雅保公司 (ALB) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Albemarle Corporation Earnings Conference Call. My name is Bev, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Sandra Rodriguez, Director of Investor Relations.

Good morning, everyone. Thank you for joining us today for a review of Albemarle's second 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 arbiters as part of our quarter end review process.

Please note that we have posted supplement sales information as well as reconciliations for net debt and EBITDA on our Website under the investor information section at Albemarle.com. I would also like to caution that remarks today contain forward-looking statements. Factors that could cause results to differ from expectations are listed in our annual report on Form 10K.

Participating with me on the call this morning are Mark Rohr, Chairman and Chief Executive Officer; Luther Kissam, Executive Vice President; John Steitz, Chief Operating Officer; and Rich Diemer, Chief Financial Officer. At this time, I'll turn the call over to Mark.

Good morning everyone. I'd like to begin the call with some observations on current business trends before sharing highlights on the quarter. After my opening remarks, Luke will give you a brief update on the progress we made versus the $160 million cost reduction objective we set for the corporation, a critical element in our strategy to perform well in this challenged environment.

Following Luke, John will discuss the business segment performance for the quarter and share our views on the opportunities for business and technology in the third and fourth quarters. Rich will then follow with a review of our financials, tax and working capital. Then I'll wrap up with a few summary remarks on our outlook for the remainder of the year before opening the call up for Q&A.

As we wrap up the first half of 2009, I'm very pleased with the progress we are making in a number of business areas, as well as our ability to draw profit in spite of unprecedented headwinds. While difficult marketing conditions prevail, we have seen month-over-month volume progress in a number of product lines from the lows experienced in January and February.

We've also seen improvements in our ability to increase margins as product breakevens have been lowered through one heck of a lot of hard work. Luke will provide some more clarity on our cost reduction efforts in just a moment.

Our second-quarter earnings were $38.5 million, $0.42 per share, which is down 38% year over year but up 50% sequentially from first-quarter earnings of $24.5 million. This achievement is particularly gratifying when considering the over $50 million of unabsorbed costs that were overcome in polymers and fine chemicals, as well as some residual high cost inventory that continues to move through the system.

Our second-quarter results include a one-time after-tax charge of $8.2 million, or $0.09 per share for a final contract settlement arising from the divestiture of Port de Bouc France facility. You will also note that in the earnings release the recognition of a one-time net tax benefit of $9.2 million that occurred as we settled from some IRS audit issues, allowing us to reverse previously established reserves.

Together, these one-time items have a $0.01 net positive impact on earnings. And Rich will share more details on these items in a few moments.

Net sales for the second quarter were $445 million, down 20% compared to the $621 million, and a further 9% sequentially. Lower volumes, product mix and, to some extent, deflation in metals led to the shortfall. I am especially happy to report, however, the second quarter saw polymer sales increased 40% sequentially in the segment return to profitability.

General improvements in consumer electronics, some restocking and a focused effort to manage costs led this business from a loss of $11.7 million in the first quarter to a profit of $14.7 million this quarter. That's fantastic performance.

While profits are roughly one half the level we expect from this segment, we do believe business is showing some signs of rebuilding. Fine Chemicals profitability for the quarter was heavily impacted by the weakened demand in completion fluids and the lingering impact of low bromine volumes across most markets. We kept units down in this segment to further reduce inventory, adding to this burden.

For the quarter, segment profitability was down roughly 40% sequentially to $5 million. We are now starting to see a rebound in certain products within our bromine chain that will necessitate increased production in the second half. In addition we are seeing stronger new product sales in the third quarter that John will provide more color on in just a moment.

The combination of increased absorption and new product sales will boost Fine Chemicals performance in the second half. Our Catalyst business reported sequential profit improvement driven by record profitability in our polyolefins catalyst division, and aided by our new catalyst offerings and the relative strength of the polyolefins business. Profit for the segment came in at $37.7 million, that's a 6% sequential improvement.

Refinery Catalyst business showed good performance in the quarter, despite product mix having a negative impact on earnings and refiners putting forth Herculean efforts to delay refills of HPC catalysts. This business is positioned to continue to improve as we go through the year.

For the second quarter, gross raw material and energy costs were roughly $37 million below last year's experience, with the vast majority of this year-over-year variance driven by volume in metals. We currently expect year-over-year raw materials to come in at $180 million lower than 2008, and, of this, roughly 2/3 are in metal costs.

To give you a flavor on pricing and volatility, moly is down from the $33 million -- $33 per pound, hitting lows of roughly $8 per pound in April to back to $14 per pound today. Ethylene from above $0.60 per pound to levels below $0.30, and benzene from $4 a gallon to roughly $2 a gallon.

Energy is following similar trends. We expect year-over-year energy costs to be [down] $22 million. Altogether we are looking at year-over-year input costs to be down roughly $200 million reflecting both products and volume impact.

With that, let me ask Luke to comment on our progress for cost reduction.

Good morning, everyone. At our conference in May, we talked about our 2010 costs savings objective of achieving $160 million in savings from 2008 actual costs, which would result in a leaner and more efficient business model.

