雅保公司 (ALB) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2005 Albemarle Corporation earnings conference call. My name is Alicia, and I will be your operator. At this time, all participants are in a listen-only mode and we will be facilitating a question and answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to introduce your host for today's call, Ms. Laura Ruiz, Corporate Director, Investor Relations. You may go ahead, ma'am.

Thank you, Alicia. Good afternoon everyone. This is Laura Ruiz, Corporate Director, Investor Rations at Albemarle and I want to thank each of you for joining us today for a discussion of Albemarle's first quarter results which were released prior to the market opening this morning.

Participating with me on the call this afternoon are Mark Rohr, President and CEO; John Steitz, Senior Vice President, Business Operations and Paul Rocheleau, Senior Vice President and Chief Financial Officer.

Please note that our earnings press release, as well as tables on net sales impact of price, volume, foreign exchange, joint ventures and acquisitions are posted to our Web site at www.albemarle.com under the investor information section. We will also be posting an updated non-GAAP reconciliation as well as a transcript of this call made available by Thomson Financial within 24 hours following the call today.

I would like to remind you that some of the information to be presented in today's discussion may constitute forward-looking statements. Please refer to our caution statement posted on the Web site also under investor information for a list of factors that could cause actual results to differ materially. You may also refer to our earnings press release and other SEC filings. I would now like to turn the call over to Mark Rohr who will provide you with a summary of the highlights for the quarter.

Thanks, Laura, and good afternoon everyone. I really appreciate all of you taking the time to participate in our earnings call today. It's a pleasure to report to you our strong performance this quarter with net sales totaling $510 million, an increase of 58% or $188 million from the first quarter of last year, which sets an all-time record for the Company.

Likewise, net income, excluding special items, totaled $25.2 million, an increase of 53% over the prior year and 28% sequentially. Strong contributions from the catalyst segment, improved pricing and product mix helped to offset continued pressure from higher raw material and energy cost. Earnings per share excluding special items totaled $0.54, an increase from $0.39 per share last year and $0.46 per share sequentially.

While it's really great to report these earnings, I'm most pleased with the success we are having driving prices as we push to return to classical margin levels for this business. Our efforts to date have for the most part offset raw material energy inflation and also helped us stay ahead of a year-on-year $2 million loss of pension income and a well deserved variable payment to employees of roughly 3.6 million this quarter.

Our pricing initiatives, when combined with manufacturing cost reduction efforts, catalyst synergies and new product introductions resulted in margin improvements across all business segments. For all the corporation, we saw a year-on-year operating margin improvement including joint ventures of roughly 260 basis points. That is really fantastic performance and something we are all very proud of.

In polymer additives, we successfully drove price increases in many areas and while volumes were flat sequentially and down slightly year-over-year, we still managed to achieve revenue growth of 15% this quarter or $25 million. Demand was down in the early months of this quarter but returned in March in most business segments. We began sales of our new Pentabrom replacement product, which is based on internally developed technology. This introduction is going well and we hope it will allow us to capture a significant share of the high growth flexible foam market over the next few years.

We're also putting the finishing touches on a new plant in Magnolia, Arkansas to all produce a proprietary brominated polystyrene for use in a rapidly growing thermoplastic applications market for electrical components. The catalyst segment had a very strong quarter, achieving sales and income records in the month of March. We realized record volumes of Hydroprocessing Catalysts, which includes the sales of our new NEBULA Catalysts, the most active hydroprocessing catalyst available on the market.

Polyolefin sales were also very strong in both conventional and our new catalyst products. We've initiated several debottlenecking projects in catalysts and have begun the permitting process for a major expansion of our plant in Pasadena, Texas to support our customers with new catalysts to address the ever-tightening fuel specifications. The integration of this segment proceeds on-track with cost and technology synergies exceeding our expectations.

Turning to Fine Chemicals, this segment showed significant improvements in the first quarter as we began to see the results of our turnaround plan which we put into place last year. Bromine profitability improved with continued customer support for price increases which are running about two times the level of last year, as well as growing global demand. JVC, our Jordan bromine venture, recorded solid profitability for the quarter as well. This venture is now operating at its bromine capacity and providing much-needed support for the growing bromine and derivatives markets in Asia.

Adding to the turnaround was strong performance in the Fine Chemistry Services area, which is starting to realize its potential with a number of new products now meeting our return expectations. I can't overemphasize that these first quarter results are particularly notable in light of the continued pressure from raw material costs incurred. As we reported last quarter, our 2004 businesses saw an increase in raw material and energy costs, excluding our refinery catalysts, of roughly $30 million versus 2003. For the first quarter of 2005, we faced cost increases, again excluding refinery catalysts, totaling 22 million versus 2004; most notably, bisphenol A, phenol, caustic and chlorine, olefins, ethylene and tin.

