雅保公司 (ALB) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 2 2006 Albemarle Corporation earnings conference call. My name is Lauren and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (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, Nicole Daniel, Corporate Director of Investor Relations.

Thank you, Lauren. Good morning, everyone, and thank you for joining us today for a discussion of Albemarle's second-quarter results, which were released after the close of 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 the quarterly review process.

Please note that we have posted supplemental sales information, as well as reconciliations 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 would like to turn it over to Mark.

Thanks, Nicole, and good morning to everyone. I appreciate all of you taking the time to listen to our earnings call and webcast this morning.

Before we go into the results, I'd like to mention a few Company highlights, some of which are reflected in these results, and others which will help our business in the future.

Let's begin by talking about some growth projects. During this quarter, we broke ground on our new hydroprocessing catalyst planned in Bayport, Texas, which we expect to be operational in the first part of 2007. This additional capacity is needed to support increased demand for HPC catalysts, as ultra-low sulfur diesel units around the world are brought online.

In addition to the Bayport project, our expansion project in Amsterdam is progressing as planned, and we will begin production of our highly active NEBULA catalyst in this facility by the end of this year. This proprietary catalyst is used to extend the capacity of older hydroprocessing units, allowing them to produce low-sulfur fuels at higher rates.

This quarter we started up alkyls catalyst blending facility and also broke ground on our technology center in Nanjing, China. We also announced our intention to build a phosphorus flame retardant plant at this same location, which will be fully operational in the second half of 2007.

This plant will produce flame retardants for rigid and flexible polyurethane foams used in insulation, and for resin blends used in electronic enclosures. These investments are all steps in the development of our China business model designed to further strengthen our catalyst and retardant positions in a rapidly growing Asia-Pacific market.

Raw material inflation remains a big challenge for all of us in the specialty chemical sector. Raw materials, excluding moly, increased over $6 million compared to the second quarter of 2005. Much of this inflation is due to increases in ethylene, olefins, butyne and isobutylene. Energy is up another $5 million, roughly split between natural gas and electrical costs. For your reference, posted moly prices averaged $24 a pound the second quarter, which is roughly $10 a pound below the level a the year ago.

Looking forward, while we anticipate stable moly prices, we do believe that pressure on energy in the olefins chain will drive raw materials higher, particularly ethylene, benzene, bisphenol A and phenol.

To deal with this margin pressure, we continue to work pricing and cost initiatives. In the second quarter, we announced further price increases for a number of our products. Brominated polystyrene flame retardants were increased 10%, and our Antiblaze phosphorus flame retardants were increased 5 to 15%. Our Ethanox lube & fuel antioxidants were increased 30% to support our global growth initiatives and to recover isobutylene, base oil and energy costs.

We increased pricing for aluminum alkyls by 30% due to record high aluminum, ethylene, and energy costs. We also raised prices both bulk ibuprofen in non-western markets, where demand has been strong and prices have traditionally been lower.

In addition to this latest round of price increases, we continue to work hard to implement previously announced price increases across our portfolio, and are making good progress with bromine, bromine derivatives and FCC catalysts.

Several other items that I would like to mention before we get into the quarterly results. First, we have begun production of the Tamiflu intermediate for Roche and expect to begin delivering product in the third and fourth quarters.

We continue our negotiations with the Works Council in Thann, France to potentially cease operations at that site. As we discussed on our last earnings call, this is a potassium and chlorire facility with approximately 100 million in revenues and a history of very low profitability. We are facing substantially higher raw material and electrical rates in France that will lead to even more pressure for products that are no longer in demand in Europe. Our discussions with the Works Council continue to progress in a normal fashion, and we should be able to provide more color around this during the next call.

We are nearing completion of our European trading company, which will yield an annualized tax benefit of approximately 12 million per year, and Rich will share more details about our tax structure in a few minutes.

Lastly, with the violence and unrest in the Middle East, we have received a lot of questions about what this means for our Jordan joint venture. There has no been impact on our operations, nor do we anticipate any. Jordan is a peaceful country and we ship our products out of Aquaba. We do however stay very engaged with our employees and regularly monitor their safety and also the security of our supply chain.

With these highlights, let me now address the Company results. All the numbers that I am discussing exclude the $4.9 million special item net gain recorded in the second quarter of 2005. So with that, I'm very pleased to report record corporate earnings for the second quarter of $0.89 per share; that is a 48% improvement over second quarter 2005 earnings of $0.60 per share and a 25% improvement sequentially.

Sales totaled $569 million, up 13% from the second quarter of 2005. Our net income for the quarter was $43.3 million; that is a 50% increase over the second quarter of 2005 and a 26% increase sequentially.

Joint venture income from our unconsolidated investments was $11 million in the second quarter, up 73% year-over-year, excluding the second-quarter '05 JBC equity earnings, which you know is now consolidated.

FCC SA, which is our FCC catalyst joint venture in Brazil, concluded price negotiations with one of its major customers during the quarter, and these strong results include approximately $1.2 million in equity earnings that is attributed to pricing adjustments made for sales in the first quarter of 2006.

Nippon Ketjen, our HPC joint venture in Japan, saw approximately a 38% increase in equity earnings over second quarter 2005, attributed to very strong HPC sales during the quarter. Our catalyst regeneration joint venture, Eurocat, also posted very strong results.

Before I ask John to make a few comments on this segment, I'd like to express how pleased I am with the quarter results and how positive I remain on the outlook for our business.

