雅保公司 (ALB) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2006 Albemarle Corporation Earnings Conference Call. My name is Cindy, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. If at any time during the call you require assistance, please key star, followed by zero, and a coordinator will be happy to assist you.

I would now like to turn the call over to Nicole Daniel, Director of Investor Relations. Please proceed.

Great. Thank you, Cindy.

Good morning, and thank you for joining us today for a discussion of Albemarle's first quarter results, which were released after the close of the market last night. Our press release contains preliminary results for the quarter, and this information is subject to further review by the Company and our auditors as part of our quarterly review process.

Please note that we have posted supplemental slides -- supplemental sales information, as well as a reconciliation for net debt and EBITDA on our website under the Investor Information section at www.Albemarle.com.

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

Now, I'd like to turn it over to Mark.

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

Before we go into results that were published last night, I'd like to mention a few highlights from the last quarter, some of which are reflected in these results, and others, which will help future business prospects.

Let's begin by saluting the efforts of our Fine Chemistry Service team for being named as Roche Tamiflu Production Partner. You need to appreciate the extensive screening process that our Company went through prior to being selected as a partner. We see Roche's recognition of our technology and service capabilities as a milestone in our efforts to build our Fine Chemistry services portfolio.

I'd also like to salute the efforts of our Catalyst team for the new UOP hydroprocessing alliance. This alliance will help UOP design new refineries and processing units around the world, utilizing our advanced catalyst technology, further strengthening our leading position in the HPC Catalyst markets.

Shifting to Asia, our Polymer Additives team continues to expand in China. The Nanjing Technology and Business Development Center is expected to be operational this July. This center will provide technical support for our Polymer Additives customers in the Asia Pacific region, as well as support research to expand additive applications. In addition, we have recently approved a project to build a phosphorus flame-retardant plant in Nanjing with a start-up objective for mid-2007. We will produce two of our phosphorus flame-retardants at this site to serve the growing Asia and construction and electronics markets. I expect you will hear more of our plans to grow our additives business in Nanjing later this year.

This quarter, we continued our focus on driving prices to better reflect the value brought by our products and to help offset continued inflation in raw material and energy. While we saw some easing in the first quarter of raw material prices, energy is up 9 million over the first quarter of 2005, while down approximately 4 million sequentially.

In the first quarter, we announced further price increases across our flame retardant portfolio, including brominated, mineral, and phosphorus. We also increased pricing for oil field chemicals, ranging from 20 to 50%. Demand for these products remains strong. In addition, we continue to work hard to implement previously announced price increases across our portfolio and are making good progress for bromine and FCC Catalyst pricing.

Also want to mention our efforts to find ways to further reduce our footprint by reducing emissions, water, and energy usage. In February, we signed on to two global initiatives -- the Responsible Care Global Charter, which focuses on sustainable development and harmonization of these efforts around the world, and the Global Products Strategy, which includes plans for downstream customer product stewardship. In addition, we have a team working diligently within Albemarle to find ways to dramatically reduce TRI emissions to load-permitted levels and also greenhouse gas emissions. I'm very proud of the Albemarle stewardship and sustainability efforts.

With these highlights, let me now address Company results.

I'm very pleased to announce record sales of 607 million for the first quarter, up 19% from the first quarter of 2005 and up slightly over the fourth quarter. We had $0.71 in earnings per share, a 37% improvement over the first quarter of last year. Our net income for the quarter was 34.4 million, a 41% increase over the first quarter of 2005 and a 7% sequentially over the fourth quarter of last year.

Joint venture income from our unconsolidated investments was 5.5 million in the first quarter, up 40% sequentially but down 26% year over year. Keep in mind that our JBC joint venture results are no longer part of this line item and are now consolidated in our results, which is a major reason for this decline.

As we've previously discussed, we're working hard to further improve our Fine Chemical segment margins. Last quarter, we ceased production of bromium from seawater at Port-de-Bouc, France.

Today, we initiated the consultation process with our Works Council in Thann, France to potentially cease operations at that site by the end of the year. This is a potassium and chlorine facility with approximately 100 million in revenues and a history of low profitability. We are facing substantially higher raw material and electrical rates in France that will lead to even more margin pressure.

