雅保公司 (ALB) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2008 Albemarle Corporation earnings conference call. My name is Emetie, and I'll be your operator for today. (Operator Instructions).

I would now like to turn the presentation over to your host for today's conference, Ms. Sandra Rodriguez.

Good morning, everyone, and thank you for joining us today for a review of Albemarle's second-quarter results, which were released before the market opened today.

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 reconciliations for net debt and EBITDA on our website under the investor information section at www.Albemarle.com.

I'd 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 Chief Operating Officer, and Rich Diemer, Senior Vice President and CFO. Now I'd like to turn the call over to Mark.

Good morning to everyone. We're pleased to have the opportunity to share our second-quarter results today, and we all look forward to answering your questions after a few remarks.

Before commenting on Albemarle second-quarter consolidated results, I'd like to update you on some of our strategic initiatives.

You may have seen our recent press release announcing the June 30th completion of the acquisition of the remaining 25% of our Jinhai Albemarle joint ventures. We're excited to have both of these Chinese facilities as 100% wholly-owned subsidiaries of Albemarle. The acquisition of the leading antioxidant supplier in China strengthens our footprint in one of the world's fastest-growing markets. Currently operating at nearly 100% capacity, the Shanghai plant expansion, which will double antioxidants capacity, is expected to be completed in the summer of 2009.

Another strategic opportunity is a joint venture in China between Albemarle and Sinobrom. Pending final approval by the Chinese authorities, we expect to complete the transaction with 75% ownership in the third quarter of this year. Sinobrom's solid position in the bromine derivatives industry in China, coupled with Albemarle's innovative leadership in the global bromine industry offers unique value to the Chinese bromine market, which will create a strong growth platform for us in this critical region.

In June, we also announced a merger between Albemarle and Sorbent Technologies. Pending Sorbent's shareholder approval expected later this month, we plan to close on the purchase by the end of this month. Driven by the federal and state regulations to control mercury levels emitted into the atmosphere, Sorbent's full-service mercury control solution is gaining traction with US power plants needing to comply with these regulations.

Albemarle's cost position in bromine creates an excellent synergy with Sorbent's technology in what we expect to be the leading mercury removal solution on the market. We look forward to the addition of another great technology platform in Albemarle's bromine portfolio.

Our lots with UOP, a division of Honeywell, continues to be successful. We've delivered on a number of growth opportunities through this venture, as we have been awarded a high percentage of new HPC units around the world, Particularly in the fast-growing Middle East and India markets.

Recently, UOP announced PetroChina's selection of UOP to supply technology, engineering and equipment to one of their new complexes in Chengdu. Albemarle will supply the HPC Catalysts for this new UOP design unit for PetroChina. This is only one of the number of our HPC supply agreements with UOP that will ramp up substantially as new refineries around the world are brought on stream.

While talking about strategic alliances, I'll mention a couple of other exciting opportunities that face us now. First, in the pharmaceuticals business, we recently signed an agreement with India-based Dr. Reddy's Laboratory, whereby Albemarle will supply bulk ibuprofen to Dr. Reddy's for use in their generic ibuprofen tablets. And Dr. Reddy's will also market, sell and distribute Albemarle's ibuprofen to its global customer base, predominantly in India, Europe, Russia and the US. This agreement demonstrates a growing appreciation for the value of the high-quality pharmaceuticals, particularly in Russia and India. We expect ibuprofen volumes to pick up through 2009 and '10 as this venture gets underway.

Another important opportunity before us lies in our Alternative Fuels Technology division. Working with Neste Oil for the past several years to develop the catalyst and process for their NexBTL renewable diesel has just resulted in a multiyear order from Neste to provide our innovative catalyst for Neste's new renewable diesel process. We're extremely pleased to be an integral part of this alternative fuel technology and with a key role our catalyst development and lab-to-market capabilities play in this new business segment. We expect Alternative Fuels sales to grow dramatically as we enter the next decade.

Now let me shift gears and comment on what has been the single greatest challenge for Albemarle for the industry as a whole. That is sharply rising raw material energy and transportation costs. Our full-year view on raw material and energy costs is now $220 million above 2007 costs with a majority of this cost weighted toward the second half of the year. Surging oil and natural gas prices continue to drive substantially higher prices on petroleum derivatives, used in many of our products. And that's just part of the overall impact as these costs ripple through transportation and services.

As we look at the specifics, we've done a good job in Fine Chemicals through this quarter covering inflation. Polymer Additives is the most challenged business area with their exposure to petroleum derivatives and alumina. Aside from metals, we're seeing the largest single raw material cost increase in ATH, currently at $26 million year over year. John will share more details with you, but it's passing through ATH costs that represents the largest raw material challenge for Polymer Additives.

Beyond ATH, a few other price hikes are certainly outpacing our ability to recover in this segment. In Catalysts, as you know, while metals costs have continued to rise, we contractually passed through the metals inflation in HPC and FCC pricing. In FCC and polyolefins catalysts, we clearly are covering the inflation curve. Throughout the second quarter, our pricing actions were more frequent and in some cases more drastic than seen in the past, a common theme spanning the chemical space. And we remain focused on staying ahead of the curve through effective pricing actions, productivity gains and production arbitrage. In a bit, John will further comment on the impact of inflation on our businesses, and how his team has and will continue to combat these headwinds.

Now, moving to the Company results. I am pleased to announce second-quarter net sales of $621 million, and $62 million of net income for the quarter, or $0.67 per share as a 14% (Sic-see press release) improvement from the $0.55 per share in the second quarter of 2007. Attaining these good results was certainly no small task. Disciplined execution at every level of the organization is critical to improve operating profitability in such a tough economic climate. And I salute our team for stepping up to this challenge to deliver these great results.

On strong pricing mix and mix, our Catalysts segment closed the quarter with outstanding segment income margins of 21%; that's a 500 basis point improvement over the same period last year.

Driven by improved demand in Brominated Flame Retardants, Polymer Additives reported record quarterly sales revenue of $261 million; that's a 16% improvement over 2007, topping first quarter's record sales by 6.5%. As noted, raw material pass-through impacted segment income margins.