In Fine Chemicals, we saw a nice improvement in operating profits and margins. We have a strong pipeline of products in our Fine Chemistry services portfolio, a portfolio that manages approximately 50 inquiries per month. I expect to see this segment continue its turnaround path in the second half of 2006.

Our Catalyst business exceeded expectations and we have numerous new opportunities to expand in this business. The first half of 2006 has been very strong, and we expect the third quarter to remain strong. Our quarterly results are clearly benefiting from FCC price increases that were announced during the fourth quarter of 2005, and we expect to see more of these gains included into future quarters as more contracts are negotiated.

The 17% operating margins recorded this quarter in Polymer Additives were really fantastic. And we continue to see strong and stable growth in this segment driven by our very innovative product line and focused pricing efforts.

Looking broadly, expect the second half of the year to mirror the first half. Benefits from Fine Chemicals and the European trading company will likely be offset by customary order patterns in Polymer Additives, HPC Catalysts and catalyst joint ventures. All in all, 2006 is shaping up to be a very good year, and we remain positive on this year's outlook.

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 the 2005 segment income comparisons are on a pro forma basis as if JBC had been consolidated, and also exclude any special items that were reported in that period.

First, in Polymer Additives, we had record net sales for the second quarter of $229 million, up 12% over second quarter of 2005 and up 3% sequentially. Our Polymer Additives segment income was $39.2 million, a 48% increase over the second quarter of 2005 and a 26% increase sequentially.

Segment income margins, as Mark mentioned, were 17%, a fantastic performance that represents over a 300 basis point improvement sequentially and a 400 basis point improvement year-over-year. Superb results from our Polymer Additives team.

Overall, we saw revenue growth in our flame retardant portfolio and in stabilizers and curatives. Brominated flame retardant volumes in the second quarter remained essentially flat, both sequentially and year-over-year. However, net sales continued to climb, up 15% year-over-year and up slightly sequentially.

Mineral flame retardants remained strong during the quarter, with volumes and net sales up year-over-year and up slightly sequentially, while phosphorus flame retardant volumes and sales were down slightly year-over-year and sequentially.

Catalyst net sales for the second quarter 2006 totaled $194 million, a 32% increase over the second quarter of '05 and an 18% decrease from our strong first quarter '06. Segment income for the second quarter was $29.5 million, a 24% improvement year-over-year and a 17% improvement sequentially.

As Mark highlighted, we had very strong joint venture income in this quarter, both from Nippon Ketjen, our Japanese HPC joint venture, and from FCC SA, our Brazilian FCC joint venture. We also saw a nice profit profitability jump in our polyolefin catalyst business, as price increases took hold.

As we had foreshadowed in the first-quarter call, our HPC Catalyst sales in the second quarter were lower than our very strong first-quarter sales. On that call, we had indicated that we saw weaker HPC sales in the second quarter than in the third. And as the quarter progressed, some customers requested delivery to be moved up from the third quarter, providing us with stronger results than we had initially anticipated.

We continue to expect a strong third quarter, but again, not as strong as first quarter in HPC sales volumes. And we continue to expect somewhat softer HPC sales in the fourth quarter.

FCC volumes and net sales in the quarter were very strong and our pricing initiatives are clearly sticking, providing us with nice profitability improvements. 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.

Overall, our Catalyst team did a tremendous job executing in this business over the quarter and through the course of the year.

Our Fine Chemicals segment income was $13.8 million, up approximately 5% over the second quarter '05 and up 42% over the first quarter of '06. Fine Chemicals' net sales for the second quarter totaled $146 million, just under a $5 million decrease from the second quarter of '05 and a $4 million decrease from the first quarter of '06.

Results were impacted favorably by pricing improvements across the entire bromine portfolio. We saw exceptional year-over-year profitability improvements in our industrial bromides portfolio, which includes clear brine fluids used as well completion fluids. We had good seasonal sales in our ag business, as well as strong specialty aluminum sales from our Martinswerk Plant in Germany.

Ibuprofen sales remained stable sequentially and we anticipate continued stability as we go forward. We expect our custom services business to be very strong in the second half of the year as a number of products that have been in the production phase will be delivered in the second half of '06. These gains, however, continue to be offset by our potassium and chlorine business at Thann, where electricity rates are eroding our pricing successes.

As Mark discussed, we're in the production phase of the Tamiflu intermediate, which we expect to be delivered to Roche in the third and fourth quarters. In addition, our multipurpose production facility in Orangeburg, South Carolina is now booked up for all of 2006 and well into 2007. And we are looking at ways to further expand our capacity to meet the demand we are experiencing.

We will continue our focus in 2006 on driving profitability in this segment and will continue our efforts related to increasing utilization of our assets. Overall, we continue to expect improved profitability in the second half of 2006 and great job from our Fine Chemicals team. I'd like now to turn it over to Rich Diemer.

Thank you, John. I would like to spend a few minutes to detail a number of our P&L line items and discuss our cash flows and financial position at June 30th.

Our effective tax rate for the quarter was 25.3% and a slightly higher 25.7% for the year-to-date. This was in line with our expectation set out at the end of last year. In our past few earnings calls, I have mentioned I have been working on a project that could bring additional efficiency to ours tax structure.

We are in the final stages of completing the implementation of a Belgian-based European trading company, which we call Albemarle Europe, that will allow us to centralize certain European activities at a single focal point and pay down external debt faster than we would otherwise. We estimate the benefit of this structure to provide approximately $1 million monthly, or $12 million annually, in tax savings on a sustainable basis beginning in Q3 of this year.

