雅保公司 (ALB) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third-quarter 2007 Albemarle Corporation earnings conference call. My name is Dan and I will be your operator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Sandra Rodriguez, Director of Investor Relations. Please proceed.

Thank you, Dan. Good morning, everyone and thank you for joining us today for a review of Albermarle's third-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 website 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 the call over to Mark.

Thanks, Sandra and good morning to everyone. We are pleased to have the opportunity to share our third-quarter performance today and look forward to answering your questions after our brief remarks. So let's get started with some strategic highlights of the last quarter.

At the end of July, we acquired a controlling stake in our two Chinese antioxidant joint ventures, increasing our ownership interest from 25% to 75%. Albemarle Jinhai is the largest and we believe the most successful Chinese provider of antioxidants for the polyolefin industry and we are very excited about this new additives platform and the opportunities it brings to us in the Asian market.

August and September revenues from the joint venture totaling approximately $8 million are included in our Polymer Additives results for the third quarter. Rich will provide further details on this transaction in his comments.

The hydroprocessing catalyst expansion at our Bayport, Texas facility is now mechanically complete. The new state-of-the-art HPC plant will more than double the capacity at our Bayport site and increase our global HPC capacity by approximately 30% positioning Albemarle with the capacity to meet the strong growth demands for 2008 and 2009 we expect in this business.

Plant commissioning activities are progressing well and we anticipate our first production run before the year's end. Our new phosphorus flame retardant plant in Nanjing, China, which some of you visited last month, is also moving along well with construction on schedule for an early 2008 startup. This flame retardant plant, along with our catalyst blending facility and technology center, further strengthens our position in the rapidly growing Asia-Pacific flame retardant market.

Last month, we approved a major expansion of our polyolefin catalyst production capability in Baton Rouge, which is needed to meet the increased demands we expect in polyolefin catalysts next year and beyond. We also have several expansions underway in proprietary brominated flame retardants and mineral flame retardants that will be complete in early 2008.

Finally, I would like to highlight our teams' continued efforts in R&D. We have approximately 500 people worldwide in research and development. That is the largest block of employees in the Company, which speaks to our commitment to create unique solutions for our customers.

To address organic growth opportunities across our portfolio, we have increased R&D spending 34% year over year, focusing in many promising areas such as polymeric and reactive additives, catalysts for alternative fuels and expanded opportunities for bromine.

We also continue to see new opportunities to expand the use of our catalyst technology beyond those areas we are currently in and we are having success developing new catalyst products that serve the expanding, very heavy and sour crude markets.

Okay, before I begin sharing Company results, I want to remind you that all of our comparisons discussed today exclude the $58 million after-tax charge related to the disposition of Thann last year. In the second quarter of 2007, an after-tax charge of $3.1 million related to the Dayton operation's consolidation.

With that, I am pleased to announce third-quarter sales of $584 million. That compares to $608 million in third quarter of 2006 and $564 million last quarter. Year-over-year sales were essentially flat if we exclude Thann's revenue impact and up 3.5% sequentially. Our net income for the quarter was $59.1 million, down 2.6% from the third quarter 2006, but up 3.6% from last quarter. Corporate gross margins improved 180 basis points from last year to 26.2%.

Continued softness in demand across consumer markets and steps taken to reduce physical inventory of bromine and bromine flame retardants, primarily tetrabrom, pressured Polymer Additives margins to 12.6%. That is down 340 basis points from the third quarter of 2006.

Fine Chemicals, impacted somewhat by lower BFR sales, delivered solid segment margins of 15.1%, a 400 basis point improvement over the third quarter of 2006. Our Catalyst segment was certainly the heavyweight this quarter with a record-setting segment income margin of 19%. Combining all this together, segment performance ended the quarter at $0.61 per share.

Commenting on Catalyst. This business continues to show improved performance with record-setting quarterly income of $41 million, an increase of 7% over a year ago and 27% sequentially. The discipline demonstrated by our Catalyst team and developing critical catalyst systems for fuel and polyolefins applications provides a great opportunity for strong year-over-year growth.

As expected, HPC volumes were not as strong as third quarter last year when the refill cycles were still benefiting from refinery response to desulfurization regulations. However, we are seeing sequentially steady increases in volumes and expect that refill cycles will create a strong pull for volume in 2008 and 2009.

On the FCC side, we are continuing our efforts to raise prices, recently posting a 15% price increase to $3100 per metric ton effective January 1, 2008.

Turning now to Polymer Additives, our flame retardant business continued to weather market weakness in consumer electronics through August. A positive turnaround came in September slightly offsetting very sluggish July and August periods. Polymer Additives' third-quarter net sales of $233 million improved 4% sequentially. As we enter the fourth quarter, we are cautiously optimistic that we will see strong FR volumes as we head into the holiday season.

Our Fine Chemicals segment had a solid quarter with increased profits of 26% over the third quarter 2006. Performance Chemicals delivered solid results even while bearing cost absorption headwinds from reduced bromine supply into our flame retardant chain.

Our Fine Chemistry Services, Pharmaceuticals and Agricultural Intermediates businesses continue to contribute impressive results. Year-to-date profits essentially equal the full-year profits of 2006.

Let me now briefly comment on input costs. Raw materials increased $24 million over the third quarter last year. Raw material inflation still remains a big challenge for us in the industry. We expect steady increases in raw material costs through the remainder of this year and we don't see any reason for inflation to slow in 2008. In fact, our first pass view of next year indicates roughly $80 million of year-over-year raw material inflation.

Of particular concern is the strong inflationary pressure on mineral-based raw materials like ATH, which goes into our mineral flame retardant business. Those inflation pressures will put increased margin pressure on the Polymer Additives business as we start next year. To help offset this ongoing margin pressure, we continue to execute on our cost reduction and pricing initiatives.