Fine Chemicals delivered very solid results again this quarter. Record quarterly industrial sales of bromides contributed to Fine Chemicals segment margins of 16% for the quarter.

Looking forward, we anticipate even higher levels of raw material and energy inflation hit us in the second half. Nonetheless, I am confident in our business portfolio and the strength of our business teams. Most of the markets we serve are robust, and we expect our strategic positions in these markets to increase our revenue and earnings growth through the second half of the year. As we head into the third quarter, we expect sequential top-line growth in all three segments, and we will aggressively work our value equation to yield improved profitability as we cover additional inflation. Year over year, we remain on track to have strong performance growth and I remain confident we can do so.

One final comment before I close. I'd like to recognize our Bayport manufacturing site for receiving a distinguished service award, naming it Best in Texas for Safety during 2007. It's a great honor to be recognized by the chemical manufacturing industry as a leader in demonstrating commitment to safe operations and exemplary safety. Congratulations to our Bayport team.

So now, let me turn in over to John Steitz, who's going to comment on our operating results.

Good morning, everyone. As I walk through the operating results today, I'd like to point out that comparisons exclude the impact of a special item from the second quarter of '07. But together, our businesses delivered roughly 10% top-line revenue growth year over year on relatively flat volumes and improved pricing across most of our businesses. Furthermore, we were able to hold operating profits steady while dealing with more than $45 million in input costs over the same period of last year. With that backdrop, let's move on to the individual segment results, starting with Polymer Additives.

We're extremely pleased with Polymer Additives' record quarterly sales revenues of $261 million. Overall, we saw double-digit year-over-year revenue growth in our Flame Retardants portfolio, and in Stabilizers & Curatives, which includes revenues from our Jinhai joint ventures. Volumes were up year over year and sequentially in Brominated Flame Retardants on strong electronics demand, we believe without any growth in overall supply chain inventory.

This was offset by decreased volumes in Mineral Flame Retardants on weak auto sector volumes. Polymer Additives' segment income declined 25% year over year. The profit decline in Polymer Additives resulted from raw material and energy cost inflation and our inability to cover a significant amount of the cost of ATH, aluminum trihydrate, used in our Mineral Flame Retardants division, where a competitive pricing environment in Europe has been extremely difficult and intense.

In addition, earnings were negatively impacted by inventory reductions we took in the quarter. Our highly oil-dependent Stabilizers & Curatives business was also challenged with staying ahead of the raw material and energy environment. All this led to a tough quarter on segment margins that were diluted by inflating revenues and relentless input costs that have been difficult to recover.

Going forward, we expect volumes and pricing in Brominated Flame Retardants to remain strong, helping to offset cost increases across the segment.

One final comment on Polymers. Polymer margins were negatively impacted, primarily by a lack of improved pricing to cover the impact of $5 million in ATH inflation. Additionally, almost $3 million of delayed pass-through in Stabilizers & Curatives occurred in the second quarter. Not for these two significant impacts, margins in Polymers would be in the range of 15%.

Moving to Catalysts, where we reported net sales of $208 million and increased segment income of roughly 33% over the same period last year to $43 million. Outstanding results in what we expected would be a modest volume quarter. Within our polymer catalyst division, we had strong pricing and revenues in our organometallics. As expected, our Refinery Catalysts volumes were down. However, HPC had excellent product mix in the quarter, as value for these higher margin activity catalysts is realized. Our HPC joint ventures had a very good quarter, as well.

On lower volumes, our FCC portfolio also saw strong mix in higher margin products. As we look forward, we're encouraged by the increased signs of market tightness and competitive pricing we're seeing in FCC, which should continue to bolster our catalyst value equation.

We've just introduced a very exciting technology breakthrough in hydroprocessing catalysts. Our new [KF-770] hydrodesulfurization catalyst, built on our patented STARS technology. KF-770 can help improve the performance of a hydrodesulfurization process by up to 35% over the most active hydroprocessing catalysts on the market today, enabling ultra-low sulfur diesel refiners to substantially improve their operations at a time when diesel fuel is in increasing demand.

Turning now to Fine Chemicals, net sales for the quarter were $152 million, 15% higher than second quarter of '07 on a sales basis. Fine Chemicals segment income was our robust $24 million. This segment offset continuing pressure from escalating raw material, energy and transportation costs. While keeping a finger on the pulse, we've been able to stay ahead of the inflation curve here.

Within performance chemicals, strong, clear brine fluids demand in Europe and the Middle East contributed to record quarterly sales in our Industrial Bromides division this quarter. Mark commented earlier on some very exciting strategic opportunities ahead of us in Fine Chemicals. We look forward to building upon our solid bromine foundation with the additions of the Sinobrom joint venture and the Sorbent acquisition.

Our fine chemistry services and intermediates portfolio had a great quarter despite normal second-quarter seasonal downturns in our ag intermediates volumes. Our ibuprofen business saw significant volume increases this quarter compared to second quarter of '07 and we anticipate strong double-digit growth for the year. However, we must work hard on the value equation to gain traction over raw material inflation.

Strategic alliances with Dr. Reddy's and other international pharmaceutical producers further solidifies Albemarle's position as the world's leading high-quality ibuprofen producer.

Lastly, just to wrap up on our operational performance this quarter, we delivered solid second-quarter results in the face of spiraling inflation and a very cautious economic environment. Energy costs are impacting our entire supply chain from raw material purchases to manufacturing costs to distribution and freight. A key factor behind our resilient earnings has been improved pricing efforts and continued cost management discipline. We're planning on a tough environment again in the third quarter and we think we can execute in that construct. We have a set of really great businesses with similar business models that are well-positioned and well-focused on the future. With that, I'd like to turn it over to Rich.

Good morning to all. The items I will address on the call today are corporate expenses, income taxes, cash flow and our June 30th balance sheet and financial position.

Unallocated corporate expense was $12.9 million in the second quarter, up $2.1 million from last year, but comparable with our Q1 2008 expense level. SG&A expense was up [14%] year over year, at 10.9% of revenues in the quarter, and for the year to date are at 10.2% of revenues versus 10.6% last year. R&D expense in the quarter is up [18%] over prior-year levels, so we continue to fund future growth opportunities.

