雅保公司 (ALB) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2006 Albemarle Corporation Earnings Conference Call. My name is Shaquana and I will be your coordinator for today. (Operator Instructions.) I would now like to turn the presentation over to your host for today's call, Ms. Nicole Daniel, Director of Investor Relations. Please proceed, ma'am.

Thank you, Shaquana. Good morning, everyone, and thank you for joining us today for a discussion of Albemarle's third 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 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'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 are looking forward to sharing with you information and details for the quarter and answering your questions after our remarks.

Before we go into the 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 our business in the future. Let's begin by talking about several recent developments that are key aspects of our strategy to drive fine chemical segment income margins to 15%.

First, we completed the disposition of our assets at Thann, France to International Chemical Investors Group. At our second quarter earnings call, we reported that we were negotiating with the Works Council to potentially cease operations at that site. As we discussed, Thann was our potassium and chlorine facility, with approximately 100 million in revenues and a history of low profitability. As our discussions with the Works Council progressed, we began discussing a potential transfer of the facility to ICIG, who wanted to invest in it and continue its operation.

On August 31, we completed the disposition of Thann to ICIG and we incurred a $1.20 per share special item. Rich will provide additional details on this charge in a minute. By selling the facility to ICIG, we were able to reduce the time required and cost to move these assets off our books. In addition, by transferring the stock that owned the facility, we also transferred all known and unknown liabilities at this site. This transaction has been positive for our Company, our shareholders, and our former employees at Thann.

The second item I'd like to mention is our South Haven, Michigan pharmaceutical acquisition. This acquisition is another key move in our ongoing effort to reposition the fine chemical division around services and higher value activities. In addition to adding approximately 20 generic APIs to our portfolio, we acquired a well-configured, multi-production cGMP facility that offers us a full range of capabilities from pilot plant to commercial scales, along with approximately 100 very experienced employees. We were able to acquire this site with very favorable economics, as DSM had planned to close the facility.

As you know, the success of our fine chemistry services model has created a demand that exceeded our asset capability. So we will immediately transfer projects to this new site. Given our business model's success and the strength of our South Haven team, we expect the acquisition to be immediately accretive.

While oil and natural gas prices have dropped considerably over the last few months, raw material inflation remains a challenge for the industry. Raw materials, excluding moly, are up $10.7 million compared to the third quarter of 2005, primarily across the ethylene chain - olefins, butene and isobutylene, and other metals. Energy was up another 2 million, primarily due to electricity and coal in Europe. While we've seen declines in U.S. natural gas, European natural gas costs have increased. Posted molybdenum prices averaged $26 per pound during the third quarter, roughly $7 a pound below the level of a year ago, but up $2 a pound over second quarter 2006.

To offset this ongoing margin pressure and to price our products more appropriately to the value they offer, we continue to implement pricing initiatives. During the quarter, ATH and magnesium mineral flame retardants were increased 15%, certain lube fuel and polymer antioxidants were increased up to 15%, our ALBlend's pelletized polymer additives up to 15%, and early this month we announced an increase in elemental bromine price from $2,500 per metric ton to $2,970 per metric ton, which is an 18% increase.

We also continue to work hard to implement previously announced price increases across our portfolio and are making good progress with bromine, FCC catalyst, and polyolefins catalyst price initiatives. While offsetting raw materials inflation remains important, it is vital to our sustainability that our products and services are priced properly to reflect the value they bring to the market. We believe this value pricing initiative is key to creating new products and technology in support of our customers.

Last, I would like to note that we began delivering under the Roche Tamiflu contract during the quarter and will continue to deliver product during the fourth quarter. After this campaign, our multi-purpose asset used to produce the Tamiflu intermediate will be converted inexpensively to produce other products as we enter the first quarter. Our team's execution on this contract highlights our ability to address complex chemistry and is an example of the type of projects we expect our fine chemistry services group to be delivering in the future.

With these highlights, let me now address the Company results. All the numbers that I am discussing today are operation results that exclude the $1.20 EPS special item recorded in the third quarter related to the Thann disposal. I am pleased to announce net sales of roughly $608 million for the third quarter, up 20% from third quarter 2005. We had third quarter earnings per share, excluding special items, of $1.25 per share, a 127% improvement over third quarter 2005 earnings of $0.55 per share, and a 40% improvement sequentially.

Our net income, excluding special items for the quarter, was $60.7 million, compared to $26.3 million in the third quarter of 2005, and $43.3 million in the second quarter of 2006. Joint venture income from our unconsolidated investments was $4.4 million in the third quarter, essentially level with third quarter 2005 earnings.

Nippon Ketjen, our HPC joint venture in Japan, saw seasonally soft orders, as most of that company's business is typically in the first half of the year. Our catalyst regeneration joint venture at Eurecat produced very strong results.

Before I turn it over to John, I'd like to make a few comments on the outlook for our businesses for the remainder of this year and into 2007. Our fine chemical segment is clearly on a turnaround path. Segment income margins improved 200 basis points year-over-year and 150 basis points sequentially. We expect strong margin growth in the coming quarters following the sale of our Thann facility that will allow us to reach our 15% margin targets sooner than expected.

We have a solid pipeline of products in our fine chemistry services portfolio and continue to see strong demand for the solutions we offer. By way of example, we had approximately 70 inquiries for our services in September alone. Our South Haven acquisition suits this growth perfectly. I expect to see this segment continue its trend of margin improvement in the fourth quarter and into 2007.

Our catalyst business also exceeded expectations and we continue to see numerous new opportunities to expand the use of our catalyst technology. The first nine months have been very strong, riding on the regulatory benefit of the low sulfur diesel regulations that went into effect in the U.S. on October 15. While we currently anticipate a lighter order pattern for HPC in the fourth quarter, our expectations for a solid 2007 have started to increase.

The growth we are experiencing in quarterly results also reflects a $400 per metric ton FCC price increase that we announced during the fourth quarter of 2005, and we expect to realize further incremental benefits in the future quarters as more contracts are negotiated.

In addition, we are seeing marked improvement in our polyolefins catalyst business that should continue into next year. Given that, we expect both the FCC and polyolefins catalyst revenues will continue to grow. As we look at the global customer base, we are getting more confident that conventional HPC volumes will be flat in 2007, with the first half volumes somewhat lower than the second half.

We also have a number of new products entering the market, some of which we're already starting to produce that will play in the expanding heavy and sour crude markets. The net result of these various factors should translate into positive year-over-year growth for our catalyst business.

Polymer Additives continues to perform exceptionally well. While we are projecting a typically softer fourth quarter in this segment reflecting normal seasonal holiday variations, we expect strong stable growth in this segment through 2007, driven by our innovative product line, new regulatory opportunities, and focused pricing efforts.

If I roll all of this information together, over the next quarter, benefits from fine chemicals and strength in FCC and polyolefins catalyst will likely be offset by customary order patterns in polymer additives and lower sales of HPC catalyst. On balance, our fourth quarter expectations roughly resemble second quarter results, yielding a very, very strong 2006. And for reasons I've already mentioned, we also expect 2007 to be another successful year for our Company.