As part of this trading company structure, we have relocated certain of our long-term debt -- approximately $128 million -- from the U.S. to Europe, where we will be able to use lower-taxed foreign earnings to repay it locally. Given these above items, we believe that our Q3 effective tax rate should be in range of 17% to 18%, with a full-year effective tax rate of 22% to 23%, in that range.

Unallocated corporate expenses were $13.8 million, up $2.5 million or 22% over last year's Q2, principally due to expenses to establish Albemarle Europe, our new trading company, and incentive compensation accruals reflective of our strong results.

As mentioned in the press release, our second-quarter results also include a charge of approximately $1.9 million, or $0.03 per share, related to an adjustment for a foreign currency denominated borrowing at our consolidated joint venture in Jordan.

For cash flow, we generated a strong EBITDA in the quarter of $93 million, which gives us $180 million of EBITDA through the first half of this year. We ended the quarter with cash and equivalents of $99 million. CapEx for the quarter was $28 million, and we expect full-year CapEx of 100 to $110 million. Depreciation and amortization was $27 million, and that brings us to $58 million year-to-date, and we expect full year depreciation and amortization of approximately $120 million.

Turning to the balance sheet, at June 30th, we had consolidated debt of $800 million, which includes $70 million of JBC joint venture debt, of which $398 million is floating and $402 million is fixed -- very close to a 50-50 split. Our floating debt interest rate is 5.08% at quarter end. The weighted average interest rate for Q2 was 5.33%.

Net of cash on hand, the $99 million that I mentioned a minute ago, and the nonguaranteed yet consolidated portion of JBC debt, which is $38 million, our net debt is $663 million, approximately $68 million less than at year-end and a $60 million decrease this quarter.

We still target achieving progress in improving working capital before year end, having decreased net working capital approximately seven days through midyear. Our quarter-end debt-to-cap ratio is 42.5%, and our net debt-to-cap ratio is now under 40% at 39.2%.

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

Okay, great. We would now like to open up the call for your questions.

(OPERATOR INSTRUCTIONS) Ray Kramer with First Analysis.

Hey, good morning, guys, and congratulations on the great quarter. A couple questions for you. With Polymer Additives, I had to look back I think more than five years ago in my model to see margins that high. Is there still room to grow from here or -- I know I think 15% had sort of been the bogey before for that sector. Have you revised what target margins could be there?

Thanks, Ray. This is John Steitz. Appreciate your earlier comments as well. Polymer Additives, I think the key will be really the economy -- will our volumes continue to hold up based on just basic economic factors. So if we get a little tailwind behind us there, I think we feel fairly confident, through good management of pricing and good discipline in the marketplace, that we can do a reasonably good job of holding on to these margins. So we are going to do our best.

We are not -- 17%, as you said, is really a high watermark for us. And it was a great effort in the quarter, so we are working hard to sustain this. But a lot of it depends on the economy.

Last year in the third quarter, particularly in flame retardants, we had pretty significant downturn in volumes. And as you know, these things happen fairly rapidly. Right now, we're hoping for the best and it's a mixed view on what you hear about the economy today.

From what you are seeing so far in the quarter, is stuff looking better than it did this time last year?

Yes, it's a pretty good start. Pretty good start. We are seeing pretty reasonable volumes right now.

Okay. Turning to the Catalyst. It sounds like you took, especially on the HPC side, a little bit maybe out of the third quarter. Was there a similar effect in the joint ventures or should we expect this level of joint venture earnings to be more or less sustainable going --?

Well, out of Japan, there were some pretty similar activities with Nippon Ketjen on the HPC side. It was not moving it into the quarter; it was the customer mix and the customer driving their turnaround and us matching up with the demands.

But generally, we feel we will have over the course of the second half lower volumes in the second half than we have seen in the first half.

And that is on the HPC side?

HPC -- right.

Is the FCC outlook for continued growth in the second half?

The FCC volumes in the second quarter were really the result of some buildup in inventories to supply those volumes in the second quarter. And it looks down slightly to flat in the second half. But we are sold out there, so the real initiative is to continue to improve profitability through pricing and I think we've got a long way to go there.

Okay. And then just lastly, I want to make sure I sort of understood Mark's initial comments correctly. Is $1.60 sort of a good way to look at the back half of the year EPS-wise? And maybe a bit more evenly split between Q3 and Q4?

Ray, you know we don't give specific guidance. What I was trying to say in the mirror image there was that the third quarter should look more like the second quarter. And I think the fourth quarter is going to look more like the first quarter. And that is just the seasonality impact.

Granted, there has been a lot of movement around as we've brought these new businesses in. But if you look at them broadly speaking, as John noted, Polymer Additives tend to wane a bit as you go into the final part of the year. And so we've got that baked into the end of the year.

Catalyst joint ventures and Catalyst tend to be higher in the early part of the year than in the latter part of the year, because turnarounds are taken before gasoline season, etc.

So I think what we are saying is that the best we can tell, we feel pretty good that the third quarter is going to look a lot like the second, and we are a bit unsure about the fourth. But I'd expect it would look a lot like the first.

All right. Thanks a lot.

Marybeth Connolly with Goldman Sachs.

Thank you. First, I just had a quick question, just to clarify and make sure I heard you correctly, John. On the brominated flame retardants, I think you said pricing was up 15% year-over-year and volumes were flat.

