雅保公司 (ALB) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Quarter 2 2005 Albemarle Corporation Earnings Conference Call. My name is Michele and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call Miss Laura Ruiz, Corporate Director of Investor Relations. Please proceed ma’am.

Thank you Michele. Good morning everyone and thank you-- okay. Thank you for joining us today for a discussion of Albemarle’s Third Quarter Results, which were released prior to the market opening this morning. Participating with me on the call this morning are Mark Rohr, President and CEO, John Steitz, Senior Vice President, Business Operations and Richard Diemer, Senior Vice President and Chief Financial Officer. Nicole Daniel, our new Corporate Director, Investor Relations is also participating and will be taking the reins for me after this call today, so that I can focus more on our company’s sustainability efforts.

Please note that we have posted reconciliations for net debt and EBITDA on our website under the investor information section at www.albemarle.com. We have also posted historical, unaudited, pro forma Jordan Bromine Company JD results back to March 31st-- Mark.

Thanks Laura and good morning everyone. I appreciate all of you taking the time to listen into our earnings call and webcast today. We’re looking forward to sharing with you performance details for the quarter and answering your questions after our remarks.

First I’d like to introduce you to Rich Diemer, our new CFO. We’re glad to have Rich on board with us. He’s very well suited to lead our financial team with his prior experiences at Honeywell and KPMG. Rich is going to walk you through the financial detail after I present the highlights and company results for the quarter and John will provide segment details.

Along with Rich, I’d like to welcome Nicole Daniel to this call. Nicole is new to investor relations, but she’s not new to the company having an extensive background in managing our external reporting efforts. Nicole’s contact information is included with our press release, so please call her if you’d like additional information following this call.

I’d also like to thank Laura. Over the last year, she’s worked tirelessly to improve our investor relations program. We’re grateful for her help leading investor relations and willingness to take on new responsibility to coordinate Albemarle’s global sustainability initiatives.

Before we go into the results, I’d like to mention a few highlights from the last quarter that provide some strategic insight into the business. First let me start with the consolidation of our joint venture, Jordan Bromine Company effective August 1st of this year. JBC is our joint venture on the Dead Sea with operations in Safi, Jordan, which manufactures elemental bromine, clear completion fluids, potassium hydroxide and tetra brome, a bromine based flame retardant.

We’ve recently made changes in the joint venture agreements, giving Albemarle a greater control of this entity, allowing us to consolidate the results in our operations. These results will be reflective in both our Fine Chemical segment for bromine and derivative sales and our Polymer Additives segment for flame retardant sales. Pro forma segment operating profit are included with our results released today and we will post historical unaudited, pro forma information on our website.

The impact of this joint venture increases segment income, profit margins in both Polymer Additives and Fine Chemicals by 51 basis points and 213 basis points respectively year over year. Needless to say, we’re very pleased with the performance of this venture.

You’ve likely seen the press release announcing the European Union’s decision to exempt the brominated flame retardant deca-brome from the restriction of hazardous substances or RoHS directive. Deca-brome, the second most widely produced brominated flame retardant, is used in many household and industrial applications such as televisions, office equipment, mobile phones and upholstered furniture. This decision will allow manufacturers to confidently design their products with fire safety in mind and will allow numerous lives to continue to be saved. It should not go unnoticed that the bromine industry voluntarily spent over $10 million testing this product, some 580 tests reported the product to be safe and of low risk in use. In my opinion, this exemption validates Albemarle’s approach to science and environmental stewardship. This exemption also lays a foundation that I believe we can build upon and increase societal confidence in the effective use of halogenated flame retardants.

You may also have seen the announcement extending the collaborative agreement with HTE, a high throughput experimentation company for novel applications in hydro processing catalysts. We expect this collaboration to fundamentally change the way we perform synthesis and evaluation of possible technologies and catalysis, in effect, tripling our testing capabilities. We believe that innovation is a key to maintaining our leading positions in refinery catalyst and developing new catalysts for bio-diesel applications and other emerging fuel opportunities.

At quarter’s end, we have over 120 products in our fine chemistry services pipeline, our position to introduce three new FCC catalysts later this year and are expanding several new patents to be issued shortly. I am convinced our technology focus is continuing to provide commercial differentiation in the marketplace.

Moving to the more immediate, this has been a difficult quarter in the chemical industry. In July you recall we reported some signs of economic slowdown and as a result we lowered production volumes to reduce inventory in our Heritage business, which impacted the third quarter to some degree. The short-term business slowdown was further impacted by two major hurricanes hitting the Gulf Coast. Our facilities were spared any direct damage and we are grateful our employees took the necessary precautions to stay out of harms way. However, we did suspend operations in Texas, Louisiana, and Arkansas for several days due to mandatory evacuations, regional flooding, and power outages. We estimate the immediate impact of hurricanes this quarter due to production losses to be $3.6 million or about $.05 per share of earnings.

Most of our customers were also spared major damage with only one of our refinery catalyst customers taken down completely by the storm. However, the ripple effects following the storm are proving to be more difficult to quantify. We were immediately faced with a surge in raw material and energy costs. Natural gas prices in the U.S. have increased dramatically over the last few weeks where prices current at the $13 per MMBTU level. Several of our raw material suppliers suffered damaged and declared Force Majeure in light of their inability to supply materials. This has forced us on to the open market to purchase some of our raw materials at prices significantly higher then what was contracted for an impact of approximately $700,000 in the quarter.

