雅保公司 (ALB) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2008 Albemarle Corporation earnings conference call. My name is Cynthia and I will be your operator for today's call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to your host, Ms. Sandra Rodriguez, Director of Investor Relations. Please proceed.

Thank you, Cynthia. Good morning, everyone, and thank you for joining us today for a review of Albemarle's first-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 quarter-end review process.

Please note that we have posted supplemental sales information, as well as reconciliation 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, everyone. We're pleased to have the opportunity to share our first-quarter results today and we all look forward to answering your questions after a few remarks.

Before I comment on Albemarle's consolidated results this quarter, I will mention a few strategic initiatives. First, you may have seen our recent press release announcing we have signed a letter of intent to acquire Sorbent Technologies. Sorbent is a full-service mercury control provider for coal-fired power plants. Combining Sorbent's proprietary technology with Albemarle's experience in commercializing innovative new technologies provides a great opportunity for us. We're excited about shaping this new market for bromine, one that could significantly expand the demand for US bromine near-term and global demand over the longer term.

While this acquisition is small in comparison to others we have done, it will be a good strategic fit in our bromine portfolio and has tremendous growth potential, which is being driven by federal and state regulations to control levels of mercury emitted into the atmosphere. These regulations, which have already begun in some states this year, will rapidly expand throughout the United States in the next two to three years, creating stepout growth prospects for companies participating in creating solutions for power generation.

We have commenced due diligence and expect to close the Sorbent acquisition during the second quarter.

Another exciting strategic project we have underway is the expansion of our antioxidant plant in China. Our recent acquisition of a majority ownership position in our Jinhai joint venture, coupled with this significant expansion, will solidify our leadership position in Greater China.

Our consolidated results include an after-tax charge of $2.1 million, or $0.02 per share, for costs associated with the consolidation of a number of our offices. Looking ahead, we expect to take additional steps in 2008 as we seek improvements in operational and transactional efficiency. Rich will provide some additional color on SG&A, and I look forward to sharing more details about this subject in future calls.

During the quarter, the Company also purchased approximately 4.1 million shares of Albemarle stock at an average price of $37.20 per share. Subsequently, our Board of Directors authorized the Company to repurchase up 5 million additional shares and also increase the Company's quarterly dividend to $0.12 per share, allowing the Company to continue to deliver shareholder value through buybacks and dividends, while maintaining the flexibility to invest in the Company's long-term growth.

Let me now shift to an area you have all been hearing a lot about. That is inflation. If I exclude moly, over the last three years, our raw material energy costs are up $160 million, or about $0.90 per share after-tax. If we add moly, our costs over the last three years were up roughly $180 million.

As we enter 2008, we are seeing unprecedented escalation in raw materials and energy. For the year, we now expect our input costs to increase $190 million. That is $160 million in raw materials and an additional $30 million in energy, or $1.60 a share after-tax. Said another way, we expect 2008 inflation to exceed that seen cumulatively over the last three years.

While it has been very challenging, the Albemarle team has done a great job managing this inflation in the first quarter, and in a minute, John will provide more color on the impact of inflation on various businesses and how we intend to manage this challenge going forward.

Now moving on to the Company results. Regarding our first quarter, it is my pleasure to announce record sales for the Company of $668 million, a 13% improvement over the first quarter of 2007, which yields record net income for the quarter of $65 million, or $0.70 per share, excluding the $2.1 [million] after-tax severance charge I have already mentioned.

These results are the product of a tremendous amount of effort to grow the Company's profits in the face of hyperinflation. We reported nice year-over-year and sequential improvement in sales in each of our segments. Catalysts continues to report strong results, with over 30% increase in operating profits. From the first quarter 2007, 220 basis point improvement in margins.

Our Fine Chemicals segment delivered their highest quarterly sales since the Thann divestiture, and strong performance in brominated flame retardants drove polymer additives to record revenues, while segment margins took a big inflation hit.

Looking forward, we're off to a great start in 2008, with better top-line growth and stronger Fine Chemicals and Catalyst portfolios than we have ever had before, yet a more challenging cost position than we expected even a few months ago.

During the second and third quarters, when higher input costs combined with lower volumes of HPC catalysts compared to Q1, we should expect earnings to be somewhat lower than those we were able to deliver in Q1, before we end the year strong. Nonetheless, even in such a challenging environment, our businesses are capable of delivering solid results, and we expect to have a very successful 2008.

With that, let me turn it over to John Steitz to comment on our operating results.

Thanks, Mark. Good morning, everyone. Before I go into the segment results for the quarter, I would like to comment on the raw material and energy costs as well. The unprecedented escalations we're seeing this year are broad-based across most materials and affecting all three of our business segments.

Raw material and energy costs are up over $52 million in the first quarter of 2008 compared to the similar quarter of last year. About half of that increase put significant pressure on our Polymer Additives and Fine Chemicals segment performance this quarter, which I will address shortly.

The other half is in metals and rare earths consumed our catalyst products. With crude oil approaching $120 a barrel and natural gas exceeding $10 per million BTU, we do not foresee the headwinds slowing as these costs push through our supply chain. To weather this inflation, we will continue to work extremely hard at offsetting most of this material and energy inflation with pricing and cost-saving initiatives.

I will begin with our Fine Chemicals segment, reporting net sales for the quarter of $147.5 million, an increase of 6% year-over-year and 12.5% sequentially. Segment income for the quarter was $21.5 million, up 22% over last quarter, improving segment income margins to 14.6%.