Well, pricing -- yes that is a pretty good characterization. Pricing overall in brominated flame retardants year-on-year -- yes, in that 15 to 20% range year-on-year, and pricing overall flat and volumes flat.

Okay. And then --

Let me restate that, because I just misstated myself. Pricing up year-over-year in the 15 to 20% range on relatively flat volumes, Marybeth.

Okay, so I did hear you right. The other question I had regarding -- again, if I think back and I seem to remember that pricing slipped something in the range of 30 to 40% sort of from the peak levels in sort of '99, 2000 timeframe.

And I guess my question is, as you've had a significant number of price increases over the last several quarters, have you made up that difference, have you gotten back to the peak pricing and how much further can you go? Or are you still below that level?

Well, we are higher than the peak pricing. But I have to say that the raw materials are dramatically higher than they ever were five to ten years ago. So the margins still -- we are going to still keep pushing it. That is the best I can say. We are going to continue to do the best job we can to demonstrate the value that these products bring, not only in flame retardants but also in catalysts, as well especially FCC Catalysts.

Okay. And then just switching quickly to the Fine Chemicals business, you saw some nice profit improvement in the quarter. What's sort of your goal in that business? And I guess maybe specifically for this year and sort of longer-term and sort of what is the impact for closing the French facility?

For the year, we are hoping for a reasonably solid 100, 150 basis point improvement year-over-year. Longer-term, we are working to achieve a 15% return on sales in that business. We feel with some of the asset improvement efforts ongoing that we will be able to achieve that in the 16 to 18 month timeframe. So you can think of next year as kind of a steady ramp-up through that period.

As Mark mentioned in his opening comments, we continue to work through the Thann issue. And as he also mentioned, it's 100 million in revenues that generates a loss right now. So as we look at that elimination from our portfolio, it is in the 200 to 300 basis point improvement impact on Fine Chemicals.

Okay, great. Thanks very much.

Dmitry Silversteyn with Longbow Research.

Good morning, gentlemen. Congratulations on a very solid quarter here in a weak market. A couple of questions. First of all, you've given us a pretty good indication of what businesses did as far as flame retardants are concerned in the Polymer Additives. What about the other part of Polymer Additives? Can you give me an idea of year-over-year and sequential volumes, as well as what the pricing is doing?

You know, it's hard to take -- there is such a portfolio of different businesses, Dmitry, it doesn't make much sense for us to give you value numbers there. But overall, I'd say you'd consider it fairly flat sequentially and maybe down moderately -- down moderately sequentially and fairly flat year-over-year.

That business, even this year as we go forward, has been hit with more raw material inflation than the balance of our businesses, excluding some of the Catalyst inputs.

Have you been able to adjust prices in response?

There is a bit of a lag there and that is why our profitability in that business sequentially is down a bit. Okay? But we hope to achieve that in the third quarter and fourth quarter going forward. In those businesses, there is a fair amount of ethylene consumed, a fair amount of aluminum and some other solvent-based, so a lot of petrochemical-based raw materials.

So that business continues to be hit with raw materials, so they are working hard to pass that through in the phenolic antioxidant business and in [Stanica], our tin stabilizer business.

Okay. You mentioned on the FCC Catalyst business that despite your recent successes in increasing prices, it is still not at reinvestment levels. How much more do you have to raise pricing before you get to a point where you need to be expanding capacity and can justify expanding capacity --?

Well, we're just continuing to work on that, Dmitry. We've had a lot of good momentum year-on-year and sequentially through the last four quarters in FCC catalyst. So we are really focusing on continuing to get the value out of those products, and we think we've got a long way to go.

It is in the -- I'd say in the multi high percentage range; it is not 3, 4, 5%. I mean, it is fairly significant. And we are seeing a lot of I'd say momentum in getting those prices up, and that is really the key to our success in that business, because we are a long way from being there.

But you are getting cooperation from other players, it sounds like, in holding on to these higher prices?

Yes, it just takes some time, because a lot of tenders have been in play for maybe as long as a year to a year and a half. So we are working through a lot of those new contracts and tenders as they come up. But we are seeing a lot of good discipline out there.

Is that because capacity is fairly constrained right now among all the players?

I think so. And I think it generally, people are just -- it's just a good reflection of the value. This is over a $2 trillion market, and all the catalysts that go into this market are about $3 billion. I mean, it doesn't even round in terms of a percentage point. And when I think of the value delivered for these products, it is just really immense.

Can you make a brief comment -- I know it is not a major business for you, but it is something that people are keeping an eye on -- the additives business for FCC Catalysts. Is that continuing to grow nicely? Are there any competitive issues that you are encountering?

Dmitry, this is Mark. Let me take a stab at that. Yes, that business is growing quite nicely, especially in the area of incrementally increasing propylene yields. And again, especially in emerging markets, we're seeing a lot of activity there.

I think that is a technically challenged business, and so do we have competition? Absolutely. But we think we are bringing forth some really strong technology to that marketplace, so I think there is plenty of room for us to continue to grow.

Very good. And then final question, you talked about succeeding with price increases in the polyolefin catalyst business. Can you give us an idea of what changed in the market to allow you to get pricing up? Is it competitive behavior, is it better demand or better profitability from your customers?

No, I can't say it's better demand from the customer base, Dmitry. But I think it is just, again, a reflection of the value that these products bring. They really don't, again, even round in terms of the costs of production in these huge polyolefin units, yet they bring tremendous value, they are difficult to distribute, there are challenges in logistics and delivery.