These products are not competitive in the global marketplace, and this is not a sustainable facility. The employees at this site have worked very hard over the last few years to improve the unit's economic performance. They are best in class, and a decision to begin consultation is not a reflection on their commitment. We will work diligently with the Works Council and our employees throughout the process.

As we stated in our press release this morning, this effort could result in approximately $100 million in pretax charges, excluding any potential environmental expenses, which we believe are covered through existing indemnity agreements. For the most part, the cash requirements will be those needed to satisfy our social obligations, which will be determined in negotiations with the Works Council. As we finalize that process, we'll provide more information to you.

The ultimate closure of Thann will be transformational to our Fine Chemical segment performance, and it will move margins in line with our target of 15% and favorably impact our Company's overall performance.

Before I ask John to make a few comments on the segments, I'd like to express how pleased I am with this quarter's results and how positive I remain on the outlook for our businesses. I believe that our Fine Chemical segment margins are on a turnaround path, which started last year and will continue through 2006. Our Catalyst business continues to exceed expectations, and 2006 should be a great year. Our first and third quarters in Catalyst are expected to be the strongest. We continue to focus on research and development to differentiate our Company's technical strength in new Catalyst development. We expect Polymer Additives to continue its stable growth as we begin our push further into the Asian markets, and we should continue to see the results of our focused effort on pricing.

Our global business leaders gathered about two weeks ago, and I continue to be in awe of their tremendous drive to help this Company grow and develop new opportunities around the world. And I can assure you, over the next few months, we expect to share more exciting developments with you.

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

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 JBC, our Jordanian bromine joint venture, has been consolidated at the beginning of the quarter, and exclude any special items that have been reported in that period.

You'll also note in our press release we have revised the way we report our segment results to remove any minority interest components.

In Polymer Additives, we had record net sales for the first quarter of 2006 of $222 million, up 12% over the first quarter of 2005 and up 11% sequentially. Our Polymer Additives segment income was just over $31 million, a 38% increase over the first quarter of 2005 and a 45% increase sequentially. Segment income margins were 14%. Fantastic performance and an over 300-basis-point improvement sequentially. Great work from our Polymer Additives team to drive value.

Overall, we saw revenue growth in our flame-retardant portfolio and in stabilizers and curatives. Brominated flame-retardant volumes in the first quarter were up 5% from the first quarter of 2005 but were flat sequentially. However, net sales continued to climb -- up 26% year over year and up 13% sequentially. Mineral flame retardant volumes recovered nicely in the first quarter, demonstrating some reasonable recovery in the automobile markets. Volume center stabilizer and curatives businesses were essentially flat sequentially; however, net sales increased approximately 14% sequentially, 4% year over year, and we saw a considerable profitability improvement. This was a very nice rebound for this group.

In Catalyst, Catalyst net sales for the first quarter of 2006 totaled $235 million, a 36% increase over the first quarter of 2005 and a 3.5% decrease from the fourth quarter of 2005. Segment income for this first quarter was $25 million, essentially flat compared to the first quarter of last year but down 11% from the fourth quarter of 2005. The slight decrease in segment income is primarily attributed to the regional mix of refinery catalyst products sold in the quarter, along with manufacturing costs related to our polyolefin catalyst business at our Pasadena plant, and more on that in a moment.

On the refinery side, FCC volumes were up year over year but down slightly sequentially. The really good news here is that we're starting to see our pricing initiatives go into effect as our profitability grew significantly over prior periods. However, we still have a long path to go before we hit reinvestment economics. We continue to operate in essentially a sold-out position in both FCC and HPC.

Our HPC Catalyst net sales decreased in the first quarter compared to the fourth quarter on slightly higher volumes, and we attribute this primarily to lower molybdenum costs that are passed through in our contracts. As many of you know, moly is currently around $23 a pound. As moly prices have come down slightly, our net sales will come down as well.

Our refinery joint venture, Nippon Ketjen, also had strong HPC sales, generating a strong equity income contribution up approximately 6% over the first quarter of 2005 and up significantly sequentially.

Our Brazilian FCC joint venture continues to be challenged due to some unresolved pricing issues with a large customer, and we expect to have this resolved completely in the second quarter.

