雅保公司 (ALB) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 Albemarle Corporation Earnings Conference Call. My name is Dan and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct 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 call over to Miss Sandra Rodriguez from Investor Relations. Please proceed.

Thank you. 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 the market yesterday. 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 Web site under the investor information section at www.albemarle.com.

I would also like to caution that the remarks today contain forward-looking statements. Factors that could cause results to differ from expectations are listed in our Annual Report on Form 10-K. Participating with me on the call this morning are Mark Rohr, President and CEO; John Steitz, Executive Vice President and COO; and Rich Diemer, Senior Vice President and CFO. Now, I would like to turn it over to Mark.

Thanks, Sandra, and good morning everybody. I have been looking forward to sharing performance details with you this morning and answering your questions, but before I go into these results, I would like to mention a few recent highlights from the quarter. Last month, we announced a shutdown and plant consolidation of the operations of our plant in Dayton, Ohio into our recently acquired multi-purpose facility in South Haven. The consolidation, which began last month, will further strengthen our ability to deliver high value products and services from a top tier cGMP manufacturing site while also reducing costs associated with overlapping equipment and staffing. We have recorded a one-time charge in the quarter of $4.9 million, about $3.1 million after-tax related to this activity.

Also, during the quarter, we announced plans to acquire controlling interest in our China antioxidant joint venture, Jinhai Albemarle. Our 25% ownership in this venture will increase to 75% pending regulatory approval, which we expect to receive in the third quarter. The acquisition of the leading antioxidant supplier in China further solidifies our growth and investment plans in this emerging market. John will provide more information on Jinhai in just a moment.

In May, we opened a new regional sales office in Dubai to meet the growing market needs in India and the Middle East. Our presence there will allow us to better collaborate with and service the needs of key customers, and will position us for continued success in this important and very high growth region.

In June, our catalyst team hosted Albemarle's 12th International Catalyst Symposium in Athens, Greece. We are very pleased with the outcome of this three-day event, which was attended by more than 200 delegates from 50 countries and included approximately 80 customers. The symposium covered critical key industry issues such as trends in refining, catalyst development, environmental legislation, global or market analysis and new catalyst technologies.

During the quarter, we were also pleased to receive an upgrade on our debt rating from Standard & Poor's and Moody's, and I'll let Rich tell you more about that in his comments. And finally, I would like to salute our manufacturing team for record production in some of our proprietary products and the research team for their continued leadership in the development of new products and services for our customers.

As you know, over 25% of our sales are from products introduced over the last five years. Combining our strength in technology with that in process safety and cost management put us in a great position to continue to capitalize on opportunities that others cannot do.

So, with that highlight, let me now address the Company results. All amounts are exclusive of the charge for the closure of the Dayton facility, which is presented as a one-time charge in our income statement. I am very pleased to announce second quarter earnings of $0.59 per share, up 31% from $0.45 per share in the second quarter of 2006, on net sales of $564 million. Our net income was $57 million compared to $43 million in the same period last year.

Margins held strong across all three segments. Catalysts and Polymer Additives recorded segment income margins of approximately 16%, and Fine Chemicals delivered an impressive 19.8% segment income margin. Corporate gross margin for the quarter is a strong 27% compared to 23% in the second quarter of 2006. And EBITDA margin is at 20%, an increase of 20% over last year.

Our Catalysts business delivered better than expected results in a quarter that we anticipated having soft HPC sales. Despite short term weakness in HPC volumes, especially in Asia, Catalysts segment income is up 10% year-over-year. We continue to see positive results from our FCC initiatives and our Polymer and Catalysts division did a great job executing with margins nearly double that of last year.

Turning now to Polymer Additives, flame retardant sales, although up slightly sequentially are down about 8% this quarter compared to the second quarter of last year. Like last quarter, demand for the brominated flame retardants, tetrabrom was weak, as reflected in the printed wiring board book-to-bill ratio. The consumer electronics market has been slow to rebound from the highs of 2006. Partially offsetting the volume decline in brominated flame retardants, our mineral flame retardants and our curative products continue to do well with increased profitability in the second quarter. Market demand for our proprietary product lines continues to improve and we are looking forward to increase consumer electronic demand later this year or early next.

Our Fine Chemicals segment had another very strong quarter, reporting segment income margins more than double the levels of a year ago. Both Performance Chemicals in our pharmaceuticals and agricultural intermediates businesses contributed to these impressive results in this segment. Moving to Dayton operations to our South Haven, Michigan facility, we will complete one more step in improving the effectiveness of this business line and gives our customers an effective scale up solution at a world-class commercial site.

Now, let's talk about raw materials and energy. Raw materials, primarily metals, Bis Phenol A and ATH are up $20 million year-over-year and $9 million sequentially. Molybdenum, the primary metal used in our HPC production, increased $7.4 million compared to the second quarter of 2006. Energy remained flat year-over-year and sequentially. While input costs continue to rise, we have for the most part been successful in passing these costs through. We expect similar levels of raw material inflation throughout the year, and we will continue to execute on our initiatives to overcome these anticipated headwinds.

Looking forward, I expect overall results for the second half of 2007 to look much like the first half of the year, with the fourth quarter being stronger than the third, reflecting historical Polymer Additives demand trends. HPC catalysts should start gaining momentum as we enter the fourth quarter and begin to gear up for a strong 2008. We remain confident of our ability to hold HPC volumes flat year-over-year, which is quite an accomplishment, given the cyclical downturn of this business this year.