Taxes. Our effective tax rate for the quarter was 18%. Our current view of our full-year effective tax rate is 20%. This is the same as the effective tax rate that we recorded for last year and is lower than the rate we envisioned at the beginning of this year and after Q1. It is based on our current forecast of the level and mix of income in 2008 and the benefits from tax planning activities we have undertaken.

Our EBITDA this quarter is $110.5 million, comparable to last year. We ended the quarter with cash and equivalents of $168 million. CapEx for the quarter was $20 million, and we're retaining our full-year CapEx estimate in the $90 million to $100 million range.

Depreciation and amortization was $27.5 million. We did not buy back any additional shares in Q2 after executing the buyback of 4.1 million shares in Q1.

At quarter end, we have consolidated debt of $891 million, including $57 million of debt from JBC, our Jordanian bromine venture. $390 million of our debt is fixed rate, and $501 million is floating rate, a 44% to 56% split. Our floating debt interest rate is 3.14% at quarter end. The weighted average interest rate for Q2 was 4.12%.

Net of $168 million cash on hand, and excluding 32 million of nonguaranteed JBC debt, our net debt is $691 million, up $141 million from year end and down $11 million from Q1 levels. Our debt to cap ratio is 39.6% and our net debt to cap is 34.6%. Given our business outlook and expected cash flow for the remainder of the year, we're comfortable with our current leverage employed. With that I'll pass it back to Sandra.

We'd like to open it up for your questions now.

(Operator Instructions). P.J. Juvekar, [Albaro].

Good morning. So in Polymer Additives, most of your sales increase came from volumes with very little pricing. And you had announced several price increases throughout the first half. So my question is how much of these price increases that you've announced are actually sticking?

When you look at the numbers, it's a big impact in Polymer Additives because with the volume decline in mineral, we've actually had a pretty solid mix effect from the Brominated Flame Retardants business. So, overall, our negotiated returns on our announced price increases have been quite successful. But there is a big mix effect in Polymer Additives. So with that said, most of our work now is regaining Mineral Flame Retardants margin losses, and the Phosphorus Flame Retardants margin losses because of the dramatic influence in the future on phosphorus going forward.

With 16% increases in sales, how much of that was pricing versus volume? Can you just break that down for us?

I'd say roughly about a third of it is pure pricing. The balance would be -- maybe another half of that would be mix. And then you have the volume -- overall volume impact.

Okay. And what were your operating rates in your bromine production facilities?

Bromine was pretty high. I would say in the -- our bromine, bromine wells in the 85, 90% range. Yielding about the same -- our specialties in Brominated Flame Retardants have been higher. The real volume downturn is occurring in our Mineral business, and those rates are probably in the low 70s.

Okay. And then one last question on Fine Chemicals. You talked about raw material and energy costs. What is the mechanics of in Fine Chemicals to pass through these costs? Is it a contract-based pass-through or do you ever raise prices on ibuprofen and other products?

No; we have to drive those price improvements in Fine Chemicals, for sure. I mentioned that we've had some good, solid gains in clear brine fluids, for example. The profit hasn't fully come down from those products because of the dramatic increases in transportation costs, for example.

So we just announced a couple weeks ago an increase in calcium bromide pricing, for example, to cover that. We announced about a month ago sodium bromide price increase. So we're working hard to get that pass-through, but we really have to drive that in Fine Chemicals.

Okay, thank you.

Kevin McCarthy, Banc of America Securities.

Good morning. John, if I look at Polymer Additives and focus on the Brominated Flame Retardants in that piece of the portfolio, what would the margin trends be there on a year-over-year basis? Are those margins hanging in relatively stable, such that the bulk of the erosion is really on the Minerals side?

You bet, Kevin. It's -- actually grew nicely on a sequential basis, our Brominated Flame Retardants. So that's why the real focus on our Mineral. We've had $5 million sequentially of uncovered raw material increase, probably another $2 million related to sales volumes due to weakness in the automotive sector and some poaching going on in Europe. So in that environment, we're working to get these prices up in Mineral.

We were somewhat pleased to see last week an announcement by a European competitor announcing a mineral flame retardant price increase. So obviously we're going to work to support that as much as we can.

Elsewhere in the chemicals sector, we've seen a few companies attempt to change pricing mechanisms to an indexed or formulaic route. Have you thought about that at all, in FRs, where you have to deal with ATH and phosphorus and these sorts of inputs -- might that be an option for you to avoid the lag effects associated with those pressures?

Yes, you bet. I think, Kevin, we're looking at all of the above. We're looking at transportation surcharges, natural gas surcharges, things like that. But the key in specialty chemicals is really to price those products for the value that they bring more than anything.

And I think in that context, many of these products that have lost margin really need be priced for the value they bring. That would be significantly more in many cases than the raw material increase we're seeing. But we've got to take this one step at a time, just as you say, and look at everything possible.

Okay. And then finally, just a couple of quick financial questions. Number one, when might you expect to resume share repurchase activity? And then Rich, can you give us an update on your working capital goals that you mentioned at Investor Day?

Sure. We may get back into the market as soon as possible. I mean we're always looking at that equation, so we have not precluded doing further buybacks the rest of this year; we will just have to see how things go.

We had a little bit of a setback in working capital from a days point of view in our second quarter, but we still have visibility to driving the improvements that we have as a goal for the year. Our net working capital is pretty much flat in the second quarter, but we're still trying to get money out there and we will be continuing to focus on that as the year proceeds.

Thank you very much.

Jeff Zekauskas, JPMorgan.

Good morning. Your Catalysts volumes were down I think 11% from the quarter. So which was down more, HPC or FCC?

Sequentially, HPC. And, secondarily, sequentially, FCC. Year over year, the majority of the decrease was in FCC.

So you brought on this large slug of HPC capacity; I take it that you feel that -- whatever volatility in the market has caused the sales volumes to ramp up slower than you expected? And you said the third quarter would also be slow? Is that right?

Yes, Jeff, I think we've been pretty crystal in our view that over the next two years, we'd fill that unit up.

Yes.