Third quarter 2005 compared to third quarter 2004 saw increases for raw materials including metals of approximately $33 million. In addition, energy was up over $2 million in the U.S. for that same period. For reference, we consumed roughly 500,000 MMBTU of natural gas per month in the U.S.

Looking at the refinery catalyst business as if we had acquired at the beginning of 2004, our businesses are currently on track to spend roughly $162 million more in raw materials and metals in 2005 versus last year. On top of this, we expect to spend roughly another $12 million of energy in 2005 compared to 2004. Combined this impact represents $175 million increase in our costs to produce our products compared to 2004. Key raw materials other than energy, which have increased include BPA, which is forecast to be up about $10 million over last year, caustic and chlorine, which are up about $13 million and olefins up around $5 million.

As many of you follow the industry know, we have been working pricing initiatives over the last 12 months. Most recently we have announced and are working to implement a number of pricing initiatives across each of our business segments to offset raw material and energy inflation and to help bring margins back to levels warranted by the value addition of our products and technology. For example, in early September we announced price increases for HPC catalyst and announced major price increases for our commodity-based aluminum alkyl coke catalyst. We have also added a surcharge to our FCC sales out of the Texas plant, which I will discuss in more detail in a minute.

In our Polymer Additive segments, we announced a significant price increase for brominated flame retardants, ranging from 20 to 40% across our portfolio of products. We also announced price increases for our antioxidants ranging from 5 to 20%. These prices increases have good traction and should be largely realized in the fourth quarter.

In our Fine Chemicals segment, we announced increases in our bromine-based clear completion fluids to offset chlorine and energy costs. We also increased prices for potassium hydroxide and other potassium-based derivatives to offset energy and potassium chloride inflation in Europe.

In addition to these prices, we announced energy surcharge on FCC catalyst shipments produced at our Texas plant. FCC catalysts consume a large amount of natural gas to produce them and therefore margins on these products are more significantly impacted by the dramatic increase in natural gas price. This surcharge, which is being accepted by our customers, will allow us to pass through the escalating costs we’re facing in the fourth quarter and into 2006.

Overall these price initiatives are being successfully implemented and should help offset all of our cost increases in 2000-- in the end of this year and provide a more significant impact in the first quarter of 2006.

This quarter also benefited from the repatriation of funds made possible by the American Job Creation Act of 2004. Rich will add some color to this in a few minutes as well as describing steps we’re taking to maintain a lower effective tax rate going forward.

With these highlights, let me now address the company results. I’m pleased to announce net sales of $507 million for the third quarter. That’s an increase of $93 million or around 22% from the third quarter of last year. These results represent a roughly $4 million increase over second quarter 2005 net sales. Net income, excluding special alignments for the quarter, was $26.3 million, a 29% increase over the prior year and a 9% decrease sequentially.

The slow start for the quarter followed by a very disruptive September combined to erode margins. In addition, we had a $4.3 million negative foreign exchange impact sequentially. Joint venture income was down sequentially approximately $7 million due to low volumes in Asia and Brazil and the handling part of the refinery cycles in these regions. Of course the reallocation of JBC into the consolidated results also impacted JV income negatively. Polyolefin catalysts were hit hard as numerous olefin plants reduced rates in September, some of which continues today. Refinery catalyst mix negatively impacted our segment income this quarter as well. Polymer Additives segment was lower due to reduced production volume driven by the business and steps to reduce inventory.

Through all this, I’d like to note that we have continued to expand margins in Fine Chemicals, assuming a pro forma consolidation of JBC, segment income margins have increased from 7.2% to 9.4% from third quarter 2004 to third quarter 2005. Year-over-year pro forma segment income including JBC consolidation is up 46% in Fine Chemicals and almost 10% in Polymer Additives, great work.

To further improve Fine Chemical segment margins, we have begun discussions with a Works Council at Port Nobel France to cease our production in bromine from sea water at that site. Bromine production at this site is costly and represents less than 5% of Albemarle’s total bromine capacity, which can easily be produced elsewhere. We hope that the Works Council consultation process will be completed in the fourth quarter, at which time we’ll be able to share the financial impact that will include some employee severance-related costs.

Before I ask John to make a few comments on the segments, I’d like to note that in spite of these disruptive events in the last quarter, it’s very easy for me to remain positive on the outlook for our business. We are in the middle of our three-year planning process and looking forward to the number of opportunities in each segment, in each business segment are far greater than those I’ve seen in any prior year. So absent a global slowdown, we remain confident in our ability to continue to grow these businesses as we have done in the past.

With that, let me turn it over to John Steitz for a few comments on each segment.

Well thanks Mark. As I walk through the results today, I’d like to point out that all the segment income comparisons are on a pro forma basis as if JBC had been consolidated at the beginning of the quarter. As we mentioned, you can find those pro forma numbers on our website.

In Polymer Additives, net sales for the third quarter 2005 were $195 million, up over $9 million or 5% compared to the third quarter of 2004, but down $9 million compared to the second quarter of 2005. Our Polymer Additive segment income, excluding special items, was $23.4 million, just under a 10% increase over third quarter 2004 including JBC pro forma, but down sequentially.