Our Polyolefin Catalyst volumes were flat sequentially and year over year; however, net sales were up slightly in the first quarter compared to the fourth quarter 2005 but were down year over year.

You may recall that in the fourth quarter earnings call I noted that we expected to have costs associated with the shutdown at our Pasadena facility related to BP leaving the site and our gaining independence from some services provided by them. This impacted the quarter approximately $0.03 and, overall, pulled down our Catalyst segment margins. Overall, our Catalyst team did a tremendous job on execution in this business over the quarter and the year.

Fine Chemicals' net sales for the first quarter of 2006 totaled $150 million, an $11 million increase over the first quarter of 2005 and a $6 million increase over the fourth quarter of 2005. Our Fine Chemicals segment income was just under $10 million, essentially flat compared to the fourth quarter and down 20% compared to the first quarter of 2005. Results were impacted favorably by significant bromine and clear brine fluid price increases and strong sales in our Fine Chemistry Services group.

Our Jordanian joint venture on the Dead Sea saw record net income. These gains, however, were offset by a significant agricultural intermediate product order that was delayed into the fourth quarter of this year. In addition, we continue to lose money in our cash and recording business at Thann, where electricity rates are eroding our pricing successes.

As Mark discussed, we are extremely pleased to have been awarded the Tamiflu intermediate business, which we expect to be delivered to Roche in the second and third quarters. In addition, our Orangeburg [Naproxin][ph] asset, which we have converted into a multipurpose production facility, is now booked up for all 2006. We will continue our focus in 2006 on driving profitability in this segment and will continue our efforts related to increasing utilization in all of our Fine Chemical assets. Overall, a great job from this team, and we expect to see continued improvements as we move throughout 2006.

I now would like to turn it over to Rich Diemer.

Thank you, John.

As you just heard from Mark and John, we experienced solid revenue growth in each of our businesses. By covering a substantial portion of input cost inflation and holding the line on SG&A, which was 9.5% of sales versus 11.2% in 2005, a 170-basis-point improvement, we were able to deliver the more than 40% increase to the bottom line. Nice operating leverage.

Our effective tax rate for the quarter was 26%, in line with our expectations for the year on a sustainable basis. As we had mentioned in prior calls, we are working on some tax-planning opportunities that could bring further structural efficiency to our sustainable tax rate.

Unallocated corporate expenses were just under $11 million, down 21% from last year's Q1, principally due to lower expense for bonus programs due to a change in the programs from last year.

Turning to cash flow, EBITDA in the quarter was a record 87 million, a great start for the year. We ended the quarter with cash and equivalent balances of $67 million. CapEx for the quarter was 21 million, and we continue to expect full-year CapEx of approximately 100 million. Depreciation and amortization was 30.6 million, and we expect full-year D&A of about 120 million.

During the quarter, we repurchased approximately 206,000 shares of common stock for $9 million at an average price of $43.66. In addition, we received approximately $11 million of proceeds from the exercise of stock options.

Turning to the balance sheet, as of March 31, 2006, we had consolidated debt of 828 million, which included 69 million of JBC joint venture debt, of which 421 million is floating and 407 million is fixed, a 51% to 49% split. Our floating debt interest rate is 5.4% at the end of the quarter. The weighted average interest rate for Q1 was 4.9%.

Net of cash on hand and the nonguaranteed, yet consolidated, portion of JBC debt, our net debt is 723 million, approximately 8 million less than at year-end. While we have continued to reduce net debt and have made some progress on working capital days, we are not satisfied with the modicum of success in wringing working capital out of our businesses.

Our quarter-end debt-to-cap ratio is 45%, and our net debt-to-cap ratio is 43%.

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

Okay, great. We'd like to go ahead and open it up to your questions.

David Begleiter, Deutsche Bank.

Excellent quarter, truly.

Thank you.

Mark, just help me with the math for Fine Chemicals. When you closed Thann, or however you pronounce it, you said you might -- you would realize mid-teens operating margins. I just didn't calculate that. If I took out the hundred million dollars in sales, [assume] we'd break even. Do we get there -- what's the timeframe to get to mid-teens margins post-closure of Thann?

Well, we really hope that as we end next year and enter into the following year, we'll be approaching that kind of level.

