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Article by DailyStocks_admin    (09-08-08 06:04 AM)

Rockwood Holdings Inc. CEO Ghasemi Seifi bought 15000 shares on 9-04-2008 at $33.66

BUSINESS OVERVIEW

General



Rockwood is a global developer, manufacturer and marketer of high value-added specialty chemicals and advanced materials used for industrial and commercial purposes. Rockwood was incorporated in Delaware in September 2000 in connection with an acquisition of certain assets, stock and businesses from Laporte plc (“Laporte”) on November 20, 2000 (the “KKR Acquisition”) by affiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”). The businesses acquired focused on specialty compounds, iron-oxide pigments, timber-treatment chemicals, clay-based additives, pool and spa chemicals, and electronic chemicals in semiconductors and printed circuit boards.



On July 31, 2004, we acquired the specialty chemicals and advanced materials businesses of Dynamit Nobel (the “Dynamit Nobel Acquisition”), which focused on titanium dioxide pigments, surface treatment and lithium chemicals and advanced ceramics. Through this acquisition, we created a further diversified portfolio of distinct specialty chemicals and advanced materials businesses, combining two companies with similar service-driven cultures focused on high margins; expertise in inorganic chemistry; stable profitability; growth platforms; and proven management teams. In addition, we believe the Dynamit Nobel Acquisition bolstered our leading competitive positions by enhancing our ability to develop innovative products and solutions for our customers, expanding our technological knowledge and further reducing our exposure to any particular raw material or end-use market.



On January 9, 2007, we completed the sale of our Groupe Novasep subsidiary, which focused on the custom synthesis and production of active ingredients for pharmaceuticals and the development of purifications solutions. On December 31, 2007, we completed the sale of our Electronics business, excluding our European wafer reclaim business. In the financial statements contained herein, the Groupe Novasep subsidiary and the Electronics business sold are presented as discontinued operations. The European wafer reclaim business retained is included in the “Corporate and other” category for segment reporting purposes. Prior period financial statements have been reclassified to reflect discontinued operations for all periods presented. The Groupe Novasep subsidiary and the Electronics business, including the wafer reclaim business, represented two of our reportable segments. See Note 2, “Discontinued Operations,” for further details.

Our products consist primarily of inorganic chemicals and solutions and engineered materials. They are often customized to meet the complex needs of our customers and to enhance the value of their end products by improving performance, providing essential product attributes, lowering costs and/or making them more environmentally friendly. We generally compete in niche markets in a wide range of end-use markets, including metal treatment and general industry, automotive, construction, chemicals and plastics, electronics and telecommunications, and life sciences (including pharmaceutical and medical markets). No single end-use market accounted for more than 16% of our 2007 net sales.



We have a number of growth businesses, which are complemented by a diverse portfolio of businesses that historically have generated stable revenues. Our high margins, strong cash flow generation, capital discipline and ongoing productivity improvements provide us with a platform to capitalize on market growth opportunities.



We operate globally, manufacturing our products in 91 facilities in 25 countries and selling our products and providing our services to more than 60,000 customers, including some of the world’s preeminent companies. We believe our products are generally critical to our customers’ products’ performance, but account for a small percentage of the total cost of their products. No single customer accounted for more than 2% of our 2007 net sales. For a geographic description of the origin of our net sales and location of our long-lived assets, see Note 4, “Segment Information,” in the accompanying consolidated financial statements.



On August 22, 2005, we completed an initial public offering (“IPO”) of 23,469,387 shares of our common stock, which included 3,061,224 shares issued and sold as a result of the underwriters’ exercise of the over-allotment option. Net proceeds of approximately $435.7 million were primarily used to reduce indebtedness.



On November 16, 2007, funds affiliated with KKR and DLJ Merchant Banking Partners III, L.P. (“DLJMB”) and certain management stockholders sold an aggregate of 10 million shares of our common stock. On December 7, 2007, these stockholders sold an additional aggregate of 125,915 shares of common stock as a result of the underwriters’ partial exercise of the over-allotment option. Prior to this offering, affiliates of KKR owned approximately 50.9% of our common stock on an undiluted basis. As a result of this offering, effective November 16, 2007, affiliates of KKR control less than a majority of the voting power of our outstanding common stock and as a result, we are no longer considered a “controlled company” under New York Stock Exchange (“NYSE”) rules.

Diverse Customer and End-Use Market Base. We operate a diverse portfolio of distinct specialty chemicals and advanced materials businesses. We have more than 60,000 customers worldwide that cover a wide variety of industries and geographic areas. Of our 2007 net sales, 52% were shipments to Europe, 31% to North America (predominantly the United States) and 17% to the rest of the world. No customer accounted for more than 2% of such net sales, and our top ten customers represented only approximately 8% of such net sales. Our largest end-use market represented approximately 16% of such net sales.

Within these end-use markets, there is further diversification by sector, product and region. For example, within the construction end-use market, our Performance Additives segment companies provide materials for new construction as well as companies that focus on remodeling and renovation. In addition, we serve construction materials clients in both the residential and commercial sectors located in North America, Europe and Asia. Within the life sciences end-use market, we serve a number of sectors, including: the medical applications sector through our Specialty Compounds and Advanced Ceramics segments, and the pharmaceutical sector through our Specialty Chemicals segment.



Our Business Strategy



We plan to grow revenue and increase cash flow and profitability by capitalizing on expected market growth opportunities in segments such as specialty chemicals, where we expect increased demand for longer life lithium-based batteries to fuel growth, and advanced ceramics, where we believe there is a growing trend toward replacing plastics and metals with high-performance ceramics. We intend to focus on our core businesses that have leading market positions, growth opportunities and higher margins, and divest those businesses which do not fit our long-term strategies. For example, in 2007 we divested our Groupe Novasep segment and our Electronics business, excluding our European wafer reclaim business. We will also continue to selectively pursue cash flow accretive acquisitions and strategic alliances in order to strengthen our existing business lines and enter into complementary business lines. In 2007, we formed a joint venture with Rohm and Haas Company enabling us to introduce the next generation of wood preservatives, and also acquired the global color pigments business of Elementis plc.



Operating Segments



The following describes each of our operating segments, as well as the principal products or principal divisions within each segment.



Specialty Chemicals (35 % of 2007 net sales )



Our Specialty Chemicals segment operates under the Chemetall brand name and develops and manufactures metal surface treatment products and services, lithium chemicals and fine chemicals for a wide range of industries and end markets. This segment is comprised of two business lines: (1) Surface Treatment, which supplies surface treatment products and solutions for metal processing industries; and (2) Fine Chemicals, which supplies lithium products across the entire value chain from raw materials to specialty lithium compounds and advanced metal-based specialty chemicals to niche markets. Our Specialty Chemicals segment generated net sales of $1,082.9 million, $918.3 million and $842.0 million for the years ended December 31, 2007, 2006 and 2005, respectively. See Note 4, “Segment Information,” for additional financial information regarding our Specialty Chemicals segment.

Surface Treatment



We believe that our Surface Treatment business line is a leading global supplier of surface treatment products and solutions. Surface Treatment’s products are used for a variety of applications and serve the automotive, aerospace and general industrial markets, including steel and metal-working industries. This business line supplies more than 5,000 different products, many of which are based on proprietary formulations and extensive application know-how, to over 50,000 customers and operates in different locations for either production or research and development in over 20 countries. Surface Treatment operates in the following core end-markets: Automotive Technologies, Automotive Components, Cold Forming and Coil Coating, General Industry and Aerospace Technologies.



In Surface Treatment, we develop and supply products and solutions for the chemical pre-treatment of metals and other substrates, some of which are customized for individual customers and applications. Our products and solutions are critical to many areas of the metal processing industry because they protect metals from corrosion, facilitate forming and machining, allow parts to be processed in a clean and grease-free environment and ensure good coating adhesion. Other products are used in the cleaning and maintenance of aircraft. As an integrated part of the business, we also offer a full range of customer services, including process control and analysis of chemical baths at clients’ facilities.



Surface Treatment competes in markets characterized by significant barriers to entry, proprietary manufacturing technologies and know-how, demanding product-handling requirements, rigorous product quality and performance standards and specifications and longstanding service-intensive customer relationships. In order to remain competitive, we are focused on developing new products, improving process technologies, expanding our customer base and broadening our technology capabilities in existing and new markets through internal research and development and bolt-on acquisitions. For example, in 2007, we increased our marketing efforts in Eastern Europe and Asia (especially in China), incorporated a new company to supply the Russian market beginning in 2008 and further developed and introduced to the market chrome-free technology in the area of thin organic coating. In December 2007, we acquired a business focused on the pretreatment of metal surfaces for customers primarily in the coil market. We currently have joint ventures and subsidiaries across Asia, which we believe will provide us with the opportunities to further penetrate these high growth regions.



