雅保公司 (ALB) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second-quarter 2011 Albemarle earnings conference call. My name is Derek and I will be your operator for today. At this time all participants are in a listen only mode. We will facilitate a question and answer session towards the end of the conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes, I would now like to turn the conference over to Mr. Lorin Crenshaw, Director of Investor Relations and Communications. You may proceed.

Thanks, Derek and welcome everyone to Albemarle second-quarter 2011 earnings conference call. Our earnings were released after the close of the market yesterday and you will find our press release, earnings presentation and non-GAAP reconciliations posted on our website under the investor section at www.Albemarle.com. Joining me on the call today are Mark Rohr, Chairman and Chief Executive Officer; Luke Kissam, President; John Steitz, Chief Operating Officer; and Scott Tozier, Chief Financial Officer.

As reminder some of the matters discussed during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please note the cautionary language about our forward-looking statements contained in our press release, that same language applies to this call. Also, to the extent that we discuss any non-GAAP financial measures, you will find reconciliations in our press release, which is posted on our website at www.Albemarle.com. With that, I will turn the call over to Mark.

Thank you, Lorin and good morning everyone. We appreciate you joining us today as we reported second quarter 2011 earnings. I will kick off today's call about sharing highlights of our financial results and the underlying drivers of Business performance before providing some context on the announced succession progress and roles that Luke and I will assume in September.

Then Luke will discuss the trends driving our quarterly results and provide an update on several of the Company's strategic efforts. John will follow with specifics about performance drivers within each business segment, and Scott will cover the financial highlights. As always, at the end of our prepared remarks, we will open it up for Q&A.

With that, I am delighted to report that Albemarle's performance reflects all-time record results in revenue, segment income and EPS for the second straight quarter. Solid volumes across most end-markets and good pricing traction across our bromine and Catalyst franchises drove net sales of $742 million, up 25% year-over-year, and 7% sequentially.

These factors, combined with strong operational performance, high utilization rates, and effective management of raw materials drove a 40% increase in segment income, to $180 million. Compared to $131 million for the prior period back and operating margin expansion of 220 basis points from last year to approximately 24%.

Earnings for the period were an all-time record, $114 million or $1.23 per share, up 38%, versus second quarter 2010 EPS of $0.89. We are very pleased with this performance, and our Business performance during the quarter when we faced a variety of challenges. Most predominantly, the continued escalation of input cost and the pressures on production and business is to fulfill exceptional customer demand across our key franchise.

These financial results are a testament to our employees' ability to execute and the demand for innovative technologies we bring to the market that deliver genuine, and often unique value to our customers. Looking forward, we expect the second half of this year to be similar to the first half, with the third quarter stronger than the fourth.

At this time, I would like to switch gears to a leadership change we announced on July 18, and effective September 1, Luke will assume the role of Chief Executive Officer and I will continue my role as Executive Chairman of the Board. Luke and I have worked together since 2003, and as the Company begins the implementation of our Vision 2015, the Board now thought it appropriate to take this next step in this succession plan, that we have been working on for the last few years.

As I have said a couple times recently, this is the time of unprecedented opportunity for Albemarle. I have the utmost confidence in the leadership team that we have in place and the commitment and capability of our 4,000 employees around the globe.

Albemarle is well-positioned to capitalize on these opportunities and it continues to generate strong, shareholder returns consistent with our Vision 2015 objectives. With that, I will turn it over to Luke.

Thanks, Mark and good morning everyone. I am honored to have been named CEO of Albemarle, and have the privilege of leading what I believe to be the best and most innovative workforce in the specialty chemicals space. I look over to continuing to work with Mark, the Board and the rest of our leadership team, as we implement Vision 2015.

Turning to our financial results, we are pleased with the performance of our Businesses this quarter. Fine Chemistry and Polymer Solutions reported record sales and segment income, while Catalyst reported its second highest sales ever, an excellent quarter overall.

Fine Chemistry's net sale of $185 million were up 31%, year-over-year. And segment income of $37 million, was more than doubled levels over a year ago. Margins of 20% were up nearly 800 basis points from last year. These results were driven by strong volumes, high utilization rates across our bromine franchise and higher bromine prices, year-over-year.