While many believe the worst of the economic downturn is behind us, you can find just as many pundits who believe that the recovery is a long way off. The goal of our restructuring efforts is to make certain we deliver quality earnings during the economic trough and position Albemarle as a stronger company whenever the economy rebounds.

To that end, we developed and are implementing a plan to free cash from working capital, and restructure our organization for cost superiority, while retaining the agility and innovation that has been a hallmark of our success. Our initiatives have been successful thus far.

Since the end of 2008, we have reduced our total workforce by almost 10%. The comparison of the total cost for the first six months of 2009 to 2008 shows a reduction of almost $60 million. And that figure excludes the one-time accrual reversal of $8 million in first quarter of 2009 and the favorable currency impact we are experiencing year-to-date.

Our challenge is to maintain that level of workforce and spending when volumes and capacity utilizations pick up in the future. To that end, we have identified specific initiatives that will enable us to meet our $160 million goal.

One of our shareholders cautioned me at our Analyst Day to make sure we weren't saving the same dollar five different times. I can promise you that we are not.

We are taking this opportunity to address structural and sustainable changes in the way we run our business and operate our assets. We have challenged our organization to be more efficient than ever before by increasing the impact of best practices and eliminating barriers to success.

Research and technology has been and always will be at the core of Albemarle's strategic focus. In R&D, we are increasing our focus and investment and high throughput screening and polymeric solutions. Our plans also include building a center of excellence for transactional processes that will lower our costs and improve our efficiencies at the same time. All of this will be done in a way that addresses cultural changes needed to create a stronger and more sustainable business model.

In addition to cost reductions, we have focused on ways to significantly reduce our working capital levels across all of our businesses. Rich will talk more about our results to date a little later but the important aspect is that we have fundamentally changed the way we forecast, produce and deliver products so that we can keep our inventory levels down, even when volumes pick back up.

In closing, our year-to-date results are ahead of schedule with regards to our cost reduction initiatives. There remains a lot of work to do, but we have plans in place that make us comfortable that our target is achievable. We will continue to update you on our progress over the coming quarters.

With that, I'll turn it over to John Steitz.

I'll begin with our polymers segment. Over the last five quarters, recall that polymers reported three consecutive quarters of record sales revenue, followed by two of the lowest revenue quarters in over the last five years.

Tetrabrome, for example, saw an unprecedented volume decline of 75% in the fourth quarter. To help manage the inventory situation, we idled many of our polymer and bromine fine chemical assets beginning in early December. These necessary actions, coupled with continued volume decline drove the segment to its first operating loss in the first quarter of this year.

We've kept most of these assets shut down through the second quarter, and again contended with significant unabsorbed fixed manufacturing costs of $24 million. Despite these harsh headwinds, as Mark noted, polymers turned a profit in the second quarter, reporting segment income of $15 million.

Second-quarter revenue of $173 million improved sequentially, but certainly reflects the economic weakness we are all experiencing. Our flame retardant volumes were down nearly 30% compared to the same period of last year, but improved 37% sequentially on flat production volumes. Pricing has held up quite well, and we have yet to benefit from any significant amount of raw material declines in this business.

Our stabilizers and curatives business recorded sequential top and bottom-line improvements in the quarter. Overall, the health of our antioxidants and lube and fuel businesses is improving. We have a strong base curatives business in China that is being aided by China's stimulus package as well.

Positive volume trends, coupled with further cost reductions, positioned this segment for continuing sequential improvement. And our third quarter is off to a good start.

Moving on to Fine Chemicals, net sales for the second quarter were $104 million compared to $152 million in the second quarter of '08. Segment income for the quarter was $5 million. Profitability of the business was negatively impacted by nearly $30 million of unabsorbed fixed cost from idled production, which are now starting to turn back up to meet demand requirements.

Our completion fluids volumes used in offshore oil and gas drilling were down sharply from the second quarter of last year, and remained flat sequentially. This is consistent with general industry trends. According to Baker Hughes, year-over-year oil exploration in the US is down 37%. US rig count is at a five-year low, down 55% since the end of last August as weak energy demand has hampered oil field activity.

However, in the Middle East we are starting to see a recovery of clear completion fluids in the third quarter.

Our fine chemistry services sales were soft in the quarter, due mainly to seasonal timing of certain agricultural intermediates. Looking ahead to what we are seeing in the second half of '09, several opportunities are shaping up to produce strong results in the pharma and ag sectors. We expect to see a marked improvement next quarter in our crop protection business from seasonal supply in the fourth quarter, and we captured new business from the general strength in multinational ag crop protection programs.

On the pharmaceutical side, ibuprofen destocking at the retail level seems to have subsided. We are seeing improved volumes and are stepping up production to meet this increased demand. Within the next few months we will manufacture the pharmaceutical agent for the smallpox antiviral registration badges for CIG A. We are also producing Tamiflu Intermediate in response to increasing demand, triggered by the swine flu dilemma.

Another positive impact in the second half will come from a large multi-year customer services project that will be starting up at our Pasadena plant in the fourth quarter. Volumes are picking up in our [sorbent] mercury control business for coal-fired power plants.