The core-end markets that Surface Treatment operates in are as follows:



Automotive Technologies. We provide surface treatment products and solutions for automotive original equipment manufacturers (“OEM”), including an entire range of products and services for use in the “paint shop” step of car-body manufacture. The products and services we provide typically represent a low percentage of total car body production costs, but have high value in terms of corrosion protection and surface quality. Major applications include car body treatment (zinc-phosphating) and paint coagulation. Our services typically include intensive process control and chemical management in the customer’s production processes.



Automotive Components. We offer cleaning and pre-treatment products and services to automotive parts manufacturers for use in the making of automotive parts, such as axles, seats and other metal components. We believe that products for the treatment of steel and aluminum wheels, including a new generation of products based on self-assembling molecules, represent an attractive growth area in this market.



Cold Forming and Coil Coating. We provide products and services used to facilitate the cold forming of tubes, wire drawing and cold extrusion of metal. We provide products and services used in forming, cleaning and pre-treating metal sheets used in the production of steel and aluminum coil.



General Industry. General industry includes the largest number of customers among the Surface Treatment businesses. We offer a range of products and services to a broad range of industrial end-markets that have metal surface treatment applications, including cleaning, activation, conversion coating and final rinsing. Our products include cleaners, iron phosphates, coolants, paint strippers and flocculants. Over the last two years, we have introduced a new generation of iron-phosphating products in the U.S. market, which we expect will provide growth in the next few years, and began offering silane or oxsilan-based systems. The markets in general industry include household appliances manufacturing, can producers, heating, ventilation, aluminum finishing and other diverse end-markets.



Aerospace Technologies. We provide products and services for aerospace OEMs, airlines and maintenance companies. Aerospace Technologies focuses on four major application areas: cleaning; corrosion protection; maintenance chemicals; and sealants. Cleaning products, including our Ardox products, are used for the interior and exterior cleaning of airplanes and range from daily cleaning to complete aircraft overhaul. Corrosion protection products include waxes used to protect airframes. Maintenance chemicals for aircraft engines and turbines include high performance cleaners and products for non-destructive testing of engines, while aircraft sealants provide high technology sealing solutions for airplanes and are expected to contribute significantly to growth in the next few years. In 2006, we introduced further variances of low-density sealants in the market place. This strategy was expanded in 2007. In addition, we produce specialty products, which are similar to metal surface treatment products, but are used on the glass substrates for glass manufacturers, including specialty cleaners, polishing products, cutting oils and cooling lubricants.



Competition



We believe that the top five competitors in the global metal surface treatment market held an estimated market share of more than 50% in 2007. We believe that Henkel Surface Technologies is the global market leader, followed by us. The remaining main competitors include Nihon Parkerizing, PPG and Nippon Paint Co., Ltd. Competition in this market is based primarily on customer

service, product quality and technological capabilities.



Customers



Surface Treatment serves a large customer base that is dependent on the industry served and its specific customer needs. Surface Treatment’s largest customers include Daimler AG, RNUR (Renault), Arcelor and Volkswagen AG. The composition of the customer base varies widely among product groups and industries served. Automotive Technologies business division serves approximately 20 customers, primarily global OEMs, and the Automotive Components business division serves approximately 500 small to large customers. Cold Forming and Coil Coating business division serves approximately 800 mid-size to large customers and the General Industry business division serves approximately 45,000 small to large customers in a broad range of industries worldwide. Aerospace Technologies business division serves approximately 4,200 small to large customers worldwide.



Fine Chemicals



Our Fine Chemicals business line consists of our lithium, special metals and metal sulfides product lines. We believe that our Fine Chemicals business line is the leading global producer of basic and specialty lithium compounds and chemicals and advanced metal-based specialty chemicals.



Fine Chemicals develops and manufactures a broad range of basic lithium compounds, including lithium carbonate, lithium hydroxide, lithium nitrate, lithium chloride, and value added lithium specialties and reagents, including butyllithium and lithium aluminum hydride. Lithium is a key component in products and processes used in a variety of applications and industries, which range from lithium batteries, high performance greases, thermoplastic elastomers for car tires, rubber soles and plastic bottles to intermediates in the pharmaceutical industry. In our Fine Chemicals business, we operate our lithium business along the following four business divisions reflecting its core end-markets: (1) Specialities; (2) Lithium Salts; (3) Elastomers; and (4) Electronics.



In addition to developing and supplying lithium compounds, we provide technical service, including training of customers’ employees, for handling reactive lithium products. We also offer our customers recycling services for lithium containing by-products resulting from synthesis with organolithium products, lithium metal and other reagents. We plan to continue to focus on the development of new products and applications. Currently, we are in the process of developing lithium compounds for several near- to medium term, new and potentially high growth products for applications such as fuel cells, batteries for electric vehicles or lithium-aluminum alloys.



Fine Chemicals also develops and manufactures advanced metal-based specialty chemicals along two business divisions based on its principal product groups: (1) Metal Sulfides, which develops and manufactures natural and synthetic metal sulfides used in brake pads and clutch facings and cutting and grinding wheels and (2) Special Metals, which develops and manufactures cesium products for the chemical and pharmaceutical industries and zirconium, barium and titanium products for various pyrotechnical applications including airbag igniters. Currently, we are a major supplier of natural and synthetic metal sulfides for use in friction materials. In addition, we hold several key patents, which, we believe, gives us a competitive advantage in the fast growing synthetic metal sulfides market. Fine Chemicals is also a major commercial producer of certain cesium compounds, which are used for X-ray image intensifiers and displays for digital X-ray technology. In order to further strengthen our competitive position in the metal-based specialty chemicals market, we are focused on the production of new variations of synthetic metal sulfides, and new cesium products for organic synthesis. We also continuously monitor our customers’ industries for potential new applications for our products. In addition, we plan to expand our business by penetrating growth areas such as the United States and Asia.



We believe that demand for synthetic metal sulfides will increase further in the future as a result of the continuing substitution for asbestos-based friction linings, transition from natural sulfides to synthetic sulfides spurred in part by environmental concerns and the transition from drum to disk brakes in Asia and the Americas. We also believe that the market for cesium compounds will grow as a result of new applications being developed in the chemicals industry, the pharmaceutical industry, the defense industry and for use in catalytic applications. As a result of our competitive strengths as a supplier of cesium products for established markets, we believe we are well positioned to take advantage of this market trend.



Principal Business Divisions



Lithium



Specialities. We develop and manufacture lithium compounds and other products for life science applications, such as special reagents for the synthesis of drug intermediates as well as for the flavor and fragrances industry. The two principal lithium products are butyllithium and lithium aluminum hydride, in which we believe we have leading market positions. We also produce various other compounds which include lithium metal, grignard reagents and alkoxides. Our research and development team often works closely together with research and development departments of pharmaceutical companies, especially in the European market in order to develop products and solutions tailored for the customers’ needs. In addition, broad variations of our specialities are designed to produce liquid crystals for flat screens.

Lithium Salts. We develop and manufacture basic lithium compounds, which serve a wide range of industries and applications. Our products include (1) lithium carbonate, which is used as a fluxing agent for enamels, glass and ceramic production to lower process temperature in aluminum electrolysis, and as a cement additive for construction applications; (2) lithium hydroxide, which is principally used in high performance greases for automotive and industrial applications; (3) lithium nitrate, which is principally used in the rubber industry and (4) lithium chloride, which is principally used in gas and air treatment.



Elastomers. We develop and manufacture high-technology lithium compounds for use in rubber and elastomer applications. Our main product, butyllithium, is used as a polymerization initiator for synthetic rubber and thermoplastic elastomers. Generally, these products require a high degree of handling, transport and application know-how and customer service due to their high reactivity. We benefit from being a major supplier with butyllithium manufacturing facilities in the United States, Germany and Taiwan.



Electronics. We develop and manufacture lithium products for electronic applications, mainly for the primary (disposable) and secondary (rechargeable) battery industries. Our major product is lithium metal, which is used as anode material for primary batteries. Lithium ion-based batteries are used extensively in consumer electronics, such as mobile phones, camcorders and laptops. We are currently developing a new generation of conductive lithium salts used for the battery market, which, we believe, has the potential to drive significant growth in the future.