Double-digit sequential improvement in Fine Chemicals' top and bottom lines demonstrates very solid performance in the face of escalating raw material, energy, and transportation costs. Increased pharmaceutical and agricultural intermediate sales, as well as pricing gains achieved in some of our performance chemical sectors, helped offset raw material headwinds.

Our completion fluid sales lagged the first quarter '07, but continued to show sequential improvement, particularly in the Gulf of Mexico, where we are starting to see shifts to more deep-well drilling in high-pressure formations, one of the benefits to our business when oil and gas prices are at historic highs.

We continue to build the Fine Chemistry pipeline, partnering with drug manufacturers on new medications for hypertension, cardiovascular disease, smallpox vaccines, and HIV. Our ibuprofen business is showing solid signs of growth this year.

We're building a brand among life science companies and have a number of new add compounds rounding out our customer and asset base.

Polymer Additives reported record net sales for the first quarter totaling $245 million, an increase of 14% from the first quarter of '07 and a 5% increase from last quarter, great progress towards turning the corner from a down year in '07 sales revenue. With that said, facing tremendous raw material and energy cost inflation, Polymer's first-quarter segment income of $29.8 million was down slightly sequentially.

Ongoing pricing efforts are starting to help offset some of the inflation costs, and we expect to see more coverage as we gain traction on some of the recently announced price increases rolling out this year.

Our Flame Retardants business, especially brominated flame retardants, saw increases in volume and revenue for the first time since 2006. We started seeing the turnaround at the end of '07, with fairly strong demand continuing in the first quarter of 2008. We continue to see positive momentum heading into the second quarter.

Looking into some of the markets our Flame Retardants serve, electronics was particularly strong this quarter versus the first quarter of 2007. The book-to-bill ratio reached 1.05 this quarter, indicating stronger sales growth in the global connectors market. Wire and cable, serving home-building and automotive markets, were somewhat weaker than we expected going into the quarter.

Now moving on to Catalyst, where we reported record net sales for the first quarter of $276 million, driving year-over-year and sequential growth of 17%. Segment income for the quarter of just under $52 million improved 31% from the first quarter of '07 and 24% from last quarter, a great start to 2008 for this business.

Polyolefin Catalysts delivered a quarter of solid results with double-digit profit improvements driven by improved volumes and pricing gains in our organometallic products. Certainly, a factor in the outstanding quarterly performance from Catalysts was the contribution from our new, lower-cost hydroprocessing Catalyst plant in Houston, where we are able to manufacture high-quality HPC product. The added capacity allowed HPC to deliver record sales revenue.

Our team's successful value-pricing efforts in FCC Catalysts paid off in offsetting rising cost inflation in raw materials such as rare earths, aluminous silicates, and natural gas, and also contributed to year-over-year segment profit improvements.

We continue to work with refineries to find economical solutions to the challenges they face with processing heavier, more sour crudes. Albemarle's ability to anticipate and quickly respond to these challenges and to market shifts, such as what we are seeing in the gasoline and diesel fuels markets, sets us apart in value delivery and continues to drive growth for this segment.

Our increased investment in research and development clearly demonstrates the importance and value we place on technology and being the leader in innovative catalyst solutions. With that, let me turn it over to Rich for comments on the financial results.

Thanks, John, and good morning to you all. The items I would like to highlight on today's call include discretionary expense control, taxes, cash flow, and our quarter-end balance sheet and financial position.

Unallocated corporate expenses were $12.8 million in the first quarter, down $1.9 million from the prior year and essentially flat with Q4 2007. Anticipating the strong material cost headwinds we have experienced and the guarded economic outlook we are all reading about in the paper, we put a stranglehold on all discretionary spending companywide and sought to keep spending flat with Q4 ex FX exchange impacts.

The SG&A leverage we achieved at 9.5% of net sales versus 10.6% in Q1 last year is a reflection of this cost discipline. We intend to continue to keep our eye on the ball on this area and are launching several companywide cost efficiency initiatives as it relates to our operational and transactional processing efficiency.

Taxes. Our effective tax rate for the quarter on a reported basis was 21.8%. It is 22.3% if we adjust for the tax benefit related to the special item charges for severance. The year-over-year improvement in our quarterly effective tax rate is principally due to the full year of benefit we will have from our Belgian-based trading and finance companies. Our tax rate is lower than my previous estimate of 23.5% to 24.5% communicated on our year-end call based on our current forecast of the level and mix of income and the benefits from our tax planning actions.

Our EBITDA this quarter is $120 million, up 8% from last year and 12% sequentially. We ended the quarter with cash and equivalents of $135 million. CapEx for the quarter was $20 million and our full-year CapEx plan is now $90 million to $100 million. Depreciation and amortization was $27 million.

As Mark mentioned previously, we repurchased and retired approximately 4.1 million shares, paying $151 million, or $37.20 per share, this quarter. Between this repurchase and our Q1 dividend in 2008, we have already returned $20 million more to shareholders than we did in all of 2007.

At quarter end, we have consolidated debt of $880 million, including $70 million of debt from JBC, our Jordanian bromine venture, and Jinhai, our Chinese antioxidant ventures. $409 million of our debt is fixed-rate and $471 million is floating rate, a 46% to 54% split. Our floating debt interest rate is 3.2% at quarter end. The weighted average interest rate for Q1 was 4.6%.