The 10,000 metric ton added capacity coming on in Bayport will be mechanically completed in September and will begin qualifying run shortly after that. HPC catalysts increases due to the expected refill cycle times and increasingly stringent environmental regulations for cleaner fuels continue to look very favorable in 2008, and we expect the plant to be essentially sold out by the end of next year. FCC and polyolefins catalyst margins should also continue to positively impact segment results. We expect modest growth in polymer additives in the second half anticipation -- in anticipation of strengthening in the printed circuit board and connectors market this fall. Our diversified flame retardant portfolio gives us a competitive advantage to weather these cyclical type headwinds like we are currently seeing. Further out, opportunities in technology and innovation will be a key component of our growth in this business.

Over the past 12 months, we have built a solid platform for our Fine Chemicals business, delivering tremendous margin growth. The dedication is paying off and the team is working hard to sustain these profits as they continue to drive our franchise value, introduce new products and pharmaceutical in fine chemistry services area. We expect stable growth through the remainder of 2007 and a very good year in 2008.

So, with that, let me turn it over to John Steitz and ask him to comment on segment results.

Thanks, Mark, and good morning everyone. I'll start with our Catalysts segment. Catalysts net sales for the quarter totaled $207 million, up 7% from the second quarter of 2006. Segment income for the quarter is $32.4 million compared to $29.5 million last year, with segment income margins of 16%. In our outlook last quarter, we said that we expected second quarter HPC volumes to roughly half that of the first quarter. We ended the second quarter with volumes down 35% sequentially, which is better than expected, but of course not indicative of where this business is headed long-term.

Our new HPC plant in Bayport will be mechanically complete in early September and we anticipate manufacturing volumes to satisfy next year's growing demand. FCC sales and profits improved year-over-year and I am pleased with the progress our team is making on the pricing effort in this business. However, margin continues to be challenged by raw material and energy inflation. We continue to work with our refining customers to deliver products, with superior yield patterns to help them boost throughput and drive value.

We have introduced three new FCC catalyst products this year and hope to add more new products in 2008. Catalysts segment joint venture income from unconsolidated investments was $5 million in the second quarter, essentially half the strong second quarter of 2006, primarily due to lower sales at Nippon Ketjen, our HPC joint venture in Japan.

Our polyolefin catalysts business again delivered strong results in the quarter, with net sales up 44% year-over-year, driven primarily by stronger revenues and volumes in our organometallic portfolio. Overall, our Catalysts team did a tremendous job executing in a quarter that proved better than expected.

Polymer Additives net sales for the second quarter of 2007 were $224 million, down slightly from the second quarter of 2006, and up 4% sequentially. Polymer segment income $35.3 million, down about 10% compared to $39.2 million in the second quarter of '06, and flat sequentially with 16% segment income margins. Our overall flame retardants portfolio performance is down from the second quarter of 2006 on weaker year-on-year electronics volumes.

As Mark mentioned, weakness in demand in tetrabrom continued throughout this quarter, with volumes down from the second quarter of last year, though they grew sequentially. While we are starting to see some indications of improvement in the electronics market in the second half of the year, as inventory and balances finally work through, we look for this business to rebound more towards the back end. In fact, the last reported IPC book-to-bill ratio, which is a good indicator for this business, was 1.05, the highest it's been all year and a good indicator for improving business ahead. So, staying pricing across our brominated flame retardants and healthy performance in our proprietary products helped offset the impact of volume weaknesses in tetrabrom and was a key driver in Polymer Additives' strong performance this quarter.

Another strong contributor to this business is our mineral flame retardants portfolio, with sales up 13% and segment income up 25% over the second quarter of last year. Our recently announced expansions in aluminum and magnesium hydroxide flame retardant production will help meet the growing global demand. These high purity mineral flame retardants are used in the wire and cable market.

In stabilizers and curatives, sales and profits improved year-over-year and sequentially. With the anticipated close of the Jinhai-Albemarle transaction in the third quarter, we expect to begin consolidating $40 million to $50 million of annual sales revenues in the third quarter.

Last, but certainly not least, Fine Chemicals net sales for the quarter totaled $132 million. Excluding second quarter 2006, potassium and chlorine products volumes from the since divested Thann plant, Fine Chemicals sales this quarter are up 5% over the second quarter of last year. Segment income of $26.2 million, excluding the Dayton charge, is up over 90% over the second quarter of 2006, and up 17% sequentially.

Our Performance Chemicals business delivered over 20% profit improvement compared to both last year and last quarter. A disciplined business strategy and superb asset management in this business is clearly paying off. Our fine chemistry services in the intermediates business continues to deliver high profitability as well, with year-over-year margin growth at 77%. The Dayton operations moved to our South Haven plant, will allow us to more efficiently utilize these assets, where we provide customers with scale-up solutions from bench and kilo lab, to commercial scale production. The pipeline of new products in the pharma and custom services areas delivered from this segment continued to enhance our segment margins.

Now, with that, let me turn it over to Rich Diemer for comments on the financial results.

Thanks very much, John. As Mark and John have both mentioned, our reported results included charge for our plan to shut down our Dayton Fine Chemicals operation, which will be integrated into our South Haven, Michigan facility. The charge of $4.9 million, $3.1 million or $0.03 per share after tax was composed of $3.4 million to write off plant and equipment to estimated net realizable value and $1.5 million for related closure costs.

Our effective tax rate for the quarter, excluding the Dayton charge, was 24.7% and 23.8% for the year-to-date. This is higher than our Q1 rate and our previous view for the year, principally due to income mix, particularly lower JBC profits, which would have it at zero tax rate, as partially offset by further improvements in our European tax structure. Our best estimate for our tax rate for the remainder of 2007 is 23.8%. Unallocated corporate expenses were $10.8 million and our revised view of this line is in the $12 million to $14 million range per quarter for the rest of 2007.