And again, we led an increase six to eight months ago in the 40% range. We led an increase about 30% two months ago. And I think the customers really value what we are delivering and what we are bringing to them. So that is the heart of the success here.

Okay, sounds good. Thank you very much.

Edward Yang with CIBC World Markets.

Good morning, guys. Great quarter. Mark, just a few questions on HPC Catalysts. First, when you say third quarter for Catalyst won't be as strong as the first quarter, are we talking roughly in line with the first quarter or 5 to 10% lower? I would appreciate some granularity there.

And second, in the past, I think you have said refinery catalyst volumes in 2007 could be flattish year-over-year because of the lumpy or wavy nature of orders. And this seems very conservative to me. Is this still your expectation? And if so, how do you reconcile that with the capacity additions that you are having with your new factories? And I have a quick follow-up after this.

Let me see if I can tackle those in order. We are in the middle of a lot of changeouts that are underway, as the new sulfur specifications roll through in 2006. And so many of those have already occurred; we have a number on the books. And I think in a broad sense, quarter to quarter we're looking at those volumes being fairly flattish, second and third in HPC.

The uncertainty that we have in 2007, I think you characterized it correctly. Our forecast today is for fairly flat volumes year-to-year. But 2007 is a transition window. You have a number of units that have been operational for some period of time in Europe that are coming due. You have a number of units in the U.S. that are coming due, and you have new units that are coming onstream.

The new units that come onstream, we've got nailed pretty well. What we are uncertain about is how rapidly the older units the Catalyst is going to expire (indiscernible) the operation. If it expires rapidly, then 2007 will be a good growth year. If it doesn't expire rapidly, then 2007 is fairly flat and 2008 is stratospheric. So I think it just depends on how that cycle goes; and we will be in a much better position as this year unwinds to give you more color on that.

But we are not at all pessimistic on the future of the growth of this. In fact, we feel -- we really believe that as this unit comes online, we're going to fill it up fairly quickly and be looking at other expansions down the road.

Okay. Great, terrific. And lastly, business seems to be clicking really well. Obviously, the Akzo acquisition was very shrewd. What is your appetite for more transformational mergers, or are you more content to look at things that are more tuck-in in nature?

Well, we are never content. But our focus is to build on our existing models. And where Catalyst seems, I think, to many folks a bit of a stepout, you know how we had gone after that for a long period of time and how we had looked at building our Catalyst portfolio. So we think that within the confines of these three segments, we've not nearly capitalized on the growth and opportunity that is there yet. I mean, we just really started that process.

And we see a number of areas where we could pull things into it that will expand both market and technology. Some of this could be quite large. But you're going to see us stay a little bit closer to home, but at that doesn't mean going to be humble with our growth expectations.

Thank you.

Laurence Alexander with Jefferies.

Good morning. Mark, you just said that there might be a issue with the catalyst expiring more quickly because of the severity of the operational run rate. Can you expand on that?

Well, as you operate at these new very low levels of sulfur, from a refiner's perspective, he has to make certain that on day-to-day operations, he is actually lower than that. I've seen some evidence that would say that just a simple tube leak in a feed/affluent heat exchanger would be enough to contaminate the entire pool.

So these guys are driving these reactors pretty hard, so they are operating at what's known as high severity. What is unclear is how that is going to the impact the run rate. So if you had a catalyst that normally lasted two years, is it going to last two or is it going to last 18 months?

And there is uncertainty on our part -- I think everybody's perspective with that. It is certainly not going to go any longer, Lawrence. And my gut is the trend is going to be towards slightly shorter life for some period of time.

Okay, thank you. And then a follow-up on decabrom. Can you bring us up-to-date on the size of your decabrom business, how the margins compare to the nonhalogenated flame retardants and how you are thinking about the European Union's possible revaluation of decabrom?

Well, let me start with the EU. For those of you that may not be aware, decabrom went through I think 560 tests to be exempt from ROHS. Recently, a legal services group came out what an opinion that said that a compounded material couldn't contain more than 1/20 percent of PDBE impurities; so these would be non-deca components.

That in itself isn't a ruling; it's a position that was -- it is a suggestion that was made. But it certainly created a lot of anxiety, because if you compound commercial deca, you are higher than 1/10 of a percent impurity level. So we are working with DG Environment, which is a group in the EU. They now realize the mistake in what they've said and we hope that that gets clarified in the future.

In the meantime, we have seen deca sales decline somewhat. And the kind of view you should have for decabrom is that it's certainly way south of 10% of our portfolio, probably even south of 5% of portfolio in Polymer Additives. It's a good margin product, but the margin is probably pretty reflective of most of the products that we have out there.

Just to build on that, Lawrence -- this is John Steitz. I think that's a really unique thing about our Company is we have such a diversified portfolio that a product like decabrom is just one of a very extensive portfolio of products. And as Mark mentioned, it is probably 5% of the Polymer Additives portfolio.

Okay. And lastly, just two bookkeeping questions. One is, is the tax rate next year in '07 likely to be around 22%? And secondly, in terms of the working capital reduction that you are planning for the second half, do you have any sense what the EPS impact would be --?

This is Rich, Lawrence. On the tax rate, we are not commenting yet on next year's tax rate. What I would tell you is that the way we look at it right at the moment is we had a tax rate of 25, 26% as kind of a sustainable rate coming into this year. And now we are building in a sustainable $1 million a month run rate better than that. Okay?