Net of $135 million cash on hand and excluding $43 million of nonguaranteed JBC and Jinhai debt, our net debt is $702 million, up $152 million from year-end. Our debt-to-cap ratio is 40% and our net-debt-to-cap is 36%. These are up 500 and 600 basis points respectively from year-end levels, principally due to our financing of the stock repurchase in the quarter.

Given our outlook for the business and cash flow for the remainder of the year, we are comfortable with the slightly elevated level of debt.

With that, I will hand it back to Sandra.

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

(OPERATOR INSTRUCTIONS) Jeff Zekauskas, JPMorgan.

In the Catalyst area, your volumes were up 3.4%. I would have thought they would have been stronger with the new hydroprocessing catalyst capacity you brought on. Were there parts of the Catalyst business that were up and parts that were down, and what were they? And how many tons of hydroprocessing catalysts did you sell?

Well, because of the competitive nature of HPC, we really would not want to probably broadcast the actual volume. But HPC volume in the first quarter was down year-over-year, slightly -- I would say in the range of about 5%.

But we still -- in '07, that plant was sold out, so fortunately we had the new plant kicking in in the first quarter and were able to make product for the growing volumes there.

But your observations about the overall Catalyst business are right on, because the FCC Catalyst volumes were down year-over-year. And there's a big mix effect, because our FCC volumes are 4 to 5 X what our HPC volumes are. So that hence gives you the net volume impacts that you observed.

I'm sorry -- you said HPC was down 5% or up 5%?

Down year-over-year 5%, but up sequentially, like, 25, 30% -- in that range.

All right. Secondly, a question for Rich. How did you -- how did the shares outstanding get to 93.7? I thought you bought shares from the Gottwald family in February.

We did, Jeff.

So on an average basis, why would your shares go down as much as they did?

It is the calculation of EPS based on average shares. So it wasn't the full amount that they came down. But net-net, I think was a pro rata amount, and you will see that more fully reflected as the year goes on.

What I mean is that if you bought 4 million shares in, say, the first two months, wouldn't that just drop your shares outstanding by about 2.7 million?

But then you have certain buybacks we had during the course of last year that were not fully reflected then, right? So that (technical difficulty) kind of catches up, and net-net you get the net -- reduction that we had.

So what are your actual fully-dilated shares or your actual average shares right now?

I know we had 92.5 outstanding at the end of the quarter, I believe. I think that's what it was.

All right. I will get back in the queue. Thank very much.

Mike Judd, Greenwich Consultants.

Congratulations on a good quarter. You did a good job buying back shares last quarter, and you talked about your net debt to total capital. You know, given the gyrations and the volatility that we've seen in the overall stock market, would you be willing to step up to the plate again should we have another swoon in the market and acquire additional shares? Or are we at a point now where there are other things that you would prefer to do with the cash that you're generating?

Yes, Mike, this is Mark Rohr. We went back to the Board and upped our authorization to 5 million shares. So we're standing by, and we feel that, broadly speaking, our share price remains undervalued. Having said all that, though, we continue to look at a lot of acquisitions.

So I think as we go forward, you're going to see a measured movement on our part to use that cash to grow the Company through acquisitions, organic growth, capital Rich talked about briefly, and then, as we feel it is appropriate, to be back in buying shares as well.

Okay. Just secondly in the Catalyst business, I wonder if you could just give us an update on what business conditions look like in April and what your expectations are for May and June.

Starting out in our Catalyst business, April started out pretty strong. But you have to keep in mind that we are anticipating our HPC volumes to dip in the second and third quarters and picking up in the fourth quarter. So overall, our projections for the year are intact. But generally across the Company, we are off to a good start in April, not only in Catalysts but also in our Polymer Additives business as well.

Mike, I think you know that a lot of these refineries take their outages as they prepare for gasoline season. So there's this natural sort of ebb and flow of HPC volumes that John was talking about, strongest in the first and fourth and weaker in the second and third.

Thank you very much for the help.

Bob Koort, Goldman Sachs.

Could you guys talk a little bit about what you are seeing on new refineries and what your success rate is bidding on catalyst charged to those new refineries that might be built in emerging markets?

You bet, Bob. In fact, we just had a review of our UOP alliance the other day. And our UOP alliance in hydrotreating continues to gain a lot of victories, driving primarily our technology into new refining throughout India and the Middle East. So we feel we are making a lot of good, solid gains there, and this is creating a pretty bullish longer-term view for us.

So you are winning a disproportionate amount relative to your installed base today, or is it (multiple speakers)?

We are winning at a rate that is probably 20% to 30% higher than our traditional share in that market. So we feel pretty good about that.

On Polymer Additives, I know you'll be reluctant to give us specific margins by specific application or product type, but can you talk about maybe where there's the greatest variation in profitability in that product line? Your margins have obviously come down quite a bit. Is it broad-based or is there one or two particular product lines that are taking the lion's share of that erosion?

Yes, that's a great question. I think the majority of the hit we're seeing -- we are seeing a lot of inflation in phosphorous and related products. So our phosphorous flame retardant business continues to struggle. And in our stabilizers and curatives business, where the whole phenol chain kicks in, as oil went up so rampantly in the first quarter, that business is struggling, and there is basically a built-in lag there that we see in terms of getting that pricing up.

