雅保公司 (ALB) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Albemarle Corporation earnings conference call. My name is Emity and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Ms. Sandra Rodriguez, Director of Investor Relations. Please proceed, ma'am.

Thanks, Emity. Good morning, everyone, and thank you for joining us today for a review of Albemarle's third-quarter results which were released after the market closed 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 reconciliations for net debt and EBITDA on our website under the Investor Information section at www.Albemarle.com. I would like to also 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, Chairman and CEO; John Steitz, Executive Vice President and Chief Operating Officer; and Rich Diemer, Senior Vice President and Chief Financial Officer. Now I would like to turn the call over to Mark.

Thanks, Sandra, and good morning, everyone. It's a pleasure to be with you this morning and have the opportunity to share our third-quarter results. I will get into the details in just a moment, but before I do I would like to make a few comments about the business impact of the September hurricanes and then update you on some of the strategic initiatives recently reported.

Most of you are aware that we have manufacturing, research, and administrative sites in Louisiana and Texas. Like most companies in the region, Albemarle was materially impacted by Hurricanes Gustav and Ike. Our facilities suffered little physical damage and thanks to our employees we were ready to restart after a few days. However, others we depend upon were not so fortunate.

A number of customers went down and many declared force majeure as outages lingered. Of particular note, there were 17 refineries down at one time and their return to full capacity has been impacted by storm damage as well as low demand in some fuel markets. Issues resulting from the storms spanned our supply chain, from lack of raw material availability to customers' inability to receive orders.

While most have recovered after a few weeks, distribution challenges especially rail car availability became the prevalent issue in the region as we closed September. We estimate the negative impact to our third-quarter results from the two hurricanes to be approximately $11 million before tax, or $0.07 to $0.08 per share, with the majority of the impact hitting the Catalyst and Fine Chemicals segments.

We also expect approximately $2 million of the impact in the fourth-quarter as raw material delays are still causing shutdowns in a few areas. Despite these natural disasters, our performance was solid with year-over-year and sequential top-line growth.

Moving on, I would like to update you on some the strategic initiatives underway. Earlier in the year we talked about possible asset optimization steps. As part of this process we have recently announced the initiation of the consultation process with the Works Council at our Port de Bouc facility in France for the purpose of the potential sale of this facility to international chemical investors group, ICIG.

This proposed divestment would improve Fine Chemicals segment performance next year and Polymer Additives business segment performance in 2010. We would expect to incur a pretax charge in a range of $25 million to $30 million at closing which could occur before year end. I will provide more information on this potential sale when available.

You have also heard us talk about the great opportunities we have developed through our alliance with UOP. Another example of the success of this alliance is a recently signed technology agreement between Albemarle UOP and Petrobras to accelerate the commercialization of UOP's catalytic crude upgrading technology. Under the agreement UOP will provide the process technology and Albemarle and Petrobras will provide an improved FCC catalyst solution to be used in this process. We are very pleased to have a role in the commercialization of CCU technology and believe it provides an outstanding opportunity for our FCC business.

At the end of July we closed on the Sorbent Technologies acquisition at a cash price of $22 million. This acquisition has more than met our expectations today contributing $2.6 million in revenues in the third quarter and adding to our profitability. Bromine-based mercury removal technology fits seamlessly within our franchise and complements our focus on products that help provide clean energy solutions. Sorbent's integration is going well and the business is positioned to grow materially in 2009 and 2010.

In support of our commitment to a sustainable business model, we are pleased to have appointed Dave Clary as our Chief Sustainability Officer. This newly created role combines technology and consumer advocacy to reinforce our commitment to innovation and help transform our portfolio to better fit the needs of society. Dave is a Ph.D. chemical engineer and his 20 years of experience in process technology, research, and business management will serve us well in this important strategic role.

Finally, I would like to note two other announcements -- the introduction of a new single site polyolefin catalyst activator who will deliver cost performance and IP potential for our customers and the six Albemarle scientists recently honored by the American Chemical Society as heroes of chemistry for their work with Exxon Mobil in the coal development of a unique and more environmentally sustainable catalyst for diesel.

These two an announcement demonstrates the nature of our business model which combines our technology with a customer-defined opportunity to create solutions for the challenges society faces. This model is stronger than ever and in tough times like these I believe will be the differentiating factor for Albemarle.

Now let's get into the specifics. Raw material and energy costs increased approximately $11 million sequentially and $52 million year-over-year. Total year forecasted inflation now stands at $192 million down about $30 million from the last time we talked. We are starting to see lower prices in some raw materials and in natural gas, which is a good thing.