We've also been very clear in communicating that volumes would be weak in the second and third quarter as part of that. So I don't think there's any inconsistency here in that volume. The broad perspective I would just urge you and I think everybody to have on this business is if you plot the growth in these volumes -- now that we don't give out publicly, what you'd see is the quarter-to-quarter volatility is just immense; and the month-to-month volatility is just immense. As a matter of fact, the month-to-month volatility is equal to the mean. So you can have pretty big swings depending on what the market is doing out there. So it may have been lower than some have predicted, but I think it was quite consistent with our views of where we're going to be.

Yes, you bet.

So you still expect to sell at least on average half of your new HPC capacity this year. You haven't changed that view.

Yes.

We will be sold out next year. And what I am not quite prepared to say is it will be exactly half at the end of this year. The team is pretty confident we're going to see those volumes come on strong as we end this year, but it's all a function of what those refineries do. Some refineries have, in places, reduced rates. We've not seen a near-term impact of that but you always worry -- I am kind of a paranoid guy, so I worry a bit about the impact of that.

But in the scheme of things from over this two-year cycle, I am pretty confident we will be full [as we in] next year.

Just a couple more quick questions. In Polymer Additives, apparently, Brominated Flame Retardants are growing and mineral-based Flame Retardants are contracting. Broadly speaking, why is that? Is it the difference between electronics and the auto markets?

I think the auto market has in particular impacted the Mineral Flame Retardants business. And that's used as a PVC alternative in conduit for automobiles. So I think that has been the biggest impact there. But I really don't see any kind of secular trend here, Jeff. I think it's really as we work through some inventories in the marketplace.

And frankly in Europe, we've got a competitor who really has not been supporting the price increase effort and has been intent on trying to take market share. So we've had to take steps to protect our market share in Europe as well. So I think that is mostly the dynamic around Mineral Flame Retardants.

Of the $220 million in raw material costs that you expect, how much of that is not passed through? Or to ask it another way, how much of the raw materials of this $220 million do you pass through contractually?

Well, we get about half passed through in Catalysts on -- a lot of that is HPC related to molybdenum cobalt, nickel. The other -- a big portion of the catalysts though is FCC related. And that has to be passed through in the marketplace. The balance of that is spread evenly between half Fine Chemicals and half polymers. So you can see from the net margins there is $10 million in polymers; there's about $8 million that we're not getting passed through today. $5 million of that in Mineral and about $3 million in Stabilizers & Curatives related to products like isobutylene, phenol, natural gas and other natural energy costs.

I guess lastly for Rich Diemer. Are there any prior-period adjustments that have affected the tax rate this year, either in the first two quarters or in the second two quarters?

Absolutely not. If there were, we would obviously highlight that out for you so you would see it; it would be transparent.

I think the biggest change between -- what we did last year, Jeff, is we said all our incremental income on a worst-case basis would be in high tax jurisdictions. And what's happened -- part of this actually planned is we have seen the bulk of the incremental income in either low or no tax jurisdictions. So what you see is JBC actually had a record quarter; that's tax-free money. It's almost like an arbitrage of our production assets. And with that, so you'll see a benefit on the tax line from that, but you'll also see a hurt on minority interest line for that.

So we feel on a total sustainable basis, 20% is where we see the full year coming out right at this moment. Should we start making more money in the back half in higher tax jurisdictions, we'll then adjust that accordingly.

And we're hopeful that -- we're getting closer to a settlement with our back years with the IRS. But while we have had conversations there, we have nothing yet to announce. And when we do have that, we will account for that and we will make sure you know what that is.

Thank you very much.

David Begleiter, Deutsche Bank.

Good morning. Can you discuss FCC pricing, how the price increases are flowing through, and our margins above -- still above 10% in FCCs?

We've had continuing success in selling the value equation in FCC. And our average price was right around $3100 a ton in the second quarter. So I think we've demonstrated consistently the ability to sell that value equation in our FCC catalysts.

Overall, the margins are less today than the overall margin of the entire Catalysts business. So we still have some work to do there as it's still being somewhat dilutive.

But there was an announcement last week on a price increase by one of our competitors. And again and I think that's demonstrating the value that these products bring. So we're studying that right now.

And John, the lower volumes in FCC this quarter -- were there any competitive situations you could not respond to, or it's just normal seasonality?

Well, some of it is seasonality. I think probably about a half of it is seasonality. Year on year, there was a major one-off shipment made in FCC that occurred. But overall, yes. I would have to say that we have lost some market share in Europe due to some other competitors not having the same view of the value that these products bring. So I would be remiss if I did not tell you that.

But things are tightening up on a supply basis, and that's good. And raw materials continue to escalate dramatically in this portfolio. Rare earth, silicates, ATH. ATH, we always talk about in terms of Mineral Flame Retardants, but there is a big part of ATH that goes into FCC catalysts as well.

I mean those input costs are rising dramatically. And we see going forward, it could have another $250 per ton impact in the second half. So we've got to work to get that passed through.

John, similar color on bromine FR pricing -- how is that trending?

Yes, we've had some good success over the last couple of months on continuing to get the prices up. The mix is really the issue there, David. Our tetrabrom. volumes have rebounded from a year ago, and so that is dilutive in terms of the mix of the overall business. But our specialties are doing quite welcome, including our decabrom alternative and products like that. So we're continuing to see a pretty resilient market out there for these products, and we're somewhat pleased by that and hopeful that that will continue into the third quarter.

And the third-quarter comp will be a little easier in the sense that last year third-quarter volumes were very, very weak in the overall Brominated Flame Retardants portfolio. Hopefully that gives you a little color on it.

It does. And lastly for Rich; Rich, next year's tax rate, should we assume a slight increase versus this year?

That would be the safe way to go, and we will give you a lot more color on that as we get closer to the end of the year.

Thank you.

Laurence Alexander, Jefferies.

Good morning. First question is in Polymer Additives. Can you give some details, some more clarity on the inventory reduction? What the impact was this quarter, the thinking behind it and whether you feel you need to do another one in Q3?

Well we try to -- this is John. We really try to manage our working capital and our inventories quite tightly, especially with this volatile raw material environment. If there ever is a downturn, we certainly don't want to be situated holding onto very high-cost raw materials. So that is kind of the driving principal, but we just want to use our cash very well, as well.

