雅保公司 (ALB) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q2 2010 Albemarle Corporation earnings conference call. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference call. (Operator Instructions). I would now like to turn the call over to Sandra Rodriguez, Director of Investor Relations. Please proceed, ma'am.

Good morning everyone and 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, which 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 non-GAAP reconciliations 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 10-K. Joining me today are Mark Rohr, Chairman and Chief Executive Officer; Luke Kissam, President; John Steitz, Chief Operating Officer; and Rich Diemer, Chief Financial Officer. At this time I will turn the call over to Mark.

Thanks Sandra and good morning everyone. We appreciate you joining us today as we report second quarter 2010 earnings.

I will begin today's call with a few opening remarks on current business trends before sharing highlights on the second quarter results. Luke will then follow with an update on some of the Company's strategic initiatives. John will follow Luke with comments on our operational performance in the quarter, as well as future business prospects, and Rich will wrap up the financial highlights. After the prepared text we will open it up for your questions.

You recall at this time last year we were reporting the first signs of economic recovery, as well as precursors of real economic strength in some emerging markets. And while we were clear in our efforts to drive profitability, to be honest, we have limited ability to predict near-term market trends. So, as you know, we focused on managing those things we could control to drive business profitability.

We emphasized production and transactional efficiency. We pushed in emerging markets and we introduced new technologies that help our customers cope with the challenges they face.

We focused on cash generation, and while demand was starting to pick up deliberately kept production rates well below sales to reduce inventory and the associated risk given the uncertainty of the recovery.

Due to the efforts of the Albemarle team, our business gained traction and profitability, improving sequentially through the course of the year and positioned us for record profitability in the first half of 2010. While it is difficult to gauge long-term growth trends in this climate, I can report that fears of a slowing economy have yet to show up in demand for our products and our services.

The key indicators that we look at, like consumer electronic sales book-to-bill ratios, which have been above parity for the past 12 months; automotive production; refinery utilization and miles driven, while trending to the upside; strength in emerging economies; global infrastructure projects; alternative fuel demands; and new opportunities in biocides are all planned to a continuation of the kind of performance you're now seeing from the Company.

From my vantage point our Company is well-positioned today to take advantage of the growth trends I previously mentioned and overcome any unforeseen future market turbulence.

As you have seen from the announcement last night, we reported another fantastic quarter with margin improvement on the top and bottom lines both year-over-year and sequentially. Our consolidated earnings of $82 million or $0.89 per share top first quarter record earnings by 30% and more than doubled the $38 million earnings or $0.42 per share reported in the second quarter of 2009. The Company's results were underpinned by strong volume growth in all three segments.

Total net sales for the quarter of $592 million were up 33% year-over-year. Corporate gross margins for the quarter improved 700 basis points year-over-year to 32%, and EBITDA margins are up 600 basis points year-over-year to 23%. Further improvements in liquidity in our balance sheet were supported by strong cash flows from operations, yielding cash and equivalents of $324 million for the six months ending June 30 and record EBITDA for the quarter of $136 million.

During the first half of the year we lowered our net debt to capital ratio to levels not seen in the past six years, funding capital expenditures of $34 million and returned roughly $40 million to shareholders through share repurchases and dividends. A good product mix coupled with high utilization rates drove all three business segments to post healthy segment income margins in the quarter, with polymer and catalysts setting record high margins of 20% and 30% respectively.

Our bromine franchise is stronger than ever. Last year at this time our utilization rates were just starting to improve from the low levels we were in in early 2009. Today we are producing at much higher rates to satisfy current bromine demand requirements. Improved absorption, supporting higher sales volumes, contributed to Fine Chemistry's strong segment income of $17 million, which is more than three times second quarter 2009 segment income.

Strong demand from consumer electronics helped flame retardants achieve volumes at the highest level since 2006, driving polymer sales up 36% over the second quarter 2009. This performance translated into record quarterly segment income of $47 million, more than triple polymer's second quarter 2009 segment income.