However, we do expect most feedstock costs to pull back -- we do not expect most feedstock costs to pullback in proportion to the decline in commodity prices since many companies have not been successful in their attempts to pass through inflation and will fight to retain what gains they have made. So while I am sensitive to market disruptions impacting volume, we will continue to seek opportunities to take purposeful pricing actions, to mitigate headwinds, and improved markets.

As noted in our earnings release, we delivered solid top-line results in the third quarter with net sales of $660 million, the second-highest sales quarter in our company's history. Driven by increased volume and pricing net sales were up 13% compared to third quarter 2007 and for the first nine months sales were up 12% compared to the first nine months of 2007. Net income for the third quarter totaled $56 million and resulted in earnings per share of $0.61, which is in line with third-quarter earnings of last year.

I have already alerted you to the $11 million hit from the September hurricane events; it is included in these numbers. Absent the negative hurricane impacts segment income for the quarter would be approximately 10% higher than the third quarter of 2007.

Polymer Additives began seeing the impact of the economic slowdown in the third quarter and yet still delivered its third consecutive quarter of record sales. Segment margins improved slightly to 10.5%. Bromine FR sales remained strong while phosphorus and mineral contributions were below our expectations.

Catalyst delivered double-digit top-line growth compared to the second quarter 2008 and 7% growth over third quarter 2007. Refineries are clearly moving heaven and earth to delay Catalyst purchases and this has impacted our business in the third quarter and we expect that impact to continue into the fourth. Nonetheless, we did see some volume improvements sequentially.

Our Fine Chemicals segment also generated record quarterly revenue with double-digit year-over-year and sequential growth. Strong sales in bromine products in our Fine Chemistry portfolio held margins essentially flat versus the second quarter.

As I wrap up my remarks let me spend a few minutes on the outlook for our business. The unprecedented volatility we are seeing in the financial markets today and threats of global recession clearly make this a difficult operating environment for our company and the industry as a whole. And while it's impossible to predict the impact of these trends, I expect they will have an adverse affect on parts of our business through 2009.

In particular, as we have seen in the past, our Polymer Additives segment will be impacted by a prolonged slow down in consumer spending. We are seeing further evidence of softening in the electronics and overall polymer demand as we hit in the fourth quarter. If history provides any insights, slow sales through October usually extend through the first quarter as buyers regroup over the holidays and plan for the coming year.

But even with this uncertainty we are seeing keen interest in our diverse portfolio of products that help customers differentiate themselves and we have a host of new product offerings in the wings that will improve efficiency for customers needing support in these times.

While the Catalysts segment has been temporally impacted by the refinery slowdowns, we expect our catalyst business to see strong growth in 2009 and 2010 as delayed units are recharged, projects underway are commissioned, and new technology is introduced. We also see very attractive longer-term growth prospects in both refining and polyolefin catalyst areas as these markets continue to grow in emerging economies.

Our Fine Chemicals segment continues to execute on its business model and is seeing economic resilience in markets that are historically less impacted during periods of weak economic growth.

In closing, with our strong balance sheet, stable cash generated businesses, ample cash reserves, absence of environmental or other legacy liabilities, and no significant debt maturities before 2013 Albemarle is positioned to excel in these troubled times. We expect the Catalyst and Fine Chemicals segments to grow even during periods of depressed economic growth.

And while Polymer Additives will be challenged, our portfolio of new products and our low cost base should help us perform better in the segment that would be expected. While I am uneasy forecasting the next six months, I am confident we will perform better than most and be one of the companies that lead the industry in performance as market stability returns.

With that, I will ask John to provide some details on each segment.

Thanks, Mark, and good morning, everyone. Our third quarter 2008 got off to a very strong start. In fact, July was an all-time high revenue month for Polymer Additives catapulting the segment to record quarterly revenues of $262 million compared to $233 million a year ago. This 12.5% revenue improvement was driven primarily by volume growth of approximately 5% and pricing improvements in the range of 4%.

Brominated flame retardants delivered its fourth consecutive quarter of volume revenue and operating profit sequential gains. Very impressive year-to-date performance in our brominated flame retardants portfolio, which has been somewhat overshadowed by weakened performance in our mineral flame retardants where increased raw material and energy costs continue to outpace our pricing gains and pressure segment income margins. We believe some relief may be forthcoming from raw materials and an improving competitive environment.

During the quarter we dialed back our minerals flame retardant production to manage this high cost inventory. While most of our polymer attitudes manufacturing is positioned outside the direct hurricane impacted areas, we still encountered delays in raw materials sourcing to some of these facilities resulting in approximately $2 million in negative profit impact.