With that, let me turn it over to John Steitz.

Thanks, Mark. As I walk through the results today, I'd like to point out that the results exclude the Thann special item. In Polymer Additives, we had record net sales for the third quarter of 2006 of $241 million, up 23% over third quarter 2005, and up 5% sequentially. Our polymer additives segment income was $38.6 million, a 77% increase over the third quarter of 2005. Segment income margins were 16%, outstanding performance that yields us two consecutive quarters with margins above our 15% corporate goal. 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 third quarter saw nice increases, both sequentially and year-over-year. Net sales also continued to climb, up 37% year-over-year, and up 7% sequentially. Phosphorous flame retardant volumes and net sales were up slightly year-over-year and sequentially, but remain challenged from a profitability standpoint. Mineral flame retardants remained strong during the quarter with volumes and net sales up year-over-year, and roughly flat sequentially.

Catalyst net sales for the third quarter of 2006 totaled $217.4 million, a 25% increase over third quarter of last year, and a 12% increase sequentially. Segment income for the third quarter was $38 million, a 160% improvement year-over-year and a 30% improvement sequentially. Joint venture contributions in this segment during the quarter were sequentially lower, due to the normal seasonal slowdowns from our Japanese joint venture, Nippon Ketjen. As we expected, our HPC catalyst sales in the third quarter were stronger than the second quarter. We expect 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 and satisfactory returns on our capital. Our polyolefin catalyst business benefited from pricing initiatives in aluminum alkyls, as net sales increased 27% on flat volumes. Overall, our Catalyst team did a tremendous job executing on their businesses over the quarter and the year - 17.6% segment income margins are excellent.

Our Fine Chemical segment income, again, excluding the Thann special item, was $16.2 million, up 34% over the third quarter of 2005 and up 18% over the second quarter of 2006. Fine Chemicals net sales for the third quarter totaled just under $150 million, a 9% improvement over third quarter 2005, and roughly flat with last quarter results.

Margins were up 140 basis points quarter-to-quarter, a nice step up in our progress to improve this segment's profitability. Volumes were lower, as expected, since we had only two months of volumes from Thann. However, results were impacted favorably by pricing improvements across the bromine portfolio.

We had good seasonal sales in our methyl bromide business and ibuprofen volumes and pricing were up as well. A great job from our Fine Chemicals team. And now, I'd like to turn it over to Rich Diemer.

Thanks, John. I'd like to take this opportunity to provide additional details around the Thann divestiture, our tax rate in the quarter, an updated full-year view of taxes, our corporate and other expenses, our cash flows, and financial position at September 30.

As both Mark and John have commented, we have experienced strong operating performance from all business units. And similarly, we've done some good work in a number of these areas that I will discuss as well.

First, let's start with Thann. We had estimated that a closure of Thann would have resulted in a pre-tax charge of approximately $100 million, exclusive of any potential environmental costs involved with such an event. The divesture during Q3 resulted in a pre-tax charge of $89 million, 58.4 million after tax, or $1.20 per share, which we have labeled as a special item in our financial presentation. The charge is largely due to the write-off of net asset values and related exit costs. The total cash outlays, after receiving tax benefit for the loss, are expected to be south of $10 million. The disposition provides a better, more timely, and value-certain resolution than any conceivable shut-down scenario.

Taxes. Last quarter, I told you that the Q3 effective tax rate should be in the range of 17 to 18%. This was based on a full year effective tax rate in the 22 to 23% range. Our current view is that our full year rate should be approximately 21%. The updated full year view is driven by a change in mix of income sources, for instance, more income from JBC, our Jordan-based venture that is not subject to tax, and a better than expected benefit from Albemarle Europe, our Belgian-based trading company.

We also made a decision to no longer provide taxes under APB23 for most countries, as we no longer expect to repatriate foreign earnings to the U.S. This last item was driven by our new debt structure in Europe, which I discussed last quarter, and our intention to use locally-generated profit to repay that debt. Our reported quarterly effective tax rate is 10.8% after adjusting for Thann. And the balance of the items that drove the rate to that level principally relate to jurisdictional tax rate changes and audit adjustments of a one-time nature.

Looking out to 2007, our initial guidance would be for a sustainable tax rate in the 23% range, as incremental income is more likely to be earned in locales with taxes that are higher than our current effective tax rate. We will provide an updated view of 2007 in our Q4 year-end conference call.

Corporate and Other. Unallocated corporate expenses were $15 million in the quarter, up $7.6 million, roughly double the prior year levels, principally due to higher expenses for bonus programs linked to profitability and other corporate objectives. The magnitude of the increase can be traced to our decision last year to reverse certain bonus accruals in light of weak performance during that period, much of which can be ascribed to the hurricanes and their aftermath.

Cash Flow. Adjusting for the Thann special items, EBITDA in the quarter was $107 million. That brings us to $288 million for 2006 year-to-date. We ended the quarter with cash and equivalents of $90 million. CapEx for the quarter was $24 million, and we continue to range CapEx for the year between $100 and $110 million, probably towards the higher end of that range.

Depreciation and amortization was $28 million and is $86 million year-to-date. And we expect full year depreciation amortization to approximate $115 million. We repurchased 90,000 shares of stock in the quarter, paying on average $53.43 a share. Year-to-date we have repurchased approximately 315 million shares for--315,000 shares--we just bought ourselves out. Anyway, 315,000 shares for $14.7 million, an average of $46.58 per share. We plan to continue deploying our cash to repurchase shares during the fourth quarter.

The Balance Sheet. As of September 30, 2006, we have consolidated debt of $785 million, including $70 million of JBC joint venture debt, of which $405 million is floating and $380 million is fixed - a 52/48 split. Our floating debt interest rate is 5.4% at quarter-end. The weighted average interest rate for quarter three was 5.7%.

Net of cash-on-hand, which is $90 million, and the non-guaranteed, yet consolidated portion of JBC debt, which is $38 million, our net debt is is $658 million, approximately $74 million less than year-end, and a $5 million decrease during the quarter. If you adjust for the Thann and the South Haven transactions, our operations generated cash that could have reduced debt an additional $40 million in the quarter and for the year.

Working capital continued to be an area focused on opportunity, and I plan on providing you with a full accountability on our progress and future targets for working capital on our next call. Our quarter-end debt-to-cap ratio is 42% and our net debt-to-cap ratio is 39%.

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

Great. Thanks, Rich. Now, we'd like to go ahead and open it up to your questions.

(Operator Instructions.) Your first question comes from the line of Marshall Reid with Banc of America. Please proceed.

Good morning, everyone. Great quarter.

Thank you.

First question, in catalysts, I think sales were $217 million in the quarter. Can you talk about the split there between HPC and FCC catalysts. And can you also talk about the relative margins for those two products?

Marshall, there are a lot of sensitivities around sharing that level of detail with such a broad community. And we're a little bit apprehensive about doing that. But generally speaking, the FCC business has turned profitable for us. But we've got a long way because this business really operates on a very high base of capital and capital deployed. And therecontinues to be pressures on raw materials, including alumna, silica, and energy going forward.