Our Catalyst segment was also a champion for this quarter. Strong sales volumes drove segment income to a record $66 million. The teams are working hard to help refiners maximize yield flexibility by offering solutions that create additional value for our customers and for Albemarle. We're really proud of how those businesses addressed the challenges of the market and positioned itself technically and geographically to be very successful.

While I'm pleased with our overall performance and the progress our organization has made in driving earnings growth, as we look ahead to the next six months the strong demand we see from our customers reinforces our view that this will be a very, very good year. I expect we will see strong third quarter, a performance similar to the second, and a fourth-quarter that reflects historical seasonality and should end the year well above the current year-end consensus. Even in a volatile environment our businesses are capable of delivering solid results.

With that, I will turn it over to Luke.

Thanks Mark and good morning everyone. As Mark indicated, our businesses are on pace to deliver record profits in 2010. A stronger economy certainly helped our results, but the restructurings and efficiency improvements that we undertook in 2009 and this year are also falling to the bottom line. We're making progress in standardizing our transactional processes globally, our plants are operating more efficiently at higher production volumes and we are maintaining reduced inventory levels.

The innovation coming out of our research labs continues to be a competitive advantage and pivotal to our success. As demonstrated in our results, we saw a significant increase in demand for products across our bromine franchise and a corresponding increase in production. As a result, we are debottlenecking our bromine production units in Arkansas and Jordan to increase production and have the added flexibility to add even more capacity when needed.

Last year we made significant progress toward our 10,000 -- 2010 cost reduction target, roughly $100 million of the $160 million target. As we have previously stated, some of these initiatives have carried over into 2010. Restructurings at our Amsterdam and Belgium facilities are on track and will be substantially complete by the end of this year. Restructuring at our Bergheim facility is also underway.

The bulk of those restructurings will be completed by 2011 with some taking a little longer. We anticipate being able to report additional progress on our cost reduction efforts in the upcoming months.

We are very pleased with the progress of the transition to our service center in Budapest, Hungary. Phase 1 of our transition is fully operational at the Budapest site and we're extremely pleased with the quality of the workforce. We're already seeing measurable improvements in our processes that are being run out of Budapest. We're on schedule to complete our initial transition to Budapest by year end.

Our team's efforts to capitalize on opportunities in emerging markets are paying dividends. Sales outside of North America and Europe have increased significantly. Our full-year 2010 sales view throws Asia Pacific ahead of 2009 by 50% to 60%.

Middle East and India sales are double 2009 levels, and our small but growing business in Russia and the former Soviet Union is also making very good progress. Our businesses are expanding their footprint in the world's emerging economies, a trend that you will see continue during the next few years.

With that, I will turn it over to John.

Thanks Luke and good morning everyone. I will start with Fine Chemistry. Improved volumes and better asset utilizations drove top and bottom-line improvements in Fine Chemistry. Net sales for the second quarter were $141 million, up 36% from the second quarter of last year.

Segment income of $17 million was more than three times a year ago and nearly 50% above the first quarter, yielding segment income margins of 12.5%, 740 basis points over prior year and 375 basis points better than the first quarter. This was achieved despite normal seasonal softness in our crop protection portfolio.

Volumes improved in almost every division of our bromine product portfolio. Our drilling completion fluids business has been impacted by the Gulf of Mexico moratorium, but global strength has led to no further deterioration in profitability. Demand outside of North America continues to build, filling the US void.

Our food safety business continues to grow nicely. One of our proprietary products is now used in over one third of the beef processing plants in the United States, and the team's growth strategy includes targeting other regions of the world and new applications. One such application is water treatment in the beverage industry, resulting in dramatic water conservation.

We expect the global bromine balance to remain tight with continued demand strength across the chain. New sources of demand being introduced for applications like mercury removal, food safety and other specialties is encouraging. On the supply side, we continue to see further depletion and environmental controls in China curtailing capacity.