The interruptions mainly impacted production volumes in our curatives business which saw strong top-line growth in the quarter. This issue combined with raw material inflation and reduced production rates in minerals diluted Polymer Additive margins, yet this resilient segment still delivered 4% sequential profit growth.

Our team is intently focused on preserving Polymer Additives' profitability through innovative product development, cost management, and asset optimization. The proposed divestiture of our Port de Bouc facilities will enhance margins in our Polymer Additives business. In the face of volatile and uncertain markets we stand firmly committed to weather these economic hard times by doing what we do best, operate efficiently and effectively and differentiate ourselves through innovation.

Moving on to Catalyst where we reported net sales of $232 million, a 7% again over the third quarter of 2007 driven primarily by pricing improvement. Catalyst segment income for the quarter was $36.5 million. This segment suffered the greatest impact from the hurricanes. We estimate lost revenue, lower production volumes, factory spending, and additional raw material expense and cost approximately $5 million in negative profit impact diluting Catalyst's margins by approximately 200 basis points.

Our Polyolefin Catalyst segment, again, delivered strong results with net sales up 10% compared to the third quarter of '07. Pricing initiatives are clearly sticking here supported by innovative advancements like our new breakthrough ActivCat technology just introduced this week. This exciting proprietary technology will significantly improve our customers cost and use of single-site catalyst systems.

On the refinery catalyst side, volumes and net sales improved sequentially despite the September headwinds we mentioned earlier. Our FCC business showed strong performance in the quarter with double-digit profit gains over the third quarter of 2007. Driven primarily by successful pricing initiatives.

The macro trend the refining industry is facing is the need for higher olefins in diesel. This global shift favors our FCC catalysts and creates opportunities for us to continue investing in new FCC products to secure our leading market position. We have come a long way in this business, raising FCC profitability and delivering advanced products that create value.

In line with expectations our HPC business showed sequential improvement with double-digit volume and revenue gains building momentum for a strong fourth quarter. Our margins and HPC were squeezed this quarter due to a number of factors including the aforementioned hurricane impacts. Those of you who followed the CMAI report saw that the Gulf Coast refining and petrochemical production was interrupted nearly all of September. We also took steps to reduce inventory catalyst this quarter in an effort to control high-priced inventory and working capital.

Joint ventures delivered weaker than expected profits in the third quarter following a robust second quarter particularly Nippon Ketjen, our HPC joint venture in Japan. Our catalyst segment consists of three very solid divisions and all three are off to a good start in October. Our view of 2009 continues to show strong growth and we continue to build confidence in our outlook for 2009.

Turning now to Fine Chemicals, record net sales for the quarter were $167 million, 24% higher than third quarter of last year, increased volumes of 10%, and prices of 9% drove this robust improvement. Fine Chemicals' segment income with a healthy $25 million. We estimate the hurricanes negatively impacted Fine Chemicals' profits by approximately $4 million.

In Performance Chemicals, our industrial bromides portfolio results were very strong in the quarter driven by strong pricing and regional mix. In fact, this is the third consecutive quarter of record profits for industrial bromides and this includes clear brine fluids that had a great quarter, despite interruptions in servicing rigs in the Gulf of Mexico.

The timing was ideal to roll in our newly acquired Sorbent mercury control business, which is already contributing to the bottom line and is accretive to Fine Chemicals' margins. Our expansive global network served to benefit the integration of the mercury control business into our global strategic platform.

One final comment on another slice of our diversified performance chemicals portfolio, I would like to highlight the continued solid operations of our JBC joint venture in Jordan. They had another strong volume and revenue quarter contributing to the overall bottom line results that you see.

Our Fine Chemistry Services business delivered good results in the quarter with strong sales in our Ag Intermediates business and ibuprofen. However, profits were down because of key raw material sourcing issues during the storms. Our new products portfolio focused on developments in life sciences, agriculture, and specialty materials has never been more robust. We are confident about the future of this sector.

All-in-all Fine Chemicals delivered an outstanding quarter and the segment weathered the storm in many steps of our supply chain and set records along the way.

With that, I will turn it over to Rich.

Thanks, John, and good morning, everybody. The items I will address on the call today are corporate expenses, other income expense, income taxes, cash flow, and our balance sheet financial position and liquidity at September 30.

Unallocated corporate expense was $10 million, down $2.6 million from last year principally due to reduced spending and benefit accruals. SG&A expense was down $1.1 million, or 1.8%, to 9.1% of revenues in the quarter as compared to 10.4% of revenues last year and year-to-date our 9.8% of revenues versus 10.5% to 2007. Other income expense this quarter was a net expense of $2.7 million, a swing of $3.5 million compared to last year due to foreign exchange losses. R&D expense this quarter was up 12.8% from a prior year levels.