As we stated in the second quarter conference call, we began the third quarter seeing signs of weakness in flame retardants. As expected, volume softened during the quarter with sales decreases across brominated mineral and phosphorous flame retardants. The largest volume decreases sequentially occurred in brominated flame retardants and year over year in mineral flame retardants. September was a turn around month for the business and momentum continues into the fourth quarter. Volumes in our stabilizer impurities business we’re down year over year, but up slightly sequentially.

In spite of the volume declines in flame retardants, the pricing improvements allowed net sales to improve year over year. However, sequentially the price increases were not enough to offset the volume declines. We believe that this was a temporary softening in the market and do not expect this trend to continue.

Year over year, favorable impacts include price improvements in brominated flame retardants and mix of products sold. However, we also saw reduced sales volumes and higher raw material costs primarily related to VPA, isobutaline-10 tetra chloride and ethylene. Operating profit was down sequentially primarily related to volume declines in flame retardants and some foreign exchange impact.

Switching to our Catalyst segment, Catalyst net sales for the third quarter 2005 totaled $173.5 million, a $67 million increase over third quarter 2004 and a $26 million increase, about 18% over second quarter 2005. Second in income excluding special items decreased 2% year over year and approximately 38% sequentially. A large part of the sequential drop is attributed to the lower contributions from the joint ventures, which as you recall last quarter were very high and some additional negative foreign exchange impacts affected the business as well.

In addition, our mix of products sold impacted earnings. Our polyolefin business ran at reduced rates during the quarter due to hurricane impacts and a large production campaign was delayed into the fourth quarter. In addition, para-ethylene, olefins and alumina prices also negatively impacted the quarter in this business.

In Fine Chemicals, net sales for the third quarter totaled $138 million, a $16 million increase over third quarter 2004 but a $13 million decrease over 2000-- second quarter 2005. Our Fine Chemicals segment income excluding special items was $12.4 million, a 47% increase year over year including JBC on a pro forma basis.

Year-over-year results were impacted favorably by significant bromine and clear brine fluid price increases. These gains were moderated by higher raw material prices in chlorine, ethylene, caustic, and olefins. Sequentially, we saw lower segment income while we had strong bromine and pharmaceutical sales and clear brine fluid pricing improvements, we continue to rebuild the business through many new product opportunities and are encouraged by the transformation of our Naproxen assets into a multi-purpose production facility, serving as a great model for how to build a profitable and sustainable fine chemistry business.

And with that, I’d like to turn it over to Rich Diemer.

Thank you John. Our press release issued this morning contains preliminary unaudited results for the third quarter and the nine months ended September 30th. Such information is subject to further review by the company and our auditors as part of our standard quarterly review process.

I’d like to begin by amplifying a bit on the consolidation of JBC and how it impacts our income statement. By consolidating JBC, we can more transparently present the impact of the strategic operation throughout our P&L. Neither the net sales nor net income lines change under this change in accounting method. What does change are all the lines in between, as the one-line equity method results are replaced by a full JBC income statement. This will result in comparability issues with prior period results, which we have attempted to bridge by providing pro forma, unaudited income statement information for all prior periods as if JBC had been consolidated.

Our Q3 results are benefiting from a low effective tax rate of 13.7%, which was favorably impacted by both the actual and planned repatriation of overseas funds under the Homeland Investment Act, as well as the consolidation of our JBC joint venture, which is not subject to tax. Albemarle is able to realize a gain from this tax legislation as we have previously accrued taxes on overseas income assuming such earnings would not be permanently invested. The Homeland Investment Act allows us to bring these funds back to the U.S. at favorable rates.

It is important to note that most companies that have repatriated funds under the Homeland Investment Act have recorded a charge when they adopt their plans as they had not previously provided taxes with respect to repatriating their funds. We anticipate our Q4 effective tax rate to be at a level of 29% or an approximate 27% effective tax rate for the full year.

As we mentioned on our Q2 call, we continue to work on a number of tax strategies that will favorably impact both our 2006 and future tax structure. We will discuss these opportunities with you in the upcoming months.

Unallocated corporate expenses were $7.4 million, a decrease of $3.1 million from last quarter and $2.5 million from prior year. This decrease occurred principally due to a $2.8 million adjustment to reduce certain incentive plan accruals in the quarter.

Turning to cash flow, EBITDA for the third quarter was approximately $70 million, which brings us to approximately $230 million year to date. We ended the quarter with cash and equivalent balances of $48 million.

Cap ex year to date is approximately $50 million and we project that full year spending will amount to approximately $70 million.

Depreciation and amortization for the quarter was $28.5 million and we expect fourth quarter depreciation amortization of approximately $30 million.

Turning to the balance sheet, as of September 30th, we had consolidated debt of $880 million including $80 million of debt in our JBC joint venture, of which $47 million is not guaranteed by Albemarle. Of this total amount, $480 million is floating and $400 million is fixed, approximately a 55 to 45% split between the two.

Net of cash on hand, which I have already said, is $48 million. Our net debt is $785 million or $34 million less than as at June 30th. Much of the cash that was repatriated during the quarter was used at the moment to pay down our outstanding debt balance. Our quarter end debt to cap ratio is approximately 48%, about a 2% improvement from where we stood as of June 30th.