But we seem to be so far successful. We're getting some of our brominated flame retardant prices up as we speak. And we are also successful in some of the stabilizers, curatives, and antioxidant businesses. So we feel pretty good about that.

Overall, I think we have seen with this margin erosion in our Polymer Additives business, I think there's going to be, probably towards the second half of the year, where we see margins up to a more acceptable level. And that being in the 15.5 to 16% range. But we do for the year see good sequential improvement as the year progresses in Polymer Additives.

Last question, if I might, for Rich. Obviously, you had some successful belt-tightening. You mentioned maybe tensioning up the belt a bit more. You have the head count reduction that you took the charge for. What can we expect on cost metrics as we go into the second half of the year?

What I would tell you, Bob, is that I think three or four or quarters in the last five years we've kind of hit the glass ceiling that we call it, which is about 9.5% SG&A to sales; and we were there again this quarter.

Some of the things we are looking at -- and I think I probably have to say watch this space, because we will be talking more about this at our investor meeting in May -- are designed to break through that glass ceiling, so to say. So we're looking at things both operationally and our footprint, manufacturing footprint, and also SG&A effectiveness that we think will have a major impact on that as we go into the future.

You know, these are things like implementing best practices, fully integrating our acquisitions, looking at the potential of kind of cost arbitrage in terms of where we run our transactional processes out of type thing. So hopefully, that is a little bit of a lure to get people at our investor meeting in May.

Got it. See you down here in a couple weeks.

Laurence Alexander, Piper Jaffray.

Actually, Jefferies. Just wanted to follow up on a couple of points. First, on the raw material headwinds for this year, was that including or excluding moly?

That includes it, Lawrence.

So what would it be excluding moly?

Probably 160 versus 190.

Given the rapid increase in your estimate for the raw material costs -- each time I talk with you, it seems to move higher -- how are you thinking about your longer-term segment targets and your margin targets for this year and then for three, four years out?

You know, when we -- let me start this off and John may have a few comments he wants to throw in, Lawrence. But you recall that as we ended last year, I think the number we threw out on the table was $80 million, was our first tranche, our first cut at this number. And that number has gone up from $80 million to $190 million in literally three months. So the rate of inflation really is frightening.

And as John mentioned earlier, the team is working hard to get ahead of that. In some areas, we have been able to do that, but it's taking its toll, particularly in Polymer Additives and some in Fine Chemicals.

Broadly speaking, we don't see this as being -- if you take out sort of this intermediate period, we don't see this as being something that should change our real margin targets overall. There shouldn't be any reason it should. And we're not disadvantaged to anyone. In fact, we think we have some subtle advantages in a few areas. So I don't think it changes the margin target.

But that rate of inflation is a pretty frightening thing, and it can cause people to do goofy things and make mistakes. So we're just very nervous about how we manage this transition to some higher level of cost that is more stable.

John, you want to make any comments on that?

Yes, I think it hasn't altered at all our views on the business segments. I think in Polymers, there's a bit of a lag we're dealing with here, Laurence, and really that's about it.

Okay. If I recall properly, on the moly side, you have more trouble passing through those costs when prices are volatile. I mean your customers sometimes push back on the swings.

That used to be the case, but now we have really instituted more real-time pricing mechanisms, particularly where that volatility exists. But that used to be the case years ago, but no longer is the case.

I think the takeaway on this today is that when we used to talk about inflation with you guys, we would talk primarily about metals, because that was the issue that John and the team were most engaged with. Today what we're seeing is inflation everywhere. So it's just really -- it permeates the entire aspect of everything we buy, and I think many companies are seeing this.

So managing it becomes actually a more complicated scenario, as John is talking to. So we actually are -- I don't want to say metals aren't an issue. ATH is something we've struggled with, but broadly speaking, it is the nature and the scope of inflation now that is causing us the biggest challenge.

Lastly, John perhaps, if you could just give us a little bit more detail on the demand outlook for some of the smaller businesses, both in Fine Chemicals and in Curatives and Stabilizers.

Yes, let me -- I will start with Fine Chemicals, Laurence. Basically, we're seeing pretty good demand in bromine. We are seeing as a result of that pretty good pricing momentum, particularly out of China on pricing. So overall across the bromine chain, pretty solid, including a pickup in activity around our clear brines business. So it is down year-over-year, but we're seeing nice improvement on a sequential basis in performance chemicals.

In our fine chemistry business, we're getting really hyped up about some of the new opportunities, not only in ag -- there's some proprietary work we're doing in ag for some big ag companies, which is very exciting for us -- but also in fine chemistry. We have announced a number of kind of branding opportunities with Anthera and a smallpox vaccine with SIGA where J&J is actually involved in that. So we're getting pretty pumped up about the prospects of commercializing our pipeline in Fine Chemicals.

The Polymer Additives business is the biggest volume because all you have to do is listen to CNN for a little bit and you go, my God, what is going on out there? But we continue to see a lot of resilience in our Polymer Additives volumes, and we're starting out April pretty strong. So overall, brominated flame retardant volumes, we see a good year-over-year volume growth. I'd say more moderate sequentially, but good year-over-year volume growth there.

The mineral flame retardant business was soft in the first quarter, and I think that's a pretty good reflection of a couple of the markets, home-building and automotive. Automotive was in pretty sad shape over the last few months. So with that said, pretty good strength in electronics and maybe a little weaker in the construction side of things.

Okay. Then just to flog the horse a little bit, the curatives and stabilizers, the more niche markets, they are holding up fairly well?