Our effective tax rate for the quarter was 15.3% as we adjusted our estimates of our full-year effective tax rate at 18.6%, just below the full year effective tax rate in 2007. As has been the case in prior quarters, both the level and geographical mix of income in 2008 combined with benefits from tax planning activities have resulted in a decrease in the tax rate as the year has progressed. A significant contributor to this result has been the increase profitability of our Jordan-based bromine JV operations where we enjoy a statutory exemption from tax.

Our EBITDA this quarter is $103 million, down $2 million from last year. We ended the quarter with cash and equivalents of $207 million. CapEx for the quarter was $23 million and our full-year CapEx estimate is in the $95 million to $100 million range. Depreciation and amortization was $27.5 million.

During the quarter we repurchased 350,000 shares for approximately $12 million. At quarter end we have consolidated debt of $969 million including $57 million of debt from JBC, our Jordanian venture. $576 million is floating rate and $393 million of our debt is fixed rate at an approximate 60/40 split. Our floating debt interest rate was 3.08% at quarter end. The weighted average interest rate for Q3 was 4.03%

Net of $207 million of cash on hand and excluding $32 million of non-guaranteed JBC debt, our net debt is $730 million up $180 million from year end. Our debt to cap ratio is 42.8% and our net debt to cap is 36.8%. With no significant debt maturities for the next four years and no significant projected minimum required pension contributions in the near term, we feel comfortable with our current leverage and liquidity profile and that we will be able to fund future growth and other corporate activities. Now back to Sandra.

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

Excuse me, question and answers.

We are going to open it up for question-and-answer now.

(Operator Instructions) Steve Schuman, [Lafayette Research].

Good morning, everyone. I noticed a number of additional hydrogen projects announced. Are you expecting another uptick in catalyst demand maybe late '09, early 2010?

The new catalyst -- that is an important question, Steve, and a lot of it I think depends on the economic outlook. The current view is that these, a lot of these major refineries in the Middle East, India will be operational at the end of 2010, sometime early 2011. I really don't have any clear line of sight on that at this point. We are hopeful that those projects will remain on track, but I think in part it depends on how things develop in 2009 and early 2010.

I guess the other piece would be that in 2010 there are some additional requirements for off-road diesel. I know it's a smaller market than gasoline and diesel, regular on-road diesel, but are you expecting a little bit of rate increase just due to that?

Absolutely. The need for additional diesel globally is an important driver for our FCC business. And a lot of that, of course, plays into ultra-low sulfur diesel requirements and increasingly stringent sulfur requirements, so it also impacts HPC. But overall, that trend is a very positive one for us in the industry absolutely.

I guess the last piece is on currency. It was a help it looked like in the last quarter, but currencies have since moved. What are you expecting here going forward for the fourth?

I differentiate between -- let me talk about currency in two different, from two different viewpoints. Steve, this is Rich. Certainly to the extent we have foreign profits that get translated back into US dollars, the way we report, there will be a headwind. There has been extreme volatility in currencies and certainly the tailwind we have had in terms of our diverse operations and getting that translated back into dollars has turned into a headwind. So that is one way I would talk about it.

The other way is in terms of the foreign currency losses that I cited as part of my part of the call. That is accounting, so let me tell you it actually really involves no cash outflows outside of Albemarle. And what it is is in a couple of cases we have, say dollar items in a euro company or we have dollar items in a real company in terms of Brazil. And we have been -- it has been cited and people have noted that our other income has benefited from that over the course of the last couple of years, okay.

Really in anyone quarter it has never been all that significant, but this quarter because of the extreme volatility, especially in terms of those two items that I mentioned US dollar to euros, US dollar to reals, we had a headwind there, a significant amount that impacted our earnings this quarter. I suspect we will see a little more of that in the fourth quarter, but we have taken some actions to make sure that doesn't have the same amount of headwind that hit us this quarter.

So that hurt us by $0.03 in terms of our reported earnings this quarter. It may be a little bit of a headwind in the fourth quarter, but I anticipate after that it will be less.

Great, thanks, guys.

Jeff Zekauskas, JPMorgan.

Good morning. Your catalyst volumes were down I guess about 11%. At least as I understood your remarks, you talked about strength in fluid cracking catalysts. So does that mean hydroprocessing was down, I don't know, 20% or 25%?