Looking forward, I expect the fourth quarter to show modest sequential growth on the back of improved volumes in Polymer Additives and Catalysts. Polymer Additives fourth quarter should deliver modest sequential improvements on what is typically a seasonally softer quarter for the segment. Demand for our flame retardants is starting to rebound as the indication suggests a slower but sustainable recovery in the printed circuit board and connector markets.

In Fine Chemicals, we expect stable growth the remainder of the year and another strong year in 2008. Our bromine franchise remains very solid with over 200 products in the Fine Chemistry Services pipeline. We expect good growth in our Pharma and Ag portfolios.

Catalyst volume will be up slightly as we prepare for the record Catalyst volumes in 2008. Pulling all this together, we are on track to deliver strong results in the year. It has been challenged with two times the level of raw material inflation and much weaker consumer product demand than we expected. The tremendous determination of our business leaders and the dedication of our innovative workforce around the globe is creating the success. With that, let me turn it over to John Steitz.

Thanks, Mark. Good morning, everyone. I will begin with our Polymer Additives segment. Polymer Additives net sales for the third quarter totaled $233 million, down 3% from the third quarter of '06 and up 4% sequentially. Polymer's third-quarter segment income is $29.4 million, a 24% decline from a very strong third quarter of 2006, primarily due to lower sales volumes and higher unabsorbed manufacturing costs associated with our tetrabrom units being down most of the quarter, as well as increased raw material costs as Mark identified.

Our flame retardants portfolio suffered from continued weakness in electronics demand. While July and August volumes were even lower than we what we saw in the first half of the year, September rebounded with very strong volumes, giving us confidence in what we are hoping we will be a sustainable market rebound.

Looking back, we saw a very similar comparison of this quarter to the third quarter of 2005 where the first two months were very soft and a sustainable rebound started in September of 2005 and continued steadily throughout all of 2006.

While our diversified flame retardant portfolio allows us to weather these types of market downturns, we will not rest on our laurels. Our business, technology and manufacturing teams are working hard to develop and manufacture more innovative and environmentally-friendly products that will continue to create value and solve problems for our customers.

Our stabilizers and curatives business continues to be faced with extreme raw material cost pressure due to the impact of rising petroleum-based feedstock. During the quarter, our polymers business also absorbed $1 million of inventory markup charges and other one-time costs associated with the consolidation of our Jinhai joint ventures.

Fine Chemicals' net sales for the quarter totaled $135 million. Segment income of $20.4 million increased 26% over the third quarter of 2006. While our Performance Chemicals business delivered strong sales this quarter, a slowdown in our bromine production due to brominated flame retardant's inventory reduction negatively impacted results for the quarter. Despite these headwinds, Performance Chemical profits increased at double-digit rates over the third quarter of 2006.

Our Fine Chemistry Services and Intermediates business continues to deliver solid results. Comparisons to the second half of last year were negatively impacted by the Tamiflu intermediates business, which was achieved in 2006.

Also, as mentioned on our last call, the second quarter of 2007 included a successful naproxen campaign for a potential new product introduction. The pipeline of new pharmaceutical and agricultural intermediate products continues to grow and enhance our longer-term segment margins.

Now moving onto Catalysts. Catalyst net sales for the third quarter totaled $216 million, 4% over last quarter and relatively flat compared to a robust third quarter 2006. Segment income for the quarter is $41 million compared to $38 million last year and $32 million in the second quarter. Great execution by our team.

You may recall third quarter 2006 was our highest selling quarter in Catalysts and we delivered very strong profitability on those volumes. I am pleased to highlight that while volumes this quarter lagged the record-setting volumes of third quarter of last year, Catalyst segment income increased year-over-year by 7%. Sequentially, segment income grew 27% on steady volume increases in both refinery catalysts and polyolefin catalysts.

Our refinery catalysts HPC business delivered sequential volume growth and is expected to continue this positive traction as we close out the year and headed into what is expected to be a strong 2008. We have been running our existing HPC capacity wide open and plan to start commercial production in our new HPC plant late in the fourth quarter to meet growing demand next year.

Our refinery catalyst FCC business is clearly making solid strides in margin improvement. While we believe there is still room for further margin improvement, we must continue to deliver high-performing, superior quality products to meet the growing demands of refiners processing heavier and heavier crudes.

Our FCC business also continues to be faced with dramatic raw material increases related to energy, metals, imported rare earths and transportation costs. The polyolefin catalyst business delivered stronger results in the quarter with net sales up 15% year over year driven primarily by stronger revenues and volumes in our organometallic portfolio. And with that, let me turn it over to Rich Diemer for comments on the financial results.

Thanks, John and good morning, everybody. As Mark mentioned in his comments, we have consolidated two months of results from our now 75% owned China-based antioxidant joint ventures, which we call Jinhai. Revenue was approximately $8 million for the August through September period with a relatively small impact to our bottom line this quarter due to required purchase accounting adjustments. We have an option to acquire the remaining 25% ownership from our partner in the future.

Our reported effective tax rate for the quarter was 15.4% and 20.8% for the year to date. The current quarter tax rate benefited from the change in German tax rates that were enacted this quarter and our revaluation of already recorded deferred tax balances in Germany to reflect the new rates. This was approximately a 300 basis point benefit in the quarter, 100 basis point benefit year to date on the tax rate or $0.02 a share.

We recorded tax benefits related to the completion of our 2006 tax returns of approximately $0.03 per share, which also benefited this quarter's rate and results. Our best estimate for our tax rate in Q4 is 23.2%, which would give us a reported tax rate of approximately 215% for the full year.

Unallocated corporate expenses were $12.7 million in the quarter and we anticipate a similar level of expense in Q4 for this line item. Our EBITDA this quarter was $105 million, slightly below the first quarterly -- first half quarterly run rate and $2 million less than Q3 2006. We ended the quarter with cash and equivalents of $101 million. CapEx for the quarter was $21 million. Our current view of 2007 CapEx is in a range of $100 million to $105 million. Depreciation and amortization was $26 million and we expect full-year D&A of $106 million to $108 million. Our preliminary roll-up of cash flow from operations is $68 million for the quarter.