Yes, those are holding up pretty well. We've got a new curative product that we call SD-10. We made a small announcement on that about a month ago, and getting a lot of excitement over that for lining -- for pickup truck linings and things like that. Very durable curative, very broad-based product that does quite a good job. So overall, curatives we're pretty excited about it.

The antioxidants business, volumes have held up pretty strong in China, and that business continues to do as we had expected when we initially did the deal. So that is meeting our expectations there. Fuel business, fuel antioxidants has been pretty strong as well.

Thank you.

Jason Miner, Deutsche Bank.

Just recircling to the raw effects, I wonder, are you making any structural changes in either how you buy or how you sell your products in light of this new environment?

Jason, let me give that a shot. If you look broadly speaking, we have been very successful in creating pressure on suppliers by bringing new people into the market, things like that. We have done a good job collaring raw material so that rate of inflation would be checked or limited. But those days are gone, I think.

We're seeing -- everyone out there is desperate to cover these costs. So the market, even if it is a contractual market, has just a lot more volatility to it. And suppliers are demanding to have the ability to pass through costs at faster pace than they did historically. So we continue to do everything we can, but I think in this period of, as John said hyperinflation, the willingness on the part of suppliers to seek incremental volume at the expense of potentially foregoing the ability to pass through our costs is just not there.

The only thing I would add, Jason, is we have made an absolute practice, a disciplined practice, out of making sure that our purchasing leadership is communicating what is going on in these raw material and energy markets almost on a daily basis. We want to make sure all our global sales and marketing commercial people are aware of what is going on, so a good, solid explanation and rationale can be given to our customer base so they understand what's happening here.

I think that is probably the most significant behavioral change we have enacted over the last six months. We have done it on a more routine, more processed way. There is a recognition of this issue, is probably one of the most important aspects that a specialty chemical company can demonstrate right now.

That's very clear. Thank you. It sounds like it would be fair to characterize the selling environment as broadly supportive amongst your competitors in passing these sorts of things through.

To varying degrees, I would say, yes.

Are there any specific trouble areas that you'd highlight where folks might be trying to take a share in this environment?

Well, I can't say that in this environment some of our competitors would deliberately try to take share, but I do know that the cost inflation in FCC Catalysts has been higher on an incremental and on a sequential basis than any of our other product lines. So the pricing gains we have made in FCC Catalysts have not covered the raw material inflation in that sector on a sequential basis. So there has got to be a recognition of those input costs that are going up dramatically, and something has to be done about it.

Okay, yes, that's helpful. Then just to focus on Catalyst for a minute, knowing that refiners are facing negative margins at the moment -- I know this is a question you address often -- but could you just remind us how -- if that persists, how long does it take before it impacts you? As does it impact HPCs versus FCCs? How should we think about that kind of environment for your customers?

HPC, definitely with the more sour crudes, the importance of performance there becomes more and more important every day. Because the regulations are getting tighter, the crude is getting more sour, and the constraints and pressures on the refiner becoming even greater. So the Catalyst performance there is more and more important.

On FCC, as the crudes have gotten heavier, more volatile, there really is -- you have to have a robust, high-performance catalyst in there to do the job. So that has only been heightened with the declining margins at the refiner level.

Okay, that's clear. Then lastly, can you help us gauge the size of FX tailwinds? I think there was, if I understand correctly, a tailwind in Catalysts -- sort of an earnings level for the quarter.

We don't really talk about earnings. The impact, I would say, on the top line was 4% for the whole company. It was not disproportionately different in the Catalyst business. I would say any attempt to stab at the bottom-line impact, you then have to counteract with the fact that the lower dollar and what that is doing to oil costs and gas costs. So it's about 4% top line, or slightly less than a third of our top-line total growth, is because of the weaker dollar.

We are pretty naturally hedged because we have got -- we have sales in Europe and we also have production in Europe and we have a lot of expenses in Europe. We have a broad base. So that -- just to accentuate Rich's comment there is -- it creates an almost natural hedge for us against the euro.

Okay, that's very helpful. Thanks a lot.

Mike Sison, KeyBanc.

Way to come through on a tough environment. In Polymer Additives, you talked about sort of strong pricing, yet price mix is only up 2.4%. What was sort of the mix negative in the quarter?

Good observation. Year-over-year, our volume was up -- mostly it was Tetrabrom, which is a lower-priced product de facto. So that was probably the biggest mix effect that we had year-over-year. But sequentially, prices in brominated flame retardants were flat.

So the squeeze in Polymer Additives' profitability year-on-year going from, let's say, 16.7 to 12.2, that is mostly raw materials?

Well, yes, I would say mostly raw material and stabilizers and curatives. But there is also another effect that we haven't really talked about it is, year-over-year, our production volume was significantly down, like 15%. So our volume in Polymer Additives inventory was the down, okay? Because, as we mentioned, sales were up; production was way down. It does not really show in our numbers because FX and the raw material inflation rolls through our working capital.

When do you think via pricing you can sort of close the gap between raw materials or can you close the gap this year in Polymer Additives?

No, we believe we can. We believe it is just going to take some more time (technical difficulty) in that stabilizers and curatives business. We are gaining a bit of traction out of the gate here in the first quarter in brominated flame retardants, and we are getting prices up. Not to the level of our announcement, but I would say half of that level.

