to the fact that you had no capacity expansion plans for this year. What are you doing to take advantage then of the favorable supply/demand situation of lithium?

Seifi Ghasemi

The thing is that we do the capacity expansions, Mark, in a step by step and as you well know, then you built upon, it increases your capacity. You can’t increase your capacity 1% a year. You either increase it 20% or you don’t increase it at all. We had increased our capacity in 2006 and 2007 so now we are taking a pause to make sure that everything is in order before we take the next step.

Mark Gulley - Soleil Securities

And following up then, if you decided to expand upon capacity, would it be a couple of years before the evaporation took place that would allow you to harvest that product? How long would that take?’

Seifi Ghasemi

About a year and a half.

Mark Gulley - Soleil Securities

Okay. So are you contemplating any pond expansions of a material nature at this juncture?

Seifi Ghasemi

No we are not..

Mark Gulley - Soleil Securities

Thank you.

Operator

We have a question from Chris Shaw with UBS. Please go ahead.

Chris Shaw - UBS

On titanium dioxide, I guess with the rising price of cotton, are you guys seeing any more greater demand for your product? Is there still a relationship there?

Chris Shaw - UBS

Chris, the [TI2] business in Europe right now, the situation is that you have the slow down in the US, therefore the US producers have extra capacity. The euro is at $1.47 so they can put this stuff on a ship, go and sell it for ridiculous prices and still a decent profit margin in US dollars over their cash costs. So they are basically, there is no better word for it, they are dumping this stuff in Europe. If there was any kind of a... You cannot actually go and accuse these people of dumping but that’s exactly what they are doing, but you cannot say they are dumping because they are still I think making more money than their cash costs, so they are not selling below their cash cost. But that is putting the pricing in Europe under significant pressure. We are not getting hit as much as the other people because as you know, most of our business is [inaudible] which is farther and we sell that into the markets in China and the Far East and on that you have a special product, we enjoy special pricing on all of that. But the rest of our business which is [lutei] is under significant pressure and that is why the other [CR2] producers in Europe are suffering in a significant way.

Chris Shaw - UBS

Has the [anatosha] seen any better demand because of the higher cotton prices? Is that still in affect?

Seifi Ghasemi

The [anatosha] demand has been very much a steady. We haven’t seen a significant increase or a significant decrease.

Chris Shaw - UBS

Okay, thanks a lot.

Operator

We also have a question from Richard O’Reilly with Standard and Poor’s. Go ahead please.

Richard O’Reilly - Standard and Poor’s

Thank you. Good morning, gentlemen, sorry for the late question. I was going to ask you to go over the tax rate changes that you had discussed. The press release and slide show numbers and I’m not sure if they’re corresponding to what you had talked about.

Robert J. Zatta

Basically the tax rate change in the fourth quarter as I said was impacted by several specific items. If you look at page 25 of the presentation for example you can see the ones that I was specifically referring to, the $9.1 million and the $7.1 million. We identified those in the press release and we show them here as basically adjustments to our reported EPS and there’s really deductions and the reason for that is because if you look at our fourth quarter, the reported tax rate was as I said artificially low relative to what a normalized tax rate would be. We have been telling people and reporting for the last three quarters a tax rate of around 41% or 42%. In the fourth quarter it came down specifically because of these three items and as well as just normal fourth quarter [true] ups. So in other words when you look a the normalized rate of about 39% for the quarter, there was probably a percentage point of true ups that probably if, it’s just the normal way you do it, that you could have probably said you would have done some of that in the first three quarters, so that’s why I come back to for the full year looking at the effective tax rate of around 41% or 42% for the year. Going forward, we will in fact benefit from the tax rate changes in those three countries I mentioned. In the fourth quarter what we had to do because the tax rate takes effect the first of January this year, so you had to look at your provisions in the fourth quarter of ’07 and you had to sort of adjust them down to reflect the tax rate that you are going to have going forward, so you had a one-time benefit in the quarter which we’ve adjusted out, but going forward they will help us which is why from a 2009 standpoint Safei ’s chart indicated that we were looking at a 40% tax rate next year. That would be one reason for it. The other items are really just a complex tax structure that we’ve talked about. We try to lay these numbers out as best we can to show what the individual impacts are.

Richard O’Reilly - Standard and Poor’s

Okay. The press release talks about a $9 million charge from the US. Is that a deferred tax asset?

Robert J. Zatta

That’s a prior year charge.

Richard O’Reilly - Standard and Poor’s

Oh, I’m sorry, I mis-read that. Thank you then.

Operator

We do have a follow up now from the line of David Begleiter. Please go ahead.

David Begleiter - Deutsche Bank Securities

Thank you. Bob, why the decrease in D&A in 208?

Robert J. Zatta

You know there’s two reasons for it, Dave. The first one, the main reason is the inclusion of Elementis. So we do have to pick up the D&A on Elementis and then the other one is... As we look at the rates, the FX rates, it does have some impact on the balance sheet assets. There’s really nothing else going on other than those two factors.

David Begleiter - Deutsche Bank Securities

Thank you.

Operator

Thank you and gentlemen we have no further questions. Please go ahead with any closing remarks.

Seifi Ghasemi

I just want to thank everybody for their participation and for the very good questions which helped us to clarify a lot of things. We look forward to talking to everybody during the course of the next quarter and obviously look forward to reporting our results on April 30th for our first quarter. Once again, thank you everybody.

Operator

Thank you, and ladies and gentlemen, this conference will be available for replay after 12 pm today through midnight, Tuesday, February 25th. Domestic callers may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 896164. International callers dial 320-365-3844 using the same access code, 896164. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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