So the real question is continuing to drive pricing for the value that these products bring. And I'd just as soon probably leave it at that between the split between FCC and HPC, if that's okay.

And on the margin question? In HPC, margins are typically higher than FCC?

Well, yes, when you don't make any margin on FCC, as we did last year. Yes, HPC had been the driver in the business. But the real key going forward is pricing improvement in that business. And we're getting some legs underneath us on that and we want to continue to drive momentum and cross-sell our markets.

And last question. In polymer additives, volumes were up I think 18% for the first three quarters. How much of the margin improvement there this year is just from greater operating leverage as you guys load your plants, and how much is simply higher prices in that business?

Well, we've had some traction on volume in the third quarter. We had volumes up 15% year-on-year, and that's comparing last year, which was the lowest volume quarter of the year - last year third quarter. So we had a nice rebound year-on-year, and we had nice sequential improvement as well, and despite reports of the economy, that business volume has been pretty resilient. So the majority of the gain has been pricing. And we've got pricing improvement in bromide flame retardants year-on-year of about 20%. Now it's flat sequentially, but we see going forward some good opportunities to continue the pricing momentum.

Thanks, again. Back in queue.

Thank you.

Your next question comes from the line of Ray Kramer with First Analysis. Please proceed.

Good morning. This is Allan Cohen with Ray.

Hi, Allan.

Let me ask a broad question on fine chemicals. You're one of the two companies I can find who is doing well in this business. The broad market has bottomed out. It is improving. But can you take us through the elements of your business model on execution on why you think your--this is a good business for you and such a lousy business for so many other people?

Allan, let me--let me give this a shot at the high level, and then I may--I'll ask John to comment some on some specific examples. But broadly speaking, the way we approach this market is to provide service. And that service is to work directly with the multinational pharmaceutical companies primarily, but there are other companies that we work with, to enable them to rapidly move new products into the marketplace.

So, we provide a service. And we expect to get a good return on that service. And we've taken that model and gone back into our existing assets and configured those, frankly, for very low dollars, so we've not over-invested in this business, and produced results for companies like Roche that are really stellar.

When you can go in and take a product that has 140 unique process steps and go from signing the contract to producing it in a matter of months at record levels, and then be out of that product and go into something else very quickly - that's the skill set we bring. And so, we're pretty excited about it. And the receptivity we get in the marketplace is just huge.

So you need to think of this as an opportunity-driven business. We're building a stronger portfolio of products as a result of that - these new APIs - and we think at the end of the day those are going--that's going to combine to be just a pretty strong model. If I had to say one thing that we haven't done is we've avoided the temptation to spend a lot of money--invest a lot of money in this business. And so many other companies have done that and that formula just does not work for them.

John, you want to comment on some of the examples--?

--I sure will, Mark. Allan, I'd just like to add that we've really taken the approach to build it as we go. A lot of our competition had just tremendous over-investment for many, many years and that is really flushing through - as you've seen - a big reconstruction in the marketplace. So we're pleased with our cost position on that basis. We've transformed a lot of existing assets into more multi-purpose assets. And now, we've--with the recent acquisition, we've got a very good value on that piece of real estate, so we're very proud of that activity.

That was--.

--So the other aspect to it is our bromine portfolio. So I'd say you have new products vitality, and then our bromine portfolio, and really driving value in our pricing model for bromine. So overall, a lot of vitality in the business and we think it's very sustainable for the long run.

Yes. Your acquisition looks like the mirror image of the Thann exit.

That's the plan, Allan.

How much is your business model being aided by the remarkably strong chemical engineering history and culture at Albemarle?

Well, I mean, you can't--I probably can't speak enough about how important that is. We have(which is really the Ethyl legacy)we have a strong cadre in R&D and in manufacturing technology of folks that really are unique in their skill set for a company our size. So we can go in and be presented with a molecule, frankly, that's never produced ever, and in a short period of time make that product or let people know we can't make it.

But we can do things that others can't doprobably in the U.S. There may be some other places where that can happen. But when you're dealing with these multinational companies, they like to get the R&D folks together and make these decisions. And we bring that technology to bear and that's a difference maker. It's a differentiating factor.

Yes. So when you marry that technical capability, which is just really pretty awesome, with getting a lot of looks in our house, the combination of those--that commercial with the technical marriage is really very strong.

Thank you.

This is Ray here. Just a couple of questions on margin. On the polymer additives front, I know second quarter you had thought that the 17% or so - and I'm looking at I guess segment operating profit - wouldn't be sustainable. You basically did almost as well in the third quarter. Is there anything that would make you think you shouldn't be able to hit these sort of numbers next year?

Well, on the whole, Ray, we feel confident that we can achieve numbers in this range. So--.

--Is this 17% sort of the new bogie in polymer additives, or could it even be potentially higher as more of these pricing initiatives roll in?

You sound like my boss. Okay, Ray? We're going to work hard to achieve that kind of level of excellence. That's what I can promise you. And we're going to work hard to continue to drive value in our product lines and continue to be innovative and use our great technical team to drive new products as well. So we're going to work hard to achieve that. I can't sit here and promise you that, but we're going to work hard to achieve it.

And then, a similar question on catalysts, especially with FCC, I mean, obviously, above breakeven, but still not where you want it to be. If and when you get FCC margins where you want to be, what do operating margins for the whole catalyst segment look like?

Well, that's pretty strong. I'd say the number you're looking at in the third quarter we think is sustainable, too. So there's two aspects to that. There's FCC pricing continue--continuing to work the low sulfur regimen around the world, and then, polyolefin catalyst - our aluminum alkyls value equation really continuing to drive pricing there. So we think the business has a lot of legs.

Thanks a lot and congratulations on quite a quarter.

Thank you, Ray.

Your next question comes from the line of Bob Koort with Goldman Sachs. Please proceed.

Thank you. Good morning.

Good morning, Bob.

Could you guys give me some sense on how you see the HPC market progressing over the next couple of years? It seems like there's been a wave of regulatory demand spurt. But now that we've got the diesel and gas specs sort of implemented, what do you think drives future demand there at anywhere near the rates we've seen? Or will we have to see some level of deceleration?

Yes, Bob. It's John Steitz. I'd say two things. There is the sulfur regulations, but there's also a much more sour crude slate that's coming into play as well. So in 2007, we see the profitability holding for the business at 2006 levels and volumes kind of flat in 2007. But in 2008, there's another ramp-up of additional regulatory tailwinds, not only in the Western markets, but in Third World markets as well. So overall, we see a large global opportunity awaiting us. And then, you have the crude slate side of things where tar sands and things like--opportunities like that are kicking in as well. So we've invested in the business and we're intent on driving returns to recognize that investment.

So I should envision it as the regulatory change created sort of a plug flow of opportunity that then gets maintained? It's a constant growth profile?

Yes, Bob. Let me follow on some of John's comments here, which were absolutely spot on. The mental picture you should have is that the regulatory changes are pushing the refineries to higher severity operations. So they have to drive these reactions to remove the sulfur. So their operating window continues to get diminished as these regulations work their way through. And this is just now ultra low sulfur diesel. We still have off-road and we still have marine coming up as this decade ends.