So the operating rates for brominated flame retardants are what -- 70, 80%? Do you think that will continue to improve as the year progresses?

We believe so. That's the current view right now, Mike. We had a good what I would say inventory correction in the fourth and first quarters. We pretty well worked through that. So we've got to keep our plants running pretty hard.

So profitability year-on-year, maybe start -- well, it should improve in the third quarter, right? But in the second quarter, probably still squeezed a little bit year-on-year.

Yes, but we're hoping for some improvement profitability-wise the second quarter, with even greater improvement in third quarter.

Okay. And you talked about earlier, I think, Mark, that you felt comfortable with the outlook for HPC for the full year. Could you update us on how the order bidding is for the expansion? You sort of used to give us some percentages of how filled it could be by the end of the year.

Let me let John do that.

Thanks, Mike. Our view -- this might seem kind of boring to you -- but our view hasn't changed over the last few months. So from last quarter, on last quarter's call, we still have a consistent view on HPC, so that we're talking 40% of that capacity occupied this year, with the balance in '09.

Okay. Then Rich, you had some other income that was sort of a positive. Could you just -- what was that?

There was just about a $1 million benefit from some debt we had over in Europe that was dollar-denominated. So that comes through as -- because of the change in the rates. That was about $0.01.

Okay, so that does not persist going forward?

Well, if rates kept going in that direction, we would have that. And if it went the other direction, that would correct itself for the year.

Okay. Then last one on Fine Chemicals, in terms of, I guess, similar question in Polymer Additives -- you feel pretty good about closing the gap there for raw materials at some point in the year?

Absolutely, Mike. One of the biggest issues we had in Fine Chemicals was our purchases of olefins, which go into our amines or intermediates business and our paper sizing business. And that created in the first quarter about 100 basis point headwind for us. And we had announced that as soon as we saw those olefins go up so dramatically in February, we announced pricing increases there to cover that raw material inflation. And it looks like we have achieved that in the second quarter.

Okay. So in total, Mark, with raw materials being up, as I recall, maybe $60 million, $70 million higher than what you thought in January, you still feel pretty good about the total year in terms of your outlook.

Yes, we're not changing that. I think we are trying to be clear, though. We think the next two quarters are going to be a bit tougher than the first quarter as these prices continue to roll through. We're seeing strength in our business. But when we look at it from an overall year point of view, we don't see anything that would change our perspective to that.

Okay, great. Thank you.

PJ Juvekar, Citi.

A couple of questions. First, on Fine Chemicals, margins are down significantly year-over-year, and the performance doesn't seem to be that consistent. I would have thought that this segment should be resistant to the economy. What is going on there? Is it the lumpiness of the business or something else going on?

Well, I would say a big piece is this issue of olefins I mentioned. That is about 100 basis point decline sequentially. And my guess is probably 150 basis point decline year-over-year. That is a big portion of the decline year-over-year.

So you are right. The margins in the first quarter of '07 were just a hair over 16%, and now we are at 14.6%. But for the year, we are still very bullish on this business and feel actually more excited about the pipeline than we ever have been. But we are dealing with a tremendous amount of raw material inflation. And in a couple of our more distinct businesses, that has been affected -- in amines and our ASA business.

Now with that said, we also had a very strong first quarter in our clear brines area, and that was a pretty distinct year-over-year decline. But we are seeing that improve sequentially now and saw really nice sequential business in our clear brines, actually, sequentially. Those volumes were up almost 20%. But the decline year-over-year was pretty significant and amounted to another 150 to 200 basis points of decline on a year-over-year basis.

So your observations are right. I would say it's raw materials and due to olefins and that clear brines business year-over-year.

How big is this paper sizing business that you mentioned?

Rarely do we go down to that level of granularity. But we sell, depending on the month, about $1 million to $2 million a month of product there.

Okay. Then another clarification question. You said your HPC hydroprocessing volumes were down 5%, and that is despite the new plant starting up. So what is going on? I thought with the new plant you would have gotten volume growth.

You know, we say down 5%, but that is the equivalent of probably one order, or a half order. So we have continued to try to explain the lumpy nature of our HPC business. But this was in line with our expectations for the year. We were sold out. Everything we produced we sold in '07. And in '08, we're seeing pretty bullish volumes, so we need to produce for future orders.

I think I would just add to that -- I don't know if you recall this or not -- but we actually built inventory quite dramatically in the third and fourth quarter last year for this unprecedented sales volume we got in the first quarter of 2007. So you've got a little bit of an anomaly there quarter-to-quarter.

But as John said, sequentially, we're seeing this business grow. We've said all along we expect to be in the 50% range by the end of this year in terms of operating utilization of this unit, and we don't see anything that can change in that. You are seeing that reflected in the profitability of the business.

So it is strong and I don't think, as John said, I would not read too much into those numbers unless you go back and look at each month's volume and understand what's happening there.

And just one last question. There was an earlier question about negative refining margins. Refinery runs are being cut, so could that be a negative surprise in the second half?

I don't know. Refinery margins are under more pressure today than they were if you look back last year and the year before that. Is that going to have a ripple effect? I kind of don't think so. I think it's hard for refineries to sit down and actually start cutting throughput in this period of unprecedented demand and time. So my gut is that that is going to sort itself out through higher prices at the pump and in the byproducts.

So we haven't seen that $110 --in my opinion -- that $110, 120 a barrel that John talked about roll all the way through the byproducts yet. That is what refineries are telling you when they say their margins were down.