Metal-based Specialty Chemicals



Metal Sulfides. This business division has two major product lines: friction stabilizers and abrasive additives. Friction stabilizers enhance the power and performance of brake pads and clutch facings and primarily serve the automotive supplier industry while abrasive additives are additive compounds. When bound with synthetic resin, additive compounds act as active fillers in cutting wheels, enhancing cutting effectiveness and tool life of cutting and grinding wheels and primarily serve the mechanical engineering industry. The demand for metal sulfides is driven primarily by the demand in the automotive supplier industry.



Special Metals . We develop and manufacture a unique range of products based on special metal compounds derived from cesium, zirconium, titanium, barium and rubidium. These products are used in highly specialized, technology-driven end-applications such as X-ray diagnostic systems, airbags, television cathode ray tube and vacuum lamps and serve various end markets, such as chemical, pharmaceutical, metallurgical, automotive, electronics and pyrotechnical industries.



Competition



Lithium . We believe the global lithium market consists of three major producers and a number of other small producers. We believe that we are the global market leader in the lithium market. While we offer a diverse range of products from raw materials to specialty lithium compounds, FMC Corporation offers mainly specialty lithium compounds and Sociedad Quimica y Minera de Chile S.A. (“SQM”) offers a more limited product line focused on basic lithium compounds. Competition in this market is based on product quality, reliability of products and customer service.



Metal-based Specialty Chemicals . We believe that in the metal-based specialty chemicals business, Fine Chemicals has a leading market position in its niche markets. It has a leading position in friction materials and is the only supplier offering a full product range of friction stabilizers and abrasive additives based on metal sulfides. Most competitors only offer single product lines in this market. Key competitors include: Dow Corning Corporation, Catalise Brasil and American Minerals, Inc., in the Metal Sulfides division and Cabot Corporation and Sigma Aldrich-APL in the Special Metals division. Competition in the metal-based specialty chemicals markets in which Fine Chemicals competes is based on product quality and product diversity.



Customers



Fine Chemicals serves approximately 1,000 customers worldwide in its lithium business and 700 customers worldwide in its metal-based specialty chemicals products business. Fine Chemicals’ customers of lithium products include Bayer CropScience, Kraton Polymers U.S. LLC, Energizer Holdings, Inc. and DSM N.V.

CEO BACKGROUND

Brian F. Carroll has been a director of Rockwood since 2000, a member of KKR & Co. L.L.C., which serves as a general partner of Kohlberg Kravis Roberts & Co. L.P. ("KKR"), since January 2006, and an executive of KKR since 1999. In addition, Mr. Carroll was an executive at KKR from 1995 to 1997, at which time he left KKR to attend business school at Stanford University. Prior to joining KKR in 1995, Mr. Carroll was with Donaldson Lufkin & Jenrette Securities Corporation. Mr. Carroll is a member of the boards of directors of Sealy Corporation and Laureate Education, Inc. Mr. Carroll has a B.S. from the University of Pennsylvania and a M.B.A. from Stanford University.

Todd A. Fisher has been a director of Rockwood since 2000, a member of KKR & Co. L.L.C., which serves as a general partner of KKR, since January 2001 and an executive of KKR since 1993. Prior to joining KKR, he was with Goldman, Sachs & Co. in its Corporate Finance Department. Mr. Fisher is a member of the boards of directors of Maxeda B.V. and Northgate Information Solutions plc. Mr. Fisher has a B.A. from Brown University, an M.A. from Johns Hopkins University and a M.B.A. from The Wharton School, University of Pennsylvania.

Douglas L. Maine has been a director of Rockwood since August 2005. Mr. Maine joined International Business Machines in 1998 as Chief Financial Officer following a 20 year career with MCI, where he was Chief Financial Officer from 1992-1998. He was named General Manager of ibm.com in 2000 and General Manager of Consumer Products Industry in 2003 and retired in 2005. Mr. Maine is also a member of the board of directors of Alliant Techsystems, Inc. Mr. Maine has a B.S. from Temple University and a M.B.A. from Hofstra University.

Seifi Ghasemi has been Chairman and Chief Executive Officer of Rockwood and our subsidiary, Rockwood Specialties Group, Inc., since November 2001. From 1997 to 2001 he was with GKN, plc, a $6.0 billion revenue per year global industrial company. He served as a director of the Main Board of GKN, plc and was Chairman and Chief Executive Officer of GKN Sinter Metals, Inc. and Hoeganes Corporation. Before that, for 18 years, Mr. Ghasemi was with BOC Group, plc, a $7 billion revenue per year global industrial gas company. He was a director of the Main Board of BOC Group, plc; President, BOC Gases Americas and Chairman and Chief Executive Officer of BOC Process Plants, LTD and Cryostar. Mr. Ghasemi has a Masters of Science degree in Mechanical Engineering from Stanford University.

Sheldon R. Erikson has been a director of Rockwood since November 2005. Mr. Erikson has been the Chairman of Cameron International Corp, a global manufacturer, provider and servicer of petroleum equipment, since 1996 and the President and Chief Executive Officer since 1995. He was Chairman from 1988 to 1995, and President and Chief Executive Officer from 1987 to 1995, of The Western Company of North America, an international petroleum service company. He also serves on the boards of directors of the National Petroleum Council, the American Petroleum Institute, the Petroleum Equipment Suppliers Association and the National Association of Manufacturers. Mr. Erikson studied at the University of Illinois and has a M.B.A. from Harvard University.

Perry Golkin has been a director of Rockwood since 2000. Mr. Golkin has been an executive with KKR and a general partner of KKR since 1995. In 1996, he became a member of KKR & Co. L.L.C. which serves as the general partner of KKR. Mr. Golkin is also a member of the board of directors of PRIMEDIA, Inc. Mr. Golkin has a B.S., M.S. from The Wharton School, University of Pennsylvania and a J.D. from the University of Pennsylvania Law School.

J. Kent Masters has been a director of Rockwood since May 2007. Mr. Masters has been a member of the Executive Board of Linde AG, a global leader in manufacturing and sales of industrial gases, with responsibility for the Americas, Africa and the tonnage and bulk businesses, since 2006. Prior to joining Linde AG, Mr. Masters was a member of the Board of Directors of BOC Group, plc, a global industrial gas company, which was acquired by Linde AG in 2006. At BOC Group, plc, he served as President, Process Gas Solutions-Americas, from 2002-2005 and as Chief Executive, Industrial and Special Products, from 2005 until 2006. Mr. Masters has a B.Sc. degree in chemical engineering from Georgia Institute of Technology and a M.B.A. from the Leonard N. Stern School of Business, New York University.
Cynthia A. Niekamp has been a director of Rockwood since March 2006. Ms. Niekamp has been a Vice President of BorgWarner, Inc., and President and General Manager of its TorqTransfer Systems division since 2004. Prior to joining BorgWarner, Inc., she spent nine years at MeadWestvaco Corporation, where she served in various senior management roles in strategic planning as well as four years as President of its Specialty Papers division and most recently as Senior Vice President and Chief Financial Officer. From 1990 to 1995, she served in various operational and business development roles at TRW, Inc. and before that she spent approximately 10 years at General Motors Corporation in operations and engineering. Ms. Niekamp has a B.S. from Purdue University in industrial engineering and a M.B.A. from Harvard University.

Susan Schnabel has been a director of Rockwood since July 2004. Ms. Schnabel joined DLJ's Investment Banking Division in 1990 and DLJ Merchant Banking in 1998. In 1997, she left DLJ's Investment Banking Division to serve as Chief Financial Officer of PETsMART, a high growth specialty retailer of pet products and supplies, and joined DLJ Merchant Banking as Managing Director in 1998. Ms. Schnabel is a director of DeCrane Aircraft Holdings, Inc., Frontier Drilling, Laramie Energy, LLC, Luxury Optical Holdings, Inc., Pinnacle Gas Resources, Inc., Target Media Corp., Total Safety U.S., Inc. and Specialized Technology Resources, Inc. Ms. Schnabel received a B.S. from Cornell University in 1983 and a M.B.A. from Harvard University.

MANAGEMENT DISCUSSION FROM LATEST 10K

General



We are a global developer, manufacturer and marketer of technologically advanced, high value-added specialty chemicals and advanced materials. We serve more than 60,000 customers across a wide variety of industries and geographic areas. We operate through five business segments: (1) Specialty Chemicals; (2) Performance Additives; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics; and (5) Specialty Compounds.



Our net sales consist of sales of our products, net of sales discounts, product returns and allowances. In addition, net sales include shipping and handling costs billed to customers. Sales are primarily made on a purchase order basis.