Fair enough. And , John, on the flame retardant, the pricing momentum has been very good. How long can this be sustained for, and what's the potential for margins in Polymer Additives going forward? Can we exceed 15%? Can we exceed 16%? Thank you.

Yes, David, thank you. Right now, I'd say in the marketplace, so we've had good success through the course of the quarter and overall good discipline in the marketplace. I think going forward, there's probably got to be some driving impetus, but in the meantime, we're continuing to try to work on really promoting and selling a lot of our value-added high technology products into some other higher-growth markets in the flame retardant area. So this is helping us offset some headwinds, I'd say, that continue in decabrome, but overall, we've been pretty pleased with the progress and momentum in flame-retardant pricing. You know, tetrabrome, for example, is up year over year by about 20%, and there is in the range of 10 to 15% pricing momentum sequentially. So a lot of that comes down to continuing balance in the bromine mix around the world. So we think that discipline can continue.

On the mineral flame retardant area, we announced a price increase, and that seems to be gaining some momentum, and that will go into effect this quarter. So we see a pricing improvement in that family of products in the range of 6 to 8%, helping offset some continuing inflation really in raw materials and energy that we're seeing, and with oil at $75 a barrel, we've got to remain as flexible as possible on the pricing front. So, hopefully, that will give you some feel for overall flame retardant volume.

Total margins -- our goal is 15%. You've seen what we've done this past quarter, so we're going to continue to push that bar up, and I'm not exactly sure how high we can drive that, but with a little luck, we'll be at the 15% range before the end of the year.

And, John, last thing. Just on the FCC, is any margin shift in the quarter -- any of your competitors distracted by other events that helped you gain some share?

No, I don't think there's, David, at all been any kind of share shift in FCC Catalyst business in the refinery market. It continues to be quite tight. We continue to do our best to lead this pricing effort because, overall, I still believethis product line is tremendously undervalued, you know, for the value delivered in the marketplace. And we're continuing to try to lead aggressive price efforts. There was recently a public tender in Mexico, and we bid at a premium level in the 20 to 30% range over our competition, so we're continuing to try to lead the overall effort based on the value that these products deliver.

Thank you very much.

Thank you, David.

Ray Kramer, First Analysis.

Congratulations on a great quarter.

Thanks, Ray.

Sort of sticking with that FCC price issue for a moment, you know, given how tight your capacity is, and I assume that's driven a lot by industry demand, I'm just a little surprised that we're not seeing more pricing traction. It sounds like maybe there's some competitive pressure on pricing. Are there any other factors there that are making it a little tough to get increases through?

Well, Ray -- John Steitz -- you know, we talked about the nice profit improvement in the FCC business. It's just -- it just depends on what your expectation is. You know, our expectations are very high for this business, so we're going to try to lead this effort. But volumes remain strong, and I mean you know what's going on in the fuel and gasoline markets, so we're just going to lead the effort. We've been pleased with the success sequentially, and we're just trying to really work to institutionalize more dramatic improvement on the price-to-value formula for these products.

Ray, this is Mark. Let me make one comment building on what John has said. This is an industry that has struggled for a long period of time because it's had a cost base, a pricing methodology like you see in many, many products in the industry. And that's just inappropriate for products that bring as much value as this, so we're really working at a [collection] hard, and my belief is that refineries and things are starting to recognize that. But it just takes a while to get your customers to understand the value, of course, that you're bringing, how you can differentiate yourself in the marketplace.

If all these efforts eventually bear fruit, what sort of theoretical operating margin can you guys see in Catalyst? Is it getting up to 20% then?

Well, it certainly would be in the high teens. Twenty percent -- boy, that's a big number, Ray. You know, a lot of that depends, too, where moly ends up. If moly's high, that becomes a much more difficult obstacle because that is built into the sales number. And we're going to continue to drive and improve profitability in this area, reflecting the value the products give. So money is a big, big hurdle, but of course, we'd be delighted to be there on behalf of our shareholders.

Okay. Turning for a moment to Fine Chemicals then with the -- shutting down this plant in France sounds like it will be a step function improvement in margin. But if I look at getting from where you are today, you know, physically doubling your operating margin, can you break it down to how much of that you think will come from France versus these other sort of incremental opportunities -- Tamiflu filling up the Orangeburg facility?