Business has a lot of promising activity in the pipeline and was recently awarded a new contract from a large utility. As critical food safety measures are taking hold, demand for Albemarle's portfolio of food safety products are on the incline. In addition to our effective antimicrobial products for poultry, we now offer such products for the beef industry and have secured business with several beef processors.

Pulling this together improved production rates, coupled with new product introductions and reduced overhead costs position Fine Chemicals to reignite in the second half of 2009.

Now turning to Catalysts. Our Catalysts segment delivered solid performance for the quarter with segment income of $38 million on net sales totaling just under $170 million. Segment income margins improved 170 basis points year over year, more than 750 basis points from the first quarter.

This was a record profit quarter for polyolefin catalysts. Topping the charts in this division were strong sales of aluminum (inaudible) and record metallocene catalyst sales. Being positioned as a leader in this market, as well as in helping customers increase value through metallocene chemistry will continue to help our polyolefin catalysts business growth through the recession.

FCC catalyst revenues was comparable both year over year and sequentially, and FCC's joint venture in Latin America delivered strong results for the quarter. Despite extreme pressure and refineries to control costs, our HPC catalyst volumes were essentially flat year over year. Refineries continued to stretch the timing of their change outs and look for ways to improve margins. Our new HPC products are answering the call to help refiners drive down costs and gain more value.

We are seeing continued success for our innovative products, addressing both performance demands and price sensitivity. Structural working capital improvements in manufacturing cost savings will keep this business on a strong growth track.

I also want to salute our strong catalyst technology base that arms this business with a broad range of products and services to strengthen our market position, and deliver real value at a time when refiners are being stretched by margin pressure and continued stringent fuel specifications. New technology developed by our Catalyst R&D group, and recently introduced to the market is likely to be the best breakthrough chemistry the market has seen in a while.

Innovative chemists and engineers who spent years conducting scientific studies recently turned out several proprietary products that are changing the shape of our catalyst business and expanding our offerings of a broader range of products and service capabilities for this business. Such proprietary products as our new activator catalyst known as Active Cat, our recently announced VTP or diesel catalyst called Go Ultra, and our new patented hydrodesulfurization catalyst built on our [STARS] technology that enables ultralow sulfur diesel refiners to improve their operating margins substantially, by increasing throughput. Great scores by our global R&D and marketing teams.

Overall, our Catalyst business continues to generate numerous ways to make money in a very tough environment.

Now I'll turn it over to Rich for an update on the financials.

I'd like to cover the following matters on today's call. First, some color around the additional special item charge arising out of our disposition of Port de Bouc. Second, taxes, followed by corporate expense, CapEx, working capital and our quarter end balance sheet and financial position.

As Mark referenced in his opening comments, we've taken additional pretax charges in the amount of $12.4 million, or $8.2 million [and] $0.09 per share after tax. As a result of our disposition of the former Port de Bouc France location. These charges relate to amendments to the original sale agreement and our related supply agreement that were negotiated and finalized during the quarter.

During the quarter we received a notice of proposed adjustment from the US Internal Revenue Service, with which we agreed, constituting an effective settlement of an issue in their ongoing audit of our 2005 to 2007 tax returns. As a result, we have reversed $9.2 million or $0.10 a share in Q2, mainly related to the settlement.

Excluding this one-time tax benefit, and the tax benefit of the Port de Bouc charge, our effective tax rate from the quarter was 14.6%. We continue to project our full-year effective tax rate on an operational basis, that is excluding prior period and special items of approximately 14%.

Unallocated corporate expense of $9.6 million in the quarter came in at expected levels. And I would continue to use a $10 million per quarter run rate for the back half of this year as our best estimate of expected spending levels.

Our EBITDA in the quarter, excluding special items, was $74 million, down 33% from last year but 27% ahead of Q1. We ended the quarter with cash and equivalents of $172 million as we chose to pay down some debt at quarter-end.

CapEx for the quarter was $27 million, and we are holding our full-year CapEx plan at $90 million, pending a clearer signal of an end to the economic slowdown. Depreciation and amortization in Q2 was $25 million and our best estimate is for $100 million to $105 million for the year.

Including $48 million of debt at JVC, our Jordanian venture, at quarter end we had consolidated debt of $847 million, down $85 million from year-end. $464 million of our debt is floating rate, and $383 million is fixed rate -- a 55 to 45 ratio. Our floating debt interest rate was 0.7% at quarter-end. The weighted average interest rate for Q2 was 2.6%.

Net of $172 million cash on hand and excluding $27 million of unguaranteed yet consolidated JVC debt, our net debt was $648 million at quarter-end, down $58 million this quarter. Our debt to cap ratio is 42%, our net debt to cap is 37%, and our debt to EBITDA ratio is 2.85 times. We have no significant debt maturities until 2013.

And during the quarter, we met with both of our rating agencies. On July 15, Moody's published a report reaffirming our current rating of BAA2 with a stable outlook.