To continue to offset this inflation, we remain focused on driving price increases in each segment as well as executing what we do best -- controlling costs and improving raw material utilizations. During the quarter, we announced further price increases for key flame retardant products which become effective April 1. In addition, we announced a 9% worldwide price increase for FCC catalysts. We're on track to exceed our three-year $50 million cost savings program by the end of this year and have now begun looking forward to identify cost, efficiency and utilization objectives for the next three years.

In support of R&D initiatives for both polymer additives and Fine Chemicals, we just announced the opening of a new 27,000 square foot R&D facility at the Company's process development center in Baton Rouge, which is the largest U.S.-based R&D location for Albemarle. This new facility consolidates all of Baton Rouge-based R&D and includes modern synthesis and applications development laboratories for the discovering and testing of new and improved products.

We also recently approved a major investment in catalyst technology for the Netherlands that should build upon what we believe to be the strongest refinery catalyst technical portfolio in the world. Our focus on technology and research over the last years has built a strong, innovative power value product portfolio. We now have over 150 new products in our pharmaceutical, polymer and catalyst development pipeline driven by one of the most capable research teams in the industry. This process has built new product sales within our portfolio to a current level of roughly 17% and the expected 20% contribution by the end of this year.

Looking forward, our new round of price increases should help to offset additional raw material inflation. And while the first quarter demand in consumer electronic-related products got off a slow start, we experienced strong orders for this market in March which continues in April and we see no reason why this growth should not continue through the second half of 2005. If that happens, we should be able to further improve our margins as we move through the year. Now for more detail on our segment performance, I would like to turn the call over to John Steitz, who heads our business operations.

Thanks, Mark. The strong results we reported today exceeded expectations and were the result of excellent execution in a number of important programs involving price improvement, cost reduction, product rotation and acquisition integration. I would like to highlight these efforts in each of our three business segments.

Polymer additives saw the ninth straight quarter of record sales as a result of continued momentum in pricing. Year-over-year, Polymer Additives' segment net sales for the quarter were up 15%. Operating profit improved 17% to $22 million due to strong gains in pricing across all flame retardants, additives and special intermediates. Operating profit margins, including JVs, improved to 12% versus 10.2% in the fourth quarter of 2004 as a result of excellent execution in our pricing and cost reduction programs.

Looking ahead to the second order of '05, pricing will continue to be a priority as we address margin improvement. We expect volumes to continue to strengthen moderately during the balance of the quarter and into the second half of 2005.

Switching to our Catalyst segment, net sales were $172.8 million, up $150 million for the first quarter of 2005 versus the same period of 2004. Catalyst operating profit including joint ventures was 25 million, up $22 million year-over-year, driven by strong sales volumes in Hydroprocessing, Aluminum Alkyl and the metallocene catalysts.

The Refinery Catalyst business reported record sales and income in March as shipments of Hydroprocessing Catalysts were over one-half that for the full quarter. Operating profit margins including joint ventures improved to 14.5% versus 11.1% in the fourth quarter of 2004. While overall catalyst results were strong, FCC catalyst volumes were weaker in the first quarter due to scheduled turnaround of refineries' turnarounds. However beginning in March, we saw a pickup in demand and expect a stronger second quarter.

Fine Chemicals segment net sales were up 10% in the first quarter versus 2004. First quarter of 2005 operating profit, including joint ventures, increased to $11.6 million, a 3.4 million improvement after adjusting for the Zeolite costs in the first quarter of last year. We believe this segment has moved past the inflection point and is making an excellent transition over the past several months towards a higher value portfolio. Operating profit margins, including joint ventures, are up year-on-year but down slightly on a sequential basis. Higher bromine and derivative prices, coupled with strong demand and improved product mix in Fine Chemistry Services, continued to offset headwinds in the more mature product lines.

As Mark mentioned, our Jordan Bromine joint venture reported strong positive results this quarter as bromine and derivative demand remains high and we realize the cost benefits of self-produced chlorine. Critical areas of focus for Fine Chemicals in the second quarter of 2005 will be to continue fueling new product growth in life sciences and maximizing our long-term bromine franchise value. Now I would like to turn over the call over to Paul Rocheleau for a more detailed overview of the financials.

Thanks, John. Before I get into the financial details, let me first emphasize that the press release issued today contains unaudited results for the first quarter. These figures are subject to further review by the Company and our external auditors.