Turning to cash flow, EBITDA this quarter was $111 million, adjusted for the Dayton charge, similar to Q1 2007 record levels, and 19% ahead of Q2 2006. We ended the quarter with cash and equivalents of $200 million. This is abnormally high as we repaid some bank debt early in Q3 and maintained liquidity to fund the Jinhai acquisition. CapEx for the quarter was $24 million. Our view of 2007 CapEx is $110 million, up $10 million from prior estimates. Depreciation and amortization was $26 million and we expect full-year D&A of $110 million.

During the quarter, we repurchased 700,000 shares of common stock for $29 million, our average cost of $41.50 per share. YTD, we have purchased approximately 1,150,000 shares of Albemarle stock, more than our entire stock repurchase in calendar 2006. We have approximately 5.5 million shares authorized for repurchase under our current Board authorization. Our preliminary rollup of cash flow from operations is $75 million for the quarter.

Turning to the balance sheet, at June 30, we had consolidated debt of $795 million, including $63 million of JBC joint-venture debt, of which $388 million is fixed and $407 million is floating, very close to a 50/50 split. Our floating debt interest rate is 5.31% at quarter end. The weighted average interest rate for Q2 was 5.18%.

Net of $200 million cash on hand and excluding $35 million of non-guaranteed net consolidated JBC debt, our net debt is $560 million, up $15 million from year-end, but down over $100 million from Q2 last year. Our quarter-end debt-to-cap ratio is 40.6%. Our net debt-to-cap ratio is 33.5%.

During the quarter, we were awarded upgrades from both S&P to BBB flat with an outlook stable, and Moody's BAA2.

And with that, I will turn it back over to Sandra.

Thanks, Rich. Okay, we would like to open it up for your questions now.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Steven Schuman from New Vernon Associates. Please proceed.

Good morning guys.

Good morning, Steve.

Question for you, we don't hear much about the polyolefins catalyst business, obviously the refinery catalyst was overshadowed here recently, but you did report that was probably the cause of most of your upside. Was that share gain, due to new products, or is that in line with new plants being built, or is there some other reason margins were up?

And Steve, this is John Steitz. We had reasonable volume growth that was in the 3% range both sequentially and year-over-year, and that was driven by new products in the polyolefin catalyst segment, and the other benefit was continued price improvement. We had significant price improvement in that sector both year-over-year and sequentially.

And this has performed very well, we are pleased with it and we are pleased with the prospects for it. Matter of fact, we are planning some future expansions in some of our plants, so we are excited about the prospects for it to complement our leadership -- overall leadership in the catalyst segment.

You previously mentioned that catalyst cost per refinery about $0.10 per barrel of product produced. As someone who has worked in these plants, I know that catalysts really are basically the technology that these facilities have. How high can you get that up, it seems to me that without catalysts, these guys are pretty much dead in the water, and $0.10 a barrel seems fairly low?

Steve, you say you worked in refining industry before?

Well, in chemicals, yes.

Yes, how high you think that can go?

Well, pipes and steel are commodities, and so are the catalysts, that's the important part.

I think what we are seeing in refining, as John kind of alluded to in his comments, today the gap between the light sweet and the heavy sour crude's price gap continues to grow. I mean, it's north of $15 a barrel now, I believe. And you've got the majority of the refineries out there old, and so they have limited capability to process the available crudes. And so, they are continuing to invest money to do that. But, what catalysts do, really give us the chance to work with the refineries and get them to maximize that yield pattern, so maximizes their value and maximizes throughput. Polyolefins catalyst is a similar scenario where we are introducing single-site catalysis primarily as well as conventional catalysts, and we allow those guys to make unique polymers. So, I think our ability to add value and differentiate ourselves with value seems very high, and how high can it go, I don't know if I can answer that, but I would hope over the next years that we can get it how [hard] it is.

Thank you.

Thanks, Steve.

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

Good morning, thanks.

Good morning, Bob.

Good morning, Bob.

Couple of questions, first Mark, more of a bigger picture strategic question, obviously you guys have demonstrated a remarkable job in integrating some of your acquisitions. I am wondering what's next, is there going to be a fourth stool or what do you see in terms of strategic direction for this Company over the next couple of years?

Yes, Bob, we remain very active in the acquisition market and as you know, it's a little bit more difficult to get -- bring in acquisitions today and the price the property is going for that are both accretive to earnings and margins, so having to work a bit harder today than we would have had to work, say, in 2001 or 2002. If you look at each of our segments, a big part of our strength, as you know, I mean you saw this for a long time is this sort of overlap that we have in technology and we keep trying to work that. So, our first objective, and this is kind of the no-brainer objective, is to continue to expand the technology foundation and service foundation we have in all of our business and there remain a number of opportunities to do that in the size of or slightly less than the size of the Akzo Nobel acquisition, so that you should put up to sort of the first priority. We do look from time to time at larger sort of Company-transforming acquisitions, including things like mergers and in those things, we will probably bring in a fourth leg. But, you shouldn't expect us to go out and just buy a fourth leg, I wouldn't do that. If it comes in, it will come in, because it's part of a bigger deal and it complements what we do.

About -- I am a little scared, Mark, to play golf with you because I am not sure what you would say your handicap is, but your margin targets in these businesses, that's clearly been exceeded. Are you going to reset some margin targets, are we at cyclical peaks in some of those margins, particularly Fine Chemicals, what can you tell us there?

No, Bob, you got to give me at least, I don't know, 15 to 20 strokes. I mean, it's something that's material, because I just can't play golf like you can. But, yes, we are looking hard. John Steitz is in the process now of teeing up our vision 2010. We have done a really good job of setting three-year plans and working those plans and next year of course is the end of the last three-year plan. As we do that, we'll set a new set -- we'll re-up across each segment new margin targets and you should expect us, in this year that we will be very public about that.