We continue to execute on our plans to drive working capital out of the business, having reduced net working capital by $80 million since the beginning of the year, with inventories having been reduced by over $150 million during that time. Compared to 12 months ago, our net working capital is down over $200 million, or 28%. We plan to produce at levels that will continue to exert downward pressure on inventory levels.

At this time I will pass it over to Mark for his closing comments.

I hope you've heard today that we remain committed to our strategic principles; that we remain focused on managing our business to limit downside risk and maximizing future opportunities and that we are staying focused on cash generation and building an even stronger balance sheet. Looking ahead, while it's hard to see signs of a significant end market recovery, I believe you've heard from all of us that we are seeing positive trends from several market segments.

John spoke about some of his team's efforts to introduce new products, to control our working capital and to drive high levels of free cash flow. We are expecting further raw material and energy deflation that will also provide some additional opportunity for us.

We are seeing the strong efforts of our cost improvement steps that we have already taken. And Luke shared our efforts to reduce our 2010 costs by $160 million versus 2008.

Combining our actions to improve productivity, cut operational and business costs, along with slowly improving business climate, gives us confidence that we can end 2009 with a stronger balance sheet than we had at the beginning of this year. We expect sequential earnings growth in the third quarter, we will provide mid-quarter updates through this year to provide more outlook, more clarity on our outlook for the end of 2009 and the beginning of 2010.

With that, let me hand it over to Sandra Rodriguez.

We would like to open the call up to questions now.

(Operator Instructions). Kevin McCarthy, Bank of America Merrill Lynch.

Good morning, thank you. John, it sounds like you are expecting a better back half of the year in Fine Chemicals, relative to the first half. So would you quantify the amount of expected improvement there, and perhaps provide some color as to how much might be derived from ibuprofen versus Fine Chemistry Services projects, and any pickup in drilling fluid.

What we are projecting now, I think, is very consistent overall with the profitability level we have traditionally had in the business. So sequentially, we are gearing up our bromine assets a bit to meet those demands.

We had dramatically lowered ibuprofen production when we saw the destocking from the first quarter continue into the second. So we are ramping up that plant dramatically. And I think overall, you call swine flu, respiratory illnesses around the country are a good indicator that demand is really going to pick up strongly for us. And we are gearing up production to meet that.

Clear brines, we are not counting on much improvement, though the third quarter is off to a better start. (inaudible) you look at some of the keys, we are gearing up -- the second quarter in fine chemicals is always typically almost a zero profit quarter for our ag intermediates business. And that production is gearing up in the third quarter for supply in the fourth quarter through first quarter. I know you know that business quite well, and you can understand that. But that's a normal seasonal trend.

But -- and then you get all these new products we kind of mentioned in our formal remarks. And it is all coming to look like a really good picture that gets our Fine Chemicals business back on track for the third and fourth quarter.

So we are counting on our traditional strong margins in that business, and get some good sequential revenue growth as well. So thank you.

Second question if I may on catalyst. What is driving the strength in polyolefin catalysts, and do you pass through aluminum costs for aluminum alkyls there?

To answer your first question -- second question first, there is not aluminum cost pass through in our alkyls business. Now these are high or form its products, high-value products, so they are really not sold on a cost basis. Second, we are -- we had a relatively slow organometallics volume quarter in the fourth quarter, and that extended into the first quarter.

So we had probably $5 million to $6 million in the first quarter of negative (inaudible) variants as we idled that production in that business. But overall, we are seeing polyolefins pick up compared to the fourth quarter and first quarter, and that's helping us.

And then our new total catalyst systems in that business are really doing quite well. We had opened up a new plant here in Baton Rouge about -- at the beginning of the second quarter. And the volumes in that product line, which are primarily metallocene-based, are doing quite well as well.

Last question for Rich. Do you have an inventory number for the quarter, and when might you expect to be running production equal to demand rather than below demand levels?

At the end of the quarter, inventory was $386 million so it's down about $150 million from -- $153 million from the beginning of the year. And I think -- what I will say generically, and maybe Mark or John would want to add, we have shifted so that we would intend to continue to make a dent in that, even as production picks up.

I think we're going to keep the pressure on that through the end of this year, at least until we see the economy bounce back.

Thank you very much.

Jeff Zekauskas, JPMorgan.

Good morning. In John's commentary on the Catalyst business, he talked about flat volumes and cracking catalysts and (inaudible) processing catalysts and polyolefins being very good as well. But in your published data, you show volumes in catalysts down 10% for the quarter. So how do we reconcile the down 10 with the commentary? What forced the number down?

If you look year over year, primarily in our Catalyst business, the big volume driver is FCC. And year over year, that volume number was down between 7 and 10%. So that's the primary driver there. And I think that is -- the basis for that is really mileage and all the economic factors that have gone into that and declining consumption of gasoline.

The good news is we are off to -- third quarter off to a very good start, and we believe the sequential volume gains will be pretty good. Pretty healthy.

So the data that you gave before was sequential information? Is that it? So if we are down 10% (multiple speakers)

FCC catalyst is just down slightly sequentially.

Right. What about hydroprocessing (multiple speakers)

What I talked about in the formal comments was revenue. So pricing continues to be up year over year nicely. And that is offsetting the volume decline that I mentioned earlier.