So you have a continued demand to produce good quality fuel. You have more fuel being demanded and you have more severe operations. So the catalyst consumption per barrel - that slope is a positive slope. So we feel very confident that if you look out over the next seven to eight years, 10 years, that this has very good growth trend to it.

Now, if you back up and say, if I just look at the physics, 2007, I think on a global basis, our calculus says all of HPC globally will be down about 3%. And that's just the cyclical nature. You mentioned this plug flow piece - a bunch of volume going in and not needing to be replaced. But that discounts higher demand and discounts higher severity. So as we look more closely at our particular situation, we think we're going to be flat period-to-period in that conventional HPC.

Then we can add on top of that new catalyst that we're actually now starting to produce and we think we'll be selling next year. So we think we can eek out some growth out of that business next year. And as we end next year, looking into 2008, it should be another pretty dramatic up tick as European products that we put in place a couple of years ago are refilled, et cetera, et cetera. So it does have a wave to it, Bob, but it has a strong positive slope to the [line].

And one last question around that. Have you guys been able to take a marketing approach to the customers that if you're not Shell or Chevron then you've got an independent supplier, whereas, if you're buying from [Craig, Terron] and the other guys you're--I mean, has that helped you at all? Have you taken market share because of that or what differentiates you to the customer base from your--?

Well, first and foremost is technology. We have hands down the best technology and we're going to work like heck to keep it. And what that means is that our material is more selective when operating in a high severity situation. So we have the best technology as it relates to those kind of severe conditions. And that's been the crude slate of choice over the last several years. So that technology has carried the day. There are some cases where clearly our independence plays a role, but I can't put a value on that or anything else in it. But mostly, it's technology, Bob.

Well, I've got to say, whoever ran that acquisition, it certainly looks like it was one of the best [actually] in the chemicals industry.

Well, it's been good. And what you can't see there are the great people in that segment that came into our Company. And they're helping more than just in catalyst. So we've been really pleased, not only with the business, but the organization that's occurred because of that.

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

Good morning.

Good morning, Laurence.

Very good quarter.

Thank you.

I guess, Mark, in the past you've indicated that Q4 was going to be a period when you'd be reducing your working capital. Have your targets changed? Do you still think you can pull out the same amount of cash as you had initially projected, or it more so?

Yes. Well, -we have built in to our latest forecast, the continued decrease in working capital. And I think we'll be able to hit the target that we had out there or come close to it, which was supposed to be down $30 to $40 million in that segment. We're great in receivables. We're a little bit worried about the payables side, given some of the order patterns that we're seeing at the end of the year.

But I think--we had set out to free up $60 million of cash, focused primarily on working capital. But if you look at our debt pay down, what's really happening today in terms of cash generation, Laurence, it's happening. And if it's not all in working capital, then it's happening some other way. So we're pretty comfortable that the net impact of that $60 million will be seen by the time we get to the end of the year, but it won't be as much in working capital as we had originally thought.

And can you give a little bit more flavor on what you're seeing in terms of competitors' support on the FCC price increases?

Yes, Laurence. John Steitz. We've seen by and large a good competitive response to the FCC pricing initiatives. So, as a matter of fact, we're having our team assemble in a couple of weeks to review our plans and programs for the future in terms of FCC pricing. So we believe the momentum will continue and it's been supported from a competitive point of view. There is also--and you have to put it in the frame of mind that there is additional raw material pressure in that business going forward as well. So, the need for an increase is very high.

And lastly, in the phosphorous flame retardants product line, I mean, that has been a lower margin part of the portfolio. What sort of leverage do you have to fix that business?

Well, we've got a whole plan to fix that business. And we're going to see some positive impacts in 2007 as that plan gets executed. In large part, it's going up the value chain in terms of new products and really providing solutions to our customer base that are good wins for them and good wins for us. So that's the key.

Thank you.

You're welcome.

And your next question comes from the line of P.J. Juvekar with Citigroup. Please proceed.

Good morning.

Good morning.

Good morning, P.J.

I have a couple of questions. First on the refining side. And if you look at near-term refining margins are down, refineries are taking more extended outages, which could slow down catalysts you said. Can you just talk how these declining defining margins could impact your business?

Yes. And that was kind of a two-part question. We will give it our best. And let's be brutally honest. When you look at each refinery situation is slightly different. But broadly speaking, let's talk about hydro processing for just a minute. Hydro processing is a catalyst that has to be used in an obligatory fashion to clean up fuel. And when you say refining margins are down, I mean, that is absolutely true. But refineries are still pushed towards buying the cheapest crude they can. And the cheaper the crude and the more foul it is, the more our catalyst comes into play in terms of value addition.

So we don't think that moderate declines in the refinery margin have any impact whatsoever on HPC catalyst. So, I mean, that's kind of our view on HPC. In the worst case scenario, if there was no--in theory, no margin, zero refining margin, then the refinery would be a bit more indifferent about quality and things like that. So you could fantasize in the extreme case that a low refinery margin could impact our business to some degree. Looking back over our shoulders, we haven't seen that. And so, we're not really anticipating much of an impact on that.

Right. No, I buy your long-term story. Just near-term with all of these extended outages. I was wondering--you don't expect that to have an impact?

I think as it relates to FCC catalyst, we've seen in the past some extended outages. In FCC, it can knock your volume down. If your particular refinery goes down, that can have an impact on a quarter or two. But I don't think on the annualized basis it makes any difference. And there was an article in USA Today talking about surging gasoline demand because price is down. So I--P.J., I'm just--I can't predict it. But I think in the--within our ability to predict it, we don't really expect a material impact.

Okay. All right. Then, quickly, your operating margins in fine chemicals was about 12% and your goal is 15%. And how much does Thann get you there?

Thann, year-on-year, P.J., will be about a 250-basis point improvement. We have always had it in that kind of framework. That's primarily eliminating those sales that were not generating any income for us.

But is it a negative impact next year from not having the Roche contract? So sort of, when you look out at all these different moving parts, where do you see next year?

We see the fine chemicals business continuing to work towards achieving our 15% goal. We're getting as each day goes by more and more confidence to achieve that through the course of 2007. And it's--primarily it's new products, as I talked earlier with Allan Cohen's question, and continued success with our bromine products portfolio as we continue to build momentum there. We've got a number of cost reduction projects we're working on, too, in that business. But overall, the view is that we'll be able to achieve that 15% operating rate sometime in the course of next year.

And one last housekeeping question for Rich. You talked about one-time audit adjustments to the tax rate. Can you talk about what these audit adjustments were and how much did that sort of one-time adjustment lower the tax rate by?

Yes, P.J. Thanks. I kind of tried to put out the framework - where we were and where we are now - between the end of the first half and now at the end of the third quarter. And you'll note I gave kind of point estimates for the rate for the rest of this year. Because literally, at the end of the third quarter, we have a point estimate for the full year. And that's where we think that the full year and the fourth quarter should be.