Our cost of products sold consists of variable and fixed components. Our variable costs are proportional to volume and consist principally of raw materials, packaging and related supplies, certain energy costs, and certain distribution costs including inbound, outbound, and internal shipping and transfer costs. Our fixed costs are not significantly impacted by production volume and consist principally of certain fixed manufacturing costs and other distribution network costs, including warehousing. Fixed manufacturing costs comprise headcount-related costs and overhead, including depreciation, periodic maintenance costs, purchasing and receiving costs, inspection costs and certain energy costs.



Our selling, general and administrative expenses include research and development costs, sales and marketing, divisional management expenses and corporate services including cash management, legal, benefit plan administration and other administrative and professional services.



We are focused on growth, productivity, cost reduction, margin expansion, bolt-on acquisitions, divestment of non-core businesses and debt reduction. In connection with this focus, among other things:



• We have cut costs, reduced overhead and eliminated duplicative positions in both acquired and existing businesses. In 2007, we closed two U.K. facilities acquired in an October 2006 acquisition by our Specialty Compounds segment. During the first quarter of 2006, we closed facilities in the United States and the U.K. in the wafer reclaim business in our former Electronics segment. We also implemented other restructuring measures in our other segments, including the closure of our Baulking, U.K. facility in our Clay-based Additives business;



• We acquired the global color pigments business of Elementis plc in August 2007 which is being integrated into our Color Pigments and Service business within our Performance Additives segment;



• We completed the sale of our Groupe Novasep subsidiary in January 2007 and our United States wafer reclaim business in February 2007; and



• We completed the sale of our Electronics business, excluding our European wafer reclaim business, in December 2007.

Factors Which Affect Our Results of Operations



Our Markets



Because the businesses in our segments generally serve many unrelated end-use markets, we discuss the principal market conditions on a segment basis rather than a consolidated basis. The principal market conditions in our segments and regions in which we operate that impacted our results of operations during the periods presented include the following:



Specialty Chemicals



• Demand for Surface Treatment products in our Specialty Chemicals segment generally follows the activity levels of metal processing manufacturers, including the automotive supply, steel and aerospace industries. Sales growth in the Surface Treatment business occurred in 2006 and continued in 2007 in most markets and regions served, especially in the European automotive, general industrial and aerospace industries, as price and volume increases more than offset raw material cost increases. We expect the Surface Treatment business to grow in 2008.



• Demand for our lithium products in the Fine Chemicals business line of our Specialty Chemicals segment is generally driven by demand for lithium carbonate in industrial applications, the aluminum business, glass ceramics, cement and the general demand in China. Sales of lithium products specifically used in life science applications depend on the trends in drug development and growth in pharmaceuticals markets as well as generic competition. Growth in the Fine Chemicals business occurred in 2006 and continued in 2007 in most market segments, which was driven by price increases in lithium salt applications, and strong demand for lithium applications, particularly sales of lithium specialty products to the pharmaceutical industry and lithium compounds. Growth in the Fine Chemicals business is expected in all market segments in 2008, particularly driven by higher demand for lithium salt applications.



Performance Additives



• Generally, a trend towards the increased use of colored concrete products in the North American construction market has historically had a positive effect on our Color Pigments and Services business line. While sales in our Color Pigments and Services business in North America increased in 2006 on higher construction volumes and selling prices, a general slowdown in the construction market forced North American construction sales down in 2007. As a result of this slowdown, North American volumes are expected to be down again in 2008. However, sales in our Color Pigments and Services business in North America are expected to be up in 2008 on higher selling prices to help recover raw material and energy cost increases and the favorable impact of the acquisition of the global color pigments business of Elementis plc in August 2007. Unlike North America, construction volumes in Europe in our Color Pigments and Services business increased slightly in 2007.



• The change in the market to environmentally advanced wood treatment chemical products, such as alkaline copper quaternary, or ACQ, and the phase out of chromated copper arsenate, or CCA, for residential use previously had a positive impact on the Timber Treatment Chemicals business, which is a leading supplier of these higher margin products. However, the market position of ACQ was negatively impacted in 2006 and 2007 by customer losses and the increasing use of wood substitutes. The expiration of the ACQ patent in May 2007 could also have a negative impact on our results of operations, as at least one new competitor has entered the market and others may follow. Although we commercialized the next generation timber treatment preservatives system ( Ecolife ) in the third quarter of 2007 through our joint venture with Rohm and Haas, we do not expect this to have a significant impact in 2008.



• For 2006, the major drivers of growth in the Clay-based Additives business, which supplies specialty rheology modifiers and additives, both clay-based and synthetic, to a variety of end-use markets, were the acquisition of Süd-Chemie’s rheological additives and carbonless clay businesses, continued strength in oilfield sales and growth in additives for water-based coatings. Sales were up slightly in 2007 as higher oilfield volumes and increased selling prices for coatings and inks were partially offset by lower carbonless applications. We expect sales growth in 2008 in coatings and inks and oilfield applications.



• Raw material costs have increased in general in the Performance Additives segment since 2004 and continue to trend upward. In the Color Pigments and Services and Clay-based Additives business, selling price increases were initiated in 2006 and continued in 2007 to partially offset the increases in raw material and energy costs, specifically iron oxide for Color Pigments and Services and quaternary amine (“quat”) for Clay-based Additives. Continuing unfavorable foreign exchange rates are expected to result in substantial cost increases in Chinese manufactured raw materials used in our Color Pigments and Services business. In 2006, the Timber Treatment Chemicals business experienced record high costs for copper, a primary component in ACQ, and was unable to pass on these increased material costs to customers in 2006. However, selling price increases were implemented in 2007 to offset higher copper costs. Although selling price increases were implemented in 2007 to offset raw material cost increases, our ability to pass on additional selling price increases in 2008 is uncertain in these businesses.



Titanium Dioxide Pigments



• Demand for our titanium dioxide products in anatase grade is driven mainly by demand in the synthetic fiber industry,

while demand for titanium dioxide products in rutile grade and our functional additives is driven by demand in the coatings, paper and plastics industries. Throughout 2006, we experienced pricing pressure from global suppliers in Asia, specifically Chinese suppliers related to titanium dioxide products in anatase grade. We also experienced pricing pressures on our titanium products in rutile grade. Volumes and selling prices in the fiber anatase business increased in 2006 but volumes and selling prices were lower in 2007. However, we expect sales in the fiber anatase business to be higher in 2008. Sales of titanium dioxide products in rutile grade were down slightly in 2006 as lower volumes were partially offset by higher selling prices. Sales of titanium dioxide products in rutile grade were up slightly in 2007 on increased volumes, partially offset by lower selling prices. We expect sales of these rutile grade products to continue to be up in 2008. Our functional additives business increased in 2006 and 2007 on higher selling prices and volumes. We expect sales in the functional additives business to continue to be up in 2008.



Advanced Ceramics



• Demand for our ceramic medical devices is mainly tied to the aging population in Europe and the United States. Although the volume of our products used in medical device applications sold experienced double-digit growth each year from 2001 through 2005, in 2006 some customers in the U.S. reduced their demand due to high inventory levels and delayed approvals resulting in lower volumes. However, growth of our medical device applications increased in 2007 on higher volumes and is expected to continue to increase in 2008.



• Despite the negative impact of pricing pressure from Asian competitors, sales of ceramic products for use in cutting tool products and mechanical systems were higher in 2006 and 2007 due to volume increases. This growth is expected to continue in 2008. Selling prices in our electronic products business were lower in 2006, and in 2007, sales were lower primarily on decreased volumes. Sales in our electronic products business are expected to be down in 2008 on lower volumes and selling prices. Sales of our multi-functional applications were higher in 2007 from increased volumes and are expected to continue to increase slightly in 2008 on higher volumes.



Specialty Compounds



• Our largest product line in the Specialty Compounds segment is wire and cable compounds. Sales within this product line are dependent upon the telecommunications market and related sectors, specifically demand for high-end voice and data communication wire and cable, for which our Specialty Compounds segment is a significant provider of sheathing materials. Newly developed non-halogen products for wire and cable data communication, military and other applications have expanded business in North America for those applications and created opportunities in Europe. Although sales of wire and cable products were up slightly in 2006 and again in 2007, sales growth in 2007 was due to the acquisition of the Megolon division of Scapa Group, plc. In 2007, the wire and cable business was negatively impacted by a general downturn in the wire and cable market. Sales of wire and cable products are expected to be up slightly in 2008, although results are expected to be negatively impacted by continued weakness in the wire and cable market.