So I gave you guidance for the rest of this year. We need to assess where we're going to be making the income next year and we will come out with guidance as we come closer to the end of this year, as to what you should forecast for next year. But the things I've mentioned are all sustainable, so you could probably come up with a good range based on that.

With respect to working capital, our goal is to take working capital out. Now we basically our net working capital is up slightly this year, when the business has grown about 16% volume-wise. So what I would say is without the focus, we probably would be worse than what we have done. We had some focus on it. But we want to drive working capital out and we think we have the opportunity to do this later this year.

In terms of EPS impact, I guess if we generate more cash, we will pay down debt quicker, and that will give you a little bit of a benefit there. We are not saying that there is going to be a decrease in EPS because we are not going to run our plants the way we run them, that type of thing. That is all kind of taken into account with what we've talked about for the second half of this year.

Thank you.

Mike Judd with Greenwich.

Good morning and congratulations on a good quarter. I have a couple of questions about your antioxidant business. I guess I saw on your website that you've got a price increase of 30% on the table for June 15th for your lubricants & fuel antioxidants. I'm just wondering if you could talk a little bit about the success of -- how successful was that. And also if you could just talk about some of the industry dynamics in antioxidants and polymer and intermediates, please.

Mike, this is John Steitz. First, the 30% increase, we have seen success with that increase in our lube & fuel antioxidants. The volumes are fairly strong there. Our phenolic-based antioxidant line of products is consistently helping our customers lower sulfur ash and phosphorus content in their lubricants and oils. And that is a pretty significant driver for us.

And I really think we are bringing a lot of value here, and the customer base, which are primarily big oil companies and big lubricant additives suppliers, have been supportive of this.

In total -- we also have a joint venture in China in phenolic antioxidants. They are more broadly used in plastic formulations that provide antioxidation. And that business is doing pretty well in China, as you can imagine. With the strong economy, strong growth there, we have seen good, solid performance with that business through the course of the last two years.

Okay. And the polymer and intermediates area?

The polymer intermediates business has done fine. Again, it is not a big portion of our portfolio, and it is also subject to the inflation of phenol, which is based on petrochemicals. So we've seen a lot of inflation in raw material and we're constantly chasing that with a bit of a lag in terms of getting those prices up to reflect that fairly dramatic inflation.

Phenol into that product line has been this year probably one of the most significant inflationary products we've had. And there is a bit of a lag, and we hope to achieve in the back half of the year to minimize that lag.

And on the fuel and lube antioxidants, with your price increase here, at this point, are you caught up with phenol?

Well, you never know. I mean, the way oil is you've got to be prepared for the worst and hope for the best. So I do not believe so. I really do not believe so, that we are there yet.

Thank you.

Marshall Reid with Banc of America.

Good morning. Can you talk about elemental bromine prices, sort of where they are today and your outlook heading into the second half?

We've continued to -- Marshall, John Steitz -- and we've continued to make good momentum on elemental bromine pricing. So we've seen additional improvement this quarter. It is not in the double-digit range, but it is in the good, solid single to upper digit range sequentially. So we are having some good success there.

Based on the value that these products bring, whether its application be bromobutyl rubber or used as an intermediate in the various production of other compounds, we just believe it's still got a long way to go. And we're going to continue to work on that.

Okay. And you guys are making good progress on reducing debt related to the Akzo acquisition. Any thoughts around uses of cash in 2007, such as share buybacks and/or M&A? And just following on Mark's comments, what sorts of things would you pull in and where?

Marshall, this is Rich. When we are successful with our working capital efforts and if we continue at the kind of rate of cash flow we've had in the first half of this year, I think we still have a priority to pay down debt quicker than we thought we would pay it down. But I think it also frees you up to do other things.

So certainly, the type of things we're looking at currently, we could easily fund any of those kind of bolt-on type acquisition, should we do those. I think you are freed up to dedicate more of your extra cash flow to buyback if that is the right thing to do at the time.

And we've had a history of increasing our dividends that we would also look at that. So it is kind of those things that -- nothing different than what we've always said. But you have more degrees of flexibility once you get that money out of working capital and then free up the cash flow.

In terms of that flexibility, can you quantify the free cash flow you could expect in '07? Just sort of a broad range, maybe.

We typically -- we don't comment on cash flow projections, just like we don't comment on earnings projection. But certainly it would be accelerating from what we've experienced this year. Because next year we don't think we're going to have the same level of CapEx. So we're probably down 20 to 30 million in CapEx next year.

Okay. And then last question. I may have missed this, but can you quantify the shift in sales from the third quarter to the second quarter in HPC? And also operating earnings.

Marshall, let me give that a shot. We had a couple of orders that came in that we didn't expect. Order of magnitude, you should view that as less than $10 million of orders that rolled in that way; probably closer to $5 million. And so it is that kind of stocks.

Okay, so it is pretty small. Okay, great. Thank you very much.

[Chris Shaw] with UBS.

Hi, good morning. In Fine Chemicals on Tamiflu, you started production, but have you recorded any sales yet or will that all start in the third and fourth quarters?

It starts next week.

Great. Is that going to be a big part of -- or at least a significant part of the margin pickup you expect in Fine Chemicals over the next --?

Well, it's all part of the equation, Chris. It is a demonstration of the models working for our Company and for our customer base. And it is one of several contributors in the Fine Chemicals business. And as Mark said, yes, that will be going out next week.