So if you look sequentially at our entire polymers portfolio, inventory is down about 12%. I mean that did not have an insignificant impact on the probability for the business. My guess is it's in the -- it's about $0.05 a share right there. So that did. Good discipline around our working capital and our volumes in our Polymer Additives business did not help in terms of our margin contribution in that sector.

Do you see a similar reduction needed in Q3, or do you think you're done at this point?

Well, it all depends on primarily volumes in Europe around Flame Retardants. We're starting to see some signs that we've rebounded out of it. The Brominated Flame Retardants business looks pretty robust right now. And our antioxidants business in China, while we have some concerns in the intermediates area, the end products seem to be -- volumes seem to be pretty healthy. So, overall, we're cautiously optimistic.

On raw materials, so you have about a $5 million to $8 million net lag currently, depending on how you look at the sort of headwinds in Polymer Additives?

Right.

For the full year, where do you think you're going to end the year, with the $220 million increase in raw materials? How much of a lag do you think you'll need to catch up on in 2009?

Well, I think if it were to stay at $220 million, we feel we can cover that.

By the end of the year?

Yes. My worry is really what happens in terms of the markets and the volatility around these products. I was reading that oil today is up another $2.00 a barrel. So it's a tough environment to understand it. We're just trying to really stay all over it. And we haven't had certainly any luck at all in the first half with this rampant raw material issue. But I think all those in our space are faced with the same issue.

I think we tend to do a better job of really getting out in front of that and understanding its impact and trying to communicate that across to our business folks and to our customer base.

One of the tough things -- this is Mark -- that John and company face is that there is a fair amount of lag time. I'm not sure quite how to do the calculus on that, but even today, if oil started dropping, I think inflation would continue to grow for a while as this sort of works its way through all the sectors.

And so the $220 million is in anticipation of it continuing to work through. And I think that's a little independent of where oil ends up at the end of the year. I mean I think it's going to be there -- if oil drops $20 a barrel, my gut is it's still about $220 million. If it goes up another $20 a barrel, then you going to have another round of inflation that rolls through in 2009 yet to be determined. So it is an unsettling time from that point of view.

And John's team I think is doing a really good job driving these prices through, and there's only that one or two areas that John has mentioned where, because of other market situations, we're just not able to do so. That has been in Polymer Additives.

Lastly, just quickly on the Neste multi-year order that you mentioned. Is that a material, or is that more just interesting as validation of the technology moving forward?

No, I think that that's going to be quite material. We're talking -- for the most part 2009 and '10 for that. And Neste is -- if you go to their web page and look, they're really promoting this technology. There are a number of new plants that are scheduled to be built that will come on stream after we end this decade. So it could be a -- it's a first step for us in alternative fuels. It could be a huge step, and I think there could be steps that follow.

Any rules of thumb to help us gauge the impact next year?

We would rather not do that right now. But it's bigger than a breadbasket.

Thank you.

Steve Schwartz, First Analysis.

Good morning. John, I think in answering David's question, you touched on this, but with the Catalysts volume drop, FX also disappeared. Are those two connected to each other? Is this related to FCC in Europe?

With the Catalysts volume drop, was there an FX impact?

Well, yes, you can see that your ForEx impact to revenue in the quarter was zero in Catalysts, whereas in the previous quarters, it had been 3.5% or 4%. So I'm wondering if there is a regional mix component in what happened with the volume, and if that is tied to why FX was zero. So in other words --

I understand, Steve. We're kind of naturally hedged. And the volume we sold in both FCC and HPC in -- in Catalysts is pretty naturally hedged by the production base there, if that helps answer your question.

On the usual breakout we do for top-line growth, we have 3.5% impact positive for Catalysts. So I'm not -- you may be picking up a bad number there.

Okay. I'll check that. And then just -- from a longer perspective on Catalysts, we're starting to see demand destruction in gasoline in the US. And I know that US or North American refineries are a big portion of your revenue there. How do you see that demand destruction impacting your business in the next six to eighteen months?

That's a challenging question, because probably a lot of people have a lot of different opinions on it. But at its heart, what our catalysts do and what our competitors catalysts do bring tremendous value. They make processes more efficient, they help drive a better product mix, they help improve the environmental situation by pulling out unwanted pollutants and contaminants. And overall, my belief is that the catalyst help refiners in that context.

Now with that said, I think the refiners are going to do everything possible they can to extend reactor times before they go through a turnaround. And try to utilize catalysts on longer duration. Things like anything that they can do to try to beef up their margins, because, obviously with the dramatic ramp-up in oil costs, a lot of the pure refining plays are struggling in this environment. But we think overall, longer-term, our catalysts can really help out that situation and not hurt it.

So in other words, the technology should overcome any decline in consumption?

Absolutely. And if we don't, we're not doing our job to really drive value in their use.

And then just one last one on SG&A. It looks like if I look over the past couple of years on a quarterly basis, on the even years, your SG&A expense is typically lower in the first and third quarter. And this year you certainly seem to be following that pattern. So should we expect that SG&A could be flat in the third quarter, on a year-over-year dollar basis?

We haven't done that sort of a regression analysis on it, Steve, so maybe you've figured out a pattern here. So I would say we're going to be very mindful of SG&A expense in light of everything else we've talked about in the third quarter. So we're only going to spend what we need to spend.

Got you. Thanks, John; thanks, Rich.

Mike Sison, KeyBank.

Any update on HPC operating rates? Have you been running that business sort of at a pretty good rate, particularly expansion anticipation of the better order timing that you see in the second half to 2009?

Well in the second quarter, we actually built a bit of inventory. We had a couple of upside orders for us that originally were planned to go out at the end of the quarter, and then did not do for a sundry of reasons. But that was some pretty significant volume in that business. So we had the inventory there ready to go. So if you include, that, yes, we had been running at reasonably high rates to make the volumes for those two significant international HPC orders.