So if you talk about revenues, revenues are flat on declining -- slightly declining volumes.

Right, but in your published data you have your prices and Catalysts down (multiple speakers).

And that's mostly metals related to HPC. If you pull that out, our pricing is positive.

I see. So your pricing is flat, is it up a little bit? Where does pricing sit at?

HPC pricing is down, because of the metals pass-through. FCC, it is up. And polyolefin catalysts, pretty flat.

I guess just a last question. So your price mix, throughout I guess for all three businesses, was down this quarter from the first time in a long time. And it's difficult to know what's metals test or were raw material passed through, and it's also difficult to know what the magnitude of the sequential changes are.

So could you just talk about the areas of sort of true price compression in your businesses across the board? In the areas in which the negative numbers are a little bit misleading?

The Catalyst business, as I mentioned, HPC is -- the big downturn in pricing there is due to the metals decrease. FCC is up sequentially between 4 and 5%. And up year over year, not quite double that but between 7 and 8%. As I mentioned, the polyolefin catalysts is pretty flat.

If you get into polymers, there is a bigger mix effect there. And year over year pricing in polymers, particularly in flame retardants, which is the big driver there, is flat. But sequentially it's down, and that is mostly a mix effect because primarily we are selling more tetrabrome in the second quarter than we had in the first quarter. The price mix effect in Fine Chemicals -- there is such a range of different products they are, it's really hard to give you a number that's meaningful.

But I can tell you that bromine pricing on the whole has held up pretty well. Clear brines, there are lower priced clear brines being used because the complexity has decreased, because of the decline in more complex oil drilling. I'm sure you can appreciate that.

That's a broad commentary on that.

I think it's -- we have not seen a material impact from lower pricing on profitability yet. And I'm not saying this -- in some products we have obviously, (inaudible) it's not been at all, it's been the other way. The biggest thing that has been impacting us is the lack of volume that's out there, the lack of absorption that's been out there. And really the steps we have taken to underrun these facilities to drive down inventory.

And those things have overwhelmed any -- to be really honest, they have overwhelmed any price mix impact that we have had.

Thank you very much.

P.J. Juvekar, Citigroup.

Good morning. I want to go back to the catalyst issue again. And focusing on HPC, you talked about HPC change outs getting pushed out.

Yes.

You combine that with supply of more light crude that's available in the market. Are refiners cutting back on heavy crude processing, and would that hurt HPC volumes in the future?

I think broadly speaking there is -- these reactors are operating under a lot less severe conditions. And that's for sure. And I think that is reluctant in the crude slate, and it's also reflected in declining throughput. Because they don't need the output because of the economy.

Overall, we are seeing, generally, these orders are getting delayed. They are not getting canceled. So they are just getting postponed, usually a number of months. And what we are seeing now is the first half of next year appears to be very, very strong as well.

So broadly speaking, we are seeing sequential improvement in HPC volumes. And as we have said for years now, it's a very lumpy business. We had a significant number of orders get delayed at the very end of the second quarter. I mean that was between 1200 and 1400 tons of product.

Those orders are getting delayed, we are talking between 30 and 60 days. So that's helping us give us a lot of confidence that we will have sequential improvement in volumes. And right now the view is that the fourth quarter will continue to improve, yielding a stronger second half than the first half.

So you're basically pushing out some demand from first half into second half. Is that fair?

Really second quarter into the second half.

It's very product-specific. Or refinery specific. But your initial question is are refiners moving -- is the crude slate getting lighter, the answer is yes. It is getting lighter. And that has an impact.

I think the broader impact, though, is that refineries are not -- they're just not pushing as hard, they're not having the temperature ramped up as hard, they are not indicate incremental volume like they were in the cutback. And that gives them more latitude to extend these run rates for longer periods of time.

Okay. My second question is for Rich. You guys have done a great job on focusing on tax rate, and you've lowered that significantly. What is the risk that the tax rate begins to creep up as the global economic recovery takes hold?

If our tax rate goes up, that's good news. What that would mean is that we are making more money in places that have higher rates. So I think it's almost a given that it will go up as the economy bounces back, just because we are making higher levels. The tax structures we have in place in the Company at lower levels of profitability really suppress the rate down. And that's why it's as low as it is.

So I am commenting about as the economy bounces back there's other things that may push the rate up also, which President Obama is pursuing. That's a whole 'nother story, but we as well as every other corporate in America are fighting that battle. And it seems like we are getting some sympathy in Washington too.

So that's -- you'll be reading a lot about that in the paper, and we are out there with everybody else trying to do the best we can there.

What could we in normalized tax rates if the economy were growing at 2, 3%?

I think it's closer to 20 then 15, so I think -- our normalized tax rate is -- we will give you guidance on that as we formalize our plans for next year and we look at where we expect to make money in the levels we expect to make. But certainly it's got a 2 in front of it.

Okay, thank you.

David Begleiter, Deutsche Bank.

Good morning. John, what should -- at least in Fine Chemicals, what should the impact from idle assets be in Q3?