With that, I’ll turn it back over to Nicole for the Q&A portion of the call.

Thanks Rich. Okay, we’d like to go ahead and open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] And your first question comes from the line of Ray Kramer of Albemarle. Please proceed sir.

Hey actually with First Analysis. Good morning everybody.

Good morning Ray. I’m glad you joined us here.

As long as I get a paycheck. A couple of questions, first all on the catalyst business, could you give us a little more color as to what was going on there? If I look at operating margin before the JVs, it looks like that was down a bunch and then obviously the joint ventures were. Is that something I should expect to sort of bounce back next quarter?

Yes Ray, John Steitz. You know we recognize, you know we had a problem this quarter and so we believe that profitability is back on track for the fourth quarter. You know so the question you’re asking is really what happened. First, we have a heavily denominated FX business here based on the Euro. And that was about a $3 million impact in catalyst. In JVs came in weaker than we expected. And that was about a $4 million impact. So what we’ve done with JBC is a good example of really kind of negotiating control and I think it’s really a good sign that we’ve preserved that control with JBC. So that’s kind of a model where we’d like to do a lot more of. But JVs are about a $4 million impact.

The polyolefin catalyst, we had just kind of a working capital move that moved at fairly significant production campaign in that business to the fourth quarter. That was in our plan, but that was about a sequentially about a $2 million issue. But we did have a number of mix and pricing issues. You know we produced some higher cost catalyst. And we sold some lower value catalyst. But it kind of begs the question, what are we doing about it to turn that business around in the fourth quarter? And we believe that JVs will be up in the range of $2 to $3 million. We continue in the FCC business to drive higher technologies and we’re really getting enthused about our jade and topaz technologies. And but the real trick there is continuing to drive pricing. We’ve announced some surcharges but we’ve really got to expand margins to reflect the value that those products bring. And that’s a real key there going forward.

Both plants now, both businesses, HPC and FCC are sold out. So this is no time to be weak or timid and we need some aggressive pricing improvement there. And a good example of that is what we’ve done in alkyls. We have seen some competitive announcements supporting a rather extensive increase in pricing for that business and we’re negotiating a lot of those arrangements and contracts now going forward. But that’s potential 45% increase on that business. And really reflects the value that those products bring.

So overall we’re still encouraged. This is a premiere business. And we’re going to continue to drive profitability.

Sort of sticking with the pricing discussion then, on the Polymer Additives front you and competitors have announced some pretty substantial price increases. Can you comment one on the sort of early signs of traction you’re seeing there? And then two, given the pretty sharp recent run-ups in raw materials, are you going to need more price increases to catch up and get ahead or are these enough?

No, well they’re never enough. I just got to believe we’re going to be continued, continually faced with volatility on the raw materials side. We, this is a very solid move to preserve the profitability of the brominated flame retardants business and the traction has been very good.

What we did in the second quarter, we saw there’s a change in ownership of one of our major competitors. We really built in to our negotiating strategies as much flexibility into the fourth quarter as possible and in order to have that flexibility to raise prices. Because in the third quarter, we saw some nice sequential improvements in tetra brome pricing, but generally we have not across the product line seen a lot of sequential pricing improvement. But in the fourth quarter, we’ve got a lot of traction, these 20 to 40% increases are holding and we feel very good about that. So the team’s done an excellent job on the execution side. And the competition appears to be holding as well.

All right, great. And then just one sort of clean-up financial question, SG&A at about 10%, it looks like it was sort of reduced a little by some reversal of accruals in the quarter, so should we expect it to sort of tick up a little from there on a run rate?

Well net our SG&A Ray, I think is 12.7% or something like that, all in total and that’s probably a pretty good number for you to assume for the near future.

Okay, thanks.

Thank you.

Thanks Ray.

Your next question comes from the line of Marybeth Connolly of Goldman Sachs. Please proceed.

Thanks. Good morning.

Good morning Mary Beth.

A couple of questions. Could you just give John I guess a little more color on flame retardants, talking a little bit more about end markets. I know last quarter you talked a lot about the automotive end market being weak for your minerals product. And then also if you could talk a little bit about the electronic, consumer electronics end markets, kind of where things, just kind of on broader trend basis what things look like in the third quarter, outlook for fourth quarter and early part of ’06?

Yes, good Marybeth, thank you. We saw as we mentioned last call, going into the quarter, we saw some weakness and I think in large part our customers were telling us that they were going through some inventory corrections and they’d see things rebound primarily in the electronics sector in August. Now we did not see the rebound in August but we did in the electronics sector saw a strong rebound in September. And that momentum continues nicely. We still saw I think as we pointed out in the script some fairly significant volume declines and we also internally had throttled back our plants to keep inventory steady through the sequentially. So we felt good about that.

We’re seeing now some end markets the book-to-build ratio is getting stronger, more positive. We’re seeing stronger demand from our customer base in electronics and we, in the automotive sector beginning in September, October we’re seeing the, that part of wire and cable pick up not greatly but in the above GDP levels in that 5 to 6% range. So overall we’re looking for volume increases in the fourth quarter if everything holds true.