We saw solid volume growth in both the Performance Chemicals and Fine Chemistry services business. Among the factors driving these gains, were the continuation of a short year-over-year rebound in clear brine volumes on the order of 60%, better ibuprofen production levels and good demand for ag products.

Polymer Solutions net sales of $290 million were up 23% year-over-year, and segment income of $77 million was up 64%, year-over-year. Strong brominated flame retardant pricing and favorable product mix more than offset softer volumes, increasing margins approximately 700 basis points to 27%.

Total Polymer Solutions volumes were down, year-over-year, mainly due to weaker mineral flame retardant volumes. Purity of demand was also weaker, year-over-year, as high-speed rail construction activity in China has slowed at this time. We anticipate that additional phases of the high-speed rail will commence over the next 12 months. As they proceed, we remain well positioned to participate in that market.

In Catalyst, strong ACC and Polyolefin Catalyst volumes improved refinery Catalyst pricing and successful pass-through of metals costs drove net sales of $267 million. Up 24% year-over-year, and segment income of $66 million.

Segment income margins of 25% were down 300 basis points sequentially. All of this was in line with our expectations. The margin decline was due largely to unfavorable mix in HPC and lower FCC volumes.

Turning to strategic initiatives, in May, we talked about entering into adjacent market opportunities, where we see a growing market with an attractive profit pool, where Albemarle has a chance to achieve a competitive cost structure. 1 of these opportunities that we discussed was the extraction of lithium from our Magnolia brines.

Our pilot plant is presently running and has successfully extracted the lithium from the brine. The technology works. This development is a great example of the innovative expertise of our employees. Our current timeline to result in commercialization in the 2013 to 2014 timeframe.

With regard to bromine, our second-quarter results reflect the benefits of the de-bottlenecking projects that we have completed at our bromine facilities in Magnolia, Arkansas and Jordan. In early March, we also announced a plan to double our bromine and derivatives capacity at our Jordan site.

During the second quarter, we accomplished several milestones, that give us confidence that we are on track to meet our original timeline and to bring phase 1 online during 2012, including placing orders for long delivery items, contracting with the regional engineering and construction firm that is mobilized and begun work.

Once again, I would like to reiterate that we intend to bring this capacity on in phases, as needed, to meet the global demand. 1 of the new applications projected to drive the demand for bromine overtime, is mercury control. As government agencies around the world consider regulations requiring industries to reduce airborne mercury emissions.

The US EPA's proposed Utility MACT standard, recognizes activated carbon, our Sorbent Technology product line, as an effective method of reducing mercury emissions at coal-fired utility plants. The regulation would require reductions in mercury emissions from coal-fired utilities, in the US, by 2015. Albemarle is uniquely positioned to benefit from mercury control regulations given our ability to supply a full range of products, equipment and services.

On the Catalyst side, tighter fuel specs should continue to drive increased demand for our HPC catalyst, as developing economies join North America, Western Europe and Japan in demanding cleaner burning fuels with lower sulfur emissions. With respect to the state of the global bromine supply demand, we are continuing to observe tight conditions overall, as demand, driven by new application, continues to rise.

Supplementing the already strong growth in traditional markets such as clear brine fluids and brominated flame retardants. Overall, our expectation remains that bromine and derivative supply will remain tight.

As you know, the price of rare earths have increased dramatically over the past year, from under $10,000 a ton to current levels of roughly $145,000 a ton. We continue to have success securing lanthanum for our FCC catalyst. China's recently released quota on rare earths for the second half of 2011, was 15,000 net tons, slightly above the first half quota.

This bodes well for our ability to continue accessing this key raw material in adequate amounts. We are working with our customers to find ways to use less or no rare earths in our FCC catalyst, and, at the same time, provide the performance necessary for the refiner to handle the challenging crude slates. To date, we take good success in this area and continue to be successful in passing through the increased cost of rare earths via an escalator clause in our sales contracts.