Turning to the balance sheet. At September 30, we have consolidated debt of $698 million, including $64 million of JVC joint venture debt of which $400 million is fixed and $298 million is floating, a 57% to 43% split. Our floating debt interest rate is 5.82% at quarter-end. The weighted average interest rate for Q3 was 5.4%. Net of $101 million cash on hand and excluding $46 million of nonguaranteed consolidated JVC and Jinhai debt, our net debt is $551 million, up $6 million from year-end, but down over $100 million from a year ago. Our quarter-end debt to cap ratio is 34.9% and our net debt to cap ratio is 31.2%. With that, I will turn the call back to Sandra.

Thank you, Rich. Okay, we would like to open it up for your questions.

(OPERATOR INSTRUCTIONS). PJ Juvekar, Citi.

Yes, hi, good morning. I wanted to get to the bottom of this flame retardant issue. We have had three weak quarters of flame retardant volumes. Can you just talk about what are the operating rates, what are the current inventories and is there a demand shift between brominated and non-brominated flame retardants or what is going on?

PJ, it's John Steitz. Let me try to address your question. The best thing I can do is kind of compare it back two years ago to third quarter of 2005 where we saw a similar decrease in demand. So when we go out and talk to our customer base, whether it be in the electronics industry, the connectors industry, the printed circuit board industry, we are hearing very similar descriptions of what has been happening.

Through the course of '06, we saw strong demand through the course of the whole year and compared to '05, especially third quarter of '05, it was down fairly markedly. '06 was very strong even though the end consumer markets, we are told by our customers, were very weak in the second half. So there was an inherent build-up of inventories at their level. So we've tried to match that and we believe that through July and August, we have finally worked through what was a big inventory build that has occurred over the last 18 months.

So if I compare the three quarters year over year, we had, in '05, a relatively weak July and August with a very strong September. In '06, we had three consecutive months in that quarter, third quarter of '06, very strong across the board. And then in '07, we had a very weak July and August, which is similar to the July and August of '05, but we had record sales and record volumes in September. We are starting out October I would say moderately strong, but November looks very strong.

So we are cautiously optimistic we have turned a corner here. We feel our inventory levels are appropriate. We have had to fire up our tetrabrom plants in the last couple weeks and we are pressing forward on manufacturing to meet what we see is a recent spike in demand. So that feels good. But it did take a toll in earnings no question in the third quarter of '07 as we moderated our plants back. My estimate is that was about $0.05 in the quarter.

So what were inventories in June, July and what are inventories now?

Our inventories?

Yes. Is that what you were talking -- about your own inventories?

Yes, our own inventories have gone down in July and August despite the weak sales and in September, we obviously had inventory to meet the spike there, but in October now, we have got to produce to meet the increasing demand. So I am hoping for sequential improvements, moderate sequential improvement.

PJ, this is Rich. The inventories are obviously up on a consolidated basis for the full year and even since the last quarter that we reported, but the bulk of that increase is in metals pricing, which is Catalyst and it is in increase demand for catalyst orders. So you don't want to miss some of those big orders that are coming through.

The other thing that is significantly impacting our inventory is FX with our inventories that we have over in Europe. There again that's substantially Catalyst-related.

John, can you talk about your operating rates at bromine wells either in Jordan or Arkansas and then you said your tetrabrom plant is back up, so what are operating rates overall in flame retardants?

In Arkansas, PJ, I would say it was in the 50% to 60% range. I mean we had them throttled back fairly dramatically as the biggest volume sink for our bromine and Arkansas is primarily flame retardants. The utilization in Jordan was a little higher than that, mostly built on some reasonably strong clear brine volumes in the Middle East.

Are you raising those operating rates now?

Pardon me?

Are you raising those operating rates now?

Yes, we are. We are increasing them to meet the increased demand in flame retardants. Now where are they running today? No, they are not near 100%, but they are in the, I would say, more in the 70% range.

Okay. All right. That's all for me. Thank you.

Thank you, PJ.

Laurence Alexander, Jefferies.

Good morning. This is [Lucy Watson] speaking for Laurence.

I'm sorry. It was breaking up. Is it Lucy?

Yes, Lucy Watson speaking for Laurence. How are you?

Great, Lucy.

I just actually have another question following up on the Fine Chemicals. Could you quantify the earnings impact of the inventory reduction in the bromine chain?

Yes, that was about $0.02, in the range of $0.02 in the third quarter.

Okay, great. And just one other question. Was there a similar impact in Polymer Additives?

Yes, it was about double that however. It was in the $0.04 to $0.05 range.

Great. And what is the status of flame retardant regulations in China?

Lucy, this is Mark. Let me try to take that. What we see in China is the government very actively promoting industry-leading regulations in all of those areas where the general public is exposed to the potential of fire safety. So in hotels and office buildings, the material they make to ship offshore, all those things are in essence meeting fire safety standards that are international in nature. The vast quantity of goods, however, are not yet flame retardant in China and there seems to be a very concerted effort on the part of the government to change that.

Great. Thank you very much.

Thanks, Lucy, for calling.

Bob Koort, Goldman Sachs.

Thanks very much, good morning. I was wondering if you could tell me if there is any standard behavior around catalyst pricing and pre-buying ahead of price hikes or what you do to minimize that.

Let me give that a shot, Bob. You know, in most cases, the inventory here is pretty tight, so you make it to deliver it and frankly we don't see very much activity there to buy early in light of a price increase. There may be some interest to cut deals early, but not to pull volume forward.

And how about -- what effect is there, if any, from the volatility we have seen in refining margins over the last couple of years? I mean they have gone sky-high, then they've crashed and they have gone back up and then they have come pummeling dramatically lower. So do you see any buying behavior? Does it change the refinery runs that are going or is the industry in the US at least pretty much full-out regardless?

Yes, the industry in the US is full-out regardless I think today. It remains a question if you look out three, four, five years. If margins pull back, does that impact the value add of upgrading heavy crude oil? I am not sure. But in the near term and certainly the recent past, we have not seen any impact as margins have volatility in them.