These strong business dynamics give us confidence in our pricing strategy and ability to recognize the value of our specialty brominated products. We're pleased with the traction we're seeing from these actions.

Our pharmaceutical business continues to deliver solid results. Revenues increased double digits in the quarter.

Sales of our crop protection products will resume in the fourth quarter and we'll see nice top and bottom-line gains from that business.

Our custom services, business which includes a strong pipeline of new opportunities, is doing well and is expected to improve further in the second half. One recent development involves teaming Novomer, one of six Department of Energy funded projects to catalytically convert CO2 into plastics. US Energy Secretary, Steven Chu, announced the project last week.

Overall our Fine Chemistry segment is on track to deliver sequential improvement in the third and fourth quarters and is positioned to further enhance our longer-term segment margins.

Moving onto Polymer Solutions, polymers delivered exceptional performance in the second quarter posting strong net sales of $235 million, up 36% over the second quarter of 2009 and up 9% sequentially. Polymer segment income for the quarter was $47 million, a robust 220% increase over the second quarter of last year and a 13% sequential increase.

These record segment earnings yielded 20% segment income margins, a dramatic improvement over the same quarter of last year. Good results from our Polymers team.

Overall we saw strong revenue growth in our flame retardant portfolio and in stabilizers and curatives. The greatest volume improvement came from our brominated flame retardants which topped second quarter 2009 volumes by roughly 75%.

Recovery continues in the electronic supply chain. Several leading indicators support this view. IPC's printed circuit board book to bill ratio stands at 1.12 as of June 2010. These current trends are very encouraging signs of continued growth and consistent with what we're seeing on our order book so far in the third quarter.

On our pricing initiatives we're seeing good traction and expected that to continue through the second half.

We had another good quarter in our mineral flame retardants business. Total mineral flame retardant earnings from the first half of 2010 exceeded full-year 2009 earnings by 60%. This business is back on track and expected to remain strong throughout the second half.

Our China-based antioxidants revenue remains strong and our participation in China's high-speed rail project is going well. Overall, Polymer Solutions' strong base business and new technology platform positions the segment for step out growth that will be driven by increased global fire safety standards and improved infrastructure in emerging markets.

Switching over to Catalyst, our catalyst team did a tremendous job this quarter. Net sales for the second quarter totaled $216 million, a 28% increase over the second quarter of 2009. Strong volume improvement and favorable product mix drove Catalyst segment income to a record $66 million, a 76% improvement compared to second quarter of 2009 segment income of $38 million and a 20% sequential improvement.

Together, all of this segment's profit driving strategies and flexible solutions contributed to Catalyst's record quarterly segment income margins of 30%. The group is working hard to drive new technology penetration and focusing on a portfolio approach that yields further productivity, cost and working capital efficiencies.

FCC pricing remains steady and we expect to see FCC volumes improve in the second half. We're keeping an eye on FCC raw materials as rare earths on the rise, primarily because China is limiting exports. We will need to take actions to offset these headwinds going forward.

Our HPC business is on track to deliver strong year-over-year earnings improvement, increased refinery utilization rates plus modestly improving refining margins and wider light heavy, and sweet/sour differentials should bode well for future Catalyst demand.

Catalyst joint ventures contributed nicely to segment results this quarter with equity income of roughly $8 million, up 30% year-over-year. Sales through our alliance with UOP also contributed to the segment's strong performance.

Our polyolefin catalyst business has demonstrated strong growth over the past few years and has become a key driver for our Catalyst segment. Over the next three to four years we expect step out growth in regions where customers are accelerating conversion from conventional to high-value single site metallocene polyolefins, especially in Asia.

Albemarle's polyolefins catalyst technology is positioned to capitalize on this market trend. We're excited to bring enabling technology to market and provide our customers around the world with advanced programs that deliver significant value. And with that I will turn it over to Rich for the financial highlights.

Thanks John and good morning. Today I will be covering income taxes, corporate expense, CapEx, working capital and our financial position at June 30.