Great. And one last question, if I might, on the comments about tetrabrom getting some rebound, but it didn't sound like you are terribly optimistic, and that seems to contradict a little bit what we are hearing from our tech analysts in terms of a rebound in that end market. So, is there something specifically going on that will messier with the competition or the customer buying psychology or why wouldn't you see a little bit more robust rebound?

Well, if you look back, I think you are seeing some caution from us because this business has a history of taking a while to rebound once it falls off. It tends to fall off sharply and you just want to crawl your way back out of it, and John who is the expert in this area, talked about the book-to-bill ratio being up 5%. But, that's 5% over a much lower base than we had a year ago. So, for instance, in 2001, it took us a couple of years frankly to recover from the post-Y2K. So, I think it will be faster now, because we are seeing such growth in Asia. But, I think you could be in this for a year before we get back to those kind of levels that we had earlier.

Great. Thanks, Mark.

Thanks, Bob.

Thanks, Bob.

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

Thank you. Good morning.

Good morning, David.

Hey, Mark, on your guidance, you made $1.19 in the first half of the year, why wouldn't you be able to make more than that in the back half, because I thought it was a seasonally stronger period for you guys?

Well, I think you are right it is seasonally stronger. And so, the little bit of -- the little comments I am giving here, it reflects a bit what we said last year is that we really kind of expect the second half to mirror the first half. But, the summer months are always a bit weaker for us and this year, unlike last year, we have weaker Polymer Additives volume. So, I think we are going to expect a pretty strong fourth quarter to allow us to double up, if you will, on the first half results, and that's what we are communicating. Now, can that happen? Our customers believe that the ripple effect of the growth in China in electronics, particularly as it relates to the Olympics, has not yet occurred. And I just got back from an extended period in Asia and they are all anticipating some pretty good results as we end this year and start next. But, so far, we have not really seen that yet, David, so I am being just a bit cautious.

Understood. And on HPC, Mark, given that you will be sold out in almost in about a year, are we looking at another expansion in HPCs going forward?

Yes, we are talking about what to do after that and so, the kind of the guides we have given on that is that will occur as we go through the year, so we will end the year essentially sold out as you start 2009. We are seeing great order patterns out there. In some ways, we have a better picture of our catalyst volumes in 2009 than we do in the third quarter, because so much of the business is coming in -- eight, nine, and ten are new units that are coming on which you win early. There is going to be need for us to boost volume as we end this decade, David, and we are having dialog about that.

You mentioned margin pressure in FCC despite additional pricing. Where are FCC margins, are they below where they were in Q1?

Well, no, they are not. There is some minor sequential improvement, David, and I was just cautioning that we continue to be concerned about energy, concerned on the input products like alumina, silicas. I mean, these products are still heavily natural gas and metal based, and we are still seeing a lot of inflation in them. So, my point there is really that it's got to be a constant evolving process to continue to drive value and drive pricing in our FCC area to regain some re-investment economics in that area.

And John, last thing on tetrabrom, is pricing discipline holding amongst the three major suppliers in tetrabrom?

David, let me comment, overall in brominated flame retardants, pricing year-over-year is up 10% and I think that's a tribute to the great portfolio we have. So, despite the tetrabrom weakness, we continue to see year-over-year pricing improvement. But, I understand the intent of your question and after everything we have been through in this business, if something thinks using price to gain market share is a sustainable strategy, I think they are sadly mistaken. What's going on in the market today, you have Chinese reducing tax subsidies on exports and that's driving prices up in some of our raw materials and in some of the products we compete with the Chinese against. We have raw material inflation and tightness in BPA. And we have, I think tremendous potential of raw material inflation in oil and its derivatives like phenol and benzene. So, I think we can never be stand idly by and think that our effort in pricing is finished. It takes constant work, constant attention, and constant training around the globe of our own people. So, thanks for the question.

And just to be clear, tetrabrom pricing is versus Q3, Q2 last year, is it flat or down or up?

No, it's contributing to the increase year-over-year.

Okay, thank you very much.

You are welcome.

Thanks, David.

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

Hey guys, nice quarter.

Hey, thanks, Mike.

Thank you, Mike.

I wanted to dig in a little bit in Fine Chemicals here. You had a very nice improvement year-on-year in the first half of '07. When you think about the sustainability of that business, I think the components to the improvement were pricing, (inaudible) is gone, which is definitely sustainable and new products in Fine Chemistry services. Is that sort of the main drivers for the improvement? And in the Fine Chemistry services, that business typically is sort of scale up, business that is won within a year, then you have to replace or is it more actual new APIs that are sustainable going forward?

Thanks, Mike. John Steitz, let me try to address your question. The issue of sustainability is a relative one in Fine Chemicals. Can we sustain the 20% margin levels we gained this quarter? That's going to be a real challenge, but that's our goal long-term over the next couple of years. As Mark mentioned, we are going to be recalibrating as we enter into our deep drilldown in strategic planning in the fall, and we will be addressing that issue as aggressively as we can. But, the second quarter was really a superb one for us and I think it's a good combination of discipline as we said and strategic thought. We replaced the PCC business out of time, which represented at the time over $20 million of sales and a slight loss with revenues out of South Haven, which generated margins that were accretive to the overall business. Then, we had a really solid effort in our ASA in amines business and that was a solid turnaround year-over-year and that's taken a lot of work on behalf of our people and in working with our customers to achieve that. Then, we had some opportunities that were filled in the second quarter, they will be finalized in the third quarter. For example, we had an [Nepraxin] campaign for a new drug that's being introduced, a new combination drug that was filled, that helped the business, and our manufacturing side did a superb job on the manufacturing front. So, it was just a testimonial to the model that we have created here, and we hope for the long-term, it is absolutely sustainable.