And if I look out three, four, five years, Mark, will the US component of that business become somewhat more marginalized so that really most of the discussion around growth and opportunity is outside the US or do you think there will continue to be technological advances beyond sort of the next wave of regulations in the US?

The real growth, the new business growth is virtually all outside the US, Bob -- Middle East, India, China, those kind of places, Brazil, Venezuela. So new volume is coming from new areas of the world. I expect the refineries in the US are going to continue to be pressed though to maximize their income and we are seeing a lot of inquiries on doing things like upgrading vacuum gas oil, so taking aromatics and moving them back towards fuel that can be used more readily and gasoline and diesel, things like that. So I kind of don't necessarily think that we are going to see a fall-off in the US, but to answer your question on growth, it is all offshore in volume growth.

Thanks very much.

James Sheehan, Deutsche Bank.

Yes, back on tetrabrom for a minute, just to clarify. Are you indicating that October sales volumes have been tracking above September and your orders for November also increasing, accelerating momentum there?

Yes, that's what I tried to communicate, James, so it looks sequentially like it is improving and that kind of correlates with the IPC report that we get. We have seen an increase in the book-to-bill ratio there as well.

That was going to be my next question. What is that book-to-bill right now?

We can get that. I think it was 1.07 I believe and that is just off the top of my head. We can get that and verify that for you.

Okay and then how about pricing in this area? Are you seeing pricing discipline hold in the industry?

Yes, the answer to that question is yes. Overall, in our entire Polymer Additives business, we have seen year-over-year double-digit pricing hold and we have seen some reasonable high single digit sequential improvement. Specifically in the brominated flame retardant portfolio, we have seen solid gains year over year and some I would say moderate sequential improvement.

All right. Thank you very much.

I think we have got a number here for you on the book-to-bill ratio. No, we will come back to you on that.

I appreciate it.

You bet.

Jeff Zekauskas, JPMorgan.

Hi, good morning. A few questions. Your working capital, are you about -120 so far this year? And what is the source of that?

I don't know about the -120. We track network and capital. 106 days I think is where we are and that is up principally because of raw materials inflation and it is also up due to FX.

In a big picture sense, Jeff, we have seen inflationary impacts hit this to the tune of $60 million or so and you have got some volume built on top of that, probably $30 million or so, so I think we are up net about $100 million. It is what I recall. I don't have the data in front of me unfortunately, but a lot of costs roll through that based on the inflation that we see out there.

We have also, through this year, it's kind of crazy, but we have had tremendous sales of catalysts at the end of each quarter, so we have this sort of outstanding receivable balance that is much higher than it should be, just the nature of the way that business has gone this year.

Okay, that's helpful. Back to the Polymer Additive area, if you look at your volumes over a multiyear period of time if you go back to '05, '06 and now in '07, there really hasn't been any growth in volumes in Polymer Additives if you net it out. If you go back and you include 2004 when you were up 19% and what you do is you get -- the previous year before that was up 2%, but you get something like 2% volume growth if you give you the benefit of the doubt in '04 and all of that is probably below the rate of the growth in the underlying plastic. So when you look at flame retardants over a multiyear period of time, whether the fourth quarter it turns up or not, why does it seem that Polymer Additive growth seems slower than the growth in the underlying plastics?

Well, let me start that and have John kind of pop in here for just a minute. And you've followed us for a long time, Jeff, so you have seen sort of the cyclical nature of the sales of this business and it tends to be -- broadly speaking, it tends to have the sort of stutter step associated with it. We had unbelievable volume growth in '99, 2000 timeframe to see volumes shrink 30% for a couple of years there until we came out of that sort of Y2K hole and then we have slowly been building back from the 2004 timeframe. So if I look at it on that sequence, I have probably got 10% and 20% growth during some period of times and minus 20% in some other periods of time. So it has been very choppy in that.

We are seeing a lot of changes in this industry. There are a lot more phosphorus-related flame retardants being sold today, including those that we expect to sell from our new plant that is coming up. There has been some shift of mineral flame retardants and we have seen a lot of volume growth in mineral bases over that period of time, so I guess it is a broad question you are answering.

We have said historically that FRs move about 2X GDP because of plastics going into consumer electronics have moved at about that pace. My gut is if I look at the number, I will get something pretty close to that before this recent downturn, but I need to check and we will do that and get back to you guys.

So I mean all things being equal, maybe you'll have a nice year in '08 given how weak 2007 has been.

Classically, that is the way it has been.

I guess lastly I just want to be sure that I understood the tax rate explanation. In the quarter, was there a $0.03 benefit from the audit of 2006 taxes or a change in --?

It's not the audit yet, Jeff, because the IRS is not on top of it with that sort of short delay. It is $0.02 from Germany, so German tax rate is down. It is approximately $0.03 from when we went through and completed our tax return. You complete your '06 tax return in '07 and you do what are called accrual to return adjustments. So to get that all in sync, you true up your corporate books, so we had positive adjustments. They could be negative, they could go either way, but in this case, they were positive adjustments, so our books were brought in sync with the tax return that we filed.

Okay. Thank you very much.

Kevin McCarthy, Banc of America Securities.

Yes, good morning. Mark, of the raw material inflation that you referenced, can you give us an idea of how much of that if any is passed through automatically according to your contract provisions and how much you will need to address via price increases and/or cost reductions?

About $30 million is moly inflation of the $80 million or so we are having this year and we work to make sure that that is passed through. So if you look at the balance of that, the other $50 million or so, we have got to fight and claw our way through to getting that passed on to customers.

And just to clarify, that was an '08 versus '07 number?

That is '07 versus '06.

'07 versus '06.

And if we look at next year, it is probably not that generous on moly. I doubt we will have as much moly inflation, but we are seeing $80 million overall and some of that, the vast majority of that will not be automatically passed through. We have to go get it.