But what I would tell you is that if you start at where we were - the first half we booked in the 25 to 26% range - and then with the [trade code] coming into place, we then had a view that would say that the back half--that the third quarter should be around 17 to 18. That's the guidance I gave on the call last quarter. So, starting at 17.5, which is the mid-point there, I would tell you that the--kind of the recurring real change in the tax rate drove us to have a rate of closer to 15 this quarter.

Now, we reported 10.8, right? So the walk between 17.5 and 15 is APB23, which I talked about, and the mix in earnings. Not only did I mention that we had more income in JBC and more benefit from the trade company, but we had more income than we thought we were going to have period. And that income tends to be a higher rate. So mix comes into play there.

So 15 is kind--is the sustainable rate in this quarter, which would then bring us to the full year, which is 21. Think about it. 25--I mean--let me start again. In the first half, 25 or 26 mathematically, and then, 15 this quarter--more income in this quarter. You weight it all out, that gets you to about a 21 rate for the full year.

So I would then say from the 15 down to the 10.8 are things like audit--you basically look at your returns that you have and you make some changes. There are some true-ups in terms of state tax rates and things like that. Those are kind of the more--the one-timers, if I can call them that. And that's really what then drove us down to the 11 that we reported. So for the fourth quarter, you should be looking at 21. For next year, I gave you kind of where our heads are - about 23.

And let me make one other point. You probably wouldn't expect to hear this on a call like ours. But in the fourth quarter, I anticipate that the Dutch government is actually very close to lowering their rates for next year. Okay? And when that law is enactedit's I think halfway through the process. It's past the lower house and has to go to the upper house. But when that law is enacted and the Dutch rates are officially lowered, that's going to lower all our Dutch deferred taxes we've already booked. That's actually about $6 million for us of upside in the fourth quarter.

So, again, in the fourth quarter, I'm telling you 21. But then, you'll have kind of a one-timer there also because we have to revalue our deferred tax and liabilities we already have on our books. So this is an area--it's as much science as art. And I tell you what I know when I know it. And that's kind of the best view that we have at the moment.

Great. Thank you.

Okay.

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

Great quarter, guys.

Thank you, Mike.

Based on your guidance or your forecast for the fourth quarter, I guess it's probably safe to add $0.10 to $0.20 to that? No. Seriously, Mark, when you take a look at the fourth quarter, what--where do you see some conservatism? And where could you see some significant upside to your forecast today?

Well, Mike, I don't think there's a lot of upside in my forecast today in the fourth quarter, if that's what you're saying.

When you went into the third quarter--.

--Am I missing something or what?

What's that?

Am I missing something?

No, I understand. I mean, I just--when you looked at your forecast for the third quarter, it did come in significantly higher. And I just wanted to get a better feel of where and when sort of that--the upside came.

Mike, we really don't give forecasts. And what we said in the end of the second quarter is that we expected the year to be a mirror image. And what we meant by that is that the third quarter would be better than the fourth quarter. And so, we still see the middle of this year being the second and the third quarter being the highest levels of profitability on a quarterly basis that will likely occur this year with the first and fourth being seasonally and for other reasons lower.

It's impossible for us to guess that exactly. We're doing pretty well today. And the business is still going. We're not seeing any material impacts of recession or slowdown. We have noted that HPC catalyst is down and we do expect that to be down for the quarter. And polymer additives we're anticipating to be down as it seasonally is virtually every fourth quarter.

That's fair. John, you said that flame--that brominated flame retardant sales are up. Was that 30-plus percent?

No, it was brominated flame retardant volumes were up about 20% year-on-year, Mike.

In the third quarter?

Yes. And that's compared to a very low base last year--third quarter volumes of last year were very weak.

Share shift or--?

--No, I really don't think so. I think it's just a nice rebound. And the market--I was encouraged by the Bishops Report that came out on consumer electronics last week that showed an increase in the book-to-bill ratios. So I think it's generally a positive marketplace.

Right. And in catalysts, are both of your plants, FCC and HPC, running sort of at full capacity?

Yes.

In the third quarter?

Third quarter, both were running fairly strongly with the exception--HPC we shut down for a few weeks.

Okay. Then when you go into the fourth and the first and the second of next year for hydro processing catalysts, do your operating rates fall to--significantly due to the slowdown or--?

--I'd say flat to down slightly.

On operating rates?

HPC operating rate. FCC is still running at full rate.

So, there's really no reason to think catalyst profitability sequentially going into the fourth, first, and second, would have a significant downturn if your operating rates stayed fairly healthy?

Mike, with the HPC unit, as we're going to--as we're running it flat to slightly down rates in the fourth quarter.

Right.

We'll be building--and this gets into the working capital question--some volumes for sale in the first quarter. That's just the way the SNLP cycle operates in that business.

And the new plant, is that on time for the first quarter?

No, it looks like more of the early second quarter.

Early second quarter? Okay. And last question--.

--And mostly that's due to just construction delays in the Gulf.

And I know you haven't given a specific sort of a breakout in profitability for--.

--Mike, let me reiterate--.

--Between [inaudible] and non-FR. But I wanted to get a gauge of, if you can, Mark, sort of what--just a gauge of how the improvement in FR margins have come over the last couple of years and the potential there. As we all know, flame retardant margins used to be in the 20s back in the late 90s. Are you there, are you close to there, or is there a lot of room to run?

Mike, let me--before I answer that question, let me ask John just to--he had a few things left to say on HPC. Just say that, and then, I'll take that.

Yes, Mike. Let me--I don't want to give you a picture that's not accurate here on HPC.

Okay.

The sales in the fourth quarter will be down. Okay?

Yes, I understand that.

And operating rates will be flat to down slightly to prepare for some orders in the first quarter.

Okay.

So--but our sales in HPC will be down in the fourth quarter compared to third quarter. And the indication is they will be more along a second quarter rate level. Okay?

Got you.

So that's--I mean, that could be in the range of 20%.

Got you.

So you need to have that in your mind.

Okay.

Okay, Mike. As we look at polymer additives margins, you're right--if you go back in the 98--97, 98, and 99 timeframe, you had margins that were clearly on the operational basis in the 20% range. And we're not there yet today. When I look at that business, what you have is you have proprietary products that have--still have very, very attractive margins. And you have less proprietary products and then things--areas like phosphorus that have very poor margin. So there still is a mix impact of that that we need to address and we're working hard to address. The big margin improvement areas we have are in phosphorus, and over time in ATH.

Okay.

And so, do I think we can get to 20? We're sure as [expletive] going to try to get this business to 20. The value that we add, even at 20%, it's a bargain.

Great. Thank you. And great quarter.

Thanks.

Your next question comes from the line of Dimitry Silversteyn with Longbow Research. Please proceed.

Good morning, guys. I'd like to add my congratulations as well to a very solid quarter.

Thanks, Dimitry.

A couple of questions. Getting back to the fine chemicals business, can you give us an idea--you talked about Ibuprofen pricing increasing a little bit. Where are you on this 20 and 40% price increase that you announced earlier in the year? Polymers are gaining traction. What has been the competitive response? And how much further do you have to go to get additional pricing there?