• Most of the other end-use markets for which Specialty Compounds’ products are used generally track growth of gross domestic product, but many are also application specific, such as automotive. Our net sales in consumer/industrial thermoplastic elastomers were up in 2006 and 2007 and we expect continued growth in these markets in 2008. Net sales of regulated packaging were up in 2006, but were lower in 2007 and are expected to continue to be lower for 2008. We are focusing more of our efforts towards increasing high margin specialty products, in particular, thermoplastic elastomers, and less of our efforts in automotive and footwear.



• The price of ammonium octamolybdate (“AOM”) and polyvinyl chloride (“PVC”) resin and plasticizers, key raw materials used in the production of wire and cable products, increased from 2004 through 2006. As a result, selling price increases were successfully initiated in 2005 and 2006 to help offset the raw materials price increase. Although raw material prices were slightly lower in 2007, they are expected to be higher in 2008.



Global Exposure



We operate a geographically diverse business. Of our 2007 net sales, 52% were shipments to Europe, 31% to North America (predominantly the United States) and 17% to the rest of the world. For a geographic description of the origin of our net sales and location of our long-lived assets, see Note 4, “Segment Information.”



We estimate that we sold to customers in more than 60 countries during this period. Currently, we serve our diverse and extensive customer base with 91 manufacturing facilities in 25 countries. Consequently, we are exposed to global economic and political changes, particularly currency fluctuations that could impact our profitability.



Our sales and production costs are mainly denominated in U.S. dollars or euros. Our results of operations and financial condition have been historically impacted by the fluctuation of the euro against our reporting currency, the U.S. dollar. For the year ended December 31, 2007,

the average exchange rate of the euro against the U.S. dollar was higher compared to 2006. As a result, our net sales, gross profit and operating income were positively impacted. Historically, however, our operating margins have not been significantly impacted by currency fluctuations because, in general, sales and costs of products sold are generated or incurred in the same currency, subject to certain exceptions.



Raw Materials



Raw materials constituted approximately 54% of our 2007 cost of products sold. We have a broad raw material base, with the cost of no single raw material representing more than 3% of our cost of products sold in 2007. Nonetheless, the significant price fluctuations our raw materials have experienced in the past during periods of high demand have had an adverse impact on our results of operations. In particular, higher prices for copper used in the Timber Treatment Chemicals business of our Performance Additives segment had a negative impact on results in 2006 and 2007. We cannot accurately predict the impact of any future price increases for raw materials or any raw material shortages on our business as a whole or in specific geographic regions. In addition, we may not be able to pass on raw material price increases to our customers. See details of our ten most significant raw materials (in terms of dollars) in Item 1, “Business – Raw Materials.”



Energy Costs



In 2007, energy purchases represented approximately 5% of our cost of products sold. However, within certain business lines, such as our Titanium Dioxide Pigments segment and the Color Pigments and Services and Clay-based Additives businesses of our Performance Additives segment, energy costs are more significant. The cost of products sold for certain of our businesses, including Color Pigments and Services and Clay-based Additives, increases when the price of natural gas in North America rises. Natural gas prices were volatile and continued to increase in North America in 2006, but were relatively stable in 2007. In contrast, natural gas prices in Europe, where our Titanium Dioxide Pigments segment is located, have historically been relatively stable, although prices were higher in 2006 and 2007.

Results of Operations



Actual Results of Operations



The following table presents the major components of our operations on an actual basis and Adjusted EBITDA (the reconciliation to net income is set forth in—Reconciliation of Net Income to Adjusted EBITDA for the years ended December 31, 2007, 2006 and 2005), including as a percentage of net sales, for the periods presented. See Note 4, “Segment Information,” for segment information and a reconciliation to income from continuing operations before taxes and minority interest to Adjusted EBITDA on a segment basis.

Year ended December 31, 2007 compared to year ended December 31, 2006



Overview



Net sales increased $348.2 million for the year ended December 31, 2007 compared with the prior year driven by increased selling prices of $77.8 million, strong demand in a number of our segments, particularly in our Specialty Chemicals segment, and higher volumes related to acquisitions. The positive impact of currency changes of $168.0 million also had a favorable impact on net sales. See further discussion by segment below.



Operating income and Adjusted EBITDA also increased for the year ended December 31, 2007 compared with the prior year primarily due to the impact of the sales increases noted above. Operating income and Adjusted EBITDA were negatively impacted by higher raw material costs in most businesses. Net income from continuing operations increased $21.2 million in the year ended December 31, 2007 compared with the prior year primarily due to the reasons noted above. This was partially offset by costs of $19.1 million incurred in the second quarter of 2007 to redeem our 2011 Notes and higher interest expense recorded in the year ended December 31, 2007 compared to the prior year due to an increase in mark-to-market losses on our interest rate hedging instruments.



Income from discontinued operations, net of tax, decreased $22.6 million in the year ended December 31, 2007 compared with the prior year primarily due to the sale of Groupe Novasep in January 2007, partially offset by the tax benefit recorded in the first quarter of 2006 related to the favorable treatment on the sale of Rohner AG in 2006. See further details in Note 2, “Discontinued Operations.”



The gain on sale of discontinued operations, net of tax, of $210.4 million for the year ended December 31, 2007 was comprised of the gain of $115.6 million (net of taxes) on the sale of Groupe Novasep and a gain of $94.8 million (net of taxes) on the sale of the Electronics business, excluding the European wafer reclaim business.



Net income increased $214.1 million in the year ended December 31, 2007 compared with the prior year primarily due to the reasons noted above.



Net sales



Specialty Chemicals . Net sales increased $164.6 million over the prior year, primarily on higher selling prices, as well as increased volumes and the positive impact of currency changes of $63.7 million. In the Fine Chemicals business, higher selling prices of lithium products, as well as increased volumes, had a favorable impact on net sales. Net sales in the Surface Treatment business were favorably impacted by higher selling prices and increased volumes in most markets, particularly in European automotive, aerospace and general industrial applications.



Performance Additives . Net sales increased $66.4 million over the prior year primarily due to the acquisition of the global color pigments business of Elementis plc completed on August 31, 2007, increased selling prices of ACQ products and the positive impact of currency changes of $19.7 million. This was partially offset by lower construction volumes in North America in our Color Pigments and Services business and lower volumes in our Timber Treatment Chemicals business.



Titanium Dioxide Pigments . Net sales increased $38.8 million over the prior year due to the positive impact of currency changes of $39.9 million. Excluding the impact of currency changes, net sales were down as lower volumes and prices of titanium dioxide in anatase grade were partially offset by higher selling prices for functional additives and higher volumes of titanium dioxide products in rutile grade.



Advanced Ceramics . Net sales increased $62.9 million over the prior year primarily due to the positive impact of currency changes of $34.7 million and the impact of bolt-on acquisitions made in April 2007 and May 2006. Higher volumes in most businesses, particularly in medical, cutting tools, mechanical systems, and multi-functional ceramics also had a favorable impact on net sales. This was partially offset by lower selling prices and volume declines in electronic applications.



Specialty Compounds . Net sales increased $25.6 million over the prior year due to higher volumes resulting from an acquisition made in October 2006 in the wire and cable business and the positive impact of currency changes of $9.1 million.



Corporate and other . Net sales decreased $10.1 million over the prior year primarily due to the sale of our U.S. wafer reclaim business in the first quarter of 2007.



Gross profit



Gross profit increased $120.8 million over the prior year primarily due to the selling price increases noted above, as well as productivity improvements and the positive impact of currency changes of $55.8 million. This was partially offset by raw material cost increases, particularly from the impact of higher zinc and other raw material costs in our Specialty Chemicals segment, higher iron-oxide and cobalt raw material costs in our Color Pigments and Services business and higher copper costs in our Timber Treatment Chemicals business of our Performance Additives segment. Gross profit as a percentage of net sales was 31.9% in the year ended December 31, 2007 versus 31.6% in the year ended December 31, 2006. Gross profit in 2007 includes a reduction of $5.7 million primarily due to an inventory write-up reversal related to the acquisition of the global color pigments business of Elementis plc. In 2006, gross profit was lower due to an inventory write-up reversal of $1.1 million.



Selling, general and administrative expenses



Selling, general and administrative expenses, or SG&A, increased $57.6 million over the prior year primarily due to the impact of currency changes of $33.8 million. Higher SG&A costs were also recorded in a number of our segments related to increased sales volumes. SG&A expenses as a percentage of net sales were 19.5% in the year ended December 31, 2007 compared to 19.9% in the year ended December 31, 2006, as a result of higher net sales impacted by selling price increases.