Our effective tax rate for the quarter and year-to-date is 24.4%, unchanged from our Q1 rate. US profitability has improved significantly year-over-year, which results in a higher tax rate for the Corporation as compared to last year, moderated a bit by domestic manufacturing credits and strong performance by Jordan Bromine or JBC.

Unallocated corporate expense in Q2 was $18 million, slightly above our Q1 run rate. Spending year-to-date is in line with the higher end of the $65 million to $70 million range of our 2010 guidance.

We generated record EBITDA for the second consecutive quarter, handily beating last quarter by 15%. EBITDA was $136 million. CapEx for the quarter was $18 million and we still expect full-year CapEx of $100 million.

Depreciation and amortization in Q2 was $24 million. Our full-year guidance for depreciation and amortization is at the low end of the $100 million to $105 million range.

Including $40 million of debt at JBC, our Jordanian venture, our June 30, 2010 consolidated debt was $794 million, down $12 million this quarter and $19 million this year. $425 million of our debt is floating rate and $369 million is fixed rate, a 54/46% split. Our weighted average floating rate at June 30 was 0.98%. Our weighted average interest rate for Q2 was 2.91%, slightly up from the Q1 rate.

Net of $324 million of cash and equivalents and excluding $23 million of unguaranteed yet consolidated JBC debt, our net debt decreased $67 million this quarter. Our debt to cap ratio is 39.2%. Our net debt to cap ratio is 27.2%.

During the quarter Moody's moved our credit outlook to positive, citing significant improvement in operating performance and noting savings from our cost reduction efforts and margin expansion across our business. Our final (inaudible) statement and full balance sheet will be filed with our 10-Q in a few weeks' time.

Cash flow from operations was $116 million in the quarter. Inventory balances are $23 million lower than at year-end despite the business upturn. Net working capital increased by $40 million from year-end due to a pickup in customer receivables. Past-due balances continue to be well controlled.

We repurchased then retired 160,000 shares during the quarter at an average cost of $39.35 and have bought back 400,000 shares year-to-date. We feel that our performance this quarter places us firmly on the path to deliver the long-term earnings goals we shared with you at our investor meeting in New York in May, and demonstrates our ability to deliver profitability levels necessary to achieve those results.

With that, let me hand it back to Sandra.

Thanks Rich. We would like to open the lines at this time for Q&A.

(Operator Instructions) James Sheehan, Deutsche Bank.

Good morning. Just wondering if you could talk about where do you think FCC pricing will go in the second half in order to cover the increase in rare earths?

James this is John Steitz. A fair amount of our FCC contractual arrangements include that pass through. And so it could be in the 3% to 4% to 5% range sequentially, but that remains to be seen. And there will be some lag on that as we are just currently buying under these new rare earth agreements. So it would probably take full effect towards the end of the year.

Also on the bromine supply demand, where are operating rates at right about now?

This is Mark. We're running power plants pretty hard, so you can argue we are at 100% close to it. So (inaudible).

As Luke mentioned, we're debottlenecking both Jordan and JBC with some relatively minor capital investments there to expand our production capacity.

Okay and in China what are bromine prices? Where are bromine prices right now in China and have you got that in Renminbi?

Well, in local they're in the low to mid-20,000 RMB range.

Thank you very much.

P.J. Juvekar, Citigroup.

This is [John Hurt] standing in for P.J. So, in Catalyst can you provide a breakdown of what your year-over-year volume growth was for HPC and FCC businesses?

Well, yes I can, John. FCC year-over-year was down a little bit and was flat sequentially. HCC was up nicely year-over-year; was down sequentially. But HPC volumes are much smaller parts of the total.

One thing we have really tried to communicate to all of the investors and analysts over the last year or so is that this business has a lot of different ways of making money. And we have -- we get royalty payments. We sell regenerated catalyst products, so all depending on what the customer needs is what we're supplying. So, pure volume statistics I don't think are a real good reflection of the profitability we're generating today.