I think our current view is we could get somewhere between $8 million and $10 million of sequential improvement due to resumption of manufacturing assets.

Fair enough. And on HPCs, the 12,000 to 14,000 tons, that won't all be delivered in Q3, correct? Or will it?

No, it wasn't 12,000 in HPC. It was between 1200 and 1400.

I am sorry. That makes more sense.

We are pretty certain that's going to go in Q3. But I tell you, we -- the extremes that the refiners are going to, David, because of the environment they are in, is pretty dramatic. So -- but we are still confident we can grow volumes sequentially.

On FCC pricing, you mentioned the year-over-year and sequential impact. Have recent tenders been rational by your competitors, are we still over the $4,000 [per ton] range?

New tenders -- yes. It depends on the nature of the products you are making. Diesel are certainly very high value-added. We are finding a lot more propylene now with improvements in those downstream markets. And those are very high value-added, in the range of 4,000.

So we are seeing pretty good help out there competitively speaking. I know that if I were running a business that had, say, some automotive real problems to it, I would certainly be pricing aggressively.

Lastly, as Grace exits bankruptcy, would you expect pricing in SEC to improve?

We are seeing -- we have seen good pricing improvement, as I said, year over year and sequentially. And I think that could continue.

Thank you very much.

Lawrence Alexander from Jefferies.

I guess a couple of questions. First, how much of an earnings impact did you have in Catalysts from working through the high cost inventory?

In the second quarter, it's probably in the range of $5 million or $6 million.

How much of a volume recovery would you need to see in polymers and Fine Chemicals for the facility utilization headwinds, I guess the $54 million that you highlighted to basically go down to zero and not be an issue any more?

Down to zero -- that's going at full production rates. And we don't see that happening for quite some time. But I think we could sequentially get, say, 1/3 of that as we gear up some of these production lines.

And lastly, can you give us an update on the prospects for the environmentally friendly Polymer Additives, or flame retardants that you've been working on? Any sort of changes in (inaudible) the commercialization or market interest?

Yes, thank you. There has been a lot of both technical work, manufacturing work, commercial work. We are seeing a fair amount of interest.

But I have to tell you I think that -- we look at this as more of a marathon rather than a sprint. And while we are getting some very strong interest from a lot of electronics producers, I think it's just positioning us for a very healthy long-term future in this business to answer your question.

So I don't think -- I think our base product lines are doing well. That's reflective of some improvement in demand in the second quarter. We are seeing a third quarter as strong as the second quarter, so we feel good about that. But there is economically speaking, for the base business, just more uncertainty beyond our ability to see past the third quarter.

But in terms of a very longer-term future, this new product portfolio that we have is, I think, quite exciting.

Thank you.

Steve Schuman, Lafayette Research.

Good morning, guys. In your comment you mentioned profitability was impacted by mix, in Catalysts. Could you detail how that happened? I would imagine with FCC down and HPC flat, trying to figure out where the discrepancy would be.

The mix within HPC, that's a degree of complexity that you don't see in those opening comments. But that was a bit of an issue as well.

So the severe crackers tailored back a little bit, and that impacted some profitability?

Yes, there is a strong -- big customer mix there. But yes, generally the refiners as we mentioned earlier, Steve, having to run under much less severe conditions, if you will. But they are really pressing their ability to keep these reactors running at that level. So we are getting encouraged about the turn of the year really improving volumes.

Next question, your Polymers business has had a couple of pretty traumatic quarters. You're starting to see some business come back -- do you feel like there is a new, lower high watermark, if you will, in that business, and that some of these products just aren't going to come back, whether it's automotive site or some other area? Or do you have a pretty good feeling things will sort of return to normal over the next couple of quarters?

Yes. It kind of comes in waves. We saw the printed circuit board market come back early in the second quarter. Now we are seeing in the connectors market, both for electronics and automotive, is coming back a little stronger in the third quarter than what we saw in the second quarter. So it comes in -- a bit in waves.

Our television-related flame retardants seem to be pretty strong right now. One of our units is sold out, so we are gearing that production up pretty rapidly, believe it or not. So that's encouraging. So it kind of comes in waves, but we haven't seen any fundamental problems in the brominated flame retardant piece. It's more directly correlated to the economy.

I think in our mineral and phosphorous flame retardant businesses, we've got some structural cost issues long term we've got to address there. We are on that, and working on it. And that's going to take some time. But I am encouraged by that.

But overall we don't see any -- what we have described previous -- any secular trends of obsolescence of these product lines. And some of the new product families we're working on now, as I mentioned, related to Lawrence's question, are quite exciting about polymeric-type materials, which have a very -- just an awesome health, safety, and environmental profile to them. So we are really encouraged by that.

So outside of that mineral flame retardant issue, the structural cost issue, you don't see any reason why these wouldn't return, if you will, to normal -- whatever normal may be.

I would agree with that.

To follow up on that environmental question, the newer products obviously more expensive to make, more expensive to the customers. Is it going to take some type of regulation to get those products to move forward? And if so, is it a net positive as far as cannibalizing the older product lines?