Impairment charges



We recorded an impairment charge of $2.2 million in 2006 related to the writedown of machinery and equipment in the Fine Chemicals division of the Specialty Chemicals segment.



Restructuring charges, net



We recorded $12.0 million of restructuring charges in the year ended December 31, 2007 for miscellaneous restructuring actions in the Specialty Chemicals, Performance Additives, Advanced Ceramics and Corporate and other segments. In the Corporate and other segment, $4.7 million of restructuring charges were recorded for the year ended December 31, 2007 primarily related to the restructuring of the wafer reclaim business. We recorded $4.9 million of restructuring charges in the year ended December 31, 2006 for miscellaneous restructuring actions in the Specialty Chemicals, Performance Additives, Advanced Ceramics and Corporate and other segments for miscellaneous headcount reductions and facility closures. See Note 19, “Restructuring Liability,” for further details.



Gain on sale of assets



We recorded gains of $4.7 million, primarily related to the sale of our U.S wafer reclaim business, and $0.3 million for the years ended December 31, 2007 and 2006, respectively.



Operating income



Specialty Chemicals . Operating income increased $51.9 million primarily due to the impact of higher sales in both the Surface Treatment and Fine Chemicals businesses and the positive impact of currency changes of $10.3 million. This increase was partially offset by higher raw material costs of $25.2 million primarily related to zinc and other raw materials.



Performance Additives . Operating income decreased $0.2 million over the prior year due to the lower sales volumes discussed above, and higher raw material costs of $10.0 million, particularly copper costs in the Timber Treatment Chemicals business, higher iron-oxide and cobalt costs in our Color Pigments and Services business and higher quat costs in our Clay-based Additives business. Higher depreciation and amortization costs of $13.9 million primarily due to the Viance, LLC joint venture formed in January 2007 and the acquisition of the global color pigments business of Elementis plc, along with increased inventory write-up reversal charges of $4.7 million primarily related to the Elementis acquisition, also had an unfavorable impact on operating income. These decreases were partially offset by the selling price increases noted above and the positive impact of currency changes of $1.1 million.



Titanium Dioxide Pigments . Operating income decreased $5.4 million over the prior year due to higher raw material costs of $4.6 million, particularly zinc and other raw material costs, higher energy costs of $2.1 million, an unfavorable mix and lower selling prices of titanium dioxide products. This decrease was partially offset by the positive impact of currency changes of $3.8 million.



Advanced Ceramics . Operating income increased $15.8 million over the prior year primarily due to the impact of increased sales in most businesses, productivity improvements and the positive impact of currency changes of $7.4 million. The impact of a bolt-on acquisition made in April 2007 also had a favorable impact on operating income. This increase was partially offset by lower selling prices and increased depreciation and amortization costs of $7.4 million related to the acquisition discussed above.



Specialty Compounds . Operating income increased $0.1 million due to higher sales volumes from the acquisition completed in October 2006 and a favorable product mix, partially offset by higher depreciation and amortization costs of $2.5 million related to an acquisition in October 2006.



Corporate and other. Operating loss decreased $0.5 million over the prior year primarily due to higher gains on asset sales of $4.0 million primarily related to the sale of our U.S. wafer reclaim business and lower professional fees incurred regarding systems and internal control documentation required in connection with the Company’s compliance with the Sarbanes-Oxley Act of 2002. This was partially offset by additional stock compensation expense related to the May 2007 equity grant, higher legal accruals and increased restructuring charges.



Other income (expenses)



Interest expense . Interest expense increased $19.2 million in the year ended December 31, 2007 compared to the prior year. The years ended December 31, 2007 and 2006 included losses of $32.2 million and gains of $7.2 million, respectively, representing the movement in the mark-to-market valuation of our interest rate hedging instruments. The remaining interest expense decrease of $20.2 million is primarily due to lower interest expense related to the redemption in May 2007 of the 2011 Notes in the aggregate amount of $273.4 million.



Interest income . Interest income increased $8.8 million in the year ended December 31, 2007 compared to the prior year from interest earned on cash from operations and interest earned on cash equivalents stemming from the net cash proceeds received from the sale of Groupe Novasep and the formation of the Viance, LLC joint venture in January 2007.



Loss on early extinguishment of debt. In May 2007, we paid a redemption premium of $14.5 million and wrote off $4.6 million of deferred financing costs associated with the redemption of the 2011 Notes in May 2007.



Refinancing expenses . In March 2007, we expensed $0.9 million related to the fourth amendment of the senior secured credit agreement resulting in a 50 basis point reduction on our new tranche G term loans.



Foreign exchange gain, net . For the years ended December 31, 2007 and 2006, we had foreign exchange gains of $7.8 million and $8.6 million, respectively, primarily related to euro-denominated debt, cash and inter-company loans.



Other, net . For the year ended December 31, 2006, we recorded $1.8 million of income in connection with the correction of an immaterial error related to a previously unrecorded asset in the Titanium Dioxide Pigments segment of $1.6 million.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Three months ended June 30, 2008 compared to three months ended June 30, 2007



Overview



Net sales increased $142.8 million in the second quarter of 2008 compared with the same period in the prior year primarily due to the positive impact of currency changes of $75.2 million, the acquisition of the global color pigments business of Elementis plc completed on August 31, 2007 and increased selling prices of $21.1 million. Higher volumes, particularly in our Specialty Chemicals and Advanced Ceramics segments, also had a favorable impact on net sales. See further discussion by segment below.



Operating income and Adjusted EBITDA also increased in the second quarter of 2008 compared with the same period in the prior year due to the positive impact of currency changes and the sales increases noted above. Operating income and Adjusted EBITDA were negatively impacted by higher raw material and energy costs in most businesses.



Net income from continuing operations increased $53.8 million compared with the same period in the prior year primarily due to costs of $19.1 million incurred in the second quarter of 2007 to redeem our 2011 Notes and lower interest expense recorded due to higher mark-to-market gains on our interest rate hedging instruments.



Income from discontinued operations, net of tax was $3.8 million in the second quarter of 2007 and was comprised of income from operating the Electronics business, excluding the European wafer reclaim business.



Net income increased $50.0 million in the second quarter of 2008 compared with the same period in the prior year due to the reasons noted above.



Net sales



Specialty Chemicals . Net sales increased $64.6 million over the prior year, including the positive impact of currency changes of $31.3 million. In the Fine Chemicals business, higher selling prices of lithium products, as well as increased volumes, had a favorable impact on net sales. Net sales in the Surface Treatment business were favorably impacted by higher selling prices, increased volumes in all markets, particularly in European automotive, aerospace and general industrial applications, and the impact of a bolt-on acquisition made in December 2007.



Performance Additives . Net sales increased $38.5 million over the prior year primarily due to the acquisition of the global color pigments business of Elementis plc. Also, increased selling prices in our Color Pigments and Services and Clay-based Additives businesses and the positive impact of currency changes of $5.5 million were partially offset by lower volumes of construction-related products in our Color Pigments and Services and Timber Treatment Chemicals businesses.



Titanium Dioxide Pigments . Net sales increased $10.9 million over the prior year due to the positive impact of currency changes of $18.5 million, partially offset by lower volumes and selling prices of titanium dioxide products, primarily commodity grade.



Advanced Ceramics . Net sales increased $26.7 million over the prior year primarily due to the positive impact of currency changes of $18.6 million and increased volumes of medical and cutting tool applications. This was partially offset by volume declines in mechanical systems and mechanical applications.



Specialty Compounds . Net sales increased $2.4 million over the prior year due to increased selling prices and the positive impact of currency changes of $0.9 million, partially offset by lower volumes, particularly in wire and cable and footwear applications.



Corporate and other . Net sales decreased $0.3 million over the prior year primarily due to lower volumes and selling prices in the European wafer reclaim business.



Gross profit



Gross profit increased $28.9 million over the prior year primarily due to the positive impact of currency changes of $25.4 million. Sales increases noted above, in particular selling price increases, were partially offset by raw material cost increases, particularly from the impact of higher tin and phosphoric acid costs in our Specialty Chemicals segment, higher iron-oxide and cobalt costs in our Color Pigments and Services business and higher PVC resin costs in our Specialty Compounds segment. We also experienced lower volumes in our Color Pigments and Services, Timber Treatment Chemicals and Titanium Dioxide Pigments businesses. In addition, depreciation and amortization costs were higher in most businesses, in part from the impact of acquisitions. Gross profit as a percentage of net sales decreased to 30.6% in the second quarter of 2008 from 32.5% in the second quarter of 2007.