The other thing, Mike, I would comment on is -- the great thing about our Catalysts business is the ways we can make money off this business. And one of those that wasn't insignificant in the quarter was -- was the royalties we make off of a regeneration process, and that yielded some significant profit for us. But it's just another great example of how the overall portfolio within Catalysts is so strong, so balanced, so diverse and allows us many different opportunities to make money.

So I would kind of include that in the HPC kind of portfolio. And that was equivalent to about 1,000 tons of HPC volume, just the regeneration work that we did. So it's not insignificant. That also helped drive the margins to that record level that you see.

Mark, your confidence in filling up the plant by the end '09 -- are you contracted out yet, have you signed most of that capacity out?

We have some big orders in there that will come in, in 2009 that helps me state that confidence. I think second to that, there are a number of units that are on the radar screen that are [filled] that we have a good chance to get their business.

And John also mentioned some of the advances we're making in catalyst technology.

Last thing I'll mention is UOP is going to start kicking in a bit in 2009.

So, Mike, I think that we will be full as we end next year, yes.

What I am a little bit less clear on -- and Jeff Zekauskas asked that question -- is we will be halfway there by the end of this year. I mean a lot is going to depend on the fourth quarter to make that happen. And we have seen a few orders slip a little bit. So I'm a little anxious about whether we will actually do this linearly, it's going to be a bit back-end weighted.

So the way to think about the third quarter, based on the FCC, and maybe some market share losses there that you noted, John, and maybe some push-out for HPC, the volumes there would probably still be down a little bit in catalyst as it was in the second, and then you would have sort of a big fourth quarter to round out the year?

Yes, but, Mike, compared to the second quarter, I think we'll see some sequential gain in FCC, and see some modest sequential gain in HPC.

So the year-over-year decline would be less than what you saw in the second quarter, in the third, directionally?

That's correct.

Okay. Then, I wanted to revisit real quick in Polymer Additives -- the $8 million sort of squeeze in raw materials that you noted, you have price increases to cover that right now, correct?

On the mineral (multiple speakers)

And phosphorus.

We're working on phosphorus as we speak. We're having some success. The Stabilizers & Curatives, we believe we can get that. We're working on those increases across the antioxidants and intermediates portfolio. But ATH, we do not have yet. We're working through that right now.

What's the delta in the third and the fourth quarter? Does that $5 million in ATH get bigger in your assumptions based on what you know now?

No, unless the euro changes dramatically.

So you sort of have a $5 million squeeze in the second, another $5 million in the third and another $5 million in the fourth to offset?

That we've got to work to get offset; that's correct.

So there's sort of a $10 million headwind in the second half for ATH. Then Curatives & Stabilizers, though, that's a business you normally can get pricing for, though, right?

You bet.

So that $3 million that you had in the third quarter, whatever the assumption is in the second half, you should be able to get that?

You bet; and we're hoping for sequential increases in Brominated Flame Retardants to help offset what we don't achieve on ATH.

And there is no squeeze in the bromine Flame Retardants side; everybody seems to be raising prices to offset and maybe get more pricing than raw materials?

Yes, it seems to be a good, disciplined environment out there, Mike.

Last question, Minerals. I know it's a necessary business for you to be in longer term; what do you think needs to happen? Do you need to right-size the business or is it just -- do you need to help consolidate the industry a little bit to maybe help improve the stability?

Clearly, there is some competition going on in Europe that just does not make any sense to me. And -- the net results of that demonstrated by that particular entity are not good. And one of them just announced a price increase that was just Thursday of last week. So it's not enough to cover all this inflation we're seeing in ATH and energy, but it's a start. So we're going to pay close attention to that.

Okay, thank you.

Chris Shaw, UBS.

Good morning. I might have missed it, but what was the -- why were volumes down in Fine Chemicals? What was the main culprit there?

Well the main thing sequentially is our ag intermediates business, which is primarily a 4Q through 1Q campaign. So sequentially, it's almost all that. I mean that was probably 7% or 8% of the total volume.

Year over year?

Year over year, primarily -- well, year-over-year, our volume was up -- pure volume. There's some mix effects in there, but pure volume was up about 5%, 6% in Fine Chemicals.

So the number -- the negative 1.6% that's in the release or in the --?

That's the mix impact of revenue, as it plays a big part in that.

Oh, okay, okay, okay.

We debate what that number is -- what we kind of publish. And we've gotten ourselves in the habit of always doing this on one methodology. But anyway, the net -- the volume impact year over year, volume in Fine Chemicals was actually up.

Okay. Just curiously, you mentioned the FCCs were around $3100. What where they in 1Q? Did you give that, or do you know? Because I know a small increase has a pretty big impact.

It was -- I mean it's up -- about 7%, 8% sequentially. And up about 25% year over year.

And then, I was curious, will the minority interest line for Polymer Additives, will that go away now that you've bought out the JV in China?

For that JV, yes, that part will. But there are some other smaller items that are also in there.

Was that the -- half of it or more? Approximately?

More than half will (multiple speakers)

It's almost all of it.

Most of it will go away, Chris.

I guess if refiners are struggling with margins, and maybe operating a little less, does that -- that doesn't encourage them to take a turnaround in [fives] and HPCs, no?

Not in my experience, no. They just hunker down and cut costs. And -- if you look at it on a variable basis and you set aside oil, the other thing is catalyst starts getting up there. So they will do things to slow down rates and slow capacity.

One last one quickly. For ATH, what is actually driving the increase there? Is it just aluminum prices?

Yes, absolutely. And alumina and the ATH market itself. There are limited choices; there are a lot of alternatives to its use, so we're competing against much bigger volume absorbers. So we have to buy according to market.

Does some of that go into pigments as well, or coatings? I thought maybe that would actually have created less demand. Do you know?

Some of the complementary uses?

Yes.

I'm not sure. I would say most of it is in other alumina-based applications.

Great, thanks a lot.

Dimitry Silversteyn, Longbow Research.

Good morning. And I just want to follow up on a couple of questions first, and then switch gears a little bit and talk about Fine Chemicals.

Do I understand you correctly in response to Mike Sison's question that the $3 million in -- that you said you're lagging in the second quarter in price increases and stabilizers and lubricants, you will be able to get that in the third quarter?