Let me differentiate, Jeff. This is John. FCC volumes were down year-over-year. We anticipated that and we have seen good sequential growth. And we anticipate continuing sequential growth in FCC. We mentioned on the last call because of tightness in supply in the markets we have seen a couple of refiners come back to us over the last couple of months and that was good to see. But it was mostly a year-over-year impact of FCC.

So how about that target that you have got of the 5,000 incremental tons of hydroprocessing catalyst. On a run rate basis where are you going to be at the end of the year as far as you can tell?

Things have changed dramatically, I think, in HPC due to the market situation we are in. As we turn the calendar towards '09 we are still very bullish, very confident on our growth projections for '09. But as you can tell by the math, '08 has turned into a very challenging year. Some of the issues there relate to if a refinery due to its margin situation today can extend the life of an HPC catalyst that is basically a free catalyst that has already been fully depreciated, if you will.

We have found that out through the course of this year and it has gotten significant, but we were glad to see some continuing good double-digit sequential growth in HPC as well in the third quarter. We are working hard to deliver a solid fourth quarter as well.

A question for Rich. Should -- in earnings-per-share terms should the fourth quarter look like the third quarter more or less?

More or less, but I think it would be best -- I think we are not going to have a hurricane and I think it will be better.

Right. But in terms of I guess what you are looking at is some downward pressure in Polymers and maybe Catalysts is sort of the same and maybe Fine Chemicals is sort of the same. I know that you have a bullish outlook toward next year, but it just seems like so much refinery expansion has been pushed off. And as you have said, customers are using catalysts longer.

So, basically are you looking -- I mean if your run rate of earnings now is about $2.50 a share, is the right number for next year something like $2.50 as well in this sense --?

Absolutely not for next year and I would say would be disappointed if we had $0.61 in the fourth quarter. That it's not just -- that is not the way we run our business. We try to drive upsides; we try to execute on our plan whatever is out there trying to push up against us. Maybe John or Mark --

Let me make a comment. You asked about five questions in that long sentence, but in a fundamental sense the refineries the second half as margins plummeted have taken extraordinary steps, steps it would normally not be taking even in times of modest margins to really do everything they could to try to hold margins. One of those things is that they extended the life in catalyst. I would also comment here, some of the new catalysts John has introduced has better life, which is a good thing, and that is part of the value equation.

Now when you roll all that up though that is a temporary situation. And so, yes, maybe you can extend it six months, but your not going to extend it two years, Jeff. It's not a two or three or four year scenario, it's a near-term scenario. So as we look at it and John said we have had headwinds the second half of this year, our real objective was to fill up HPC by the end of 2009.

And as we reported, we still feel pretty good about that, but we haven't done half of it and won't do half of it. It will be a linear process I guess is what I am saying. It will be more back-end loaded.

Now when you rollout beyond that and look at what we see around the world, we still see the growth continuing out there because there are now new emerging needs as we shift the refinery mixed to more diesel, less gasoline, and that is an extremely attractive area for us. We still see most of the emerging economies moving ahead with their projects, although we have cautioned that projects scheduled for 2012 or maybe in our portfolio are going to be 2013 now or something. That could easily happen. But I don't think materially it's going to make much difference for us.

Thanks very much.

Bob Koort, Goldman Sachs.

Thanks, good morning. I was wondering if you guys could talk a little bit about the customization quotient of your catalyst and how far in advance do your customers have to give you order visibility in order for you to meet that order?

I tell you that is a very broad question, Bob, because it impacts three to four different businesses, including our AFT business, our Alternate Fuels Technology business. Let me start with AFT, because those orders are placed generally 12 to 18 months in advance. They are in anticipation of some significant capital outlays by our customer base and that is kind of the window of opportunity there.

In our Polyolefin Catalyst business about half of our polyolefin catalysts are organometallic compounds, and those orders are placed routinely with not a lot of advanced notice. We are talking 15- to 30-days notice on those orders. It's fairly routine, we produce them routinely, and our customers use them normally routinely outside of the scope of the hurricane impacts.

And then you get into FCC. There is some customization in FCC but we have got to be very quick, very fast, very resilient in that business. And we have worked hard to do that. So those orders, generally we are talking 30- to 60-, maybe on the outskirt 90-day notice on those.

The HPC, normally, we will have some pretty significant advanced notice there -- four to six months. But in this environment, we are finding more what I call emergency orders. We had one customer come in yesterday, for example, who had been using regenerative -- regenerated catalyst that failed on them so they needed a shipment in the next couple of weeks, for example. So you do have those kind of emergency situations and we are seeing more and more of that lately I think reflective of the environment we are in.

Hopefully, that gave you some color commentary around that question.