Selling, general and administrative expenses



Selling, general and administrative expenses, or SG&A, increased $26.5 million over the prior year primarily due to the impact of currency changes of $15.8 million. Higher SG&A costs were also recorded in a few segments, particularly in the Specialty Chemicals and Advanced Ceramics segments, related to increased sales volumes. SG&A expenses as a percentage of net sales were 18.9% and 19.0% in the second quarter of 2008 and 2007, respectively.



Restructuring charges, net



We recorded $1.5 million of restructuring charges in the second quarter of 2008 for restructuring actions in the Specialty Chemicals, Performance Additives and Advanced Ceramics segments for miscellaneous headcount reductions. We recorded $2.0 million of restructuring charges in the second quarter of 2007 primarily related to headcount reductions and facility closures in the Specialty Chemicals, Performance Additives, Advanced Ceramics and “Corporate and other” segments. See Note 13, “Restructuring Liability,” for further details.

Loss (gain) on sale of assets and other



We recorded a loss of $0.8 million in the second quarter of 2008 related to the liquidation of a joint venture in the Titanium Dioxide Pigments segment and a gain of $0.4 million in the second quarter of 2007 related to the sale of assets.



Operating income



Specialty Chemicals . Operating income increased $11.6 million over the prior year primarily due to the impact of higher sales in both the Surface Treatment and Fine Chemicals businesses and the positive impact of currency changes of $4.9 million. This increase was partially offset by higher raw material costs of $4.7 million, primarily for tin and phosphoric acid, and increased depreciation and amortization costs, including the impact of a bolt-on acquisition made in December 2007.



Performance Additives . Operating income decreased $12.5 million over the prior year due to the lower sales volumes discussed above, and higher raw material costs of $13.0 million, particularly iron-oxide and cobalt costs in the Color Pigments and Services business, MEA costs in our Timber Treatment Chemicals business and higher quat costs in our Clay-based Additives business. Higher depreciation and amortization costs of $3.8 million primarily due to the acquisition of the global color pigments business of Elementis plc also had an unfavorable impact on operating income. These decreases were partially offset by the sales increases noted above.



Titanium Dioxide Pigments . Operating income decreased $8.6 million over the prior year primarily due to the lower sales volumes and selling prices noted above, increased depreciation and amortization costs of $2.9 million and higher energy costs of $1.3 million.



Advanced Ceramics . Operating income increased $11.1 million over the prior year primarily due to the impact of the increased sales volumes noted above, productivity improvements and the positive impact of currency changes of $4.6 million. This increase was partially offset by lower selling prices.



Specialty Compounds . Operating income increased $0.4 million over the prior year due to higher selling prices and lower operating costs relating to the closure of a U.K. facility in December 2007. This was partially offset by higher raw material costs of $4.2 million, particularly PVC resin costs, and lower sales volumes.



Other income (expenses)



Interest expense . Interest expense decreased $37.3 million in the second quarter of 2008 compared to the same period in the prior year. The second quarter of 2008 and 2007 included gains of $34.0 million and $0.8 million, respectively, representing the movement in the mark-to-market valuation of our interest rate hedging instruments. The remaining interest expense decrease of $4.1 million is primarily due to the redemption of the 2011 Notes in May 2007 in the aggregate amount of $273.4 million.



Interest income . Interest income decreased $2.2 million in the second quarter of 2008 compared to the same period in the prior year due to lower short-term interest rates and lower average cash balances in the second quarter of 2008 compared to the second quarter of 2007.

Loss on early extinguishment of debt. In the second quarter of 2007, we paid a redemption premium of $14.5 million and wrote off $4.6 million of deferred financing costs associated with the redemption of the 2011 Notes in May 2007.

Foreign exchange gain, net . In the second quarter of 2008, we had foreign exchange losses of $0.8 million compared to foreign exchange gains of $3.4 million recorded in the same period in the prior year. The foreign exchange loss reported in the second quarter of 2008 is primarily due to the impact of a slightly weaker euro as of June 30, 2008 versus March 31, 2008 related to intercompany financing arrangements and non-operating euro denominated transactions.

Provision for income taxes

The effective income tax rate for the second quarter of 2008 was 21.3% and an income tax provision of $21.1 million was recorded for the second quarter of 2008. The effective income tax rate compared to the federal statutory rate was positively impacted by domestic income which is not tax effected as a result of a full valuation allowance, primarily related to mark-to-market gains on interest rate hedges, favorable European rate changes and geographic earnings mix. The effective income tax rate was 44.1% for the second quarter of 2007 and was negatively impacted by the absence of a tax benefit for the Company’s domestic losses as a result of a full valuation allowance.

Minority interest in continuing operations

Minority interest represents the minority interest portion of the Viance, LLC joint venture completed in January 2007 between our Timber Treatment Chemicals business and Rohm and Haas Company.



Net income from continuing operations



Net income from continuing operations for the second quarter of 2008 was $78.0 million as compared to net income from continuing operations of $24.2 million for the second quarter of 2007 for the reasons described above.



Income from discontinued operations, net of tax

Income from discontinued operations, net of tax was $3.8 million in the second quarter of 2007 and was due to income from operating the Electronics business in the second quarter of 2007.

Net income

Net income for the second quarter of 2008 was $78.0 million as compared to net income of $28.0 million for the second quarter of 2007 for the reasons described above.

CONF CALL

Tim McKenna

Cathy, thanks. Good morning. Thanks for joining us. This is our second quarter results conference call. Seifi Ghasemi, our Chairman and Chief Executive, and Bob Zatta, our CFO will conduct the call. We’ll make a formal presentation, which is available on rocksp.com. Then we’ll follow it with a Q&A.

Before I start the call and turn it over to Seifi, I need to read the forward-looking statements. 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 condition of Rockwood Holdings Inc. and its subsidiaries. Although Rockwood believes the expectations 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 risk statements reflecting or referring to the prospects and future performance of Rockwood. Actual results could differ materially from those projected due to numerous known and unknown risks and uncertainties, including, among other things, the risk factors described in Rockwood’s 10-K filed with the SEC. We do not undertake any obligation to publicly update forward-looking statement to reflect events or circumstances after the date on which such statements are made.

Seifi, we’ll turn it over to you. Thanks.

Seifi Ghasemi

Thank you very much, Tim, and good morning to all of you and welcome to Rockwood’s twelfth quarterly conference call. I thank you for taking time from your busy schedule to listen to our presentation.

For the discussion today, I will use the presentation material that we have posted on our Web site. I am very pleased to report that Rockwood had an excellent performance in the second quarter of 2008. We are reporting good results despite an economic environment that has created significant head bins in some of our markets.

The fundamental strategic strengths of Rockwood are the key factors in enabling us to continue to grow sales and profit. These fundamental strategic strengths, as you know, are, number one, our strong portfolio of market leading global businesses; number two, our diversified exposure to end markets; number three, our basically inorganic raw material base, which is not subject to significant change due to (inaudible); number four, our balanced exposure to the economies of North America, Europe, and Asia Pacific; and, lastly, our constant focus on innovation and improved productivity. The above factors have been the drivers of our past performance, and they will be the drivers as we move forward to achieve our goals.

At this point, would you please turn to page six of our presentation material. As you will note, we achieved net sales growth of 17.8%, including the 2.6% price increase. Our adjusted EBITDA was $178.3 million, which is up 11.1%, compared to second quarter of 2007. Even on a constant currency basis, both sales and EBITDA are ahead of last year.

In the second quarter, we also generated more than $48 million of free cash flow. Our growth was primarily driven by a strong performance in our specialty chemicals and advanced ceramic businesses. This is line with what we had been telling you for the past three years that these two businesses, which generate more than 70% of our profit, are the key drivers of our growth and profitability.

As you have noted from our press release, we continue to see a significant slowdown in construction-related businesses in the US, which has impacted the results of our performance additives business. Also, please note that due to strong – very strong cash flow, our leverage ratio, that is net debt over EBITDA, is now at 3.47, which is below our expected target of 3.5.

Now, please turn to page eight. I have already commented on the EBITDA numbers. You will note that as reported, net income and earnings per share are very significantly ahead of last year. Some of these is due to one time gains that our CFO, Mr. Bob Zatta, will explain to you later on this call. But please note that our adjusted net income and earnings per share are more than 45% ahead of last year. A very good performance.