Yes, we hope so. We're work hard to get that through. (multiple speakers) butylene, phenol related, and we're going to work hard to achieve that.

Now, the softness that you expected in the second and third quarters in the Catalysts business -- did you expect it to come on the FCC side, or did you expect it to come on the HPC side and just happen to come on the FCC side?

No, we expected both, because, generally, the first quarter is pretty high volume. We had lost some volume, as I mentioned, in Europe to a lesser extent in Europe, that's more market share related. And we've had a couple of those customers come back to us, which is a good thing. And so we're continuing out there to try to sell based on our value equation, and now it appears that the market is tightening. The raw materials continue to escalate. I think we've been kind of on track with that curve, but if it hadn't been for that dramatic increases that we saw in rare earth and silicates and ATH, our margins would have been even higher. But with what we're facing, we're pretty happy where we ended up.

So if I can kind of summarize what's going on in the FCC business and why the volumes there are negative is, you're having a little bit less of a market, if you will, in the US because of fewer miles driven or whatever and then you have market share loss in Europe.

Correct.

Okay. And then on the HPC side, you talked about some orders that you were thinking of shipping this quarter that got pushed into the next quarter? Is that the way to understand your comments?

Well, they were originally planned for the third quarter, and then the customer tried to move them up. But there were some complications in it because these are fairly complex orders. So they didn't end up going.

Now what we don't know is what's going to happen at the end of the third quarter. So, overall, we're anticipating a sequential volume growth in HPC, but we were also aided by a very strong mix effect in the second quarter. So I'd -- if we could -- I'd anticipate the net profit we make off of Catalysts would decline in the third quarter. But that's kind of in our plan for the year.

Versus the second quarter or versus third quarter of last year?

Versus second quarter.

All right. Switching gears a little bit, talk about the Dr. Reddy's agreement for your ibuprofen supply. Was that agreement or anticipation of it part of your comments during Investor Day that you were looking to get the ibuprofen plant to 9% utilization rate I think by the end of next year?

Yes, that's part of it. That and we've got a number of other good volume opportunities. So the business, from a volume perspective, is doing pretty well. It's also faced with a lot of raw material inflation, so to bring that down to the bottom line, we've got to run our plants very well, and we've got to continue to get pricing up, because a lot of these organic derived raw materials are involved in ibuprofen. Natural gas is used in making ibuprofen and other input costs like hydrochloric acid and things like that are used in ibuprofen production. So it's all going up and to continue to drive the profit, we've got the volume now. We've got to produce efficiently and get some improved pricing.

So do you have price announcements or private price initiatives out there in the marketplace currently?

Not right now, but it's being worked on.

And does the Dr. Reddy's contract have any kind of a price band on it? Or is it just market pricing or any kind of (multiple speakers)?

I wouldn't want to get into all of the details around that, but yes. There's some coverage there.

Thank you.

Robert Koort, Goldman Sachs.

Good morning. Mark, I need you to move down to Baton Rouge more quickly so I can take advantage of the Houston and Baton Rouge connection speed maybe next time.

It's happening, buddy. It's happening.

A couple questions. First on the ATH, do you guys buy ATH or do you buy bauxite?

We buy ATH, Bob.

And do you -- or do you know if your competitors buy it from Chinese sources? I guess they're really curtailing aluminum production over there, so is that going to create some supply constraints for somebody?

No, they don't buy so much from Chinese sources as some others.

You mentioned that maybe your competitors have a little different objective on pricing and profit margins in Mineral Flame Retardants. And obviously you guys are still producing at 10% margin, which I know you're probably disappointed in, but looks quite a ways up from others in the industry. So do you think this is just an issue where you've got much higher expectations and the rest of the industry is willing to accept lower returns? Or can we have some reason to hope that this is just a temporary issue?

Well, I think it's just temporary. When I look at the financial results delivered by the competition, it is way below anything close to what we're doing. So there are orders of magnitude; the question you ask is one of relativity, so. But I think they're so far off the mark that they've got to do something to get (multiple speakers).

I guess to be more explicit, what I'm wondering, John, is -- are your margins sufficiently higher than your competitors' that even if they raise price, that you create an umbrella there? What do you think your competitive margin structure looks like in that particular product line? Is there some reason to think that you're constrained in margins or no?

No, I don't think so. Because we know where ours are, of course. And the company I'm referring to is a public entity as well, so we know where theirs as well. And they continue to kind of talk about volume expansion, which in this environment we just don't understand. So we've had to take steps to protect our market share.

And -- but as I said, there is just a recent announcement last week, and it's only an announcement, but it's the first one of its kind. So we will see how the behavior -- what the behavior is coming out of that. Going to pay attention to that closely.

John, I think you mentioned mix effects partly resulting in the we looking price, mix dynamic in additives. I guess when I look on an annualized basis, given what raw materials have generally done, I wouldn't have expected that this year would be the slowest rate of increase, especially given your comments about bromine still having some improvement. And over in Fine Chemicals, you've got a lot of price, obviously; that's influenced in part by the bromine molecule.

So are we talking actual price declines in some of these products? Or what would cause such a modest price movement in '08 so far?

Well the Mineral product line is priced at roughly half that of the bromine Flame Retardants line, just by its nature and cost structure. So that's really the mix effect that I am talking about. When we've seen just the base volume decline year on year in Mineral, it's got a big volume impact, because it is much bigger volumes; it's twice the volume level of Brominated Flame Retardants. And then on a pricing level, it's half. So that's really what I was talking about, was the big mix impact.

So the help is on the Brominated Flame Retardants side; we've continued to see profit improvement sequentially, and we're hoping for a good third quarter there as well. Does that help you understand a little better?

I'll try one more. It does, although I am often and still confused.

With ATH, if you're suffering on volume, given it's got the lowest product price point, wouldn't that actually help your year-on-year realizations from a mix standpoint?

Yes, right.

So I guess my question is in the quarter, you showed 1% price mix improvement in additives. And given where benzene and phenol and bromine costs have done or prices have done broadly, I would have expected a much higher rate, I guess.

If you look at our Polymers business, in total, the Polymers volumes are actually up sequentially and up year over year if you actually look at volumes in polymers and exclude the mix effect.