As stated previously, our first quarter net sales increased 58% versus 2004 with Refinery Catalyst business adding net sales of $146 million for the quarter. Foreign exchange effects accounted for 4% of the increase year-over-year.

I would like to draw your attention to a format change we have made in our earnings release on page 5. As joint ventures have become more significant, we have highlighted the unconsolidated joint venture income associated with the three segments and the reconciliation of segment income in the press release. John has been mentioning some of these figures in his report.

Overall, we experienced a 260 basis point increase in our operating margins, including joint ventures to 9.2% driven by the strong performance in the higher margin Catalyst business and the price-led recovery in Polymer Additives and the turnaround in Fine Chemicals. Income before taxes excluding special items at 36.8 million is a 59% improvement from first quarter 2004. Higher financing costs associated with the acquisition partly offset the strong operating performance.

During the quarter, our unallocated corporate expenses were up $8.3 million compared to 2004 due to the variable compensation expenses of 3.6 million and increased non-cash charges for long-term compensation and pensions. Our effective tax rate for the quarter was 31.4%, above the 29% rate that we estimate to be the full-year average. As we look forward, you should expect a couple percentage points fluctuation around this norm driven by changes in our geographic mix and the timing of certain tax deductions.

We reported net income for the quarter before specials of 25.2 million, up 53% from 2004. The special items included a $1.4 million charge for the write-off of unamortized bridge loan fees incurred in connection with the acquisition of the Refinery Catalyst business.

Let me turn to some of the cash flow and balance sheet details. On our website, we have provided non-GAAP reconciliations for EBITDA and net debt. EBITDA for the first quarter was $75 million, driven by the strong operating performance. You will also note that our capital spending for the quarter was 18.8 million and we made further investments in joint ventures of 0.4 million, consistent with a full year capital spending projection of approximately $80 million.

During the first quarter, we experienced a $53 million increase in working capital which was necessary to support the underlying growth of the business. For example, in the Catalyst segment, receivables increased $35 million, driven by strong sales levels late in the quarter. In addition, we made a $10 million payment as part of the final working capital settlement associated with the Refinery Catalyst acquisition. As a result of these items and the $19 million in capital spending our net debt, post the $148 million equity insurance, has remained at approximately $830 million. We've continued to project a significant reduction in debt level as we've progressed through the balance of the year.

As of March 31, we had total debt of approximately $900 million, including joint venture debt guaranteed by the Company. Our total debt to capital ratio is just below 50% and average interest costs during the quarter was 4.2%. As a reminder, our fixed rate debt is composed of $325 million of 10-year notes and 60% of our debt is floating at LIBOR plus 100 basis points.

The 46.9 million outstanding shares in the press release are an average for the quarter. On a prospective basis, fully-diluted shares outstanding will increase to approximately 47.9 million shares. Looking forward, we expect to continue to drive our business to generate strong cash flow and to further strengthen the balance sheet. Let me again mention that our balance sheet accounts are subject to revisions due to the final allocation of purchase price. However, we are close to finishing this work and do not expect any significant changes. With that, let me turn over to Laura for the questions and answers.

Thanks, Paul. Alicia, we're now ready for questions.

(Operator Instructions). Jeffrey Zekauskas, J.P. Morgan.

Hi, good day. A couple of things. Can you talk about your sort of longer-term strategies to minimize chlorine costs and bisphenol A, and sort of what your outlook is for those raw material items as it affects Albemarle?

Sure, Jeff, let me give that a shot. I think strategically for chlorine of course in Jordan, we self produced chlorine at a pretty attractive price. We have in the U.S. a number of long-term relations with suppliers that at least up to this point in time have served us pretty well. And I think it's fair to say we're just now debating internally whether that process is going to continue to serve us well going forward or not.

Regarding just bisphenol A, we don't frankly have a real strategy in that in terms of self producing, if that's what you're implying. We see that market being driven primarily by the benzene market, which of course is driving phenol dramatically. I should note that in Asia, we see material becoming available in there and we think that's going to perhaps dampen some of the pricing power that exists in that market today, Jeff, and pull those prices down a little bit in the future.

Jeff, I would add -- this is John Steitz -- that the BPA consumption for flame retardants is a very minor part of the overall BPA market. So we’ve look periodically at self-producing, but it does not make any economic sense at all.

Second question is, are your first quarter Catalyst operating profits representative of sort of quarterly catalyst operating profits, or is the first quarter number unusually seasonally strong or because of various demand characteristics in the quarter, it was unusual, or is that a run rate?