I only add that our fundamental belief is that our catalysts improve refining margins.

Right. Okay. Thank you.

Dmitry Silversteyn, Longbow Research.

Congratulations for getting off to a good start in a very difficult environment. A lot of my questions have been answered. But kind of looking at the Fine Chemicals business and the margins that you posted in the beginning of last year versus the margins that you posted in the second half of last year and so far this year.

What is it going to take to get the margins up kind of back into the high teens -- 17, 18 -- I'm not even talking about 20% margins. Is it a question of getting clear brine fluids up and running or some of your smaller-volume research projects hitting a stride, maybe getting into Phase III and something like that? Or is it just strictly a mix and raw material issue?

Yes, it is really -- just as you said, Dmitry, it's getting a passthrough on the raw material inflation that we've seen. It is continuing rebound in clear brines, which we fundamentally believe, especially with oil at $120 a barrel it is going to happen. And we see that, thought it is a fairly volatile business for us. Then it is commercializing the new product pipeline, where we see some really nice opportunities blossoming for the second half of the year. So it is a combination of all of those activities, but those are the highlights.

Okay. So basically, we're starting out at a profitability level in the first quarter. Given what you said, it sounds like it should be at that level or slightly better as the year unfolds.

That is our belief. That's correct.

Okay. Second question, and it was a little bit addressed by Mike earlier. Your price increases or your average price increases in Polymer Additives, up about 3 percentage points in the quarter. I think that was -- well, actually 2%. That was -- the low was going back about three years, and this comes at a time, as you yourself said, where there is unprecedented inflation in raw materials.

Are the customers becoming more resistant to price increases? Is it taking you -- is it more difficult to justify them? Or is it just a question that you got moving a little bit late in the quarter to get the full price increase realized and we should kind of more like high single digit price increases as the year unfolds?

I think it is a combination of effects. It is the declining volume environment of '07. And with the turn into '08, we're seeing stronger volumes. And that always helps in terms of getting price increases through.

But the bigger effect, I would say, in our business year-over-year, from first quarter '07 to first quarter '08, was a mix effect, which is basically a healthy thing for us as our Tetrabrom volumes rebounded nicely.

But we do -- as you said, we have got to get these prices up. In particular, in mineral flame retardants, there's a lot of ATH inflation going on there. And in the phosphorous flame retardants, we have had a lot of unprecedented levels of increases in phosphorous-based products now.

The last effect is the whole phenol chain in our antioxidant and related products in stabilizers and curatives. We've got to get that margin up in the business. It is basically dragging the entire polymer portfolio down a bit. So -- and that is where we see the most rampant inflationary impact.

Okay, so it would be fair to say that the pricing was actually up about mid single digits, but you had a negative mix component in there.

Yes, that's true.

Okay, good. Then final question, your equity income continues to grow at a pretty nice clip and is becoming kind of a meaningful driver of earnings. Can you give us a little bit more detail of what is in your equity income line, kind of what are the major JVs that are being accounted for there -- and how they are doing and what their projections are for the balance of the year?

You bet. There's, I'd say, three important ones. There is our alkyls JV in Japan with Mitsui. And that is doing better. Some new products kicking in, and our alkyls price increase, even in Japan, is doing better than expected.

Our Nippon Ketjen joint venture out of Japan did actually a bit better sequentially. It is not near where we would like to see it, but it is improving sequentially. We had hoped for pretty good uptick in the second quarter. It looks like that's rolling into the third quarter now.

And then most significantly, I would say, would be our FCC SA -- FCC Catalyst joint venture with Petrobras in South America. And those volumes and price level are doing just fine. A lot of unprecedented raw material inflation in that venture down South America as well. So we've got to continue to work to get pricing up down there to offset this raw material inflation. But it is a combination of primarily those three.

Okay, thank you very much.

Chris Shaw, UBS.

You covered most things, but I had a question on -- can we see the natural gas surcharges come back in from -- was it FCCS -- or are they still in place? And just curiously, how much of that raw material inflation is natural gas?

The raw material inflation, the view today is about $30 million out of the total. But that was when natural gas was at just a hair over 10, and I think maybe it is at $10.80 this morning.

So to answer your question, we have got to cover that. So it has either got to be done through just price per ton or it has got to be done through some surcharge kind of implementation. But it has a big impact. Every dollar per million BTU impacts the Company by a nickel. And the majority of that goes into FCC. So the answer to your question is yes, we've got to recognize that and reflect that on our price level.

When you had to pass surcharges on, did they just roll off when natural gas went back down?

Yes, they did. There was a trigger point what they used to be. But our FCC margins were pretty sad then. That was a matter of desperation more than anything.

And they're not contractually retriggered when it goes up?

In some agreements, yes, they are in there. But it depends what the price level is, what the application is, a lot of variables. But it is not automatically across our entire portfolio. But this unprecedented inflation triggers additional action, and we look at these things almost every day.

Then quickly on clear brines, why have they been weak? Aren't they just related to drilling activity?

Yes, I wish I could answer that question. That business, we get no lead time. We get a call on a Friday night to ship out a couple hundred tons of product over the weekend. It's a difficult business to really understand and it's really real-time online.