Yes. Dimitry, this is John. I feelwe've had some moderate success in Ibuprofen pricing. So we've seen increases up from earlier in the year in the 15% range. But we also had suffered through a tremendous amount of raw material increases during that period also. As always the case on a product like this, a lot of competition from China and India. Always a lot of resistance in international markets on successfully executing a pricing improvement.

So we'll know more internationally as we get closer to the turn of the year. But it takes a lot of work, it takes some risk, but we're working hard to achieve it. Success in my mind would be in the range of 20% at the turn of the year. Okay?

Okay. And that--.

--We're not there yet--.

--Would start to offset the raw material increases and actually improve profitability of that business?

It would do that. And then, if we get any kind of relief going forward on some of these raw materials, that could help us get margins back to where they were a couple of years ago.

Okay. Then, a follow-up on your Michigan plant acquisition. You said it comes with 20 generic APIs, and then, you're going to load it up with your proprietary products as they come out of the R&D lab into the power plant, and then, hopefully, into the commercial production.

You bet.

How long is it going to take for that process to improve the profitability of the plant? First question. And then, second question. What do you plan to do with the generic portfolio that it inherited? Is there some pruning involved there? Generic market for APIs has really been taking a pounding since the Indians have become much more of a player in this industry. How do you view the generic portfolio that you inherited? Is it something that you want to grow? Is it something that you want to maintain? Or is it something that you want to prune?

Yes. Thank you, Dimitry. Let me first talk about filling up the asset with some of our products and how quickly we can do that. As you know, we closed on the deal towards the end of September. And we are already working today to fill up that asset with some of our products that we didn't have the capability of--we didn't have the hardware to do previously. So it's already in play.

We believe the acquisition will be accretive in the fourth quarter and will be accretive for the full year 2007, based on the product portfolio that we bought and the new products that we're filling it up with. So to that end, hopefully, that would answer your first question, if I don't come back and--.

The second, on the product portfolio that we inherited, there are some very niche injectable APIs that we're very excited about. There are some other bulk actives like diphenhydramine citrate, which is the preferred sleep-inducing agent in Advil PM. And as Advil PM grows and as generics come on the marketplace, diphenhydramine citrate is the product of choice there. So there's some select bulk APIs that we're really excited about running through our commercial organization and really driving it. So we're not planning on pruning that product line. We're planning on really commercially broadening the opportunities that exist from it.

So we're excited about the acquisition and the people. It's about 100 employees. DSM operated it with 140 employees. So right out of the gate, we believe we're going to--it will be accretive for the fourth quarter and going forward.

Okay. All right, fair enough. And then, final question, just kind of a strategic question. Have you given any thought to splitting the stock given where it is and increasing your flow to closer to 100 million shares?

Not really, Dimitry. We're just focused on driving net income and return on invested capital. And I think that all of that stuff will sort itself out over time. So, to answer your question, no.

Okay. Fair enough. Thank you very much.

Thanks, Dimitry.

Your next question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

Thank you. And again, very nice quarter.

Thanks, David.

John, could you walk through supply/demand fundamentals in the bromine flame retardant industry and new capacity coming for--coming on-stream over the next couple of years?

Yes, David. First of all, we see--the fundamentals we see are strong for bromine flame retardants with continuing global standards tightening up, a lot of demand growth in China, consumer electronics having higher--much higher voltages, and concern about flame retardancy around those type of applications. So, I'm continually encouraged by the growth prospects around the globe. And in terms of the supply portion of that equation, we're comfortable with the projections of increasing capacity that it wouldn't create an oversupply in the marketplace.

What do you believe global operating rates are today and what are your operating rates, John?

We have some excess capacity in tetrabrom, but we're choosing not to use it. We have excess capacity in bromine and we choose to run our plants according to what the demand is, not to what our capacity is, David. I think the overall operating rates are quite high around the globe, particularly in tetrabrom. I think they're very high, if not in the 90-plus percent range. So--and that's, of course, the biggest flame retardant, so that covers a lot of acreage there.

Fair enough. And just on the pricing, it was up obviously strongly year-over-year, but flat sequentially. You say that you believe you will see some further price increases going forward in bromine FR. Can you comment on timing and why the confidence? Is it the globally high operating rates?

Yes. A lot of it is globally high operating rates, David. We have not seen any easing on the raw material front. As a matter of fact, the opposite has occurred with BPA and phenol and benzene. And those continue to be very tight and prices continue to have risen in that area. So, we're continuing to be under a lot of raw material pressure. But I think we'll have some favorable mix effects in the fourth quarter - some of our higher value-added products. And their markets are quite strong, so I think we'll see a positive mix effect going on.

The mineral flame retardant area, we're under a lot of raw material and energy pressure in Europe. So, as you've seen, we announced a 15% increase there and we're continuing to work on execution on that front, so that's very important. And the phosphorus flame retardant market, we continue to try to drive pricing improvement there, but that's really difficult. We find that in some cases, some of these markets, the leaders just don't lead. But some additional pressure on us in polymer additives is on the--in the phenolic antioxidant arena, where phenol has just been driven up to record levels. So continuing raw material pressure on that front as well.

And John, last thing. Can you comment on the stable logic dynamics - the flat volumes? What do you foresee going forward?

Well, our--the niche opportunities in our curatives business are quite exciting. And we continue to see a lot of good opportunities there. On the pure stabilizer side, we include additives in that business line. And the additive volumes have been pretty good - up mid-single digits sequentially. But the real problem there is getting pricing passed through on the raw materials, and that has not been happening. So we're continuing to work hard to try to execute on that front. But it's a tough marketplace.

Thank you very much.

Thanks, David.

Your next question comes from the line of Frank Dunau--I'm sorry.

Frank Dunau.

Dunau. I'm sorry--with Adage Capital. Please proceed.

Yes, I've got a question.

Hey, Frank.

You guys had a great quarter and I'm trying to interpret Mark-speak. And so, there's a pretty good funhouse mirror if I look at the distribution around the mean.

Did that work for you, Frank?

What?

Did that work for you?

Yes, that was fine. And but--now, you've got to interpret for me what successful means for next year. How do we define success?

Well, I think you should define success by our measure of success. I mean, we would not be happy unless we continue to perform strongly.

Okay. So are you--so would you be happy--I mean, so let's say--you would not be happy with a sequentially down year next year, would you?

No, we would not.

Okay. Just making sure.

That would not be successful.

Okay. That's it. Thanks.

Your next question comes from the line of Ed Yang with CIBC World Markets. Please proceed.

Very nice quarter.

Thank you, Ed.

Most of my questions have been answered. But I guess one regarding free cash flow. You could potentially be debt free in about two to three years given your free cash flow. I would expect that you would want to spend some of that excess capital on acquisitions. And, Mark, I mean, how full do you think is the deal pipeline? Where are you looking? What's the size of the acquisitions you're considering? And maybe some color on that.