Well, we feel pretty good about this business. The FCC business really did not contribute materially to the profit level in the first quarter because of these turnarounds we mentioned of some major customers. But going forward, as their volume picks up, that profit will kick in in subsequent quarters through the course of the year. The HPC business, our concern was the rampant run-up in molybdenum prices late last year. We've been able to achieve coverage and we have a better mix due to higher activity catalysts that we're selling to help further reduce the sulfur levels of the more sulfur-rated crudes coming in.

So we're going to work hard to achieve those levels. We're delighted by the mix, delighted by the sales levels. We're working as Mark mentioned to -- on some de-bottlenecks and some expansions in HPC. We're working on improving the FCC profit level by some pricing initiatives through the course of the balance of the year. So our goal is to keep that run rate going, but we have a lot of good solid tailwinds behind us in the first quarter.

I guess lastly, this may be obvious to other people, but it's a little lost on me. Can you again explain the sort of the improvement in equity income in general on a sequential or a year-over-year basis?

Yes. Sequentially, we had better performance from our HPC catalyst joint venture, Nippon -Ketjen out of Japan. And of course our Jordan venture with higher prices, higher production, self-production of the chlorine is kicking in higher profit levels for us too. So those are the two significant players in that part of the equation.

So you also regard the equity income number as representative?

Yes. We feel pretty good about it, so we're going to keep pushing and doing our best.

Okay, thank you.

Ray Kramer, First Analysis.

Hi, good morning guys and congratulations. Just some follow-up on some of those questions that Jeff had with respect to the joint venture business. Is that -- can you comment on -- you had mentioned that the Japanese venture did pretty well. Can you comment on the other two ventures there and sort of their contributions? Should we expect to see more coming from them throughout the year as FCC picks up?

Yes, we're hopeful. There, the Brazilian JV, FCC SA, they are going through some expansion plans in Brazil as well, so we are working hard to drive that. The catalyst regeneration needs a lot of rework in terms of generating higher levels of profit to meet our expectations. So they did not really kick in profit-wise materially in the first quarter but we have high hopes going forward to improve on that.

Okay. And then on the Polymer Additives side, I'm surprised a little to see volume down about 3 or 4%. I know you said that sup (ph) looks like it was picking up towards the end of March and April, especially on electronics. Should this second quarter see a positive volume comparison there, or were some other issues beyond just electronics?

Yes, Ray, this is John Steitz again. We did see some volume sequentially, some decreases volume-wise in brominated flame retardants. It was nothing we didn't anticipate. January and February started out slow with the Chinese New Year kicking in a little bit earlier than in previous years. We saw March pick up fairly nicely and our forward look in the second quarter the order-book looks pretty strong. So the second quarter at this point in the quarter looks better than the first quarter did at that point in time. So we're feeling slightly bullish that we will see some moderate volume growth going forward which will help us continue to focus on improving pricing levels, and we believe we have some legs behind us on that too.

Okay. And then just finally on the Fine Chemicals side, I heard obviously all of the good things at some of the newer developments there. Can you touch a little on what's happening in the mature stuff with ibuprofen or some of those other businesses? Have they pretty much bottomed at this point?

No. I think just to talk about the pharmaceuticals business, our real view there is to calculate that business with some new products, some new active ingredients, new high-potency active ingredients. Ad ibuprofen, just to give you a little color commentary on that, we have seen price declines in the range of 10% sequentially. We're working hard on offsetting that through cost reduction. We see some actually some nice volume gains sequentially. On ibuprofen, we have seen 10-plus percent volumes year-on-year in the 20% range, but it still -- we have a new competitive threat coming in there, so we are working hard to try to prepare for that and offset that through some good solid cost reduction. But I think we still have a bit of a struggle ahead of us in ibuprofen, but our goal is to get that profitability level back to where it was last year. So that's ibuprofen.

On methyl bromide, methyl bromide volumes are primarily in the second, third and fourth quarters, but year-on-year that profit level is holding up nicely. We're offsetting some volume declines there through improved pricings. Overall, our profit year-on-year will hold up pretty nicely. Our oilfield business year-on-year is up nicely as you might anticipate, particularly in North America. That business is doing quite well. Our ATH performance chemicals products, our aluminum-based products there, have done very well. We have gotten price improvement. We're continuing to drive pricing improvement in that sector to help offset the rising cost of alumina products. And Fine Chemistry and new products, that is the real way of our world; new products in life sciences and continuing to leverage bromine as best we can.

Alright, great. And then finally from Mark, given the real strong performance in this quarter, especially relative to street estimates, can you give us any more guidance or clarity what you think you can do for the rest of the year?