Okay. Given that refinery utilization rates have recently topped 90%, at least here in the US, do you anticipate a stronger second half as a result?

Yes, we do, John. I think we included that kind of view in our comments. But there is no question that it appears to us that FCC volumes, the market is on the rise and [they] will benefit [a lot of us].

Lawrence Alexander, Jefferies & Co.

This is Amanda Sigouin on for Lawrence. First, could you please provide us with a sense of where Polymer Solutions margins would've been in the quarter if you had the full benefit of recent price increases?

Oh boy, that would've been better, Amanda. I think that is a hard one. But they would have been better.

Okay, and if you could give a little more color on pricing trends you expect in the back half of the year particularly in the bromine derivatives and the polyolefin catalyst?

Yes, I sure will. In bromine derivatives, basically the flame retardants are the most important driver there. If you look at our brominated flame retardant business and you take out the [toll] production we do, some of the co-manufacturing arrangements and the mix effect of Tetrabrom, we have very solid sequential improvement in the second quarter, about 10%. And I would anticipate that we ought to be able to exceed that in the third quarter and fourth quarter as our pricing initiatives roll through across the whole product line.

So the outlier is raw materials and energy, and those tend to be quite volatile in the brominated flame retardant business, but so far so good on the pricing initiatives globally.

Thank you.

On the polyolefin catalyst, the pricing is really up nicely year-over-year. It's in the 15% range year-over-year. So I would anticipate that that kind of year-over-year performance will continue in the back half of the year in polyolefin catalyst.

Thanks.

Mike Sison, KeyBanc Capital Markets.

Great quarter. Mark, I wanted to understand your enthusiasm a little bit for the second half of big year. I think you noted that you felt third quarter would be similar to second quarter. Is that in terms of profitability, volumes? Could you give us a little bit more color on that?

Yes, I think what I'm trying to indicate is as we look at the year unfolding and we are into the now third quarter, it is -- there is a mirror image in there that would indicate we're going to be producing -- we are going to have economics that are similar to the second quarter. As we look at the fourth-quarter I will be very clear; we're not seeing any signs of an economic downturn, but we do expect there to be some seasonality pull back a bit in the fourth quarter.

Great. John, when you think about Polymer Solutions, as I recall April wasn't running full out. So I think about third quarter and July continues to do well, August and September hold up, and in addition to pricing would polymer additives potentially be better sequentially?

Yes. We believe it will be better. And so far in July we're off to a real solid start. And with the pricing traction I mentioned earlier we're anticipating an improve performance sequentially in Polymer Solutions.

Last question on pricing; where is that going to show up? Will that show up in the -- in terms of sales, is that going to show up more poignantly in the selling price percentages that you give us on a quarterly basis?

Yes, it will, Mike, and then there is also the mix effect because we're selling more Tetrabrom and the mineral flame retardant business, if you look at overall Polymer Solutions, those volumes are higher, too, and that is a much lower priced product.

But if you just look at the micro effects of each individual product, the pricing momentum is continuing and especially in our mineral flame retardant business. But that had been mitigated a bit by the stresses on the euro in the second quarter, but it looks like that is kind of improving a little bit now.

Mike when you -- you didn't ask about Fine; you didn't ask about other costs. You should be aware that we're still seeing cost creep in our Company. If you push more overseas and (inaudible) have been mitigated -- it is not mitigating, but it has a governing effect a little bit on some of the ramp ups.

I want to be clear in my communications to you. When I say similar to the second quarter, I mean it will have eight in front of it. I don't mean it's going to be the same number. I don't mean it's going to be a hard number necessarily.

But, you know, I think we're in the range of saying in the $0.80 range is the kind of range we're talking about for the third. And of course seasonality -- seasonally lower number in the fourth. That is how I would kind of (inaudible).

Steve Schwartz, First Analysis.

Good morning, everyone, nice quarter. John can you help us understand a little more about the metal price pass throughs? It has been an issue in previous quarters. It certainly seems like you've hyped up how you're managing that.