I think I'll have to (technical difficulty) with you guys. Thanks, John.

Todd Vencil, Davenport.

Quick question. Most of my questions about the business have obviously been answered; you guys have done a good job.

You've talked in the past about your feelings regarding the consensus estimates out there for this year, which I think at this point are about $2.76. Do you want to weigh in on how you feel about those right now?

We kind of start the year given that perspective, and we said we felt okay with consensus as we started the year, and so far, we've not changed that perspective.

Okay. Thanks a lot.

Steve Schuman, New Vernon Associates.

On FCC, there's only two parts to the business; there's sort of the base FCC Catalysts and the Additives. Can you go over how those two are doing to sort of sum up to the total in the FCC business?

Well the Additives business is a real small portion of our overall FCC business. But it's doing well; they tend to be SOx and NOx reduction additives. But it's -- in terms of total volume of the overall business, it's a fairly minor piece of that.

I guess on profitability, however, I think you've made comments that those are -- they add much more value than sort of your core Catalysts. So on the probability side, is it much -- is it punching above its weight, if you will?

Yes, on a relative basis, it is. It's doing well, yes. But still, in terms of being a significant part of the FCC profitability, it's still much less than the majority. I mean you're talking 10% or 20% of the total.

Can you give us an update on methylbromide, and any expectations in the next couple of years outside of your previous comments?

Well, methylbromide year-on-year is just stable. It's flat, it's under the critical use exemption process. We still don't see any change there. Pricing year over year has changed as the cost structure has obviously increased as well. But we have been successful year over year in getting some reasonable price improvements.

But for us, year over year, there's really no significant change in methylbromide either way. And we don't anticipate any changes going forward as that is governed by the EPA critical use exemption process.

Finally, on the Chinese antioxidant plants, net of any -- if there were shutdowns or slowdowns in manufacturing in other parts of the world, how material is that really going to be at the end of the day?

That business has been a really nice business for us. We're working on continuing to drive pricing improvement to cover the oil-based input costs there. But that's been a good business for us. And I think as one of the other callers mentioned, the minority interest line will go away as we now own 100%. But its overall margins are higher than the margins of the total Polymer Additives business.

So it's accretive to our margins and it's accretive to our earnings. It's been a great deal for us. It's put us really on the map in terms of China. And roughly about $5 million a month in sales. So it's good.

Just to clarify, we do have -- JBC has minority interest in both the Fine Chemicals business and in the Polymer business. So John's comment is that as it relates to anything Jinhai-related, that minority interest will go away. That will disappear.

And then a clarification on a couple of HPC orders that did not go in second quarter. Were those due to complications on the customer end or on your end? And then you mentioned that you will have to wait until the end of the third quarter to see if those went. I would imagine they would be pretty much right away if they were on the cusp of the quarter.

We think those are going to go in July. But what I was referring to was other orders that are on the fringe of the quarter. Mark mentioned how lumpy this business is. And the last week of a given quarter can make or break this business many times. So the -- to your specific question is mostly delays due to -- at the customer side of things.

Jeff Zekauskas, JPMorgan.

The interest expense for the quarter was about $8.5 million. Is that a good number to use for the next two quarters?

I would use it definitely for the next quarter, and hopefully by the end of the year it will be a combination of what, if anything, we do in terms of potential additional buyback, and where rates go. So we should be very cash generative in the third and fourth quarter, and what we do with that cash will influence that.

What was the operating cash flow in the quarter?

Operating cash flow for the six months was about $94 million, up 10% year over year.

So the Catalysts equity income went from $5 million to $7.5 million. How did it do that?

Yes, it was two factors. We mentioned good growth in the regeneration piece of that; and that's through one of our ventures. And also our Nippon Ketjen HPC venture in Japan did better.

I was a little bit confused in that there are some orders that will probably flop into the third quarter. And I think one of the commentators said that you thought that all in, your segment income in Catalysts would be sequentially down. Are both of those true?

Yes. Now we were aided by a very strong mix in the second quarter, and particularly in HPC. Jeff, our nebula very high activity sulfur reduction catalyst did quite well, and that's probably the highest margin product in the whole family. So strong mix impact.

In terms of the whole raw material issue, sort of order of magnitude your prices were up 10%, and last year you had, call it $560 million in sales. So your prices look like they're up about $56 million, and your cost of goods sold is up maybe about $45 million, all things being equal. So I take it that in the aggregate, you're still ahead of your raw material price inflation. Is that right?

Yes; now you have to take into account we reduced volumes in polymers, year over year and sequentially. And I think that had an absorption impact as we watch that working capital. My guess, about $5 million. And then -- so there's other impacts like that.

But you really have to get into the weeds, Jeff. And that's where, when we look at Polymers, and in its margin decline, either year over year or sequentially, it really comes down to this Mineral Flame Retardant. And our inability to get that ATH passed through in this European competitive environment.

Then lastly, for Mark, it just seems that marginally, you're just the slightest bit more conservative about your HPC volumes for the entire year. And there's all kinds of reasons why it may be volatile on a quarter-to-quarter basis. But are there fundamental reasons why you're a little bit more cautious for the year? And what would those fundamental reasons be if there are any?

Every time I make a comment it's based on some fundamental perspective in the market.

Good, okay.

What we see in 2009 is a fair amount of clarity on new business is booked. And so that base goes in there. And so the rest of the ambiguity deals with change out-- change-out schedules and whether we win or don't win an account. As I just got back from Asia, and there were a couple of accounts in Asia -- this has no impact on us today -- where refineries in Korea have actually slipped the turnaround by a year. So they have started backing off a bit on sulfur. That's an example. It's a data point.

And so I -- until I get the orders booked and -- when John gets them booked and he comes and reports them to me I start relaxing, and I have not gotten to that point I can relax yet for this year. So we got work ahead of us to get -- to drive volume, I think this year. I think we got more tail winds; next year, I think we will end up quite -- I feel good we're going to end up there, Jeff, at the end of next year. But this year it's just too difficult to tell.

Okay, thank you very much.

You have no further questions at this time.

Thank you, everyone, for participating on the call today. If you have any further questions, please 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.