When you think about the improvement year-on-year, it's been about from 10% last year to 20%, it sounds like two-thirds of it is fairly sustainable, meaning those are cost savings, those are assets internally that are observed.

Absolutely.

And then, the other third is maybe sort of mix and depending on what you can fill the pipeline in, it could fluctuate on a quarterly basis going forward.

I think that's a reasonable assessment.

And then, how big is ibuprofen now, is that -- with margins this high, is that still a drag I would imagine to a degree?

No, I mean I still have high prospects for our ibuprofen business. Our volumes were flat basically. But, it's a good solid efficacious product. I think there is a pressure on the imports to make sure that their quality levels stay at our quality levels and our standard. We have year-over-year, we have some pricing improvement there that's in the double digit range. So, I have high -- I am optimistic about our ibuprofen business. But, again, it's -- in this Fine Chemicals business, no product accounts for more than 5% of our operating profit and I think that's another unique strength for our Fine Chemicals business.

Okay. And last question for Mark, when you -- I understand the conservatism going into the second half, could you give us a little bit more color in terms of by segment, is it sort of mirror by segment year-on-year? Does one segment maybe can do a little bit better, a little bit worse? And maybe talk about what you are worried about in more detail in the second half and maybe what could be more positive as you get into the second half.

Thanks, Michael. You have had your shot. Polymer Additives I think, we reflected that, we are driving that business hard, but until we see some pickup broadly in the consumer electronics and tetrabrom, I think we are going to struggle a bit to get that business back on the kind of growth track that we want to be on.

Okay.

So, you can characterize that as being pretty reflective of what we have already seen. Catalysts, as John noted, should be strengthening slowly as we go through the year, and we think Fine Chemicals is going to be good. So, that's kind of how I characterize it. These numbers are conservative I think in some of the things we see. We are spending more money in R&D all the time and you got reflected that in your model, I doubt. So, you could see more money spent there, more money spent in the administrative areas, we do certain things to drive our corporation forward that are important to us, training in different programs, like that. So, there is more cost I think that we are looking at spending and making a conscious decision to spend and getting ready for 2008 and 2009. On the upside, John mentioned a lot of those, I mean I am continuing it will be so (inaudible) out of our folks in R&D. They are really kicking out a lot of new products and the attention we are getting from the refining industry all the way through to our Polymer Additives is just huge, and we are working hard to start capitalizing on that strength and driving sales. So, I think the upside is we can get some of these new products in the market quicker. Jinhai is an upside for us, it's not built-in, it's not a huge acquisition, but it is going to be accretive to margins and accretive to our earnings day one. And so there is a few cents there in that kind of business. So, I think it's a little bit more the same. I will say the strengths that we brought to the table, Mike, that have allowed us to do so well last couple of years. We are just keeping capitalizing on those and that's what will give us the opportunities in the second half of this year and next year.

Okay, thank you.

Thanks, Mike.

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

Good morning gentlemen. Congratulations on a very solid quarter here.

Thank you, Dimitry.

Thank you, Dimitry.

Couple of questions and a lot have been answered, but when you look -- when you talked about the improved performance of minerals based flame retardants helping to offset the weakness in tetrabrom, were you talking about on the volume side or on the pricing side? And have the margins in that business improved as well or are you still suffering from some raw material pressures?

Yes, Dimitry, all of the above. Sequentially, we did have volume growth of about 5%. We have had pricing improvement sequentially of about 5%. Year-over-year, the pricing improvement has been between 15% and 20%. But that is helping offset significant raw material inflation on ATH. And so, overall, our margin has improved both year-over-year and sequentially in that business. But, it continues to be under, I would say, margin pressure because of the outlook on ATH supplies is a key raw material.

Is there much differentiation between the precipitated versus the ground minerals or both of these moving kind of in, at least in the same direction, if not at the same rate?

Yes, the precipitated for different product, for different applications, whereas the super ground alumina tend to be more, in our performance chemicals portfolio, kind of paper fillers, things like that and ceramic and lower-end markets, things like that. So, when I am talking about mineral flame retardants, I am strictly adhering to the precipitated products.

I got you, I got you. As the Dayton facility is closed and some of the standard costs are removed, is this going to be a meaningful contributor to sustainability of margins in Fine Chemicals, or is it going to be more a function of loading up the South Haven plant with high value production?

Yes, Dimitry, John again. It is going to be accretive for us, again meaningful, that's a relative term. But, it will help us to the tune of between $0.01 and $0.02 this year.

For the second half of the year?

Yes. I can't tell you $0.02, but on an annualized basis, it would run between $0.01 and $0.02 here.

Right, okay. And then --

But, it will start -- it will start immediately. I mean it's in process as we speak.

All right. Just want to make sure that I understand your answer to Michael's question earlier, when you talked about the sustainability of profits in Fine Chemicals, we are not necessarily -- we shouldn't necessarily be thinking that this is now a 20% margin business. But, I know here we shouldn't expect a reversion to the mean of your 15% goal, given the strong start you have to the year and some of the sustainable things that you have done that accounts for that, it sounds to me that within the fluctuation of typical lumpiness of these businesses and the campaigns that you run, especially in your multipurpose plans, that kind of the mid-to-high teens is a level of profitability that we should be expecting from this business going forward?

Well, thanks for saying that, Dimitry, because I am in the very concerted effort to get my leadership in that business to understand exactly what you just said. So, we are working hard on that. I cannot see it going below 15%, but we are working hard to exceed that 15% number going forward and then build into our longer-term efforts more significant margin gains.