You know, Ray, well, our margin was abnormally low this quarter as we had some products shift in the first quarter into other quarters, so I think you need to take a reference point more on if we -- where we ended last year, let's say, which would be a couple hundred basis points higher.

So if you take $100 million, it was contributing nothing; that's going to shift you up quite a few basis points alone there. There are a number of products that we're bringing on. Tamiflu is just one that will start to come in in the third quarter of this year and carry us through into next year. So it's a combination, really, of shutting down assets that in spite of the hard efforts of the employees are just not competitive and new products that we're bringing in. And that will roll in as we go through next year.

So it sounds like most of the improvement should come at the end of the year and will be more or less flat in terms of margins with what it should have been in the first quarter until then?

Yeah, I think what we've pledged to you guys, you know, really starting a few years ago, is that 2005 would be a turnaround year. And we boosted our profit nicely 2005 versus 2004 for that segment. You should expect this year we're going to boost it again. And next year, we're going to boost it again. What I'm saying is by the end of next year, we'd hope to be at that target level that we're talking about. So the step change in Thann will occur as we end this year and enter next, and the other is going to be just ratable additions occur in margin.

Okay. And then, lastly, maybe for Mark, sort of taking a big-picture look, it seems like everything's getting better, if you will, from the first quarter going forward. So is there any reason that we should see EPS below where it was in the first quarter and any of the remaining quarters this year?

I think the second -- you just have to have an appreciation that Catalyst is a lumpy business, and the second quarter, our sales are down as we build inventory for the third quarter. So I think we could find ourselves shorter in Catalyst certainly in that quarter, and how much, I'm not sure. But we are off to a great start for the year, and we're very positive about our prospects for the year. We feel good about them.

Great. Thanks a lot.

Take care.

Mike Sison, Keybanc.

Great quarter.

Thank you.

Thanks.

Wanted to get a feel for -- I think you commented, Mark, that you felt Tom -- or I think it was John -- Polymer added margins here and that 14.5% range is sustainable for the full year?

Yes, we feel, depending if the economy keeps reasonably strong, Mike, that the volumes in the second quarter -- for example, April started out a little bit weak, but May looks very strong, so on the whole, yes, we feel it's sustainable. But part of this -- you know, my only caveat is the raw material and energy, and with oil pricing at $75 a barrel, that's going to have some downstream effect on some key raw materials for us.

Right.

So we've just got to be flexible and robust or prepared to deal with that in the marketplace. So that's, of course, a bit of a concern. I would imagine it's a bit of a concern for everybody. So going forward, it looks like the year, we're going to continue to have some raw material and energy headwinds in the majority of our businesses.

By the way, when you get away from metals, Mike, I think we're looking at 35 to $40 million of inflation. Now, metals, as John noted, has started easing somewhat, but in the -- certainly, in polymer additives and those other markets, we're still seeing a lot of inflation, and that was inflation estimates based on crude lower than where it is today.

Right. But in the quarter, your pricing rollout weighed with the margin potential, the increase in raw materials for the quarter.

That's right.

That's correct.

Okay. And --

We tend to really recoup many years of really being below that trend.

When you look at flame-retardant profitability for the segment, and that's about, what, three quarters or so of sales, are those right up there with the segment average? I would imagine that would have been the key driver?

Yes, primarily in the brominated flame-retardant area --

Okay.

-- that's the key driver. The key volume driver tends to be the ATH family of products because on a volume basis, that's a lot higher.

Okay. Then on Catalyst, I just -- I guess I wanted to better understand the profitability number. Volumes were great. You know, if you take a look at margins being down year over year, a little bit of that was the polyolefin plant being down. But was there a squeeze in raw materials in the quarter year over year?

Year over year? Well, yes, energy and electricity were up pretty significantly year over year, and that was across the company. I mean it was not quite $10 million. It's in the 9 to $10 million range, energy and electricity, year over year.

Okay.

But the big issue is really this polyolefin catalyst shutdown, and then FCC SA, our Brazilian joint venture, this unresolved pricing issue, the major customer there was the other part of that squeeze.

What was the impact?

Oh, it was --

Just on an order magnitude basis, were it not for those two issues that John mentioned and a few other small ones, the margins would have been essentially flat.

Flat year over year?