But the fundamentals of that business, with oil at $120 a barrel, production companies are going to seek to procure every additional barrel they can at this kind of level. So I think it is kind of somewhat a mix effect and it is a geographic effect. But at the end of the day, we're seeing stronger drilling today than we did over the last six months, and we're seeing it go deeper, which requires more bromine content and overall the fundamentals of that business are --.

Good job. Thanks a lot.

Kevin McCarthy, Banc of America Securities.

Mark, you mentioned that the Sorbent Technologies deal has potential to expand demand for bromine. Would you explain why that is the case and how significant could that be?

Kevin, the fundamental technology that is being used to control mercury one of taking activating carbon and impregnating it with bromine or some inorganic bromide. And then that is injected into the flue as a powder, and then the bromine catalyzes a reaction that creates mercury bromide, which stays on the carbon. And then it goes out in the ash collection system of these power plants.

If you take and look at it from a broad perspective, we anticipate that in the US, we could see bromine demand by the turn of this decade or early next -- a few years after that -- 2010 to 2012, we could see an additional 30 million pounds of bromine -- sorry, 30,000 tons of bromine demand increase.

The global bromine production today is between 500,000 and 600,000 tons. So you see in a pretty dramatic -- and of course it's much lower than that in the US -- pretty dramatic uptick.

The other place this could really apply beyond the US is in China. And it is too early to tell what that holds, but we are pretty excited by dialogue that is already starting to occur in China to use this technology. So net-net you could see the global demand of bromine being really impacted in a very favorable way through this process.

Great. Then John, shifting gears to raw materials, if I look at the headwind on raw materials you experienced in the first quarter, and net against that the various selling price increases that you've implemented, how much of a drag do you think it was in the quarter on a net basis?

Well, it's such a relative question. Because if we didn't have it, our profitability would've been higher in some product lines. So it was sequentially $20 million. And I would say roughly -- I haven't looked at it in terms of the way you are questioning me -- but I would say about half of that we need to work through. We were surprised by the relative degree of it, and we think we can get going forward.

So it sounds like maybe you have underrecovered by about $10 million or so. Is that fair?

Yes, I would say directionally in that order of magnitude.

It's certainly a moving target, I know, but it is difficult when your exposure is so broad and it's very difficult to model explicitly that way. So think of it in terms of a gap that you need to recover.

Yes. That's a very good point, because we used to see, as Mark mentioned in his comments, a lot of tremendous metals volatility and inflation. And now, with oil -- I think it hit $118 this morning -- that is becoming a much more broader issue that we have got to deal with. But your point is dead on.

Then finally, bisphenol has been in the headlines recently. How would you characterize your risk or lack thereof in molecules like to Tetrabrom, since you are a large buyer of BPA? If that were to be phased out several years down the road, let's say, do you have alternative chemistry that you could employ or would there be any meaningful impact to you?

I think BPA is coming under a lot of attack. And that concern has primarily been directed towards BPA that is coming in contact with formulas and waters and things like that that can be consumed especially by children. BPA is found to some extent in the environment, so there's a more broader concern about that product.

In Tetrabrom's case, Tetrabrom is a reactive product, primarily, in its use today, so the BPA is fully bound, so it is much like a polycarbonate or something else. I mean, it does not fundamentally exist after the reaction.

So my fundamental belief system is that it is not going to be impacted by that. Having said that, John and his team are doing a lot of work to find other alternatives for polymer additives or flame retardants or reactive flame retardants or polymer flame retardants that go into these applications. So we are not sitting idly by and claiming everything is great. We are working hard to make sure should we get concern about that product or somebody else get concerned about it, that we've got viable options.

Okay. Then last question, Rich, what is your latest thought on the tax rate for the year?

Kevin, the beauty of the accounting for income taxes now is that you basically have to book to what you think your full rate is. So what you should be using -- our best point estimate right now is the number we book to X the special items, right? So 22.3 is the number that we would say is our best estimate right at this moment. And I hope it is going to be higher, because if it is higher, that means we made more money.

Very good. Thank you, guys.

Steve Schwartz, First Analysis.

On the Bayport expansion and so forth, I think for the year we have all been talking on previous calls double-digit volume growth. And just based on the first quarter and then the outlook you're giving for sequential quarters, do you still expect that we could be above 10% volume growth in this business for '08?

Yes. I think I commented earlier, too, Steve, that we're being very boring in that regard. So that's a good thing.

Okay. Then on the pricing, as I tally up the price increases, you know, in the fourth quarter you put out -- and I recognize this is crude -- but you put out like 10 announcements. And so far this year, you have got six. So as we look at how those carry through and the effectiveness of them, you've got quite a bit of a gap. So would you expect that you're going to be putting out a significant number of announcements, or how do you expect that you'll overcome this?

Well, there is no question what we're seeing is unprecedented. So to answer your question, I think, yes, we've got to continue to drive it. We've got to understand internally exactly how much we're dealing with and what the issues are on a business-by-business basis, which we're doing. And then communicate to our customer base around the globe. Because what we're seeing is of, I would say, historical levels.

Okay. So that being said, as late as March at various conferences and so forth, I think you've expressed a certain comfort with hitting [280] on the year. And I know you don't give guidance, but do you still feel comfortable hitting -- coming in in that range?

I think as I said earlier, we're not making any forecasts. But we are -- we think we have a strong business and we're going to do our best to have a great year.

Great, thanks. I look forward to seeing you all in Houston.

You may proceed with your closing remarks.

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

Thank you for participating in today's conference. Your conference call has finished. Have a great day.