And then we've always heard about it with respect to HPC. Today you mentioned those contract clauses for FCC. Is that a newly developing situation in FCC?

Yes, Steve. On metals let me first talk about molybdenum. When it causes us a lot of pain is when it goes up and down dramatically like it did at the end of 2008. So we've done a number of things to mitigate that.

One, we are really managing our inventories with much more precision and I think that is helping us manage the ups and downs of, in particular, pricing much better than years ago.

The fact is that this year the changes have been much more gradual and the price changes are based on the index, published index. So as we've lowered inventories and as the index has just moved somewhat gradually, we can handle that extremely well. So in the second quarter, for example, it was almost directly in sync between what moly cost did and what our pricing did, and so that was -- that had no effect on the profitability whatsoever.

On FCC -- well, I think when these dramatic events happen like China is limiting exports, depending on the report you get, somewhere between 25% and 35%, and that is can I have a fairly significant impact on our cost structure because the biggest component of FCC pricing are these rarer materials. So, we're just trying to be aware, recognize it's an issue and manage it accordingly. So that's why we highlight it today because it is a more dramatic event than what we have seen.

So, having the contract linked to your cost is not necessarily new. What's new is, it sounds like these agreements with China and what is happening there and the supply/demand situation.

Yes. That's right, Steve.

And just going back to the moly situation. Usually in the reporting it's a year-over-year comparison. But in reality, what happens with the cost of your inventory and pricing occurs on a sequential basis. So, as analysts, how do we want to look at moly pricing so that we can maybe get a better feel as quarters roll out what is happening there?

Well, we watch it on a weekly basis, Steve. We could give you some alerts to some of the metals bulletins but I'm sure you're aware of that. That is our only crystal ball.

We can look at demand and stainless steel and things like that. And we pay attention to what we can control, which are inventories and managing our finished goods and raw material inventories very tightly.

But do you get hurt when things change big sequentially from quarter to quarter? Or do you get hurt big when it changes year over year?

(multiple speakers) like the -- when in 2008 -- as that inventory, say higher or lower, manage through that, it depends on how much inventory we've got. So if we carried four or five months of inventory that would be phased in over a couple of quarters, which is what really dramatically impacted us at the end of 2008 and in 2009.

Steve this is Mark. If everything was made to order there would be no concerns whatsoever by metal impact. Because we have a price, we go bid, we get it. We make it.

But we have some products we actually have to inventory a bit, as John noted, so there is a challenge in managing this process. But we've done such a great job, the team has, in getting those inventory levels down. We're much closer to a made for order kind of process today, so with that our risk has also decreased.

Great. Thanks for your patience with the questions.

Kevin McCarthy, BofA Merrill Lynch.

This is Alex (inaudible) for Kevin. Another question on Catalyst, if segment income increased $11 million sequentially, how would you attribute this variance between volume, price mix and cost maybe?

Well, sequentially, there was some change in molybdenum but not dramatic impact. That was, as I mentioned, perfectly passed through, Alex.

The sequential gains in Catalyst were driven by volume improvement in HPC sequentially. And I would say just holding onto our volumes in FCC in the second quarter sequentially and good cost management on that side, and then I would say an improvement in mix in our polyolefin catalyst. We saw that improve. And then we had some improved performance in the joint ventures.

So, it was a really a very balanced scenario in the second quarter, Alex, to answer your question.

And by diesel catalyst was a headwind sequentially, right, because you had this benefit in the first quarter which you didn't have in the second I presume.

In polyolefin catalyst we had some improvement in its profitability sequentially.

In biodiesel I meant, sorry.

Oh yes, I'm sorry; I didn't hear you. Yes, that's correct.

Okay, great. I guess another one on Catalyst, in the first half your segment income margin averaged 27% so far in 2010. If you compare it to your 2012 goal of 24% segment income margin, do you think this margin looks -- this target margin could be reassessed higher at this point or do you expect margins to decline in the back half of 2010?