Well, Ray, we're pretty excited about how the first quarter has shaped up. And as John mentioned, we've put a lot of energy into last year preparing our customers well for what we saw was going to be a lot of pricing pressure on them and so we're pleased with what we have done there. I think when we look at the year-end numbers, I would just say that we're pretty pumped about our ability to do well this year.

Okay, fair enough. Thanks a lot, guys.

Marshall Reid, Banc of America.

Good afternoon. A couple of questions. First, you guys raised prices on flame retardants April 1. How much of the March strength do you think was perhaps in pre-buy and what gives you confidence that the Polymer Additive demand is going to hold up in the back half of the year?

We did see -- Marshall, this is John Steitz again -- we don't believe there was a lot of pre-buying. The price increases that we have been putting through have been continuous price increases to really try to achieve, as a good friend of mine calls it, sustainable earnings power, and that's really our goal here. We saw some customers slowed up volume-wise in February with the Chinese New Year. They did not really kick in in any substantial way until towards the end of March, so we really believe that was demand-driven as they had reduced their inventories and corrected for that.

We do have some momentum behind us. Tetrabrom, for example, going forward, we think we can get between another 10 and 15% pricing in the second quarter. Decabrom, we think we can get another 5% and that is on top of a 14% sequential improvement. We have some specialties kicking in where we are driving hopefully some continuous price increases to help us offset this raw material inflation. That continues to in our mind get bigger through the course of the year. And we also are intent on getting our margins back to levels that we had achieved in the late '90s and in 2000.

Okay, great. Thank you.

Bob Koort, Goldman, Sachs & Co.

Thank you very much. John, I'm curious a little bit about your commentary on the second quarter outlook in polymer additives looking better at this point than a quarter ago. And if I'm not mistaken, last quarter, you were expecting maybe 8% volume improvement in the first quarter. So I can't recall if that was a year-on-year or sequential development. And I guess it didn't quite turn out that way, so maybe following on that last question, is there something you see out there on your orderbook or something in the book-to-bill numbers that gives you more confidence now than you had three months ago?

Well, the book-to-bill number over the last couple of months has continued to go up. We have seen PC sales pretty strong and we still have, primarily in the Tetrabrom area, the orders going forward look very solid. We're getting some pretty strong indications from the customer base that this electrical connector market continues to drive some growth. So we know there's always this tendency -- you know, you read the headlines and there's this CNN-type recession, you read about it every day. But we feel if we can just have some moderate amount of legs behind us on the volume growth and continue to use some real discipline and not grab any share on the market side and continue to drive pricing improvement, we'll continue to expand the margins in the flame retardant business.

At the risk of a comical answer from Mark, when will he be pacified with margins in the Polymer Chemicals division?

The beatings will continue (multiple speakers).

Bob if you look back, when I talk about classical margins on a gross margin basis, these were 30% kind of business and we have our sights set on trying to find a way to get back to that level.

Should I expect then pricing will continue to increase as long as demand increases as well?

Yes. If we can maintain enough demand out there to -- and that demand comes both in the form of classic products, but also innovative products to keep this business tight, there is no reason why we shouldn't be able to over time achieve those margins again.

And Bob, I'd just add on that. If we do see volumes dip, we're prepared and have trained our people on taking what we call the sacred pause and really assessing the situation in great, painful detail before we see any prices decrease.

And then John, I think maybe you gave some indication last quarter as well on this equity affiliates line about getting a double-digit absolute profit level this year. And I guess it looks like you will get there in the first half now. So did something get decidedly better, or what has really changed your thinking there? Or I know 20 would be double-digits too, but I'm just trying to get a little more --.

It all really comes down to Jordan and our investment in Jordan. We have been driving bromine prices hard, the plant has run well. We have our chlorine plant in Jordan up and running and it has done well and it has helped us debottleneck that plant to reasonable levels, but the real key there is pricing. And I think in bromine, our team has done a hell of a job in pricing and it is up year-on-year, pricing of commercial bromine up 2X at the level it was last year. So that momentum is really helping a lot and we believe it's sustainable. We believe we can keep it there, Bob.

From accounting standpoint then, the bromine products lined up in your Fine Chemicals segment, the Tetrabrom you produce there, it winds up in Polymer Additives?

That is correct. That Tetrabrom, Decabrom, all of the bromine-based flame retardants are in Polymer Additives, and then bromine, methyl bromide, the organic bromides and the inorganic bromides are all in Fine Chemicals.

One last question, I appreciate your time. If I recollect originally, the capacity available for your tetra plant there may have been larger than rates you were producing previously. Have you now filled that plant up, or if not, when would you expect to, and is there any more justification for incremental expansion across your asset base in flame retardants?