I think it's a pretty -- a good observation you made there. The driver sustainability is still there and it's still very strong. But with the dire economic conditions, you're seeing a lot of folks who are reluctant to move away from some lower cost solutions that -- where they may have environmental challenges associated with them. Today they are just running to try to find a way to stay alive.

So I think it has been -- you've extended a bit some of the curve there, but the level of interest remains sort of keen. And people are looking to use these kinds of products to differentiate their end product in the marketplace. So I think perhaps it has been extended a bit, but the trend is going to be there.

Would we need regulation to drive us to that? I don't think so. I think you are seeing the industry move that way, both from the point of view of those that provide the chemistry and the end product guys that are all working together to move that way. So I think directionally it's going to happen. (multiple speakers) first question, I would just make one comment, Steve.

You mentioned when you started that question with John in two or three quarters, I think that's a bit optimistic to think that the -- broadly speaking -- our economy is going to get back to the point -- a level it was like in 2007 or something. So I agree with everything, every comment that was made by John -- just a caution to you. I think the slope on that line is not quite as steep as you've made it out to be.

It would be wonderful if you are right, but it's hard for us to see that.

To go back, will there be a big obsolescence cost if you do see a big switchover into the more advanced environmentally (multiple speakers)--?

No. No.

Not at all.

You can use the same assets essentially, then?

That's right. We put a lot of energy and effort into rebuilding assets and moving them, and we work our tail off not to end up with obsolete assets on our hands.

Thank you.

Steve Schwartz, First Analysis.

Good morning, everyone. Mark, I think in your prepared remarks, you said raw material costs were down about $37 million.

That's right, that second quarter to second quarter.

Can you break that out among the segments, which once benefited the most from that?

$25 million of it was metal. So you've got to take that off. You had a volume impact in there, which unfortunately [none] of a breakdown. If you're really looking for the benefit to margin out of that $37 million, it was very small. Just a few million dollars. It was mostly volume and mostly past-due products.

Then what drove the strong incremental margin and polymer additives? You increased your profit by $28 million on a $50 million increase in sales area and your unabsorbed overhead really didn't change much from the first quarter. You had like $28 million on unabsorbed overhead in the first quarter, $24 million in this quarter.

So where all of a sudden are you getting that strong profit performance?

I think that we've -- really a fantastic job in terms of lowering costs, lowering our expenses, lowering SG&A. And then you had a really terrific sequential, at least, volume improvement that was a very strong mix in the case of polymers.

So -- then our stabilizers and curatives business, I mentioned this product for the China stimulus, we had to gear up a small amount of production in our curative business to make those orders. So that was encouraging.

But the nature of your question, I really have got to tell you, I think the second quarter is just a defining moment for our Company. I think dealing in this environment, we've had much better financial quarters over the last few years.

But I tell you, I think what this Company and our people have done this quarter has just been really spectacular in terms of comparing to the environment we are operating in and controlling what we can control. And I think we are very proud of that, and I think we are going to be paying, figuratively, dividends for many years to come because of what we have achieved in this quarter.

And then just one small financial question on Other income. It was positive in the second quarter. Negative in the first quarter, due to foreign exchange, yet the foreign exchange impact was even more pronounced in the second quarter on the revenue line.

So did you have some special item in there that shifted that sequentially?

There was no special item. There was a bunch of little things that can impact that, and I think for the six months it pretty much nets out. But there's no one timer at all, we would've told you that if that was the case.

Okay, thank you.

Edward Yang, Oppenheimer.

Thanks. Good morning. This is an accounting question. I'm just trying to better understand your margins.

Your operating margins nearly doubled from the prior quarter. But your top line was down about 9% sequentially. And I'm surprised to see this in a relatively fixed cost business. At the same time, I've noticed that your CapEx has gone up. It's about up 36% year over year and the spending year-to-date, about $61 million. That seems fairly high versus annual guidance of $90 million.

So my question is, is there any relationship between the two in terms of margins, operating expenses and your CapEx level of spending? And did any assumptions change in terms of which expenses you would look to expense sort of P&L, or capitalize through CapEx?

You may call it an accounting matter, I think to do anything like what you may be suggesting is not GAAP, and we would never go there. But to maybe just answer the second question first, and then I'll let John or Mark deal with the first question.

Our CapEx on an annual basis is as we are guiding. There are some specific projects that were in process and that are being wrapped up, mostly in the first half and wrapped up a little bit more in the third quarter. But so it's not exactly going quarter by quarter incrementally.

But our guidance is -- remains 90, and there is one big project that we are doing that links in with a new product we are introducing in the fourth quarter that John spoke about, that kind of weights it in the way it is quarter to quarter. So 90 is what we are sticking with, and if that changes we will let you know that.

Yes, and on the margin side, I would just say that in Catalyst, our organometallics and new Catalyst businesses really carried the day in the second quarter. So if you look at sequentially what we were able to do there, and then we controlled what we can control. SG&A and costs. And we took a lot of cost out in the second quarter.

But John, you mentioned SG&A being a help, but sequentially SG&A was up $6 million from the first quarter.