I think we're on track for the overall goal this year and 30% is a really challenging number to continue to sustain. But as we get into our programs and plans longer-term, we always reassess those margin targets and we'll just try to keep you tuned in on that.

Finally on this debottlenecking in bromine, could you tell us about the relative for absolute size of it and when you expect this additional capacity to be online?

Yes. In Arkansas you can expect your incremental capacity is - I don't want to give the numbers, but it's probably 5% to 10%. Sometime at the end of this year, they get into the first quarter next year, Jordan could take a couple of months longer and it would be a similar type of capacity increase.

Great, thank you.

Dmitry Silversteyn, Longbow Research.

Good morning and congratulations on a good quarter. Question in the Catalyst business, the higher pricing; that is just a pass-through on raw material cost, correct? You are not -- you mentioned that FCC pricing was flattish and you don't really talk much about HBC pricing as a concept. So were those just a pass through?

Yes. It was mostly the model year-over-year, Dmitry, that's correct. It went -- and directionally for the year costs about $10 a pound to the mid teens, something like that, year-over-year.

Okay. And then, John, I just want to make sure I understood your comments on the Fine Chemicals portion of the business. You talked having about sequentially higher third and fourth quarter. You meant that in terms of margin or in terms of actual operating profit or just revenue?

Both. Margins should improve and we hope to achieve our targeted margin of something in the 15% range by the fourth quarter, Dmitry, with that help kicking in from our more seasonal Ag business.

Got you. And there's nothing in the market in Ag to make you concerned about the typical seasonal pickup you should see in the second half of the year? I mean nothing -- (multiple speakers)

There's a lot of concern around Ag and crop protection these days. We, I think, went through an inventory correction working with our customers in the first quarter and their indications for the fourth quarter are pretty strong. We feel pretty good about that.

You mentioned the debottlenecking projects in Arkansas and Jordan and I'm assuming that other players are going through similar debottlenecking processes. The bromine capacity has been kept tight by the large producers, allowing it to get pricing. Is there any indications or any thoughts on your part, or indications in the market, that there is going to be meaningful expansion in capacity beyond the 5% to 10% debottlenecking that you're going through right now?

This is Luke Kissam. I would not anticipate that. I think we have the world's cheapest expansion capacity and we'll manage that accordingly to maximize the profitability of our bromine franchise.

Okay, so there's nothing on the horizon that causes you to lose sleep, of something happening to the pricing discipline here?

No.

Okay. You mentioned, and correctly so, that looking at volumes or revenue trends on the catalyst is not the way to look at the business properly in terms of appreciating its strength. One of the benefits to your margin has been -- my understanding is refineries going for perhaps not the latest and the greatest product, but a lot of the regenerated catalyst and older generation catalysts which are higher margin for you, [but] potentially.

Are you seeing this type of behavior begin to change? We are seeing utilization rates in refineries go higher. I'm assuming their margins are improving a little bit. Are they going back to buying more advanced catalysts and looking for the latest and the greatest?

Yes. We've actually, Dmitry, seen more emergency type orders where because of the increased utilizations, and because of the nature of the regenerated catalysts and its short cycle life, that we've had to go in and make some more -- I would call it prompt shipments in that family. So to answer your question, yes.

But in terms of (multiple speakers)

It is still subtle and a lot remains to proceed here, but --

But directionally Dmitry, directionally as you have seen the utilization rates go back up, the price -- the [risk] of the refinery increases as well if you have underperforming catalysts. That is catalyst that's either poisoned or does not have the [run length] you want.

So to John's point, we're saying some evidence that in some cases the more cost effective, but yet not nearly as efficacious material, is going to run its course and the refiners are finding themselves in a box. Directionally that is good for our business. Have we seen a huge impact to that yet to the bottom line? No. Maybe next year we'll start to see some benefit from that trend.

When that does happen should we expect perhaps higher revenues and higher volume numbers, but maybe margin per pound would decline a little bit? So there's going to be some offset on margin compression?