Okay. And also in the, actually can you just remind us again what percentage of the Polymer Additives is flame retardants and then within flame retardants, kind of a quick breakdown of the different flame retardants.

Yes, if you look at our flame retardant business, flame retardants itself is boy about 65, 70%.

Okay.

Total and then stabilizers cured to and a host of others about a third. So, that’s roughly the breakdown. So the good thing about our Polymer Additives business is that the breadth of markets it serves. So we have electronics. You’ve got wire and cable for automotive, wire and cable for construction. You’ve got the construction industries. So the end markets are very diversified for us. And I think that’s a strength when you have the broad portfolio of products that we offer in our Polymer Additives business.

Okay and then just switching gears one other quick question. Ibuprofen, just kind of a bigger picture question on for the competitive positioning, you had a lot of challenges in that business. Pricings been a pretty big issue for awhile. Just what’s the long-term outlook for this business and beyond-- I guess how close are you to getting costs down to where they need to be to remain competitive in this area?

Yes, next year is a very critical year for the ibuprofen business. We’re building into our plan. Mark mentioned we’re going through our three-year cycle right now. And we’re building into our plan a lot of cost reduction activity around ibuprofen and our pharmaceutical business. So we believe next year will be a turning point. The pricing this year sequentially has held pretty steady. Year on year we’ve seen about a 15% decline. So we think next year we can cover that through some more aggressive cost reduction. But there’s no question we believe we’ve been harmed by the import of products coming from India and China. And but we’re going to work hard to offset that.

Okay, I’m sorry.

The real key, the real key to our pharmaceutical business is finding those niche products that have a real classic barrier to entry against the Indians and Chinese and this involves kind of a broader technology play for us. And we’re trying to build that cyto-toxin, these products are sold in microgram type quantities and require real technology to be brought to the forefront as a real key part of our overall Fine Chemistry effort.

Okay, I’m sorry, just one quick question. You mentioned some Ag weakness I think in the press release. Is that just seasonal issues or is there something else?

Absolute, absolutely that is just seasonal. The majority of our Ag intermediates are sold between the fourth quarter and the first quarter.

Okay. Great.

So that, that’s really no issue for us.

Okay, thanks very much.

Thank you Marybeth.

Your next question comes from the line of Mike Sison of Keybanc. Please proceed.

Hi everyone.

Hi Mike.

Say Mike.

In terms of the foreign currency negative is that related to the Euro being weaker relative to the dollar?

Yes Mike.

Sequential move?

Mike this is Rich. The average rate that we consolidated our results of our catalyst business was $1.28 in the second quarter and that went down to about $1.22 in the third quarter. So, it’s a Euro-based business and that’s what the impact was.

That was an impact on a sequential basis?

Yes.

On the, on the year-over-year basis, that would have been about even?

Yes, it’s really the yen on the year-over-year basis.

Oh, yen, okay.

Yes, we have a good number, sixty-- I’m not sure what the number, current number is 60 to 70 million outstanding receivables all the time in Japan. So you can get hit there, when the yen moves around pretty good there.

And John what was the pro forma catalyst number for the third quarter of ’04? I’m trying to get a feel for what’s sort of the comparable year-over-year sales growth number was?

Yes.

Was it like 150 or something like that?

Yes it was in that range. Yes, so we’re up--

16% or so?

Yes, in that range Mike. And you know what, but the molybdenum inflation is pretty significant too during that period.

The volumes were down on a pro forma basis year over year?

No, volumes were up.

Volumes were up.

Volumes were up pro forma. HPC was up fairly significantly. So that’s where we get into the mix issue. And volumes are up on FCC as well. But the real issue as I pointed out earlier Michael is to get these prices aggressively up.

Okay, if I just sort of work the math, your margins in catalyst is about 7% right? Then the $3 million hit from FX maybe that’s another 2% and hit at margin so that gets you to 9%. Then the hurricane comments you had earlier, Mark was that primarily in catalyst?

Well a good chunk of it was, yes. But it was also our, yes a good chunk of it cause both of our plants in Houston are big catalyst plants.

So that’s about $3 million, maybe another 2%. So I guess you back to about 11%, is that sort of an underlying margin there if you take away these issues?

No it’s higher than that Michael. Cause we also had--

Higher.

A fairly big campaign moved out of our polyolefin catalyst business. That was about a $2 million issue.

Another $2 million.

Yes.

So a lot of this--

It’s we’re weak as we pointed out. JVs surprised, surprised us a bit.

Right so that’s another 1%. Then was there a squeeze between raw materials and selling prices?

Yes, we’ve in the third quarter, we’re, caustic really went up. And of course the, some natural gas impact in the third quarter and we generally have a lag in catalyst where we can get that up. But that’s why we’ve announced a surcharge in FCC. We’re planning some additional pricing improvements, really critical to getting margins back up to really reinvestment in economics.

Right. Then, when you talked about FCC and HPC largely being sold out, would you expect sales to sequentially improve fourth quarter versus third quarter?

Well we produced, we produced a fair amount of HPC for example in the third quarter that will be sold in the fourth quarter. But we’re hoping to get profitability back to levels we’ve seen in prior quarters outside of these third quarter impacts.

Right so, if you, if fourth quarter sales are sort of sequentially in line with the third, back on a 13 to 14% margins, there should be significant improvement in earnings?