Yes. That's correct.

Okay. And so the polyolefin's at 2 million, and if it was flat, that's another probably five. So, really, you did get some leverage with volume growth into the bottom line for catalysts.

Yes, sir, that's right.

We did.

Then when you look at the potential margin improvement -- I think Ray was trying to get to this -- but what should the ramp be as the year progresses? I mean what would you be comfortable with or sort of happy with by year-end for Catalyst?

Well, those are two different things! You know, you just need to appreciate the bumpy nature of this business, and I can tell you this quarter we are building for sales in the third quarter, so you can't look at it on a quarterly basis. You got to look at it on an annual basis. Right now, looking at this, we expect to be at or above our margins, you know, some of our historical margins, for the year.

Okay. And the goal --

Mike, just to reiterate, again, we'll have a down -- second quarter will be down sequentially and --

On an earnings basis?

That's correct. And then it looks like the third quarter will be back up again.

It will be lower on a sequential basis, so you're excluding the impacts of the polyolefin and the Brazil stuff?

No, I'm including that.

Oh, those are going to reoccur?

No, they'll rebound, and it will be an improved situation, but even with that included in the numbers, it still looks like the second quarter will be down a bit in Catalyst.

Great. Let me get -- I'll get back in queue. Thank you.

You bet.

Marshall [Reid] , Banc of America.

You guys saw strong top-line growth in refinery catalysts again. I know that there are long lead times for HPC. How's the order book sort of shaping up for the second half? And could we see potentially peak HPC sales in the third quarter?

Yes, I think as it looks right now, we'll peak in the third quarter for this year, Marshall. Yes, so it's shaping up to be a good year.

Yes.

And as we look further ahead into 2007 for HPC, do you expect, again sales to be up versus '06, or--?

I think next year's a bit of a question mark for everybody. We're not booked up for next year. You wouldn't expect that to be the case right now. If you look at historically, it's reasonable to assume that 2007 could be down a little bit in pure HPC sales year to year. But frankly, it's far too early to tell that, and we're going to work hard if that is the case to have other products in those plants.

Then on polymer additives, I know volumes were a little bit disappointing in the second half of '05. Did you guys see some restocking, do you think, in the polymer additives business? And do you think the 5% volume growth that you saw in brominated flame-retardants is sustainable?

I'd say the current view, 5% year-on-year growth, I think, is sustainable for the year. And the order pattern today is reasonable, Marshall. So I think that assumption for the year looks to be pretty good. We generally have pretty reasonable volumes through the second and third quarter and then we tend to have a fall-off in the fourth quarter post holiday build-up. That tends to be the normal seasonal trend.

Okay. And on mineral flame-retardants, I know North America auto production was a bit higher. Did you guys see some of that balance in minerals and -- so what gives you confidence in your minerals outlook given some of the difficulties in auto OEM?

Well, we had an off year volume-wise last year. This first quarter was, frankly, a nice surprise for us in terms of volumes. Second quarter started out reasonably strong. But, yes, for the year, it's hard for me to predict because I see the same trends that you do in the automobile markets, and I know a lot of the major automobile companies are sitting on some fairly high inventories now. So it will be difficult for me to predict if that strength continues, but so far, it looks reasonably good.

Okay, and the last question on Fine Chemicals. I know elemental bromine prices are at record highs right now. Do you think those prices could weaken in the back half of the year as Israel Chemical brings on new capacity in the fourth quarter?

No. I think that the additional capacity is really being brought on fairly rationally. And that's in the scope of -- you know, we had shut down that French bromine unit last year. So, no, we still see today some pretty good momentum on bromine prices, and not just bromine but clear brines -- hydrobromic acid, the whole range of products. So as I've tried to elucidate, we look at the whole portfolio of our bromine, and we really try to manage it from a whole portfolio basis.

Great. Thanks very much.

You're welcome.

Thank you.

[OPERATOR INSTRUCTIONS]

Laurence Alexander, Jefferies.

I guess the first question is on working capital. Do you still intend to make working capital, if possible, be a source of cash for 2006?

Laurence, this is Rich. That's definitely our goal. I mean we're actually -- that's one of our goals in terms of compensation for this year. So while we got a little bit of a slow start in the quarter, we want to take working capital out. I mean it's one thing to keep it steady, given a good quarter like this, and I guess it could have been worse, but we don't take much comfort with that. We want to take it out and drive it down.