Got you. And not simply a double [delegate] here but a big contributor to the improvement in the margins, that business obviously has been the brominated portion of the portfolio. At some point in the future, the bromine prices start rolling over, is this still a cyclical business even with the improvements that you made because of the bromine price cycle?

Yes, I will tell you, more than any product we have got, bromine as a commercial product I think brings just more value than almost any product in our portfolio. And I would also like to point out something I said about ibuprofen is that when you look at Fine Chemicals, while bromine in all of its derivatives in Fine Chemicals is certainly an important product, each product is going to have to carry the margin that the entire portfolio carries. So, we are going to continue to try that, push that and use our commercial bromine as a base for it. But, there is no product that is more than 5% of the total earnings in that portfolio of products. So, I think that diversification in our Fine Chemicals business is a real strength.

Okay, very good gentlemen. One final question on Catalysts, this is the first quarter probably going back 2.5 years or so, where you had a negative comp on year-over-year basis in terms of your margin. Was it entirely a function of raw materials, because if you look at, I understand that volumes were weak, but they were actually a little bit stronger on year-over-year than they were in the first quarter, you got a little bit better pricing there and yet your margins have declined sequentially as well as year-over-year. Can you give us kind of a more flavor of what happened there in terms of margins and where we should think of margins going forward?

Yes, Dimitry, when you look at it, I think probably the singular reason there, well probably two, raw material and inflation year-over-year is definite. But, the joint venture Nippon Ketjen, I mean, went down dramatically year-over-year. And I would say that that was probably the most significant contributor to the price -- margin erosion in Catalysts.

Okay. Was that, when you were talking about a $5 million contribution versus $10 million last year?

Yes.

That's right.

That's correct.

Okay, got you. Thank you very much.

Thank you, Dimitry.

Your next question comes from the line of Edward Yang from CIBC World Markets. Please proceed sir.

Thank you, good morning.

Hi, Ed.

Hi, Ed.

My first question is for Rich. Corporate and other was sort of lumpy this quarter, what drove that, and what was the tax rate guidance again?

Yes. So, our corporate and other, that line item is a little bit of a pig's breakfast is what I would say, Dimitry, I mean, Ed. What we are looking at really is in the second quarter and third quarter, probably the two middle quarters this year are a little bit tougher than the other quarters and we really did try to hunker down on the corporate line item. You have a number of things that go in there including some costs for HR, some costs for normal corporate expenses, variables pays and that type of thing. So, we try to hunker down in there, to be responsive to the outlook and the difficulties we saw in terms of numbers. So, we were at $10.8 million this quarter and the guidance that I would give you is $12 million to $14 million, more normalized spend in that line item going forward for the rest of the year. On the tax rate, this quarter, we took the rate up, and so, because we were booking at 23% in the first quarter, that was our view of full year, we actually are now at 23.8% for the year, and what that means is the second quarter really bore the brunt to get up to that level for the full year. So, in the quarter, it was 24.6%, 24.7%. The full year view is 23.8%, and that's principally up because of the mix of income that we are seeing year-to-date than for the rest of the year is a little bit different than the mix that we anticipated going into the year.

Okay. And then, a question for John on polymer additives, margins were down sequentially. Was that a price or mix issue?

Yes, this is John. It was really neither, it was volume absorption because through the course of the second quarter, we fairly dramatically took down our inventories of tetrabrom during that period. So, the production volume both sequentially and year-over-year were down significantly.

And just to understand what's going on with tetrabrom currently, is it mostly driven by inventory issues or is it just slack consumer end demand on the electronics side?

I think basically what we are hearing from our customer base, and Mark was out in Asia just recently and spent a lot of face time with our customers, and what they are telling us is their volumes have been weak. However, they do believe that there has been a bottoming out of inventory too in their supply chain with their customer base. So, I think it's mostly volume related in electronics, which affects printed wiring boards and connectors for consumer electronics and television production through the course of the last quarter, and actually first half has been relatively weak. That's why the issue would be Olympics, as Mark pointed out, I think can be a catalyst for additional growth next year hopefully.

Okay. And on the Catalysts segment, Criterion announced a Brownfield expansion in capacity. There you have a deal with [Porosil], I don't know if I am pronouncing that correctly. But, were you surprised that they were able to find that additional capacity? And are there opportunities for you to also have some Brownfield expansions given the great outlook for Catalysts next year?

I think with our added capacity coming on in Bayport and the vision that we had that really began 2.5 years ago of how strong 2008 could be, that's helped alleviate any need to do any kind of Brownfield or cooperative endeavor. But, on that note, I would say that putting in any kind of major capital expansion anywhere in the Gulf Coast region is very difficult to do. Labor, engineering, materials, construction, I mean, it's all a much more timely process than it was pre-Katrina and pre-Rita. So, that could be a contributing factor there in that kind of decision.

Thank you, that's a great point. And finally a question for Mark, when you look at the three businesses that you have, which do you think is more right for additional consolidation? And specifically, in the HPC catalyst space, do you think that there is more room, I know you have very good market share there, but do you think that there is more room for consolidation amongst the different players? And if there were to be consolidation, what would be the driver, would it be technology, market share, synergy opportunities?