Yes.

Sequentially.

That’s what we’re working at--

That’s where we’re, yes, we’re working on that exact issue Mike.

Okay, great. Thank you.

Thanks Mike.

Your next question comes from the line of David Begleiter of Albemarle. Please proceed.

Thank you. Deutsche Bank. But thank you anyway.

Yes, we really like the fact that you’ve joined as well David.

Thank you Mark.

Doing great, we really appreciate that.

And Mark and John in flame retardants, did you gain any volume or share given the disruption at Great Lakes at Chemtura?

No, we don’t think there’s been any share movement in that business materially. We’ve been pretty aggressive in pricing as John noted and so there has been some subtle movement around on a small account-by-account basis, because we’ve really not been at all flexible in our application of those price increases David. But net, net, it’s the same.

And on the pricing and as far as if you’re gaining good traction at this current price increase, will you or should you raise prices again further to again recapture historical margins?

David, this is Mark. You know when you look at the, at the value and use of these products, they are very lowly priced even today with the increases we’ve got out there. I mean if you just had in front of you a rundown of all the different polymer additives that go into, go into these products. So generally speaking, we think that they’re undervalued. Generally speaking, we’re going to continue to work to see if that value’s reflected in the price.

And Mark can this be a 15% operating margin segment going forward?

Yes sir. That’s, I mean that’s what we’ve been saying. That’s what our intent is to get it to that level. And I mentioned the 2000, I mean our three-year plan, we do this every year and I can just tell you David we have never seen the kind of opportunities driving these businesses that we see today. So we’re very, we just feel very excited about what’s in front of us and short of any global uh-oh because of energy and things like that, we’re pretty confident that the growth rate’s going to be pretty strong for these businesses.

Just on the antioxidant pricing, you’re not as strong as far as obviously due to the different industry structure in that business, but again can pricing go forward from here, year over year?

Yes, volumes are a little weak right now David, but it’s always better as far as those price increases when you’ve got a good tail wind, the volumes behind you. But yes overall we’ve seen some good solid pricing improvement in antioxidants year on year, sequentially less so. But we’re hopeful to continue to drive the, that whole value proposition that Mark pointed out.

And last item, just on the, on refinery catalysts, the jade and topaz technology is this designed to compete with the Engelhard Napthomax (ph) technology?

Well the whole effort is really to drive technology for, to help those refinery operators improve their efficiencies and outputs. So yes, I mean but we’ve been working on these a long time and we’re really encouraged by the acceptance of our technology as well. The real key here is to get the value out of this entire product line around the globe and I don’t think any of us have done that suitability. So we got to continue to drive that technology but we also got to get paid for it at the end of the day as well. So that’s what I’m pushing our people to do.

And John what portion of your refinery catalyst sales are in the jade and topaz technology?

Well we’re, it’s probably in the order of magnitude of 25 to 30%. So that’s what we would call in that premium range.

And how much of a premium do you get for these products? 20%?

Yes, over the, you know in that range but not near enough David. It’s just not, it’s not near enough the-- of premium. Again, the whole product line just for the efficiency that these catalysts create in the refinery, it’s just, it’s just not getting enough value.

Okay thank you very much fellows. Thank you.

Very welcome.

Your next question comes from the line of Marshall Reid of Bank of America Securities. Please proceed.

Good morning.

Hi Marshall.

Hi Marshall.

Good morning. The pricing effort has been impressive and just punching on the previous question, where have you seen sort of the biggest challenge in terms of implementing higher prices? Has it been antioxidants or some other areas?

The biggest challenge, we’re driving hard in Europe some increases in potassium and chlorine products out of our French plant in Europe. That’s certainly been the most challenging. It’s relatively compared the whole company of fairly small business and it’s a $50 to $60 million business that we’re losing money on. So that’s been no question I think the most challenging. We’re really stepped up the effort there at the beginning of the-- middle of the third quarter to drive pricing improvement as in Europe we’ve had a lot of electricity rate increases. So we’re trying to recoup that and that’s been, it’s been difficult.

Okay.

Yes, Marshall I would sort of add to that. I think the, one of the things that we’ve done a pretty good job with is working internal to our organization and talking a lot internally and with workshops about what it takes to drive pricing. One of the biggest challenges you have is the internal challenge relative to doing that. Internally getting an organization to go out and sort of put it on the line and drive prices in a big way and being tough enough to hold the line in that, especially if the competition comes in and nibbles around with, nibbles around in terms of market share and things like that. Frankly, we’ve seen good acceptance in Polymer Additives broadly speaking. We’ve done some stuff in catalysts and broadly speaking to date, it’s been accepted or being accepted. So we’re really pretty pleased of what’s happening out there. There’s a need that everyone recognizes. And so, and so the question is just, is just one of working with your customers and getting these things through in my opinion.

You mentioned you’re seeing better pricing just a point from your domestic competitor. Are you seeing that same sort of discipline from your international competitor in Polymer Additives?

Let me take a stab at that. I, yes, I think so. You know we’ve-- I think so to answer your question. You know time will tell in that. But we’ve certainly have seen indication. There’s been public announcements made that would indicate that they are working hard to drive prices.

Yes, the only think I’d add is they may, in certain situations delay 30 days before the full implementation of it. But that’s about it.