And then for FCCs, could you -- in terms of pricing, I know you spoke about it a little bit before. Part of it before was I believe an energy surcharge. Are those still in place? I remember it was, I think, initially it was like $400 a ton. Is that still the sort of level you are looking at or has it come back down? Is it difficult -- is it coming down, then you have to actually add an increase on top of that, beyond that for nonenergy reasons?

Yes, Chris, this is John. The energy surcharge really kicks in at much higher natural gas levels.

That's not part of the equation right now.

So what we have done is really tried to institutionalize those pricing increases as we have bid on new tenders and new requirements from our customers.

So it's nothing that is rolling off now --

No.

-- that's going to be a negative, okay. Do you guys at all break out anymore or did you mention, I forget, the impact of the Jordan JV in terms of how much profitability it had, how much it contributed to the segment?

We do not comment on that, although what we do is we actually take out the minority interest of that so you could kind of see the other side of the equation. That is clouded a little bit because of the adjustment we had with respect to the foreign denominated borrowing that we kind of quelled out in the earnings this time, because that was JBC related.

Okay, I'll look at it that way. Thanks.

Dana Walker with Kalmar Investments.

As you might know, it is Dana; good morning. Looking at the volumes in the supplemental materials provided on your website in Fine Chemicals where volumes appear to be lower by 12.3%, the prior year's quarter was strong, but could you amplify?

You know, Dana, the Fine Chemicals business is such a diverse array of different businesses. For example, some of the fine chemistry products for pharmaceuticals would be a much higher dollar value, yet lower volumes. So it is difficult to mix and match volumes. But let me, aside from that, give that a bit of a shot.

Methyl bromide volumes were pretty flat year-on-year; ibuprofen volumes pretty flat sequentially, but down year-on-year about 12 to 15%. We think we've hit the low watermark there, but it's beginning to pick up. We've seen strong clear brine volumes year-on-year and sequentially, and there seems to be some good momentum building in that business. And the whole range of Martinswerk ATH-based products of volumes have been pretty good, both sequentially and year-on-year. So I don't know if that little bit of commentary helps.

Our ag intermediates business year-on-year I think is pretty flat. But going forward, we're seeing some weakness in the second half, but our numbers reflect that. Our optimism despite that weakness reflect decline in ag volumes in the second half of the year.

Before the likely feel from Thann or the comparisons from Thann that you will see in '07 versus '06, is that volume number in Fine Chemicals as you've described less meaningful than it once was?

Yes, absolutely, yes. But as we pull that business out, as I mentioned, we're looking for a 200 to 300 basis point improvement in overall profitability. So we feel good about that.

Rich, are you in a position to talk about the negative operating profit swing from Thann that you've seen year-to-date?

No, I would just say it continues to be not profitable.

Is it more non-profitable than it was a year ago?

Not substantially one way or the other.

The effect of the Orangeburg multipurpose facility, as you see it prospectively, can you talk about that, looking at the earnings base that we see in the first half of this year?

Yes, I'd say the more significant volumes in that asset, Dana, are coming into play as we speak. The Tamiflu production is occurring this quarter and sales are going to go out the door. There are some other specialty intermediates that we make on a proprietary basis for some large multinational pharmaceutical companies; that is kicking in.

Then we are anticipating a run of specialty in Naproxen application later in the year as well. That asset again is contributing to the good solid improvement that we are seeing in Fine Chemicals.

If Tamiflu, though, might be considered serendipitous, and you've talked about Orangeburg all but being sold out for '07, it sounds like the runs that will be Tamiflu-based this year will largely be replaced by other projects next year.

Yes, well, it is kind of a wait-and-see approach. I mean Tamiflu is a great -- just great antiviral outside of the avian flu application. So you have to keep that in mind. So it is really growing tremendously in its application across a number of antiviral applications. That is really good; we feel good about that position.

In the event that it does subsite, we are not planning on a major production run of that in 2007. So we've got -- our model is really generating a lot of great opportunities, and we continue to investigate a number of opportunities to debottleneck that business, if you will, from a volume perspective.

Two last rifle shot questions. Can you comment on the percents of your first-half catalyst revenue comprised by FCC, and can you talk about the relative progress you are making in Polymer Additives in growing your flame retardant volumes over a several year basis?

Over a multiyear basis?

Yes.

Let me take that one first. Our flame retardant portfolio is really, without question, the most extensive in the market today. So we are seeing a lot of good opportunities continue to develop as the whole concept of flame retardancy in materials continues to grow around the world, and those standards continue to increase. So long term, we are very bullish on this business.

We're continuing to invest in R&D in it and continuing to look at a whole range of solutions for our customers. So we feel good about that.

If I understand your question on FCC, the weighting in terms of dollar value continues to be much higher in HPC as a part of the portfolio of overall catalysts. But it also highlights a growing commitment from us continue to grow -- improve the pricing on the FCC side of the equation. I mean, those products do just great things for an industry that is really going at max rate. So that is very important.

So you are willing to be qualitative but not precisely quantitative?

Right.

Thank you, and good work.

Some things never change, Dana.

Tim Acquino, KeyBanc Capital Markets.

Good morning, gentlemen. Can you hear me now? I'm sorry for that.

You must be multi-tasking.

Actually, the phone was on mute, so I apologize. Great quarter. A few questions. First off, in the past there have been some competitive pressures that you've spoken of in the Fine Chemicals, primarily on the ibuprofen. Can you maybe, just broad brush strokes, give us an update on those competitive pressures, and do you envision those reemerging sometime in the second half?