Well, we don't see adding any capacity to Tetrabrom right now. We are really working hard to get the reinvestment economics, continue to drive that price, get the pricing up there. So we're running on any given Sunday 90-plus percent utilizations on Tetrabrom, probably 95. Our brominated flame retardants continue to be very tight. We are looking at some selected niche products and we believe we have really the highest value-added portfolio in the industry and the electrical connector market and under the hood in high-temperature engineered thermoplastic resins, we think we have a product out there that really solves some problems and we're looking at an expansion of that facility in Magnolia as we speak.

Super, thanks very much.

Mike Sison, Key McDonald.

Good afternoon everybody. Nice quarter. I just wanted to get a feel for HPC, the strength in the quarter. Did any of that business get pulled ahead from the second into the first?

No, Mike, it did not. It just doesn't happen in that business. Those orders are just so large, the refineries are watching it. When they ask it to be delivered on a day, that's when we deliver it. So nothing was pulled forward.

Just pure demand?

Pure demand. We're working on a number of debottlenecking activities in HPC around the globe. And as Mark mentioned in his commentary, we're working on an expansion in that business as well.

So when you look into the second or maybe the third and fourth quarters, do you see that demand to that degree staying that healthy?

Well, we hope so, we hope so. Year-on-year, I think we're talking double-digit volume increases year-on-year. So our biggest concern had always been on the molybdenum making sure we get a full and complete pass-through on that. And with -- the fundamentals are very strong in that business with higher sulfur levels with the increasingly stringent regulatory environment, and we're just really working hard to get sulfur out of the air and helping our customers solve that problem.

Just give me a better feel, was volumes up by 20, 30, 40%, or near that degree?

Well year-on-year, volumes were actually flat year-on-year. Sequentially, if you look at their business under their prior owner and our business today, year-on-year flat in HPC. Sequentially, it was up dramatically and we're talking 40 to 50%, that order of magnitude.

Then in FCC, was the weak demand sort of industry-wide, or was it just more indicative of the customers that you served had more turnarounds versus others?

No, I think it Mike was more indicative of our customer mix. It was very specific. We knew. We anticipated it. It was a couple of our large North American customers who had some significant turnarounds planned and this is fairly normal as these big refineries prepare for the summer driving season.

And in total Mark, when you look at what's left in terms of integration, do you have a lot to do? Are you pretty much over the hump here and things -- a lot of savings should start to kick in?

Yes, Mike. There are a lot of opportunites still out there. The team in the Netherlands has done a great job of identifying areas where between our two corporations we can cut cost and we are frankly coming in a lot better than we thought we would in that area. We have a technical team that's working between the two companies that -- where we're looking for opportunities where we marry our technology. And where that's not going to hit us for a year or so, there's just some unbelievably great excitement around what these guys are uncovering there. So we're pretty pumped with how it's going.

I think in terms of the work that's in front of us, we're going to a single instance of SAP so we're having to go into the catalyst system and move off the Akzo system, which we're still on and will be through the end of July and go to that new system I think. So there's a lot of work that has to be done there. We also have to do our 404 work around the entity which, because we acquired the second half of last year, wasn't included in last year's 404 efforts. So a lot of activity but a great team, highly motivated and focused, so I don't think we're going to have any problems meeting and exceeding our expectations for that integration.

John, can you give me a quick feel when you look at Polymer Additives less FR, the curatives business, the antioxidants, etc., how were volumes during the quarter?

Volumes held up pretty well in that area, Mike and we did I think a really good job. We were lagging back to the third quarter of last year in terms of getting the phenol pass-through. The team did an excellent job of recovering that margin and had a nice sequential growth in profitability of that business and volumes remain pretty solid. Curatives volumes were off a little bit in February and March, but they have come back nicely in April. So a lot of special type applications there, a lot of Homeland Security type applications that we're getting a little bit of momentum behind. So we feel pretty good about the second quarter there as well.

Okay, so when you look at down 3 to 4%, that's pretty indicative of the whole group?

Yes, I think so.

FR might have been a little weaker and the non-FR might have been a little bit less weaker?

Yes. The volume for the entire Polymer Additives business was really flat sequentially and flat year-on-year, if you look at the volume across the board in our entire business segment.

Great. Thanks, guys.

David Begleiter, Deutsche Bank.

Thank you. Mark, very nice quarter. Mark, when we look at a new proposed Crompton Great Lakes combination, how do you think you guys stack up vis-a-vis them as well as Ciba with your polymer offering?