Well, I think that -- my gut says you wouldn't see an offset on margin compression. I think you would see those things respond favorably because our throughput would go up, so you get the absorption impact. So, my gut is -- John, [I don't know] if you disagree with that -- my gut is you would probably see a favorable margin impact.

You mentioned that you expect to see faster growth in FCC volumes in the second half of the year assuming the HBC business remains at kind of current performance levels adjusted for seasonality. Is the higher relative volume on the higher relative portion of the business coming from FCC in the second half of the year going to have any impact on margins?

Yes, a little bit. There will definitely be a mix effect. We will have somewhat lower HBC volumes in the third quarter and those are picking out in the fourth quarter. And the FCC volumes are improving a bit in the third quarter. And they appear to be staying consistent in the fourth quarter right now, but that remains to be seen. So there is a bit of a mix impact there. Right.

Final question on this new generation FCC catalyst that you've introduced and talked about at the Investor Day that is supposed to improve gasoline yields by a couple of percentage points, can you give us an idea for how -- where that is in terms of market adoption, in terms of being commercial versus beta testing and what the reaction has been and how that business is doing?

It's been somewhat favorable. We've got it -- it is commercialized in a couple of units. But I have to tell you, I think the real driver in overall FCC volumes is the miles driven statistics. There's no question that's the real trump card.

And you mentioned on -- currency impact was not a big problem for you this quarter. You are somewhat self-hedged in the sense that where you produce is pretty much where you sell, in many cases. But as you look at it, at least the translational impact of currency in any -- can you bracket for us the impact we're likely to see in the second half of the year if currency stays at current levels?

This is Rich, and up until this point I was proud we didn't even talk about FX at all, which is a good thing. So we're not using it as an excuse. We are not going to -- we try not to talk about it. We try to manage it.

I would say the guidance we gave you in terms of the euro translational impact of a penny decrement for every euro penny, I mean on an annual basis it probably cost us a penny to two in the quarter translationally, so it wasn't that big a deal. And as you know, we have done a quick round-trip from $1.35 down to $1.19 and back to $1.30. So, that relationship should hold true; a penny degradation in the euro means a penny per share a year for Albemarle.

Got it, got it.

So basically you had about $1.30 rate on average for the quarter, so that would hurt us by a penny or two.

Very good. All right, Rich, thank you very much guys. Congratulations again.

(Operator Instructions) Jeff Zekauskas, JPMorgan.

Good morning. This is Olga Guteneva for Jeff. I have a quick follow-up on polymer additives. Could you discuss the sequential volume trends in the second quarter? I think volumes sequentially were down, if I'm looking at the right numbers. And if you could discuss it by the product line and how do you see these volumes going in the second half of the year, please.

Overall volumes, if we just look -- we strip out the analysis; if you just look at our core volume sales number, it was up a couple of percentage points sequentially. And that was pretty much held across the board.

Flame retardants were up in the range of 4% to 5% sequentially and mineral was flat to up a bit. So, overall, volume is flat to trending upward and I think that should continue in the third quarter as well.

Okay, thank you. And going back to Catalyst, so, the margins in the quarter were pretty high. And what does it take to sort of get to the -- not seeing this same level of margin, but above normal level of margins for the second half of the year, what do you need for that?

Well, I think what we're looking at in the business is -- if I break it down by segment, HPC will be down a bit in the third quarter. And then it appears now to be a reasonably strong finish in the fourth quarter. FCC volumes, we show improvement in the third quarter a bit, and not dramatic but in the range of say 4% and holding onto that volume level in the fourth quarter.

And then polyolefin catalyst, just continued commercialization of our new cats and continued strength in the petrochemical industry which is what we are seeing now. So, I would say just no dramatic inventory curtailment in the fourth quarter and we should be on track to achieve our goals of that 24% segment margin for the year.

Okay, that's helpful. Thank you.

There are no further questions at this time.

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

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