Yes, thanks. And John if you -- I guess I get worried we might be on the precipice of repeating 2001 or 2000 in the flame retardant industry. Can you just give me some reason why it might not get as bad as it did back in the prior tech bubble?

Well, I tell you with what we have had to live with the last couple of months, I'm not sure but --. It's difficult for me to sit here and predict these macro environments we are in. But I will tell you that if it does occur that we are going to be prepared for it. That we are going to work to be lean and mean. We are going to look at high-cost operations like Port de Bouc and address those. We are going to come out of this stronger as a result, and we are going to do a lot of contingency planning around that issue.

Third quarter, for example, we reduced inventories, I think, forcefully in Polymer Additives and that is a good thing. So we are going to be lean and mean in preparation for this, and we are going to come out stronger as a result. We have lived through these kind of situations before and we certainly come out stronger as a result.

Bob, I would add to that, we just got back from -- the senior leadership team and the Board we spent about a week in China. Through that process -- one of the things we had in 2000 was very high inventory levels, not only companies like Albemarle, but in our end-customers. You had customers like Nan Ya that when the crash occurred in 2001 found themselves with, as I recall, three years of inventory. So you have these absurd levels of inventory throughout the supply chain.

To my knowledge that doesn't exist today. We don't see that with our customers. As we are being very prudent with our inventory levels, so I think the system will respond much quicker to moves in demand both up and down now than it has perhaps in the past. So I would not expect the kind of deep tail we had in 2001. You may recall it took several years, actually, for volume to come back -- about three -- but much of that was a product of the inventory and things like that. I have a hard time seeing that replicating itself.

And Bob, I would just add one last comment. Our Fine Chemicals business during that downturn in 2001 and 2002 carried a lot of water. Now we are even more diversified with our Catalyst franchise, so I think the diversification for our company will be a real strong benefit going forward.

Got it. Thank you very much.

David Begleiter, Deutsche Bank.

Thank you, good morning. John, can you discuss how pricing is holding up in bromine flame retardants? You haven't seen any weakness yet, but what is your expectation on volumes to soften over the next couple of quarters?

Yes, David. If you take brominated flame retardants, we did see a sequential improvement in pricing, up 4%. Due to some mix impacts, it was pretty flat year-over-year. But again, one of the real strengths of our portfolio is its broad diversification from a really fantastic line of brominated polystyrene polymeric materials to our proprietary decabrom alternative product, S8010. So we feel from a portfolio perspective we are really prepared for this and we are seeing the discipline out there on the pricing front.

So with that said, the biggest issue on the pricing horizon we have relates to mineral flame retardants. We are continuing and in the last few weeks have seen a very good discipline in terms of trying to get the rampant raw material inflation covered. We think this bodes well for the turn of the year, January 1. So that we hope will help us going forward to.

To be clear, are you expecting flame retardant volumes to be up year-over-year in Q4 and/or sequentially in Q4?

Well, it's hard for me to see an increase sequentially due to the economy. If we -- the current projection is we will be flat to slightly down. If we can hold onto those, that kind of view I think that would be an outstanding accomplishment. A lot of this comes down to the holiday season, as you well know, and the order book over the next month or so in anticipation of holiday spending. Anybody's guess there.

John, just on FCC pricing, there were some pricing actions over the summer. How were they taken up by customers?

Yes, FCC pricing continues to help us offset the raw material inflation we have seen. And David, the pricing in FCC was just under -- average price for our FCC portfolio is just a hair under $3,400 a ton for us. We are seeing good competitive support for that. The increase year-over-year is double-digit, significant double-digit number.

But we continue to see, despite the oil pricing, we continue to see very high rare earth and related product inflation. So that has not ameliorated, if you will, over the last couple of months. Actually, it has gotten worse.

And would you expect FCC pricing to be up double-digits as well in 2009?

We feel pretty good about that. We have had some recent tenders where there has been some very good price support, so we remain hopeful for 2009. We think 2009 will be a strong year for our business in FCC. And with the lowering of gasoline prices out there, we think a lot of people are going to start firing their Hummers up back in the US so we are a little bit hopeful.

Thank you very much.

Kevin McCarthy, Banc of America Securities.

Good morning. The subject of raw material costs, obviously (inaudible) is moving lower, but you have a fairly broad basket of things that you buy along with lag effects I imagine. So could you comment on your expectation for raw materials in the fourth quarter versus the third quarter, please?

Yes, as we look at it, Kevin, John mentioned rare earths are not moving with us; maybe they are moving against us. We are seeing metal prices come down a bit, but for the most part that is pass-through. It does afford some perhaps cautious view that we should get a break or could get a break as we start next year. I don't think we will see any of that in the fourth quarter.