As Mark previously noted, the benefits of our focus on emerging economies was evident across each business segment this quarter. Within Fine Chemistry, for instance, the rebound for completion fluids was principally driven by a year-over-year surge in orders from customers in Malaysia, Saudi Arabia and Egypt.

While we should eventually benefit from rebounding recounts in the Gulf of Mexico, the primary driver of that turn around in this business, year-to-date, has been markets outside of North America or Western Europe. Demand for plastics in developing economies is contributing to a strong demand for the portfolio of Polyolefin Catalyst that we offer. Finally, our Polymer Solutions business should benefit from increased fire safety standards and rising per capita demand for electronics in emerging economies.

In closing, we believe that our solid results for the first half of 2011, indicate that we are on track to achieve the type of growth we outlined in Vision 2015. With that, I will turn the call over to John to discuss our growth drivers in greater details.

Thanks Luke and good morning everyone. For the second straight quarter, the results for Fine Chemistry were solid, reflecting impressive operating leverage as this business achieved record sales and income levels. These results represent a combination of new product success, and continued development of our broad, bromine-based portfolio.

Specifically, rebounding demand from traditional applications such as clear brine fluids, as well as increased demand for new applications like water treatment, and food protection, drove revenues. These factors, combined with new product commercialization in our Fine Chemistry services model, drove operating margins, exceeding 20%.

Currently, asset utilization rates remain near maximum levels and as Luke stated, we project that the factors driving this dynamic will persist for the balance of the year. Overall, we are experiencing increased demand across the portfolio of new technologies within the Fine Chemistry services business.

Drivers include the positive impact of having project Tiger, our Exxon lubricant business, fully commercialized and some additional advanced materials being delivered into the growing, global polypropylene market. Our agricultural related businesses have shown strength as well.

We also experienced a strong pharmaceutical business and remain excited to fulfill future orders for the SIGA contract. We are in the process of finalizing another opportunity which we will announce in the coming weeks, which continues to build an impressive portfolio of new products in our Fine Chemistry unit.

Polymer Solutions had a record second quarter thanks to balanced and strong performance across our portfolio. We experienced strong profit growth in our flame retardants business, up 71% and our mineral flame retardants portfolio up 59%.

Mineral flame retardants benefited from strong wire and cable demand and good price realization. We are also encouraged by the recent upward trend in the IPC booked-to-billed ratio for print circuit boards, which stood at 0.99 in May, up from the year-to-date low of 0.94, as just 1 of positive indicator for this business.

Our Catalysts segment had another good quarter and is on track for another record year. We continue to be encouraged by the improving trends in refining, especially improved customer margin. Our technologies continue to help solve refining problems related to heavier and increasingly sour crude slates, and the critical need for addressing added complexity due to rare earth costs.

Global demand for plastics, particularly in rapidly developing economies such as the Middle East and Asia, remains strong and continues to drive sales of our Ziggler-Natta catalyst within our Polyolefin Catalyst business. Sales for this business rose 19% on a volume increase of 10%.

Additionally, for some time now, we have been executing strategy of shifting the business toward higher value, specialized catalyst systems. We continue to see good customer reception to these technologies, as well as supplying advanced, new products into the growing LED market.

On the acquisition front, we funded the purchase of what we now call Albemarle Catilin Corporation. The integration of this business has proceeded smoothly, market interest is good and we are running a pilot plant and testing various feedstocks as we speak. With that, I will hand over the call to Scott.

Thank you, John and good morning everyone. I will echo the comments already made regarding another stellar quarter and the Company's continued momentum.

For the second consecutive quarter on record sales of $742 million, and 25% growth we achieved record EBITDA levels of $178 million, up 31% from $136 million last year. Our EBITDA margin is up 110 basis points year-over-year to 24%. On a year-to-date basis, our EBITDA is at $349 million, up 38% from 2010. This is an EBITDA margin rate of 24.3% up 270 basis points.

Now, I will cover some expense details. Our second quarter R&D expense is up 36% versus Q2 2010 as we invest in our organic growth and adjacency initiatives. Through the first half of 2011, R&D costs as a percent of revenue, is up 10 basis points to 2.6%, versus the first half of 2010.