And then, second, on the polyolefin catalyst, when your plant comes back on stream, how tight will industry utilization rates be?

Oh, I mean we build the shutdown into our overall planning processes, Laurence. I mean this is a fairly closely held marketplace in terms of supply, so we don't see any overabundance of these products in the marketplace. There are a lot of barriers to building inventory in that business. But we kind of built the whole shutdown of this plant into our planning processes and continue to manage that pretty tightly.

Okay. Is there a scope for polyolefin catalyst pricing to improve heading out over the next one to two years?

Yes, we've had a lot of success from our pricing initiative in aluminum alkyls, and the -- we're continuing to look at ways to continue to drive value in that business. There are a number of business opportunities in that range that will make pricing opportunities avail themselves to us through the course of the year, so we're going to try to push that very hard on the pricing front in alkyls.

Okay. Now, with Dead Sea adding capacity in elemental bromine, would you plan on adding capacity in 2007?

No, Laurence, I -- when you look at the growth in this business, I think we're a couple years away from more capacity being needed.

And, finally, if you take all of the price increases that you've announced excluding Catalyst, and you compare it to your forecasted of raw material [indiscernible] of 35 to 40 million, roughly do you think you'll offset, or how much of a gap do you think you'll extend across the entire portfolio, so not just in bromine flame-retardants but across the entire bromine chain?

Well, Laurence -- this is John Steitz. In our current plans, we have not inputted the additional pricing improvement going forward into our forecasts. We do have the raw material cost in there, so we would hope to recover the current view. But when you get $75 barrel of oil, that kind of shakes things up a lot. So we've got to continue to look at these things to -- you know, at the end of the day, our overall objective is to drive margin growth in these businesses. So it's difficult for me to forecast the success of future price increases, but I know that that headwind is there, so we've got to be diligent in how we go after it.

Thank you.

You're welcome.

Dana Walker, Kalmar Investments.

Could you comment on the seasonality of the Catalyst business? Last year, the third quarter was not your best quarter, although there were a lot of outside influences. Why would this year be so strong in the third quarter?

We have the change in the ultra-low sulfur diesel specs coming into effect this year, and that's one opportunity they have. It's kind of the last opportunity a lot of refineries have to put that catalyst in and make the obligations of year-end quality.

And, Dana, we really -- I mean we don't determine this turnaround schedule of our customer base, particularly in HPC. And a lot of times, that's just the way it falls out. So that's a big part of it as well.

You announced a 20% FCC price increase late last year. You've talked qualitatively about the fact that it's beginning to take hold. Can you talk on a ratable basis, though, how you think you're doing? And I'd presume you would expect to make incremental progress as the year progresses. Is that a fair statement?

Dana, maybe we have half of that worked through so far, and we're continuing to push it and lead it, as John mentioned, so we're going to keep working that equation till we can get it all through.

When you say you have half of it through, was half of that through reflected in Q1, or is that more likely to be fully reflected in Q2?

You know, when I say -- you know, that's a very specific comment. When I say half through, we have, in terms of -- this is a general statement -- we have in terms of the contracts worked -- started to work that through and got a recognition of it worked through. I don't know what percentages roll through in the first quarter, but it would not have been all done.

Fair enough. On the topic of Brazil, I suspect talking about any one customer is sensitive, but what gives you the type of confidence needed that that will fully resolve in Q2 and beyond?

Well, I mean there's -- you know, it's a willingness on part of both of the partners to find the right solution there, so I'm quite confident that's going to be resolved as we go through this year.

Yeah. And I think I'd add, Dana, that the solution is virtually reached; it's just a matter of going through some bureaucratic approval process.

Two last questions. You talk about Orangeburg being a multi-use facility at this point. How important is that to the bottom line '06 versus '05 and, let's say, '07, potentially, versus '06?

I'd say it is fairly significant. The nature of our plant before converting it to a multipurpose plant was one product and a fairly limited customer base. So we always lost money on that asset. And this effort really helps turn it into a profit-driving situation for us, and we're filling it up with some -- actually, some higher-margin products for us. And we're pretty pleased with that. So it also gives us a lot of flexibility with our model to continue to drive success in commercializing products that today might be in their infancy. So we're pretty excited about it.