My comment on people not pulling down prices as rapidly as commodities have come down really relates to a bunch of products out there that we buy, not the big ones like chlorine and caustic and those things, but the huge number of products we buy that are specialty in nature. And frankly, we are not seeing any real movement south in the prices of those products yet.

Long and short of it, direct fuel derivatives like ethylene will come off and things like that, benzene will probably come off a bit. But we are not seeing it much anywhere else today.

Okay. And then when you close the sale of the French plant could you quantify the expected benefit to profitability in Fine Chemicals in 2009 and Polymer Additives in 2010?

Kevin, we would like to take a pass on that for a month or two. We are in consultation processes with the union and the Works Council there, so we have got a lot of work to do to see if this is possible. If you will indulge with us just a little bit, we will give you an update on that whenever we get that -- see our way clear to.

Okay, fair enough. A couple of quick ones for Rich, if I may. Rich, it sounds like you have reduced inventory and mineral based FRs and maybe certain catalyst lines. Do you have a preliminary inventory number for the quarter? That is the first question. And the second one, what is the magnitude of other expense that you would expect for the fourth quarter given your foreign exchange hedges?

Inventory is around $520 million thereabouts at the end of the quarter, so it's up a little less than $50 million for the year. At one time I think we were up over $100 million for the year, so we have improved there. In terms of the other income, if I had to give you a number right now, Kevin, volatility is the key word in and around these types of calculations. I would say we will probably be down $2 million in the fourth quarter. So not as much of a headwind as it was this quarter.

Great, thank you very much.

Chris Shaw, UBS.

Good morning, everyone. I think normally you -- are you still behind in your pricing, trying to catch up for the raw materials for the year?

Well, yes. To answer your question specifically in polymers, yes, we are still behind primarily in the stabilizers curatives area. And I would add, Chris, the mineral flame retardant has been probably the single biggest inflationary impact to impact polymers. We are still working on getting that through, but we are starting to see some line-of-sight that will be successful on that initiative around the turn of the year.

Do know what kind of gap you are running between the two? Between your cost inflation and the price gains this year?

For example, the mineral retardant gap in the third quarter was about $5 million year-over-year and that is the biggest single issue that Polymer Additives is dealing with today. So it's pretty significant when you look at that in terms of margin and the margin impact it's obvious. We are talking 200 basis points.

You will still be going after the pricing there, so there could be benefit going into 2009?

Yes, and I think I had a question earlier I kind of reiterated that, but that is what we are working to achieve.

Right. The ActivCat announcement, is that going to be meaningful? Are there orders on the book already?

Well, I mean, it's just a good example. We just try to give you examples in a situation like this where we are really bringing value. Is it a significant material issue? It's probably, hopeful, a penny or two next year that kind of thing.

Our organometallics business continues to do quite well in terms of providing value to our customers. We are actually continuing to see good volume growth in that line of products and some new applications, including use as an intermediate in solar cell technology. We feel pretty good about that, but that is just a good example of being innovative and driving value with our current product line for our customer base.

And then on SG&A, I know Rich touched on it briefly but it was a lot less than I thought. I know some of that I think he said was just cost controls, but was there a big impact from lower option expense? Is that what the other part was?

It wasn't really lower option expense; there was some variable pay impact on that.

But based on the share performance?

No, just based on our overall performance.

Okay.

Versus our plan.

That makes sense. All right, thanks a lot.

Mike Sison, KeyBanc.

Saw you had a nice quarter in a difficult environment here. In terms of HPC backlog or orders, whatever you want to call it, is the backlog full enough to fill up the expansion in '09? Was that what I was hearing earlier?

Yes, Mike, I tell you the way I view it today is we will have sequential growth in the fourth quarter and hopefully again double-digit. And with the turn of the year, the first quarter looks to be a very strong quarter for us where both our plants -- all three of our plants will be sold out. So we feel good about that and the remainder of the year we believe will provide additional growth. Possibly more like book ends, as we have said, with strong first quarter than second and third quarters more flattening out with a strong fourth.

But our view is currently, as Mark said and I will reiterate, we are looking for a strong year in HPC. A lot of these units are really, are in need of refills. So with that we will be real close to having that plant sold out in '09.

So when you think about -- you have outlined the 2010 sales goal of the 11%. It sounds like FCC pricing will be good. Maybe you can make a small comment on polyolefin catalyst next year. HPC being good, hitting that 11% top-line growth target should certainly be in the cards next year or a little bit better, a little bit less but within spitting distance, right?

Yes, you bet, Mike. And the polyolefin catalyst view for next year continues to look very strong. As does, I would add, as does Fine Chemicals.