Okay and then last question. Again on pricing, you mentioned that recent increases, you expect them to be largely realized in the fourth quarter. Do you expect to gain traction in margins sequentially because of that? And when should we see these price hikes fully implemented?

Yes, we should-- we believe we will expand the margins but in large part, it’s kind of volume related. We’re basing it on a view that volumes sequentially will continue to increase. So if there is any again, any kind of signs of the downturn at the turn of the year that could stress us a bit on margins. But if the price increases hold, it will help us offset a lot of raw material increases as you are well aware. And we hope to make some progress towards that 15% goal that Mark mentioned.

Okay and full implementation you expect the first quarter of ’06?

Yes, absolute. I mean it’s in brominated flame retardants, we’re seeing a very good acceptance and full implementation as we speak.

Okay great. Thank you.

Thank you Marshall.

Thanks Marshall.

Your next question comes from the line of Lawrence Alexander of Jefferies. Please proceed.

Good morning.

Hey Lawrence, how are you?

Very good. Can you address your plans for reducing inventory for the next couple of quarters? And whether or not that would have any impact on the P&L?

Yes Lawrence, we’ve pulled down inventory to some extent this quarter. I don’t have an accurate number on that, but I would guess it’s $5 to $10 million, a P&L hit probably this quarter for that. We had planned for that. And so I don’t want you to think that was in the, it was in the results but it really-- we would be able to deal with that kind of decrease we think without too much difficulty.

Our intention is and from this going forward is to continue to work that inventory down, hopefully as volumes increase. You know we’ve been pretty flat on volumes in most of our businesses through the year. And a good chunk of that increase you’re seeing is the raw material costs that work through inventory. So, you should have a view of the move by the end of the next year, we’ll have worked that number down. But we’re not going to do it immediately. We’d like to do it in a way that you don’t see it in terms of earnings.

Okay and on pricing in oil field chemicals, your bromine derivatives for the oil field market, have you seen the price increases you’ve announced met, stick? Or were those or have you had any customer resistance?

Lawrence, John Steitz, we’ve seen very good acceptance in the oil field. I mean you can have the view for example, most of our price increase efforts began around the June timeframe. And the profit in that business has tripled from the second half versus the first half through the course of the year. We’ve seen again some additional traction in that marketplace and the volumes are up nicely as well. So, we feel pretty good about that business. And overall, the way we manage our bromine portfolio is when we establish a benchmark bromine price, we try to manage our entire portfolio to that, to that benchmark price. And so we feel good about that process and the traction behind it. And we’re continuing to drive it.

And finally just to follow up in your comments about recapturing value in FCC, should we expect a step change in FCC pricing heading into next year?

Well--

Sometime in 2006?

Lawrence that’s, that’s certainly a hope, but we cannot sit here and tell you that that’s going to be a reality right now. I mean there, as you know, so many factors in that marketplace not to mention competitive ones, market dynamics, volume, regional issues. So we’re working hard to spread the margin in that business, it needs that badly. But I can’t, I really can’t sit here and tell you that you could put in, that into your model right now.

Okay, thank you.

Thank you Lawrence.

Thanks Lawrence.

Your next question comes from the line of Chris Kapsch of Black Diamond Research. Please proceed.

Yes, I had a couple follow-ups on the catalyst business. I think John you mentioned that pro forma year over year the HPC business was up strong and the FCC was up modestly. And then there’s also a negative mix issue. So it’s a little confusing. Maybe I misunderstand. Would have thought that HPC was higher margin than the FCC business?

Yes, first let me clarify my earlier comment. A year on year, it is, it is up in the 10% range. Sequentially it’s up more than that. But that’s where we had heavy production in the quarter of some more costly catalysts and the sales were of those less, lower activity catalysts. So that’s where we had the mix issues come into play. And that was, that was a pretty significant issue for us and we’re talking order of magnitude sequentially about $5 million in mix impact there.

Does that relate to just a higher molybdenum content?

It’s a combination of molybdenum and you said it pretty well Chris. We just call it moly, but moly, nickel, cobalt, some combination of those three.

Okay and then I think in the wake of the hurricanes, I believe the EPA suspended some of the emission requirements which I would have assumed meant some of the, some of the sulfur content emission requirements. So I’m just wondering if that has at all affected, it might be pretty localized, but has that at all affected your HPC demand?

No Chris and it’s a temporary, it’s a temporary waiver and so we’ve not seen any impact of that whatsoever.

Great. Okay and then in just in flame retardants, you mentioned a rebounding in demand I think in September. Was that, can you just talk about that geographically was it mostly pronounced in Asia or across the board?

Yes, most of now most of our flame retardant customers really are in Asia. So, but the ATH business here in the U.S. picked up in September. Europe was pretty strong but Asia we’ve had a record September. So--

Okay thanks guys.

And your next question comes from the line of Mike Sison of Keybanc. Please proceed.

Rick, just a quick follow-up on the, will there be another negative effect from foreign currency in the fourth quarter for catalyst?

If rates stay where they are now, there might be a slight negative effect. It’s there or thereabouts. It’s not a big number. If it is a negative effect at the moment.

Not as material as it was in the third quarter?