I think the way I would say that is we don't -- frankly, we don't compete very much against Crompton in the markets we're in out there. Our products are complementary in some ways to what they do. And with regard to Great Lakes, I think we have worked hard over time to compete well against those guys. So we see a merger broadly speaking as a positive event. We think Bob is pretty focused on driving margins and bringing discipline into that arena, which is a good thing for all of us in the business. So I guess what I would say generally is I see it as a positive and I think our focus on technology in Polymer Additives areas and new products is going to continue to carry the day for us.

Okay. And when we look at Fine Chemistry Services, a business that people have stubbed their toe on in the past, you seem to be doing a much better job. What is the longer-term margin potentials, both topline potential in Fine Chemistry Services for you guys?

Again in that business if you look at it, it had historical margins that were near the level in Polymer Additives if I go back into the late '90's, early 2000 period. And we've been working hard to overcome some of those headwinds, David, you're well aware of. Over the last couple of years, as John mentioned, we think we have reached that inflection point and we expect to grow from the point we are today. We see a couple of opportunities out there to do some -- take some actions to drive sequential improvements, both in terms of new products and reducing operating cost in some units. And I think those alone would get us maybe 300 basis points in that segment.

So my belief is that segment, like the Polymer Additives segment, should be able to in a few years approach that classical level of gross margin.

John, just in Catalysts, how is the 9% price increases in FCCs progressing?

What I'm learning there David is it really takes time as these previously agreed-to orders and contracts work their way through. So we continue to be very hopeful as volumes pick up in the second and third quarters to achieve that level of pricing improvement. First quarter, we did not see that. Prices were flat sequentially, flat year-on-year. But as these commitments run through their process, we feel the newer commitments will be priced at that higher level, and that all would work through in the second and third quarters. A little longer lag time I would say then what we have worked our way into from the flame retardants and some other phenol type derivatives.

One more question. Just in HPC's given the strength this quarter, do you have a longer-term view now of the long-term growth in HPC's going forward?

David, yes. We're very glad we bought this business. The fundamentals are strong, the regulatory environment is real tailwind for us. We feel long-term consumption of oil will stay relatively high. Our technology we feel is the best to continue to help solve these problems and we have invested in some debottlenecking and some expansion of our ability to expand our technology base. So we feel pretty good about it.

Thank you.

Frank Dunau, Adage Capital.

Thank you guys for having at least one good quarter of a Company that I invested in.

Any time, Frank.

I have two questions. First on the HPC business, the strength we saw there, how much was because your customers postponed -- I think in the fourth quarter, there was a postponement because they were hoping molybdenum prices might come down. And then how much -- and I guess by the first quarter, they had to buy them anyway. So how much of the first quarter strength might be just capturing some of the stuff that should've happened in the fourth quarter?

That's a good question, but I'm not sure I can totally answer that Frank, to be honest with you. We just continue to see volumes in the second, third and fourth quarters continue to be strong. So I don't believe the phenomenon that occurred from the fourth quarter to the first quarter is going to unduly impact our volumes going forward.

And you made an allusion, I think it was Jeff Zekauskas' question, about chlorine strategies changing, and I'm trying to figure out what it is you're thinking about doing?

I think, Frank, what I was trying to get across there was what we have done in our chlorine buys is we have worked with a few suppliers and really worked hard to make sure that we're getting as good a deal as we can get and that served us well historically. So although we've looked at investing in a chlorine plant, frankly we have never felt up to this date that we could get any kind of return in that that would make any sense. It is a valid question going forward if you look forward the next 5 to 10 years should you have a chlorine plant in place, and we will investigate that at that time. But I'm hopeful that as we're becoming a larger and larger buyer that a few of these guys in the merchant market would like to have us in play and would like to do so at a pretty attractive price. That is my hope.

Thanks.

Kali Ramachandran, State Street Global Advisors.

Hi, great quarter, guys. Quick question. Can you give us a sense of where you see permanent debt levels being at the end of the year with all of this free cash flow you're generating? I know in the past, you had mentioned debt reduction was one of the areas you were looking at?

Kali, this is Paul. As we've indicated before, we think we're going to be able to generate some free cash flow in excess of $100 million for the year and we're still holding onto that target, trying to achieve that. You get an appreciation in the first quarter, we did have this bump-up in working capital really attributed to this very strong performance in Catalyst and HPC sales really in March. And the working capital just bumped up associated with that. And we would expect some pretty significant cash flow to come home over the next couple of months as these receivables are collected. So we're still very optimistic that if you look at our EBITDA, look at the underlying performance, that our internal targets are north of that $100 million of free cash.