I would add there is -- cobalt and nickel is probably another $15 million and that is included in the pass-through.

Okay. So let me revise those numbers. So it is about half pass-through, about half that we have to fight for.

Got you. In Fine Chemicals, you mentioned the lower bromine operating rate there being about a $0.02 headwind, John. I think you also mentioned in the text of the press release some lower revenue from Fine Chemistry Services. Can you elaborate a little bit on the trends there and what the future looks like?

Yes, Kevin, last quarter, we had a large naproxen order go out for a potential new migraine drug and so that was a nice tailwind for us in the second quarter. We also roll in a lot of our ag intermediates into our Fine Chemistry services business and that tends to be -- that particular business tends to be a fourth-quarter through first-quarter driver for us because we are building up for our customer inventory for the upcoming planning season. So that tends to be less of a driver in the third quarter, second and third quarters and more in the fourth through the first quarter of the following year.

But generally, we are getting I think a lot of exciting new opportunities. I know you are relatively hungry to understand those better, but just because of the proprietary and confidential nature, we can't go into a lot of those details, but there are some I think very unique opportunities in the active pharmaceutical range of products that next year, if they come to fruition, could be quite exciting for us.

Your custom synthesis inquiry still running north of 50?

Yes, yes, they sure are, Kevin, very strong.

And lastly, any change in elemental bromine prices?

Well, we have been studying that because the raw material and energy concerns are out there and chlorine continues to go up in pricing and so we are studying that as we speak.

Okay. Thank you very much.

Steven Schwartz, First.

Good morning. In the electronics with Polymer Additives, one supplier just this morning announced really strong results in the quarter, but then Texas Instruments disappointed and they gave kind of a down outlook possibly on the fourth quarter. Is there any way you can help us understand exactly what part of electronics you are more strongly tied to?

Well, we tend to be -- this is John Steitz, Steven -- really the broadest supplier in the industry, so there are a lot of touch points for us. There is industrial and home construction. There is automotive. In the electronics area, there is the printed circuit board market for small volume electronics and mobile phones. There is small connectors that our brominated polystyrene line of products plays into. It's a high temperature nylon and advanced applications like that, so it is a very broad portfolio.

One index that we have followed over the years has been the IPC index and a gentleman earlier ask me about that and our volumes have tracked pretty well with that and that is in the rigid PCB area. Let me just share with you some numbers there. In May, it was less than 1, it was 0.98. It went up to 1.01 and 1.02 in June and July and then spiked up a bit in August to 1.6. So that is a pretty good barometer for the end markets of tetrabrom.

The larger -- there is another report called The Bishop Report that we study that covers the connectors market globally and that gives us a pretty good picture of the end markets around the globe.

Okay. All right. Thank you. That helps. Moving into Catalysts with the price increase on FCCs, is there any way you can help us understand what the potential impact of that might be in 2008? I guess ideally what I would like to know is what percentage of your business is pricing below $3100 and by how much. I realize you may not be able to give all those details, but maybe you get an idea of what I am interested in.

Yes, I can get a pretty good idea of what you are interested in. It is a difficult question to answer because the mix in that range of products is fairly dramatic depending on the end application, but I can tell you that pricing year over year is up about 20% and there has been a lot of discipline in the marketplace to help achieve that.

Going forward, you have seen the announcement we have made that is in the range of $200 a ton. Unfortunately, we are faced with tremendous raw material escalation in that business as well. I mentioned -- Mark and I have both mentioned the ATH raw material that is going up. That is based on alumina and that is going up dramatically. Rare earths out of China is going up dramatically and the related transportation costs to get these products shipped around the globe is going up dramatically as well. So we are hoping for some margin expansion, but it is very difficult in this environment, especially when you think of $90 a barrel oil and the ramifications of that.

All right. Okay. Great. Thank you.

Mike Sison, KeyBanc.

Hey, guys. On HPC, you talked about the expansion coming onstream. Congrats there. How is that ramping up in terms of orders for next year and could you give us a little bit of color on what you expect -- sort of the fill rates in that new plant will be?

Yes, Mike, we are going hard now. We have been going hard this year as we have been sold out during the construction phase of this plan.

Your base HPC Catalyst business has been sold out?

Yes.

Okay. So if it is sold out now, that means you are ramping up capacity now in anticipation of good orders in your base business in '08?

That's right. So as we mentioned kind of in the text, the fourth quarter sequentially in HPC looks pretty strong. The first quarter of '08 looks very strong and will probably be a record quarter for us. So we need that plant up and running quickly to help us meet the growing demand in the first quarter and beyond. So we are hopeful that this plant will be sold out at some point towards the end of the back half of '09 and so the opportunities globally are coming in at a very strong pace.

So in terms of the order rates right now and granted you're going to get more visibility as the first half of '08 comes to fruition, is the HPC expansion partly, what, 20% sold out, 30%, 50%?

I think it would be in the 40% to 50% range in the first year and the second half of '09 would ramp up that second 50% of that capacity.

If demand is stronger, is it possible to have more of that filled up in '08 or is it sort of these are big orders and that is probably the best case at this point?

Well, ideally, yes. I mean if the '08 demand continues to build momentum through the course of '08, yes, we will keep that new plant running as hard as we can.

Get that running. And in the fourth quarter of '06, Catalyst segment volumes were down 24%. So you sort of have pretty easy comparisons going into the fourth quarter of '07. Should the volume growth in the fourth quarter in Catalyst be pretty pronounced based on what you're seeing?

Compared to the fourth quarter of '06?

Yes.

Yes, I think it is in the 15% to 20% range.

Right.

And that is just directional.

Directional, correct. Okay, great. And just switching gears a little bit. I don't want to sort of really belabor this, but the impact in profitability in Polymer Additives was 2% to 3% on margin based on the shutdown based on my math with Arkansas going to 50% to 60% at sort of that 16% level Polymer Additives is running at. What operating rate do you need to get Arkansas back to to get back to 16%, just back to like 70%, 80%?