Thanks, Ed. When you look the businesses, the broadest business out there remains Fine Chemicals. And there are literally hundreds of niche players in the Fine Chemicals business around the world. Many of whom who would like to replicate what we do no doubt, but I think that's an area that continues to offer opportunities for incremental expansion of our business and we are very excited about that and we are excited about making our model, which is primarily U.S. focused, more global. So, there we keep working on. In the Catalysts area, I think there are a number of acquisition opportunities that are possible, some in emerging technologies that are more theoretical in nature, seems to be small technology acquisitions up to established producers of material today. Would some of those areas be hard for us to do from an anti-trust point of view? Yes, perhaps, I mean they could be, they could be. But, when you look at things, even things like HPC, HPC in itself has a number of different segments to it, and we tend to be strong in one segment, others may be strong in a different segment. So, I think it's possible for consolidation to occur even in areas like that or in areas even like FCC perhaps. So, are we interested in those kinds of things? Sure, there is no question, but we are not hanging on just to that being our only opportunity to grow and expand this Company.

Thank you very much.

Thanks, Ed.

Your next question comes from the line of Steve Schwartz from First Analysis. Please proceed sir.

Good morning gentlemen.

Good morning, Steve.

Good morning.

With these refinery outages in the second quarter and what's carrying over even into the third quarter, can you explain how that impacts you, if it impacts you at all?

Yes, that's interesting question, Steve. There is a major front page article on New York Times that kind of addressed that issue in North America and how that is really squeezing the availability of gasoline. We still in the quarter saw growth in our FCC business in North America. So, I think it served the outages that have been going on, have mostly been unplanned. And that has, I think been a governor for the volume consumption of FCC catalyst in the U.S. Outside of that, in Europe, it's primarily -- there were a lot more planned outages as the heavier driving season is a little bit later in Europe than in the U.S. But, I think it served as a bit of a governor on overall FCC volumes.

So, do you start to see a boost here in the second half make up purchases?

Well, I think the problem is that there have been so many unplanned outages because of the age of these refineries, the difficulty in processing of these crudes and the complexities around them. So, it's really, I can't sit here and predict that honestly.

Okay. And then, in your Fine Chems business, last quarter you made a comment about the pharma pipeline having a 175 projects and now you are talking 230 in this release. Is there something that you are doing internally, additional sales people, it doesn't sound like your R&D spending is directed at that, or is it something in the end markets that are driving the increase?

Well, I think it's all of the above. We have really developed I think an outstanding model for getting touch points throughout the globe and for bringing in opportunities. And I think that has served as strong incentives for our sales organizations as they see positive results, or filling these opportunities of our customers. So, it's been just a very great, very solid engine that we have created. And I think the end markets, primarily pharmaceutical, if you think about pharmaceutical and the pressures that the pharmaceutical industry is under to develop new molecules and do it relatively quickly, I think we are the kind of Company that can fill that need that they have. So, it's a combination of all the above.

Okay and then one last question, just on your JV income in the Catalysts, in the second half of last year, it looks like your Catalysts income was about $3 million a quarter. You are running about $5 million this quarter for each of the first half of this year. Is it going to drop off in the second half, is there a seasonal pattern there or do you expect it will remain at the higher level we are seeing this year?

Well, the biggest driver there has been the Nippon Ketjen joint venture in Japan on HPC. And we hope that that will be moderately better in the second half. But, the big opportunity for that business remains in 2008 and we think will rebound in 2008 back to last year's levels.

Hey Steve, this is Rich. On the JV income, it tends to be weighted towards the first half of the year being higher than the second half. So, now, John's comments is that, Nippon Ketjen might get a little bit better, but compared to last year, not compared to the second quarter we just had.

Thanks for clarifying that.

Thanks.

That's great, thanks gentlemen.

Thank you, Steve.

Thank you, Steve.

Your next question comes from the line of Kevin McCarthy of Banc of America. Please proceed sir.

Yes, good morning.

Good morning, Kevin.

Hi, Kevin.

With regard to FCC catalysts, how much of the price increases that were announced previously for January 1st would you say have been realized at this point? And given that circumstance, do you see room for additional increases over the next six months or so?

Kevin, this is John. In the second quarter, we achieved about two-thirds of the increase of that announced increase. And in July, it appears that the balance of that will be achieved. So, we will again reassess the total effort a little later here in the fall. And I think towards the end of the year, we will be able to answer your question more precisely. But, again I go back to the value of these products [spring], the difficult crude slate, the drive to improve yields and improve productivity at the refinery level. So, I remain cautiously optimistic we can continue this effort.

Great. And then shifting gears to HPC, if we consider the incremental capacity coming on at Bayport in early September, how much of that capacity would you say has been presold in general and then how much of a sales contribution, if any, might we expect in the third quarter?

In the third quarter, you should expect none. Perhaps (inaudible) the fourth quarter, but I wouldn't -- I don't think you should factor very much into that. What we are saying is that we expect HPC volumes to be flat year-to-year, and that, as you probably recall, is a pretty good achievement given the downturn that the industry globally suffered through this year.

Right.

What we will be doing in the third and fourth quarter starting to produce commercial quantities of material and going through a testing and a validation process of it. And hopefully, as we end the year, we will be starting to produce products, we will be selling probably in January and February kind of timeframe. How much of that is presold? The new units that are being built around the world that are eight, nine and ten, in effect you bid for that and you win those. And so, there is -- that is kind of built into our numbers, when I was saying it would be sold as we end 2008, start 2009. So, I think what I would say is of this capacity, virtually all of it is presold when you get down into that timeframe.

Okay. And then lastly, if I add up the various raw material pressures that you have and counterbalance that with price increases that you are pushing through, would you say the gap between those two factors is more positive or less positive in the back half of the year versus the first half of the year?

We talked about $20 million year-to-year inflation in the second quarter. I think we are looking at maybe $80 million for the year. So, it's pretty consistent. We don't see it -- we don't see a change. And Moly went from $26, $27 a pound to $35, it's back maybe to $33 now. I haven't looked at the LME recently, but that's last time I looked. And as John mentioned earlier, we are seeing -- we are just now starting to see I think the mid $70 barrel ripple effect in things like benzene and phenol and those kind of areas. So, my gut tells me it's going to be more the same.