SG&A expense rose 24% versus Q2 2010, principally driven by increased personnel-related costs and sales commissions following our revenue growth. As a percentage of sales, this line item is actually down 60 basis points through the first half of the year, at 10.8%, versus 11.4% during the first half of 2010.

Unallocated corporate expense in Q2 was $28 million, up $8 million year-over-year, and this is in line with our expected quarterly average for the year and reflects higher personnel related costs. We expect to continue to see EBITDA margin expansion, and with our continued focus on working capital management and asset returns, we remain confident that we will generate sufficient cash to fund organic growth, capital investments, strategic acquisitions, dividends and share repurchases as a program.

Our effective tax rate for the quarter is 21.7%, down compared to the second quarter of 2010 of 24.4%, driven primarily by continued increase profitability overseas in lower tax countries. At this time, we expect our full-year rate to approximate 22.9%.

Turning to cash flow, year-to-date through June, our reported cash flow from operations was $146 million. This is up only 9% from the prior year operating cash flow of $134 million. However, this includes $56 million of pension contributions in the first half of 2011, and $24 million of contribution in 2010.

Excluding these contributions our cash flow from operations was $202 million, up 28% versus last year. Year-to-date free cash flow, defined as cash flow from operations, adding back pension contributions and subtracting capital expenditures, was $134 million for the period and is up 8.5% versus 2010.

Capital expenditures for the first half of 2011 were $68 million, double what we spent in the first half of 2010 as we invest in the build-out of our announced expansions in Korea and Jordan, domestic investments in our polyolefin catalyst business and continued to de-bottleneck our plants to produce at higher capacity levels. We still expect full-year CapEx to be around $150 million.

Depreciation and amortization expense in Q2 was $24 million, that is $47 million year-to-date, and is on pace with our full-year expectation to be at or near $100 million. Net working capital was up $99 million, net of foreign exchange, from December 2010, or, 21%, mainly due to the business upturn.

This compares favorably with our sales growth of 23%, between Q2 this year and Q4 last year. Our past due accounts receivables balances continued to be well controlled at less than 10%.

Given our sales growth, the team has been very successful in making sure inventory stays under control. Inventory has grown only 10%, net of foreign exchange, from the end of 2010. More than half of this was driven by increases in raw material pricing, and the remainder by volume.

I am very pleased with the discipline we have shown in managing working capital during our first half, in which we have experienced such rapid sales growth and increases in raw material costs. Through June of this year, we have invested about $15 million in new businesses. This includes the $10 million that we invested in the SABIC joint venture in the first quarter, and about $5 million that we invested in Q2 to the Catilin acquisition that John highlighted earlier.

Finally, we continue to pay our quarterly dividends of $0.165 cents per share, at this level, we are maintaining a 1% dividend yield. We ended the quarter with $491 million of cash and equivalents and net debt of $255 million, excluding $26 million of non-guaranteed debt from our JBC, joint venture.

Our net debt has decreased by 16% from the end of 2010. Our debt-to-cap ratio is 30% and our net debt-to-cap ratio is 13%. And, both are down meaningfully, versus year-end, due to debt reduction and strong profitability that has resulted in cash generation. Our weighted average interest rate for Q2 was 4.8%, approximately $704 million of our debt is fixed and $68 million is floating rate, a 91% to 9% split.

We expect the debt portion of our capital structure to remain heavily weighted towards fixed rate debt, until such time as borrowings are needed in connection with acquisitions or other strategic initiatives of size. Our weighted average floating rate at June 30 was 5%, in line with last quarter. However, it is up from last year's rate.

After paying off all our US revolver debt in the fourth quarter of last year, our remaining floating rate debt is at subsidiaries located in countries where borrowing rates are much higher than in the US. Our average fixed interest rate stayed at approximately 4.8%.

Finally, as a recognition of the quality of our balance sheet, fiscal policies and cash flow outlook, Standard & Poore's upgraded our credit rating, during the quarter to BBB+ stable and Moody's confirmed its rating of BAA1 stable. With that I will hand it back over to Lorin for Q&A.

Thanks, Scott. At this time, we would like to open it up for any questions. Operator?