Yes, again directionally, I would say that is the order of magnitude we are talking about.

Right. Then anything above that you start to get further improvements on that.

Yes, that's correct.

Great. And then lastly on Fine Chemicals, when you sort of take a look at the backlog -- one of the things the Fine Chemistry business is sort of known for is sort of winning new projects. How does that backlog of new project wins look as we head into 2008?

Yes, it feels really good. There has been a couple of unique opportunities that we are filling at a couple of our plant sites and one is actually kind of in the homeland defense area and another is in the ag area, very profitable -- some very profitable streams on new products that are looking really bullish into next year. There is a couple of opportunities in the pharma sector that are really exciting that we are not building into our financial planning, but if they happen could really take us up a notch.

And lastly, brominated pricing in Fine Chemicals, has that continued to go up?

It has been I would say relatively flat here the last quarter or so. As we enter into January of '08, Mike, we are looking at some more raw material cost pressure and so as I mentioned earlier, we are analyzing how we react to that right now.

Great. Thank you.

Dmitry Silversteyn, Longbow Research.

Good morning. Couple of questions if I may. A lot of them have already been answered. You talked about raising prices in FCC catalyst about 15%. Your latest price increased to $3100 a ton. Given all the cost offsets that you have on the raw material transportation, are we likely to see additional price increases in '08 and kind of what is your longer-term outlook for this business as far as pricing is concerned?

Well, we are still not at reinvestment economics and the long-term forecast I mean over a multi-year period are for a lot of volume growth here and we don't believe right now that the economics justify any significant investment. So we are working hard to get the economics right, so I think we have got to be very nimble at how we address this going forward.

And I think that is particularly true in '08. We have got to be in the position to continue to supply -- I think it is a critical raw material for this industry obviously and as we mentioned, we have got to continue to drive value through new technology, new products that really solve problems in the refining sector and we are working hard on that. But to say we are finished on pricing I would be really misdirecting you there. I think we have got to react to the raw material pressures and energy pressures and also provide products that really meet a growing slate of difficult problems in this marketplace.

To kind of take this a step further, at what point in time or when would you need to have capacity expansions at least beginning to meet the projected demand? Are we talking about having to do something with capacity in 2008 or 2009 or is it further out? I mean how much time do you have to get your economics in order before you really start jeopardizing your business by, not just you, but other players in the industry?

Yes, it is further out than 2008, 2009. It is in that range of three years out. So I think we have got to be very thoughtful in how we approach that.

Okay. So you have got couple of more years of price increases is another way of looking at it.

Well, we are going to keep continuing to try to generate value and earn our way here.

Very good. Let me follow up on the Fine Chemicals business. You have announced price increases for ibuprofen again I think earlier in the third quarter. Can you give us an update on how that is going and how successful your price increase from last year has been?

Yes, pricing year over year is up in the double-digit range, but, Dmitry, we also have, in this whole chain of producing ibuprofen, we use a lot of organics and these organics like isobutylene and toluene and a lot of products like that are used in our process. So they are very just inflationary because of the petrochemical base for that.

So margin overall has hung in there. We are starting to see some increased demand in our ibuprofen business. We feel good about that. And we feel especially good about the quality that we bring, especially compared to imported products from around the world and the concerns around importing raw materials from China and India and places like that. So we are pushing hard on that. So we have got a good product.

But I would have to say that in our Fine Chemicals sector again ibuprofen is one product of a fairly large portfolio and it is nowhere even close to 5% to 10% of our overall profitability in Fine Chemicals now. So it is just a good solid product that is part of the overall portfolio.

I got you. Thanks for putting that in perspective. And then one final question on Polymer Additives, particularly the tetrabrom and brominated (inaudible) in general, my understanding is that under the European REACH program, this is one of the first chemicals that is being examined. Do you have any early feedback on how the process is going, where you are in getting those products through the REACH process in Europe and do you see any risk to continued volume growth or even acceptance of that product in the region?

Yes, there is a broad class of products that have to go through REACH and some of the FRs are early on a part of that assessment. The preliminary results we have from tests we have done and others have done is that we think these products for the most part can go through REACH without difficulty.

There are one or two exceptions out there where I think the potential toxicity of the molecule, if it were to find its way in the environment as such, we will have to mitigate risk or move to a different product. So REACH to us fundamentally is not a risk. It's frankly the right thing to do to test these products to make sure they are okay.

There has been some concern raised about bromine broadly and the use of bromine broadly. We have a lot of initiatives underway to manage that and try to manage that well. So there is the court of public opinion we are having to deal with and I think we can deal with that successfully. If we don't deal with it successfully, as you end this decade and go into the next, you could see some fall-off on volume.

Okay, all right. Thank you very much.

Edward Yang, CIBC.

Thank you, good morning. Mark, you mentioned fourth quarter should show modest sequential growth. Was that for revenue or EPS?

Well, we don't comment on EPS near term like that. So on a revenue basis, we should see some modest growth.

Okay, thank you. And on Polymer Additives, I understand the acceleration and improvements from August, September, October to November, but to get a better sense of the velocity and the slope of potential year-over-year improvement in 2008, John mentioned the 2005 parallel. I think at that time in the third quarter '05, your Polymer Additives volumes were down 7% and a year later, they were up 11%. And I would like to get a better feel this go around if things play as they did in the '05, '06 playbook, what sort of volume, year-over-year volume growth recovery we should see in '08 for Polymer Additives.

Yes, Ed, we are still cautiously optimistic, as I said and I am hopeful we can get -- I don't think it is going to be as dramatic as 11%, but somewhere in the high single digits I think is possible as we rebound out of this downturn on volumes.

Okay. And you mentioned the strong outlook for Catalysts for 2008 and I think John was trying to back in to a volume growth number for 2008 during the Q&A. Would you hazard to put forward kind of a range in terms of what we should expect to see in terms of HPC volume growth for 2008?