Now, please turn to page nine of our presentation. We always break down the details of our sales growth. Out of the 17.8% increase in sales for the second quarter, 2.6% was pricing, 9.4% was currency, and 5.8% was volume mix and acquisitions.

Now, turning to page ten, we have the details of the performance of each one of our reported business units. I’m not going to read the details of this page since I would like to comment separately on each one of their business units.

So would you please turn to page 12 of our presentation. Our specialty chemicals sector continues to have an outstanding performance. Sales for the second quarter was up 23.8% and EBITDA was up 23.8%. Year-to-date for the first half, sales are up more than 20% and EBITDA is up more than 20% also. These outstanding results are driven by a strong pricing and volume for our lithium products, and in addition, our surface treatment business is performing favorably due to increased volumes, particularly in European automotive, aerospace, and general industrial applications; higher selling prices; and, a small bolt-on-acquisition that we made late in 2007, which was basically the acquisition of the surface technology businesses of GE. We continue to believe that this business sector will perform well for the balance of the year.

Now turning to page 13, our performance additives sector. Here, the increase in sales, which is 17.8% is fundamentally due to the acquisition of the color pigments business of Elementis that we made last year. Otherwise, on a pro forma basis, volumes in this sector are significantly down. We have told you that this sector is exposed to the construction business in the United States and we see our volumes down 20% to 30%. But despite that, because of improved productivity and additional selling prices, we have maintained the EBITDA margin of this business at 15.1% despite the very strong, very unfavorable market conditions.

Now, (inaudible) turn to page 14, titanium dioxide business. The significant impact on this business where we are behind last year is basically due to pricing, and that, as we have explained to you before, is because of the very strong Euro. It is easier for the American producers to export to Europe and enjoy higher prices that they can get in the United States. We are facing that situation that I don’t think will get diminished, but we believe that this business sector will perform better once they execute the joint venture that they have proposed with Kemira

Moving on to page 15, our advanced ceramics sector is performing excellently. Sales are up to 22.5% and EBITDA is up 37.3%. And those are kind of in line with what we have seen for the first half. And please note that the margins for business now are at 29.9% due to a very good job that our business unit is doing in improving productivity and improving margins.

At this point, I would like to turn it over to Mr. Bob Zatta, our Chief Financial Officer, to give you more details about the numbers. And then I will come back to comment about our businesses as we move forward. Bob.

Bob Zatta

Thank you, Seifi, and good morning to everyone. As Seifi has already covered the second quarter results, I’d like to go straight to page 19 of the presentation.

As you can see, Rockwood has sales growth of 17.8% and 8.4% on a constant currency basis. EBITDA growth was 11.1% and 1.2% at constant currency. So the total company EBITDA percent sales was 18.9% in the quarter versus 20% last year. Of note, Rockwood specialty chemicals and advanced ceramics businesses both reported strong margins in the quarter, with advanced ceramics at almost 31%. Performance additives in TiO2 pigments have seen margins come down versus last year, as those sectors have had the most exposure to the slowdown in the economy.

For total Rockwood, the solid EBITDA performance in the quarter, despite the uncertain economic environment, reflects strength and diversity of Rockwood’s global portfolio as Seifi had discussed. Page 20 of the presentation provides the operating results of the first half. As you can see, Rockwood’s EBITDA margin for the first half is 19.3%, well within our target range.

Page 21 of the presentation presents Rockwood’s income statement for the quarter and first half. The results through operating income are driven by the operating performance of the company as we had discussed. In addition, depreciation and amortization in the quarter – excuse me – is higher than last year. It is 63.8 million in ’08 versus 51.2 million in ’07, and this is due largely to purchase accounting impacts of recent acquisitions and normal capital additions.

The middle section of this chart deals with interest expense. As you can see, we recorded a net interest expense of $8.3 million for the quarter. However, this made is made up of expense of 9.7 and income of 1.4. The $9.7 million of expense is detailed at the bottom of the page where it would show interest expense on debt of $41.3 million, deferred financing costs of $2.4 million, and a mark-to-market gain on our interest rate swaps of $34 million. Regarding the mark-to-market and as we have discussed in the past, the expected movement of interest rates impacts the fair market value calculation for swap contracts, and since we are not using hedge accounting, the change in the fair market value from one period to the next runs through our P&L. This can be a gain or a loss. Since the swaps are remaining in place, there is no cash or economic impact on the company.

The next item on the chart is the FX gain or loss resulting from the translation impact of converting non-US dollar in the company’s debt and receivables to dollars. Since there was no real change in the Euro-dollar rate at the end of June versus March, the impact in the second quarter was very small.

The next item is our income tax acquisition, which we all discussed in detail on the next page. So if you would please turn to page 22, here I have presented a reconciliation of Rockwood’s reported to normalized income from continuing operations’ tax provision and tax rate. Rockwood’s reported tax rate for the second quarter was 21%. This compares with a 40.8% reported tax rate in the first quarter. Now, the primary reason for the reported rate came down so much in the second quarter is that our reported profit before tax included a gain of $34 million on the mark-to-market of interest rate swaps. As I discussed in the last chart, this accounting treatment comes about as a result of changes in interest rate expectations since the first quarter and the implied gain or loss just (inaudible) on our interest rates swap contracts.

However, from a tax perspective, and since we are in an NOL position in the US and have a full valuation allowance against our NOLs, there is no tax provision against the US mark-to-market gain nor would it be a tax benefit if it was a loss as in the first quarter. Therefore, as page 22 shows, it is important to look through this accounting gain in determining the normalized tax rate for the quarter of 28%. There are a couple of other minor adjustments, but the mark-to-market is a major impact. The normalized tax rate in the first quarter was 31% resulting in a normalized rate of about 30% for the first half of ’08.

We are very pleased with the low tax rate for the quarter and first half. We are benefiting from lower tax rates in Germany and the UK, and from very effective tax planning. I will provide some additional metrics on the full year at the end of my presentation, but we are currently seeing a normalized tax rate of about 35% to 36% in the second half resulting in a full year normalized rate of about 33%. The reason we expect the second half normalized rate to be higher than the first half is due to the seasonal pattern of earnings we are now forecasting in the US.

I would like you to turn to page 23. Here we provide our standard reconciliation of net income to adjusted EBITDA. You can see for the second quarter, net income of $78 million, a tax provision of $21.1 million resulting in income from continuing operations before tax and minority interest of $99.1 million. We then add that interest expense depreciation and amortization coming to a subtotal of $171.2 million. We then have several normal one-time charges, mostly related to our recent acquisitions, resulting in adjusted EBITDA of $178.3 million.

Turning to page 24 is our net income and EPS chart. At the top of the chart is the second quarter reported net income and EPS of $78 million and a $1.01, respectively. In coming to adjusted net income and adjusted EPS for the quarter, the most important item is the mark-to-market adjustment on the interest rates swaps, which I discussed already. Making this adjustment and a few others, as noted on the chart, resulted in adjusted net income of $52.3 million and EPS of 68% per share. For the first half of ’08, this is net income of $96.7 million and adjusted EPS of $1.26 per share.

Page 25 shows our consolidated net debt position. As you can see, we had cash of $342 million at the end of June, and net debt of just under $2.3 billion. Using the latest 12-months’ EBITDA of $663 million yields a leverage ratio of 3.47x. This is below where we where at the end of March and at year-end ’07, and as Seifi has already mentioned, this is slightly below our 3.5 target. The slight increase in net debt that you see at the end of June versus year-end ’07 is entirely due to foreign exchange movements.

Page 26, thus, show our long term trend in continuing to reduce the company’s leverage ratio, something which we are obviously very proud of.

Page 27 shows our free cash flow. As you can see and as Seifi has mentioned, we generated $48 million of free cash flow in the second quarter, which is right in line with our expectations. And we are right on target to reach our full year free cash flow goals.

Finally, on page 28, we have prepared our 2008 metrics versus what we’ve provided in February. The challenges [ph] to depreciation and amortization interest expense are due to movements in the – primarily movements in the dollar and Euro foreign exchange rate and some other exchange rates, and I have already discussed our tax rate expectations.

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

Seifi Ghasemi

Thank you very much, Bob. Before we open this call to questions, I would like to make a few comments about the balance of the year. At the end of last year, we have stated our goals for 2008, which was to grow sales by 8% while maintaining an EBITDA margin of about 19%, and to grow earnings per share by double digits.

We have had two quarters of our strong results now, and therefore, we continue to believe that despite the economic – the difficult economic environment, we should be able to achieve our stated goals for the full year.

Now at this time, I would like – we would – I am very much looking forward to answering your questions. Cathy

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