Well, I'll answer that the way we typically answer that, which is to say that for us, we really look hard at technology that builds on our foundation technology. And we look hard at market access because we're trying to--we really--we have an integrated company. And I know some folks may find that hard to believe, but the relationship between these businesses is real and we try to lever that relationship. We look to build on that.

Are there deals out there? Absolutely. I mean, I think companies continue to try to prove their effectiveness. And so, we're always knocking on doors. We try to create our own opportunities and we'll continue to do that.

Are future acquisitions more in the range of the Michigan plant type of acquisition or something more in the range of the Akzo Nobel deal?

For us, I would say, I wouldn't worry so much about a range as I would just success [rate]. It's really important for us to be right and to make sure we can do a good acquisition. And that can be a $30 or $40 million acquisition, or it can be a $500 or $600 or $700 million acquisition, or even larger than that in theory. But for us, really it's that we--we have to make sure when we do a deal we can make accretive and it can add to shareholder value in a reasonable period of time. Reasonable to us is just about right now. And so that will drive it more than the size of the deal.

Okay, great. And I guess just switching things around completely, just to play devil's advocate. The type of triple digit growth you're generating is a very scarce commodity in this industry. And certainly, I think your valuation is attractive. And I would think that combination could be fairly tempting for some of the larger [gold star] conglomerates that are out in the industry. I guess, philosophically, you do have some larger size shareholders. But from a management standpoint and from a board standpoint, how important is it for Albemarle to maintain its independence? And is that culture something that's amenable to joining a larger company, or just your thoughts around that?

Yes. We don't--I don't know how to say this, but we really don't pay attention to that kind of stuff. We're focused on driving profitability and returns for shareholders. That's what our job is. And we're just going to--we wake up everyday and just try to make that happen. And I mean, all those kind of things that you mentioned, that stuff just takes care of itself. I don't know how to say it. So we don't worry about it. We're engaged in driving the business and that's what we're going to continue to do.

Thank you very much.

Thank you.

Your next question comes from the line of Jeff Zekauskas with J.P. Morgan. Please proceed.

Hi. Good morning.

Good morning, Jeff.

Just two quick questions. In fine chemicals, your volumes have been down for the first three quarters, but prices have been up quite a great deal--or average prices have been up quite a great deal. So, I assume that bromine prices within that segment have been up more than quite a good deal. So, when you try to assess the real performance of fine chemicals, how do you disaggregate the bromine element from I guess the product development element? In that, it seems that what's--I mean, it seems like another way of selling bromine. Or are there some subtleties?

Jeff? John Steitz. It really is almost apples and oranges to look at a volume measurement in terms of fine chemicals because we'll have some small volume products like the Tamiflu intermediate, which would create a fair amount of sales. Okay? And we'll have some other [clear brines] that are a lot of volume and on a relative basis don't have that kind of level of sales.

So the volume issue really isn't one that's an important metric or an important measurement for us in fine chemicals. What we're really looking for is driving returns and profitability in that whole new product portfolio. And then, looking at the whole range of brominated products and its portfolio, and measuring those--that portfolio of products in terms of the contribution on a bromine basis it brings to the Company.

Well, maybe just another way of just reframing my question is what percentage of operating profits in fine chemicals is attached to a bromine molecule?

I'd say about half.

About half?

Yes.

And that's either directly or indirectly.

Yes.

I mean, that it's used in the [inaudible].

Okay. My last question is when I look at the insider transactions through the course of the year, there have been a number of stock sales by executives at much lower prices than the current price. And so, the way that I read that is that things, all things being equal, have turned out to be much better this year than you expected. And so, I was wondering, is that because you got better catalyst realizations--or catalyst price realizations or bromine price realizations? So do--why has the year configured so much better than it seems that everyone thought?

Well, I don't--I guess I wouldn't bridge that data the way you have bridged it. We have a number of options that were granted years ago that are expiring. And people are using programs like 10b5-1 programs and stuff to sell that, which is--as you know, is a way of just moving it--it's really transparent, very open, and you declare something well in advance of when you actually sell it. And I think a good tranche of those shares move at that kind of level.

Is this year better than we thought it would be--stronger than we thought it would be? Yes, I think so. But what I would say, it's not a particular business or product line. It's the--my spin on it is that the world, contrary to popular belief, needs goods and services like a company like Albemarle provides in all facets these days. So, China and India and Russia and Europe and the U.S. and South America, they are all growing economies and we're providing goods and services to them. And I think the strength of that global economy--if I've said anything has surprised me, it's that.

I guess just maybe a last question is, so bromine prices--order of magnitude--are up gigantically over a multi-year period. And in part, this has to do with sort of changes in industry structure. So have your customers noticed this? And what's been their response or what do you think their response will be in the future?

Well, keep in mind, we only sell about 10% of the bromine as--as elemental bromine.

Yes, that's right. I mean, in the flame retardant area.

Direct customer exposure to elemental bromine prices is very, very limited.

Right.

And have those guys noticed? Absolutely.

What about the flame retardant customers? Have they noticed it?

Well, if you go back--historically, I mean, our prices for the most part are even still lower than they were in 1998 and 1999.

Right.

So, yes, everybody always notices when you raise price, Jeff. But I mean, Albemarle is not taking advantage of anybody. We're out trying to create value and we do that in a way that our customers value it or they wouldn't do the transaction.

Okay. Last thing, what was cash flow from operations for the nine months?

Rich?

We haven't published that yet. We typically publish it in connection with our Q, Jeff. So I don't want to give you something that isn't announced to the world. But it's strong. But I would say, as the CFO, you like to see the cash flow support the earnings and certainly the EBITDA number that I did quote does that. And the cash flow from operations will do the same.

Were you a net user of working capital for the nine months?

For the nine months, yes, we were. What I would tell you from a days point of view, we're down five net days in net working capital for the year. We have targets significantly ahead of that--higher. What I would tell you, and the reason why I commented like I did, is really the rubber meets the road at year-end on working capital. We have so much more enhanced visibility into the levers that we can pull there and a lot more focus. Payables have gone down during the course of the year. And we've done really, really good things in growing the business.

And when you're doing that growth, especially in parts of the world where terms are above our average, it's tough to get receivables down. But we have good plans in place. And I think we're going to see--we have actually reduced inventory this year versus the end of the year. And the rubber will meet the road in the fourth quarter.

And Jeff, just parlaying into your previous question. Customers want high quality products and they want exceptional service. And price is always part of that equation, but it is only part of that total equation.

If you were able to receive the--if the Dutch did lower their tax rate, how much would that affect you next year?

The--I think what we--what I would tell you is that the number I quoted for the fourth quarter is obviously one-time, and that's just adjusting our balance sheet.

Right.

I think our view of next year and the point estimate I gave you as kind of our preliminary thinking anticipates that the Dutch rate will go down because we plan ahead. And the trade code was put in place planning ahead. Germany is another country in Europe that's also looking at lowering their rates.

So we do look ahead when we plan, and I don't think it would have a significant--it wouldn't have an impact on the number I gave you. We anticipate that that will be enacted in the fourth quarter and will be in effect next year.

Well, then, to flip it, what would happen to your tax rate if the Dutch didn't approve it?