Well, we have kind of mentioned what the capacity addition was for the new HPC plant and so if you look at that as 20% to 25%-ish kind of thing and what we are saying is that we expect through the year for that to be about half full through the year on an annualized kind of basis. So you take that number and cut it in half, so 10% to 12% on HPC volume growth is kind of the thing that we would work hard to deliver.

Okay, thank you. And lastly on Fine Chemicals, the long-term margins for that business? Is that still something you would target in the 20% range? It has been moving around a bit.

Wow, that is 20% -- I can see quarters where we can hit peaks like that because we have had this kind of second quarter where everything ginned up and we got some nice orders out, plants all ran well and volumes were relatively robust. So I can see peaks like that, but to say that that would be sustainable, I think it is going to take a number of years for us to get to that level.

We are in the process of our planning programs for '08 through 2010 right now and we will be solidifying these targets I think as I promised many of you by the end of the year, at the turn of the year. So we are going to target for margin improvement in Fine Chemicals. We feel good about that. But to say 20% over the next 18 months I think is too ambitious for this business right now.

Okay, thank you.

Doug Shaw, UBS.

It's Chris Shaw, not Doug. How are you guys doing? Just to follow up I guess on what Ed was saying. I assume some of the sequential margin decline in Fine Chemicals was because of that inventory reduction. Would you expect the margin to be back up or sequentially up in 4Q for Fine Chem?

Yes, we are working hard to do that, Chris. We had some issues that we had to deal with in the third quarter and we had -- we have got some of these ag intermediates that are picking back up in the fourth quarter so that will all help us. I think -- there is no way it would be 20%, but I think it would be better than 15%, in that 16% plus range.

And then I guess curiously you were just talking about the FCC business not being worth reinvesting in it right now, but are any of the competitors out there adding to expansion right now ahead of sort of the growth that's coming up?

I think there is a difference between expansion and debottlenecking and I think there has been some degree of debottlenecking and some degree of maybe consolidation of some manufacturing to a degree, but a major expansion will be a major investment for this market and that is why I think that has to be done in a very thoughtful manner. So it could be several, $200 million to $300 million investment depending on the size and scope of the manufacturing plant.

As far as you know no one has plans to do that yet?

No.

Not a major one, but I think BASF has got an incremental expansion underway in Georgia.

Okay. And then finally, you have got about $100 million in cash. What are your plans for cash? I forget the priorities.

Our priority has been to invest internally. We have grown CapEx a little bitter over the last couple of years. We have invested in R&D. We have increased our dividend double digits this year and once we get our outlook set, I hope to be able to do that again to increase the returns that way.

I think I am probably slightly suboptimal on debt to cap right now, so I have cash available and we have not hesitated to buy back our stock should that look to be good investment. So that is another alternative, another way to return funds to shareholders.

Are you still looking at bolt-ons and such?

We are always looking at M&A, that is the case as it has been the last couple of quarters. It's still I think more of a seller's than a buyer's market, but we are always looking to grow that way also.

Okay, great. Thanks, guys.

Guy Baron, Dune Capital.

Hi, guys. I just wanted to go back to FCC catalyst for a second and you almost answered my question a few callers back when you talked about discipline in the industry. But wondering if you could give a little bit more detail as to what -- as to how your competitors have reacted or are reacting to the pricing actions that you have taken in FCC or I guess and how your expect them to respond to that.

Well, I think we're -- my belief is is that we are all under the same raw material pressure. There is a lot of common ingredients from ATH, silicates, rare earths out of China, all of these raw materials are going up dramatically and so my belief is we are all under similar cost type pressures. So therefore we have been forced to announce this price increase and we are trying to implement it through the course of next year and we have been successful in doing that over the last 18 months. So my hope is that our customer base will continue to understand the position we are in and continue to be -- to work with us to get these prices up.

Okay. So the refineries have for the most part taken it in stride. When do you expect -- at what price level do you expect some pushback on that if at all?

Well, I mean there is always -- purchasing organizations are obligated to do their job and there is always a lot of pushback, so we just have to continue to try to drive the importance of value and try to really focus on solving some difficult technical challenges.

The biggest technical challenge is the heavier and heavier crude slate that has got to be utilized in the worldwide refining market today and FCC catalyst can really help solve that problem.

And just lastly, are you seeing any of your competitors, and I guess there are only two of them, but are you seeing either of them do anything irrational or try to grab marketshare on the heels of your pricing actions?

Well, it is hard to isolate individual situations and say there is a trend there. There is always going to be situations that come up, but generally there has been pretty reasonable support for this.

Okay. Thanks very much.

Aditya Narayanan, SAC Capital.

Thanks for taking my question. Two quick ones if I may. First one, I know you guys don't give specific earnings guidance, but when you talked about the earnings for the second half of the year on the second-quarter call, you talked about being flat with the first half, but just working through some of the trends you guys talked about earlier, I come out with the fourth quarter possibly being the biggest quarter of the year in terms of earnings. Am I directionally correct there?

I don't know how you did the calculus, Aditya, but --

I can just walk you through what I was thinking. I mean essentially you talked about Polymer Additives improving sequentially. You talked about the HPC catalyst volumes getting better in the fourth quarter and moving on from there and then Fine Chemicals, I am assuming that you get a slight improvement in elemental bromine demand.

And then you have the tax rate going up to a more normalized 23.2%, so that will offset some of those things. So it will probably be -- we execute all out, it could end up that way and if we don't execute all out, maybe it won't. I am getting close to giving guidance, so I better be quiet.

Fair enough. And then just a quick follow-up, not to beat a dead horse, but am I doing the math correct that if I add up the $0.05 headwind in Polymer Additives, the $0.02 in Fine Chemicals and the $0.01 for Jinhai Albermarle, you essentially had an $0.08 one-time cost in this quarter offsetting the $0.06 tax benefit. Is that the right way to think about it?

Those are your words, but you got the math right.