Okay, thank you guys.

Thanks a lot, Kevin.

Your next question comes from the line of P.J. Juvekar from Citi. Please proceed sir.

He must have his line on mute, I will take the next question. Your next question comes from the line of Laurence Alexander from Jefferies & Company. Please proceed.

This is [Swaraj Mittal] stepping in for Laurence. We are just wondering on how much of the margin expansion in Fine Chemicals was due to bromine pricing rather than pharmaceutical intermediates?

We can start real quick. Well, I am sorry, what was your name? We missed it.

Swaraj Mittal (inaudible) for a second.

Great, thank you. John, you want to grab that?

I would say maybe we are talking 10% to 15% of the total, [Swaraj], because you have, as I mentioned, you have eliminating the PCC sales out of Thann and filling that up with profitable South Haven products. You got improvements in some of our performance chemicals like ASA and amines, and you have got some other pharmaceutical products like the naproxen opportunity. So, that was probably 70% of that total and then bromine was in the 15% to 20% range and some other productivity improvements and efforts combine the other. But, it was much more overall well balanced improvement year-over-year than any one particular item or product line.

Excellent, excellent, thank you. And also how much did FX contribute to earnings for the quarter?

FX didn't really contribute to earnings. We do have the analysis that we put out that talks about the componentry of the sales increase, and I think FX was somewhere around 2% as I recall.

Okay.

But that's really, that's more what I would call translation benefit, taking foreign and overseas results with the stronger currencies and then translating them into dollars.

Okay, thank you so much.

You are welcome.

Thanks a lot.

Your next question comes from the line of [Todd Bensel] from Davenport. Please proceed.

Yes, good morning. This is actually Tom Brinkmann with Davenport.

Hi, Tom.

Hi, Tom.

Nice quarter guys, congratulations on that.

Thank you.

Just wanted to -- a lot of these questions have been touched upon but just wanted to sort of expand a little bit. You mentioned that excluding Thann, the Fine Chemicals sales would have increased 5% year-over-year. You just mentioned that PCC sales were eliminated out of Thann. But I am wondering just more broadly, if there were some product lines that were discontinued not picked up by other facilities or really most everything being transferred over to South Haven and other plants?

Yes. Tom, there are some -- no other product lines that we discontinued as a result of that really. It was, mostly some of the products in Thann were transferred to our Port de Bouc facility in France, and the Dayton product portfolio, as we said, went to South Haven. I think one product went to Orangeburg. But, generally, we have absorbed those assets, which is why we see the improving return.

And Tom, this is Rich. The walk on kind of apples-to-apples revenue there is take out $20 million of Thann revenue, okay, that went away, and approximately, say, $8 million or so of South Haven revenue coming in.

Okay. Right, that's helpful. Also, did you guys mention, I didn't catch your 2007 guidance for R&D expenses?

No, we didn't do that, but I think R&D is up 30% or so this year year-over-year and I would just take that number.

Okay. And then finally, you did mention that there were some unplanned U.S. refinery outages. Can you talk about the difficulty in processing crudes? Is that a lot from the heavier crudes coming out of, say, the Canadian Oil Sands, or was it sour crudes? Just I am wondering how quickly that's having an impact in terms of the Canadian crudes heading U.S. refineries.

Well, it is mostly sour crudes on a global basis. The Canadian crudes tend to be upgraded in Canada and of course, we sell into that market. But, as you know, that capacity where it is coming on stream is coming on stream frankly pretty slowly. So, it's primarily the movement from the light sweet crudes that were in abundance a decade ago to the heavier crude slates that exist today.

Yes. Tom, it's just a huge issue globally that the refining industry has to deal with.

Okay. And you also mentioned just the large amount of cash you have now, are there any I guess longer-term plans to sort of adjust the way the capital structure is or is it something that just sort of has happened over time accumulating cash?

The cash accumulation is a little bit of an aberration at the end of the quarter because we did pay off about $100 million of third-party bank debt early in the third quarter. So, it's a little bit of an operation. I think in terms of cash, we are a very cash generative business. We have been deploying that cash both internally through CapEx, increasing CapEx through increasing R&D to keep the growth in the new products and projects along the way. And we have significantly accelerated our stock buyback this year basically buying back as many shares in the first half as we did all of last year. And as we mentioned on a couple of calls, we are continuously looking on the M&A front, this quarter announcing the buying of a controlling interest of two Chinese JVs, which we will have to fund in the third quarter, but also looking at other ways to extend our business. So, all of those things are where we are deploying our cash to keep the ball rolling.

Okay, thanks very much guys.

Thanks, Tom.

Thank you, Tom.

Your next question comes from the line of Steve Schwartz from First Analysis. Please proceed.

Thanks for taking my follow-up. I don't think it's been addressed, but you had a significant decrease in your corporate and other expenses? Can you talk a little bit about what's behind that?

Yes, Steve, we did -- I did mention, maybe you didn't hear, we were -- we spent a little bit more in the first quarter than we thought we are going to. And given the outlook for second and third quarter, we kind of hunkered down a little bit. Those are typical corporate expenses, they can be lumpy. There are some discretionary expenses there. But, what I did is give guidance, the $10.8 million this quarter is not sustainable, I think we are looking at a more $12 million to $14 million spend rate going after the rest of the year.

Great. Yes, I did miss that statement. Thank for restating that.

No problem.

Thanks a lot.

At this time, there are no further questions in the queue.

Okay, great. I would 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. Good day.