Right -- (multiple speakers). My next question, the outlook for Fine Chemicals certainly that business continued to very, very well. Can you walk us through in '09 some of the things that maybe aren't as economically sensitive, meaning Fine Chemicals Services probably has a pretty good backlog, Sorbent expectations, and anything else pricing there that helps you achieve that annual goal of 12% to 13%?

You bet. Let me start with real hot button for us is Sorbent on mercury control. Our order book there for '09 continues to build. The margins overall are accretive to our Fine Chemical margins as they are today. The new product portfolio, we are doing some new Ag products for a couple of new significant customers so that continues to look very good in the life sciences area.

Our ibuprofen business in Fine Chemicals, volume-wise, continues to do very well. We will be sold out next year and we are getting good support for pricing improvement.

The overall -- we call it Specialty Materials. The Specialty Materials area is one where we have to be fairly confidential in our description of those products because they are one customer opportunities, but that looks really strong for '09. We have got the orders, we are putting in an expansion in our Pasadena plant to provide that, and that is looking really solid. It's for a new material that will facilitate the growth in windmill -- windmills as an energy source.

We have mentioned earlier the SIGA opportunity and that one continues to blossom for us. So we are very bullish about that for '09 as well, and that is just to name a few.

So given a difficult economic recession in the US and Europe, it sounds like Fine Chemicals should still show fairly good growth within, again, within -- should be close to where your annual sales growth goals would be?

You bet. We feel very, very confident about that.

Then last question, in Polymer Additives when you think about the last downturn wasn't pricing -- the major three still sort of fighting off pricing at this time around? Maybe the major difference would be the pricing amongst the majors are more rational. Any comments there what you think would happen in terms of pricing if the economic environment slows significantly for brominated flame retardants?

Yes, I just echo your view that we have made such good pricing gains over the course of the last decade that to jeopardize that is just putting one's business at such great risk that it's not a viable option. The hopeful aspect to aluminum flame retardants is that we will see that discipline going forward and we have seen some early signals that would support that.

We are hopeful phosphorous has had a lot of inflation. We have gotten some new management of one of the key competitors in that area, and we are hopeful that their leadership will be strong going forward. We haven't seen that yet, but we are hopeful.

I apologize. Mark, any change to your confidence in the 2010 goals given the difficult time we are seeing here in the environment?

Mike, we are going to -- we are in a process today of going through and updating that. We will have that done I think probably February/March timeframe next year and we will share that with all you guys. Clearly, when we rolled that out some folks cautioned us with a view that Polymer Additives maybe too strong and Catalyst maybe too weak. That could turn out to be true.

So today we are not backing off that goal, but I think in fairness you need to give us a few months to sort out what is going on. We will be in a position to talk more clearly about it next February.

Great, thank you.

Laurence Alexander, Jefferies.

Good morning. On the FRs, how much of an earnings hit did you have for inventory reductions? What is your confidence level of not needing further inventory reductions in the first half of next year?

Laurence, this is John. I think the impact in the third quarter was in the high $40.02 to $0.03 range in Polymers. The question is if we had had that inventory around would we have sold it. I'm not sure, so that draws into your question of the first half of next year. I think we are getting our pot right in terms of inventories, but we are going to continue to watch it especially in light of some of these raw materials and what is going on there. We do not want to be saddled with higher-cost inventory as some raw materials decline so we are going to watch it very closely.

Your whole view towards Polymers in '09, we are going to try to going into 2009 be very lean in terms of inventories, in terms of asset base, and support to move. We are just going to try to make our business use this as an opportunity to make as much stronger and better positioned as the growth returns to the segment.

Then on the Catalyst business given what is happening in the end markets are you seeing any shift in order patterns in favor of lower price and lower margin, less sophisticated cash flow, particularly in HPC?

We have seen some customers attempt to use some portion of their catalyst fills in terms of regeneration that we have some proprietary technology where we make a very good royalty fee on that technology. But it is not fresh catalyst, and we find that with -- if a customer is using a very difficult crude slate that that could fail on them.

Hence, I identified earlier the customer who had been using a higher amount of regenerated catalyst and has come back to us for an emergency fill. So we are seeing more of those kind of things. That is the only example I can think of.

And then lastly on working capital are you saying much of a tailwind from molybdenum in Q4, possibly in terms of reducing working capital?

Yes, absolutely. Molybdenum is going down. We are managing our inventory very closely there to what we need. But a lot of these metals are going down, so we are going to keep a close eye on that.

Thank you.

Okay, thanks again, everyone, for participating on the call. Have a great day.

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