Okay, cool. Then finally just one last question in terms of thinking about '08 catalyst demand. I guess you guys have given some color in terms of HPC volumes. I am just trying to layer in what else the other legs are to the revenue story for '08 for the segment as a whole. I am thinking you've got 15% FCC price and then polyolefin catalyst, I know it's a smaller piece, you've probably got another good year of pricing. Is 20% revenue growth top line for that segment overall, is that of fair number or -- I am not trying to nail you guys down to a number, but I am just wondering directionally if those are kind of completely incorrect or are they a fair estimate?

I know you are not trying to nail us down for the number, but you are getting pretty close to it.

Actually I wouldn't mind nailing you guys down to a number.

I think that 20% is probably a high number. 15% may be more in line with how we do our calculus and again, as we end this year and communicate year-end, we will communicate more clearly what we expect for next year.

You should note though that moly plays a pretty big role in that and if we saw deflation for instance in moly, you could pull $60 million off that top line without even thinking about it. So you've just got to be careful in there how you use revenue, what you expect of revenue on the Catalyst side because there is so much of a metal impact in that number.

And then finally one last one for Rich. Just thinking about the capital structure and kind of how underlevered you are as you referred to earlier, is it that, at some point, where the stock price makes you get more urgent in doing something more like doing a buyback? What is the right way to think about how long you guys will let your balance sheet just stay in this fashion versus doing something more aggressive?

Well, I think my priorities are to continue the growth whether they be organic or by doing M&A. That is a top priority. But in the absence of those type of opportunities, we have not hesitated to buy back stock in the low 40s or cheaper. So that is kind of where my head is and I think given our outlook for next year, it is a good investment at that price.

Fair enough. Thanks, guys.

Dana Walker, Kalmar Investments.

Hopefully I will be last for [Paul's] sake. Good morning. With the start-up of the HPC facility in Bayport, could you describe what is entailed in bringing up a new facility?

Yes, sure. Once it is mechanically complete, you have to go through really a series of dummy runs if you will where you run the individual pieces of equipment on water or on compounded material, but you really run individual sections to verify that it is okay. Do all your -- if you do that, you can doublecheck all your instrumentation and trip logic.

You make sure it is all clean and crisp and then there is a series of catalysts that will run through it to produce commercial quantities. These are small volumes. We go ahead and produce commercial quantities and then we put those through a battery and series of tests to validate that it is good quality catalysts that meets the standards that the industry expects of us. So that is the process that is underway as we speak today. As we get towards the end of this year, we think we can start to make proving commercial runs of product for ourself next year.

So it is not sitting there idle right now. You have mechanically completed the process and you are beginning the test initiatives necessary to run it through its paces?

Yes, the team is -- the team over there is just doing a herculean effort to manage this in a safe, environmentally-sound way, not have any accidents and start up the equipment in a good fashion so we don't make any mistakes with that as well. So there is a lot of activity underway to get us to a point where we actually have validating commercial runs of product out of that unit.

In the past, moving to margins, you have described how at the segment level you would like to see your businesses in the 15%, 16%, 17% range depending on which one we are talking about. How does raw material inflation as you look at '08 and likely operating rates affect your confidence in those types of segment margins?

Well, we are confident that on an apples-to-apples comparison these businesses are going to be 15% and greater segment margins, income margins and we pledge to you guys as we end this year and start next that we will talk about that in a futuristic sense. What are our targets now that we have established that sort of 15% benchmark?

The watch-out for all that is really the apples-to-apples comparison because a $10 per ton change in moly, $60 million, $70 million, $80 million -- I mean a $10 pound change at $60 million, $70 million, $80 million of top line, that can have a big impact on margins in a favorable way as a for instance.

The flipside is is if we get a lot of inflation like we are expecting in aluminum trihydrate John is going to have a hard time passing all that through and I am worried that that can pull down margins in Polymer Additives for a while until we work that through. So that is an annualized kind of number, not a quarter-to-quarter number and we would expect to be able to keep those kind of numbers as we go forward.

Rich, how would you suppose your '08 effective tax rate assumptions will compare to the average you foresee for '07?

Given the increase in profitability that we anticipate to have next year and the fact that the bulk of that increase will be in tax jurisdictions that probably has a tax rate with a three or a high 20% type rate, we have kind of noodled through a 20%, 24% to 24.5% range is kind of where I am looking at the tax rate going next year.

That is all for me. Thank you very much.

Andrew Shirley, Ivory Capital.

Hi. I noticed that your Catalyst margins declined sequentially after a strong 3Q '06. And I was wondering whether that was entirely tied to volumes and is that a normal trend you expect to repeat in the next few quarters?

Well, we include -- when we look at (technical difficulty) margins in Catalyst, Andrew, we include the JVs that support that business and so year over year, if you look at third quarter of '06, we had -- my numbers indicate 17.6% segment margin and went to just under 19%. Then sequentially we saw it go from 15.6% to just under 19%. So we feel the team has done a really good job there and if we need to clarify some numbers with you, we would be happy to do that. But really across the board, the revenues were down slightly in Catalyst, but that is primarily due to a very strong demand in the third quarter of '06 as some new regulations kicked in prior to the fourth quarter of '06. We saw of big step-up in our demand for HPC catalyst and very strong mix last year in the third quarter.

Okay. I guess I was looking at it before the JV interest.

Yes, and the primary issue there would be the HPC impact. We had some very strong, very robust sulfur-reducing catalyst systems ship out in the third quarter of '06 to prepare for these new regulations kicking in.

Andrew, this is rich. If you only look at the operating before JVs and even before minority interest, you can get a distorted view of how we -- a different view than how we run the business. So it is really important the way we run the business as you add that JV income in, but also you take away the minority interest because we don't count -- we don't want to count our partners' interest in some of the businesses that we consolidate.

Okay. Well, maybe I will look at the numbers that way and then follow up off-line.

Okay.

Thank you.

At this time, there are no further questions in the queue. I would now like to turn the call back over to Sandra Rodriguez, Director of Investor Relations.

Thank you. 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, everyone.

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