So where would you -- could you just give a range of where you would see debt levels at the end of the year?

Yes. As I said, in terms of the net debt, if I subtract half the cash that we have on hand, you know, mid-600's.

Thank you.

Jeffrey Zekauskas, J.P. Morgan.

A few questions. I think Paul Rocheleau was talking about the tax rate for the year and I didn't exactly understand the number or the range he provided. That is, I thought you said that things might be plus or minus 2. Is that right? And if it is, that would mean that there's a 400 basis point range for the tax rate for the year?

You are correct. We're targeting a full year average of around 29 to 29.5%. If you go back historically, our effective tax rate has bounced up and down quarter to quarter. And what we are finding as we operate the business is that the source of income is a significant -- has the same effect on the tax rate. For example, if we're generating a lot of income in Europe from the Catalyst business and the Netherlands in particular, debt is taxed at a little bit higher rate for us right now if we don't get the export tax credit that we had from the business coming out of the U.S. We are in the process of executing some tax strategies where we think that we're going to be able to reduce the tax rate of some of the European derived income, and that should come into play during the second half of this year. But yes, we look at 29% plus or minus a couple of percent as being a pretty good range to work from.

The second question is, your corporate costs were -- whatever it is -- 13.5 million. Is that a run rate number, is that an elevated number, a light number, and what's in there?

That's a little high. If you take that 13 million as Mark indicated, there was $3.6 million of this variable compensation paid out to all of the employees this quarter. Much deserved and that level, if it continues at that level in the future, you will be delighted with the bottom line. But we do expect it to be a little bit of a onetime event, and that's why we put it into the unallocated corporate because it is somewhat of a onetime type of situation.

We also have our pension expense. As Mark indicated, in 2004 we actually had GAAP pension income flowing through to our bottom line. This year, we are at a slight pension expense. The delta there quarter-to-quarter is about $2 million. And the rest of that is associated with some long-term compensation in the performance units for management of the Company and then some other smaller items as well.

In fluid cracking catalysts, I guess there's a product called NapthaMax out there. Do you guys have products that are competitive with that? Is that a high bar to reach, or is it a low bar?

It all depends on the customer, the refinery, the application, the variables that that operation is running under. And in some cases, we have catalysts that operate the given refineries far better. And in some cases, it's not so good, but it all depends. You cannot just broadly say that a given catalyst in FCC is far better or far worse than another. And if that was the case, the economics would just be overwhelming towards the particular catalyst. But we feel in many applications, we have catalysts that far exceed the performance of the one you mentioned. So it all depends on the given conditions and operating parameters and feed stock that a given refinery is using.

Just two more short ones. Are there any antitrust investigations into bromine that are recent, as far as you know in any major jurisdiction?

Jeff, this is Mark. No, there's none to our knowledge anywhere in the world.

And then lastly, and this again may be obvious to other people, do you guys have earnings guidance and have you lifted your earnings guidance?

No. As a rule, Jeff, we don't put out earnings guidance.

Okay. Neither for the quarter or for the year?

No, not for the quarter or the year.

Okay, thank you very much.

Sir, we have no more questions in the queue at this time. Would you like me to repeat the instructions?

Okay.

(Operator Instructions). Ted Isaac, Bear Stearns.

Hi, good afternoon and congratulations on your quarter. Could you just tell us about your bank lines, how large they are, what the availability is, how much is drawn? And in terms of your debt reduction plan, you said net debt of 600 million by the end of the year. And will you actually be paying debt off, or will that just be cash balances? Thanks.

Ted, as you know, we just went through the major refinancing exercise back in January and we have the 325 million of 10-year notes which are out there, unamortizing notes certainly. We also have a term loan that is right now approximately $416 million as of March 31. That is an amortizing loan 10% per annum, so there is a small payment every quarter. And then we have -- and that is a little extra capacity under the terms of the term loan. We do have the revolver. We have a $300 million line of revolver credit. We are about $65 million drawn on that, so we have headroom of approximately 240. And then we have a number of bilateral lines of credit with some additional headroom. But the real headroom for the Company is their revolver worth about $240 million.

Okay, great. And is the term loan with the banks?

Yes, it is.

So the revolver is where you have a lot of flexibility then?

Correct.

Thank you.

We think raising money is not a problem at this point in time, but again, we don't need more than we have right now.

Okay, great. Thanks.

We have no additional questions at this time.

Thank you everyone for participating this afternoon. If you have any additional questions, I would be happy to take them at the contact numbers given in the press release. Thank you.

Ladies and gentlemen, thank you for joining today's conference. This concludes your presentation. You may now disconnect. Good day.