And second question, just switching topics to catalysts, can you maybe either qualitative or quantitatively give us some direction as to what the margin potential could be if we look maybe a time horizon 6 to 9 months down the line?

Good questions. Tim, let me first start with ibuprofen. First, ibuprofen is I think a very efficacious, cost-effective analgesic and anti-inflammatory, and we are seeing it grow around the world. So we are seeing fairly strong volumes both within the U.S. and outside the U.S., though a year ago as we have talked, we had lost a position with a fairly major customer.

We have stabilized that business, and our volume kind of outlook going out the next 12 to 18 months is pretty strong. But if we're going to supply those markets outside the U.S., we need to improve profitability. And it is also in light of a lot of the raw materials in that business have risen dramatically. Isobutylene, for example, is a key raw material in ibuprofen production, and that is petrochemical based, oil base. So it has gone up dramatically.

So we are -- I think going forward, we are just working hard to really maintain our profitability level over the next 12 to 18 months as the market continues to grow, and then we can capitalize on helpfully higher pricing and improved economics in that business.

On catalysts, for the year we are working to achieve 14% -- 13.5%, 14% operating margins in the overall business, and we are not happy with that. We've got an overall view to achieve 15% margins for the Company in the next 18 months or so. And catalyst has continued to contribute to that margin improvement. I believe FCC is an important area to focus on, particularly in 2007. So our team is doing just that.

All right. Well, great. Thank you very much and congratulations again.

Mike Sison with KeyBanc.

Hey, guys, great quarter; didn't mean to double-team you. I came in a little late. I apologize if a couple of questions have been asked. But when you think about flame retardants, you've gotten a lot of pricing over the last couple of years. Your profitability is fairly noticeably improved here in the second quarter and likely be much improved '06 to '05.

At what point do your customers start to think about alternative materials? I mean, are all raw materials that provide flame retardancy expensive? Have they all gone up where there really isn't an alternative?

Mike, this is Mark. Your questions are always appreciated, so we are glad you joined, but that is a real broad question. I think it depends in some areas, but let me say that this is an area that remains very dependent on innovation. And innovation allows the compounders and the OEMs to create new products into the marketplace, meeting ever-growingly stringent regulation.

So first and foremost, our ability to innovate gives us a broad portfolio and allows us to bring a lot of value into these customers. One of the ways you reflect those values is in net higher margins. If you look at those margins, yes, they're certainly better than they have been, but they are still quite modest. I think anyone would agree with that, and frankly don't compare to some kind of margins that you would expect to get longer-term. So I think there is room to continue to improve.

The caution that John put out there that I think is very valid is that the business -- we need volume growth and we need those kinds of things for the business to continue to expand well, and it's been a bit flat for me. So we are hopeful to see as we end this year and enter next more volume growth, and I think that combined with innovation gives us ability to keep driving margins.

Yes. I wanted to touch base; I'm sure you've talked about it. But in terms of volume growth, electronics, consumer electronics, a big portion of demand for flame retardants; Rohm and Haas reported good numbers there. Is there any reason volumes are flat for FR in total? Is the electronics industry doing well for that business or is it really other sectors?

Well, I think there is a lot of sectors involved and construction has been weaker, as you know; automotive has been weaker, as you know. So it is kind of a broad brush there. Electronics are doing well. Having said that, we think some of the electronic guys are skimping and -- I'd just say they're doing what they should be doing in regard to fire safety, and that is going to come back to haunt them. So generally speaking, it has been the nonelectronic sectors that have depressed our bulk average volume.

-- so industry growth in flame retardants flat in general. No --

Say that again, Mike.

Industry growth for flame retardants in total has been largely flat year-to- date?

Market --

Market growth.

Mike, overall, here is the view to have, is we are still looking at volume growth year-on-year in the 3 to 4% range.

Okay.

In flame retardants.

Thanks guys and nice quarter.

David Begleiter with Deutsche Bank.

This is actually Jason sitting in for David today. Congratulations. Quickly, actually, on the flame retardants, just following on, have you guys taken some market share in flame retardants broadly?

Absolutely not.

No. I wanted to focus on the Catalysts for a moment. In terms of what is driving price increases, can you characterize how much of it is raw material pass-through, i.e., you might have to give it back should those come down ever, versus secular trends such as regulation?

The raw material pass-through had occurred really rampantly last year. We still continue to have raw material pressure in this business, Jason. So it is still a concern. We've improved margins of the overall business; you can clearly see that, and flame retardants is a contributor to that. But they were far too weak over the last recent past history, three to five years.

Sorry, maybe I wasn't specific enough. In Catalyst in particular, what is driving price up in Catalyst?

Catalyst, I think you have to look at FCC really supply and demand. And the demand is strong. The economics around that product line have been poor. And I think it's just raising those prices to get the value for which they bring.

HPC is really just driven by overall strong market demand. We could talk a long time about that. But basically driven by increasingly stringent sulfur regulations.

Okay, great. Just on FCC then too. Any visibility on new products? I know you've mentioned some -- actually MTBE focus, (indiscernible) light catalysts, that sort of thing, that might help your margins in the future?

Yes, absolutely. I mean we are continuing to work on -- I mean, this is really an important driver for us to continue to innovate and improved efficiencies. Because the real key in this marketplace is that crudes are becoming more sulfur-laden and much heavier crudes. Just for example why the tar sands in Canada are a real paradise for catalyst producers, because of the nature of that raw material source.

Okay, thank you.

There are no further questions in the queue.

Okay, great. We would 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.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.