If Orangeburg was a contribution loss in '05 -- is that what you're saying?

Yes.

Over a couple-year period with a five to six hundred -- let's say a $500 million business, when you ex out Thann, can the swing in Orangeburg provide more than 100 basis points of Fine Chemical swing?

Yes, but I'd ask you to kind of keep in mind the whole picture between -- in terms of the total asset optimization effort in Fine Chemicals. Our goal is to get the operating margins to 15%. So between the actions we're taking and working through at Thann, between this effort in Orangeburg and some other efforts at some of our other plants, the overall goal is to get to 15% in that business, and we feel with the steps we've taken over the course of the last couple months that the probability of achieving that continues to get higher and higher.

Good to hear. Final question. You mentioned in your corporate expense that the way that you will account or pay out incentive comps led to that number -- the approval being lower in Q1. Can you elaborate on what you're doing and how that might flow as the year progresses?

Yes, Dana, this is Rich. I didn't mention incentive comps, so I mentioned bonuses, and it was just a change in a bonus program that we had a little bit of a trade-off in terms of not doing that program but instead building in salaries at a higher increase in salaries year over year for the general population. So that's what that was. It's not incentive comp. Incentive comp, we had a good quarter, and we accrued appropriately given that quarter and our view of the full year.

Very well. Thank you.

You're welcome.

You're welcome.

Bob Koort, Goldman Sachs.

Mark, you mention the Nanjing phosphorus flame-retardant plant. Can you talk about the current competitive environment for that product in Asia, and are you displacing somebody -- displacing your own shipments there, or is it just purely new growth you expect to serve?

No, it's new and emerging growth, Bob, in that marketplace. It's a very competitive market on the low end of the business, and these products that we're putting in are fungible products. There are a number of people that can produce them. But we see the combination of our technology, that foundation base. It really positions us well to add products down the road that are higher value in that region. We don't currently move very much material from the U.S. or the U.K. into Asia just because it's -- from a cost point of view, those plants are not as competitive. So we will not be taking material away from our plants. They'll continue to serve the U.S. and European markets, and we'll use the Asian platform in growing that part of the world.

And do you ever -- do you serve the same customers ever with bromine and phosphorus and ATH, or are they usually separate sales?

Bromine and phorphorus, perhaps a little overlap. ATH is really separate -- separate businesses.

Yes, Bob, John Seitz. Flame-retardants are mostly consumer electronics, really, as you know, and phosphorus flame-retardant, primarily flexible foam, home furnishings, furniture, automobile seat padding, things like that. That's the general nature of that market. So you can imagine the growth in China would be fairly significant, and that's really our strategy there.

Then the last question. The polyolefin catalyst business -- do you have much leverage to new capacity, or is it -- you know, obviously, the installed base is 20 or 30 times what any new capacity coming into the market is. And beyond that then, is there any reason to position the assets in the Middle East where all the new capacity seems to be coming on?

Perhaps in the future that could be the case, Bob. I think what we see today is that there is sufficient capacity around the world from a couple of major competitors to serve the market needs today. The plants that are in place are pretty low cost, and as I said, [indiscernible], so they're fully depreciated, so it's hard to rationalize new capacity at this time, we think.

Great. Thanks a bunch.

Thanks, Bob.

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Chris Shaw, UBS.

Just had a quick question. Could you just update me on any -- on the hedging program in national gas if you're doing any right now?

Chris, this is Rich. We still have our program. When we implemented the surcharges in FTC, effectively, that served as a hedge in and of itself --

Right.

-- once gas was over a certain level. So what I would tell you is that we have selectively done some hedging. Actually earlier in the year, we went out into, say, the mid-summer timeframe. Nothing substantial. And then we haven't done anything at all when you look at kind of the next winter season given the fact that we think those prices are just not worth the locking in, I guess, is the way I would put it.

Right. Okay. Thanks a lot.

You're welcome.

You bet.

Thanks, Chris.

And there are no other questions in the queue.

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

Thank you for your participation in today's conference. This does conclude the presentation, and you may now disconnect your lines. Have a wonderful day.