I mean it all depends on where the rates go between now and the end of the year. So, I’d say where they are now, it shouldn’t be a big, you know it’s not anywhere--

We’re 120 I think aren’t we Mike?

Fair enough.

So we ended at 122.

Then Mark when you take a look at the catalyst segment, you sort of addressed this for Polymer Additives but do you still think the potential profitability for that segment is in the mid-teens longer term?

Yes sir. I mean there’s, that business has so much inherent value in just based profitability I certainly think it’s in the mid-teens. You know the wash out for that business as we cautioned everyone Mike is that it does have lumpiness with it. So I’m talking kind of year-over-year number and not sequential numbers. The joint venture, reduction in joint venture income we talked about, that was more severe than we thought, but we’ve been very clear that hey seasonally the Japanese venture makes money and we make a lot of money in the first half of the year and makes much, much, much, much less the second half of the year because it’s HPC catalyst and they take all their allergists in the first part of the year. In FCC, I’d say we had a lot of allergies in Petro Bros (ph), which again are kind of seasonal this time of year. There so you’re going to get lumpiness in this business. But broadly speaking this business and Fine Chemical business and Polymer Additives businesses should be pushed towards the mid-teens.

Right. And I just wanted to, last question just to better understand when your plants are sold out in a given quarter for FCC and HPC, why wouldn’t you be at that 15% or so or mid-teens level in that given quarter? Is it just in the near term, raw materials and maybe the next time you’re full out, you might be caught up and that would be the run rate we’d be at?

Well there, we produce material today and sell it tomorrow in all these ventures. And so you need to be cautious of the margin moves around a lot in these products from products that are very proprietary and very special like Nebula on one end of the spectrum and other me-to kind of products at the other end. So it depends a lot on the products that you’re making. It’s the first comment I’ll make. The second comment that make and Lawrence mentioned our inventory, it also requires us to run on average higher inventories because once you get into a run of a particular catalyst, let’s say it’s a common catalyst, we’ll run that and actually produce more immediate sales than we have for that product, that material. So you don’t immediately see that impact I guess is what I’m saying Mike. It has to work through the system for you to see the impact of that, those plants running flat out.

Okay, great. Thank you.

Thank you.

Thank you.

And your next question is a follow-up from the line of Lawrence Alexander of Jefferies. Please proceed.

Hi could we take a step back and talk, look at the longer term market share outlook for polyolefin catalysts as the central gravity of production shifts increasingly to the Middle East?

Well let me, let me take a stab at that. You know clearly, this material is produced primarily in the U.S. and Europe. A lot of manufacturers, there’s very little production outside the world. We do have, we do have production in Japan for these products. The Middle East is an emerging area and at some point it could make sense to produce there. You just need to appreciate that economies of scales of these plants is a very important criteria. And today there’s no incentive for anyone to do that. But if you fast forward ten years from now, Lawrence you know I think, I think with no doubt there will be a plant there.

Thank you.

Thank you.

Thanks.

Next question comes from the line of Chris Shaw of UBS. Please proceed.

Sure good morning guys.

Morning Chris.

I would have just thought that the, when you gave the impact of raws and energy, I just thought energy would have been a little higher given sort of the, some of the energy intenseness of some of your businesses. Is there something missing there? Is it a hedging program? Is it just some of the energy is already captured in the raw material pricing?

You know up until, I mean really up until and through the third quarter the, at least the sequential impact of energy wasn’t that profound. We have had a hedging program, have a hedging program in place. We had covered some of that as well as the business just hadn’t moved that much. We are not covered in the fourth quarter and we are not covered in the first quarter from a hedging point of view. So there is more profound impact today. The catalyst business consumes roughly half of our natural gas in the U.S. So it’s much more dramatically impacted then all of our other businesses, where it’s spread over hundreds of products. So clearly you’re seeing a change sort of in the nature of Albemarle energy has a bigger impact going forward, primarily in the catalyst area.

All right. What is your normal hedging program? Or is just on an ad hoc basis?

Between 25 to 50% hedge. It has been based on a model, on a series of models and outside support dealing primarily with weather patterns and inventories. That’s just doesn’t work anymore. So we’re going to go to a slightly different program going forward. But I don’t feel like getting into today.

Okay. If asked to throw a Symantec question, when you say sur-- is a surcharge immediate versus a price increase? I mean is that a way to look at it?

Yes, surcharge would be immediate and it’s designed to cover that immediate impact.

Right, right.

And so what we’re longer term trying to do is build in some margin expansion in FCC for example.

Right, I was just making sure of that. And then you talked about the weakness in the JVs and the catalyst segment, what were the issues there? Or is it just sort of the same stuff that was affecting you throughout that segment?

Niponcatcum (ph), frankly your sales in the second half of the year are just not very great again because all the refineries are shut down in the first half of the year and this is HPC catalyst so it’s only charged when the plant’s down.

Right.

In FCC SA, that’s an FCC venture. Our largest customer is Petro Bros. And Petro Bros had just a host of refinery outages in September and particular and so performance is very poor.

Okay great. Thanks a lot.

Thank you.

Thanks.

Okay and there appear to be no further questions sir.

Great well I’d like to thank everyone for participating on our call today. If there are any further questions, you can contact me at the number indicated on the press release. Everyone have a great day.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the presentation. You may now disconnect. Good day.