It wouldn't be substantially different because we planned for one way or the other. It's not going to be a big mover.

Okay. I appreciate your patience. Thank you very much.

No problem.

Your next question comes from the line of Dana Walker with Kalmar Investments. Please proceed.

Good morning, all.

Hello, Dana.

Hey, Dana.

If we were to compare your fine chemical revenue in Q2 to Q3, recognizing that you had one fewer month--or one less month from Thann, how might we do that?

It's up by 10%, if you exclude--on an ongoing basis the revenues--exclude Thann, we're still up.

Would we take about--just not having done the math, would we take about $8 million?

From a--yes.

Okay.

Take out the whole prior quarter as well, Dana.

Agreed, understood. We'd need to add back $8 million I guess is the way to look at it.

Yes.

If we were to look at South Haven, what type of revenue--annualized revenue pacing has it been on?

Annually, it has been on the $30 million a year range.

As you look at those assets, based on moving projects there, what type of revenue could that facility support?

It can support a lot more. We want to be successful. It's--boy, it depends on the product mix, Dana. I mean, it would--easily I'd say 2x, but it depends on the product mix we're running through there and what the price per unit is. So--but, a good order of magnitude is twice that.

By moving projects there, does that in any way affect the capacity utilization planning that you had for other locations in a way that would be an offset to the positive?

No, because prior to this we really had an asset squeeze issue. So we were really--we were going to have to invest in some of our other plants to be able to supply the products that are being commercialized.

When you described how in September you had as many as 70 inquiries about your fine chemical services, can you relate that to more recent inquiry levels? And how would you describe the quality of those inquiries and their translation into business?

Tthe quality of the level of the inquiry has really gone up over the last say two-year period, Dana. So we're really pleased with the quality numberand that is the one we really focus on as well. So we like those touch points and take a look at those 70. But we also measure the success on achievement of commercializing those 70. So that's really important.

A prior questioner was poking some fun at Mark on the semantics translating qualitative statements into quantitative statements. What would you consider success for fine chemicals in a couple year growth rate sense, once you cull the Thann revenues and not include South Haven, given inquiry levels and other things going on at bromine and elsewhere? Just focused on revenue?

Dana, let me take a crack at that. I'd say revenue and--boy, excluding any acquisition, just organic growth, in the $600 to $700 million range a couple years out. So--and that's a much more high quality mix effect. So if we can approach somewhere between $160 and $200 million a quarter, that would be strong. But what we're really--we're not really focused on revenue next year. We really want to drive the operating profit margin in this business and achieve that 15% level.

If we take your $600 million run rate down to 500 million ex-Thann, and then, add back 30-plus from South Haven, it sounds as if though you're of the mind that you ought to get back to something well in excess of 600 over the next couple of years, based on what you believe you have in-house and in your pipeline.

Yes. Directionally, that's a good direction to be in.

The final question from me would be the polyolefin catalyst business in the latter part of last year was a problem. Can you talk about the things that you've done to improve its state of being? And whether the level of confidence that you have in its--the consistency of such improvement?

I sure can, Dana. These products bring just tremendous value to the customer. To those plastics manufacturers and to those petrochemical manufacturers, these products do not even round in the cost of production. So I'd say one of the biggest efforts where we have been successful has been driving the pricing initiative through the course of the year. And pricing to reflect the value that we bring to this industry has been really very important. That's been one of the big drivers.

The second aspect of that business has been really driving the new products portfolio. One thing we wanted to do in the leadership of this business was put our--one of our fine chemicals leaders, who really inspired a lot of growth in our fine chemicals new product portfolio, into polyolefin catalysts to really gain an [unfair] share of the growth in that market place. And we're really encouraged with the competence and the success in executing on that business that we've generated over the last six to nine months.

You have some happy shareholders here at Kalmar. Well done. Thank you.

Thank you, Dana.

Thanks, Dana.

And your final question comes from the line of Mr. David Duff with Merrill Lynch. Please proceed.

Hi. This is Jim Stanley, actually. I'm not sure how they got David's name, but I work with David. I just--I think this has been touched on, but I wanted to go over it one more time maybe in--with a little more depth or a little bit differently. But in the polymer additive side, obviously, great quarter, great year. The margins continue to surprise on the upside. And you've gone over sort of the reasons why you're excited about the potential for the growth rate, specifically within flame retardants, specifically why pricing should remain strong, operating rates are high.

I guess my question is theoretical or--and also, sort of looking back. And I know there's a lot of different things going back in history, and it's never the same. But the question really is, in that segment, in polymer additives, if we--if the economy slows down, what are the expectations or what should we expect from this business in a slower economy? Meaning, how well do you think it will hold up margin-wise, volume-wise, and the like, obviously, assuming the economy slows down, which at some point it will.

So, can we hold the 17% margin? Would you expect, well, in a weak economic environment you've got X margin and in a strong environment, like we're in now, maybe we're in the higher end? Or is it sustainable regardless? How would you characterize the cyclicality of this business now?

Well, Jim, let me go back. If you look back--and it's really one of the things that happened in the '99, 2000 timeframe. The business had--it's strongest driver was consumer electronics. And frankly, it was TV sets and big bulk items that the U.S. consumer was buying. So it had a strong seasonality impact to it. And then, built into that was Y2K, which prompted a lot of change out in--certainly in computer equipment and related hardware for the concern with that. And you add on top of that the recession, and that's what pushed business down so much as we entered 2000 and we went through a couple of years of slowdown.

What's taken the business out of that has really been the broad increase in the use - and I'm talking about flame retardants now - of these materials in societies around the world. Flame retardant standards are still being increased around the world on average every day. Combined with that, emerging technologies like flat screens, miniaturization. Those things all play into creating new and innovative products that really play into our strength.

So the U.S. consumer, where they're still critically important I think, to broadly the specialty chemical business, has lost some of its importance as it related to FRs. And can I quantify that, Jim? I probably can't. But intuitively, what I would say to you is that our vulnerability today has been reduced materially over what it was in '99 for the--as it relates to the U.S. consumer. So will a slowdown impact this business? It will impact the U.S. [fees] perhaps a little bit, like construction would or like automotive would, that we've lived through the last year and you guys never saw.

So, what my gut tells me is that this industry has kind of had a bulk average growth rate in volume of 7% over like a decade kind of thing. It's doubling every 10 years or so. And I don't see a reason why that growth rate should change, albeit, one year it could be down a bit and another year it could be up a bit from that. I think that's what the history has been.

And when I look at the regulations that are being debated now and discussed in places like China, and for enclosure technologies, my confidence level is pretty high that there's going to be a lot of pull-through for these products. That also applies to the curatives and additives, which are niche products, if you want to think like high speed rail applications and things like that - cuttings and curatives.

Homeland security.

Homeland security. So my gut is—, broadly speaking, I don't want to say it's recession-resistant, but I think our portfolio is so broad that it would just dampen the impact of a slowdown.

Okay, great. That helps a lot. Thanks.

All right. Thanks, Jim.

Thank you.

At this time, there are no further questions.

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

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