Yes, but there was a lot of one-time events in the first quarter --.

I think it's on a normalized basis you spent about $45 million in SG&A in the first quarter, and it was around $52 million in the second quarter.

We spiked out an $8 million accrual reversal in the first quarter, so that's obviously not a recurring item. (multiple speakers)

But the base, the fundamental business in Catalyst did quite well, built on strong polyolefin catalyst results sequentially. And offset some weakness in some other areas. In polymer, it was really brominated flame retardants carried the day with some strong curative performance that I just mentioned earlier.

And Fine Chemicals, you can call it a disappointment, but the fact is that we usually have very strong ag intermediates business I think, as you well know about us, that runs from the fourth quarter through the first quarter. And we had that seasonal issues always impact us in the second quarter. And of course we are through that and we're looking forward to strong performance in new products.

So just no changes (multiple speakers) assumptions or any sort of inventory true-ups or anything like that. It was just your cost performance that allowed you to improve the margins from the first quarter to the (inaudible).

That's absolutely right. Every product between John and Luke, the guys have gone in and are working hard (inaudible) with that breakeven. I don't know how to outline that with the kind of specificity that I know guys like you would like to see. But in the most fundamental sense, we've lowered the breakeven broadly.

In a lot of areas there is still work under way there, and as we spoke to, it's our expectation we will keep those costs out. So you should have the ability if we could flash forward to drive higher margins on lower sales in this corporation.

And that's what we said in New York we had to do to be in a position to meet the kind of expectations we talk about in 2010. So you're seeing that -- as John noted -- you're seeing that materialize, and it's why we are so proud of this quarter is that we have accomplished a hell of a lot since the start of this year. And you're starting to see some benefits out of it.

It really is phenomenal performance, Mark, and kudos to your team for that. In the Polymer Additives segment, basically, what kind of margins should we expect in the third quarter and going forward? Is the current level of margins a good run rate?

And again, if you kind of look what you earned in segment income for Polymer Additives, you're basically already there in terms of your annual targets for 2010 of $45 million to $60 million. So do you need to revisit that target?

We are always revisiting targets as we achieve them. To answer your question, in the third quarter -- and we're working hard to improve our sequential profit from our Polymers business. And as I mentioned, we've started out fairly strong here in July, and the uncertainty, though, is where things go in the fourth quarter. And that's kind of part of your question.

And I know it probably frustrates you guys that we can't add a lot of clarity there in the Polymers piece. But it probably will all come down to December and what our customers are doing in terms of either continuing to produce or cutting back working capital and cutting back inventory at that point in time. So we'll just try to keep you tuned in on that as things develop.

Thank you very much.

Bob Koort, Goldman Sachs.

Good morning. This is Amy [Zhang] sitting in for Bob. Just follow on the previous questions on the segment margins. And obviously if you will look across the three segments and Polymer Additives and margins improved pretty significantly on a sequential basis. Fine Chemicals shows some erosion, and we understand there's some seasonal factor there. Catalysts at an all time high.

I'm wondering, could you give us a little more color about the margin progress by, I would say, fourth quarter of this year, how we should think about particularly Fine Chemicals and Catalysts, the margins -- how -- you know.

Those are great questions. I think what you're seeing, and what we try to communicate to you guys through this call is that this is a period of tremendous volatility. You've got -- we've got raw material prices going from unbelievably high levels to just being dirt cheap and then popping back up to try to manage that process as you go through the inventory build and inventory process. We've got customers delaying orders, at the same time they're expediting orders.

So you should have a view that it is a very rough sea out there, and there's not a lot of predictability in the marketplace. As it relates to the fourth quarter, to build on John's comments a bit, we've had a number of customers who are coming in and placing orders in the broader electronics market that are very attractive and good today. And we are happy to get them, as John noted, warning us that they don't intend to run into the fourth quarter blindly expecting to have a good holiday season.

So you can -- they are communicating to us quite clearly, to have a view that they are going to be very timid with their forecast in their production of fourth quarter. And in that environment, I would love to give you margins. But it's just really hard for us to have the kind of foundation to do so. I think we're going to have to run through the next couple of quarters, maybe by then, maybe by the time we get to the end of the year we will have some foundation that is being sort of reestablished.

Directionally, we expect polymers to grow, is what we've said. And John was very clear on that sequentially. Directionally we expect Fine Chemicals to move back into the range of what you expect normally there, and we are going to kind of slug it out in Catalysts, and you should see continued improvement in the bottom line there. And I think you have some pretty good margins in that business as we go forward as well.

So I'm sorry we can't give you more clarity. We would if we could, but today it's just a bit hard to do that.

Thank you.

[Skip Teague], [Springpoint] Capital.

Good morning, I just had one quick question. What was the inventory levels at the end of the quarter?

We gave that number earlier, Skip. Hold on, I think it was 380 -- got it right here. $386 million is our inventories at the end of the quarter, down $153 million for the year.

Thank you very much.

And year-over-year from $560 million. Very strong.

Great. Sorry I missed that.

There are no further questions in the queue. I would now like to turn the call back over to management for closing comments.

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.

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