(Operator Instructions) David Begleiter, Deutsche Bank.

Mark, you mentioned that earning wise, second half should be similar to the first half. That would imply earnings per share of around $4.75 for the full-year, which is above where our consensus is right now. Is that where you were intimating?

You're awful specific there, David. What I will say is there is a lot of anxiety in the world today, but frankly, we are not seeing that as reflected in our businesses. We are seeing a strong third quarter and we don't have a lot of -- to be honest we don't have a lot of visual in the fourth quarter, but classically fourth quarter is a bit weaker. So, if I kind of roll those I'd say it's a little of a mirror image for the year, with the third kind of similar to the second, and the fourth probably a little bit similar to the first. But, again, I'm guessing on the fourth.

And just on bromine prices, can you comment on elemental bromine prices in China? As well as where you are in flame retardant bromine prices?

Yes, David, let me take that. We are continuing to see a lot of momentum across the bromine chain. Brominated flame retardant prices are up sequentially in the range of 10% and the entire, I'd say, bromine and bromine derivatives chain is doing quite well.

One of the things we are really encouraged by, David, is we are beginning to see our customers benefit from these activities. Vis-a-vis the because of the tightness and lack of supply in China. Our customers, competitors have found the inability to produce their product because they are not able to procure the necessary bromine derivatives which are really critical in some of these chemical processes. So, we are beginning to see the start of that and I think that is really encouraging. So, just to give you a little color on that. And bromine prices are now are beginning to see it a back up and because of some of these ongoing supply issues.

Do you have an actual number for China bromine prices right now, John?

David, I didn't see anything in the last week, but, somewhere in the range of, we're talking $4,000 to $4,500 a ton. But, I just kind of harken back to you too, the fact that we look at this whole portfolio, commercial bromine is just really a small piece of the total package here. Because, you have to look at clear brine fluids, those are priced bromine -- hydrobromic acid, some specialties that go into water treatment and food protection, and then you have the whole portfolio of brominated flame retardants. So, and not to mention mercury control and where those prices are. So, our whole netback, is higher than that $4,500 a ton indicator for commercial bromine. I just wanted to kind of highlight that to you.

Thank you very much.

PJ, Juvekar, Citi.

In Polymer Solutions your volumes were down 1.5%, how much of that was due to curatives in China? And how much volumes were down in China?

Yes, the curatives for the high-speed rail project, PJ, are a big part of that. We didn't see any benefit in the first half from that. We are encouraged that China has gotten through some of these problems related to high-speed rail project, and it appears to us, that they remain committed to that. So, we don't have anything in our forecast now for the second half. But, if that does come back into play, that could help the overall business, volume wise, by a couple hundred basis points.

The bigger issue, year-over-year; year-over-year our mineral flame retardant volumes were down those were about double what brominated flame retardant volumes are. And, year-over-year, brominated flame retardant volumes were right in line with last year. So, if I look at Polymers, I think a good way to look at Polymer volumes is that, it is following a similar trend as last year, though the entire number is higher, year-over-year, than last year. So, that is the way we are currently looking at volume trends.

PJ, one of the tough things about volume for us is, we have annual sales volumes in the 800,000 ton range. If all in, a kind of annualized sales volumes. And two products represent 250,000 tons. And so, subtle changes in those, overshadow volume from the higher value products that we have. So, it is one of the tough things about looking at segment volumes. We apologize for that, but that is just kind of the way it is for us.

Okay. And then, in Catalyst, I understand the Rare Earth situation and the pass-through which lowers margins; but your absolute number -- absolute dollars were down in profitability. You mentioned unfavorable HPC mix and low FCC volumes. I was just wondering if you could just drill a little bit deeper into that?

Yes, yes, PJ, this is John. The first quarter was an absolutely stellar quarter for Catalyst and, there was a very favorable mix of profitable products within HPC. And, and that did not happen again in the second quarter though, year-over-year, we had favorable volumes in HPC. So, as you kind of look forward, I think we are through the worst, as we said last quarter, we would see sequential volume improvement in FCC in the second quarter, and we had that. And, we see, going forward, additional volume growth in the third quarter sequentially. Which will be close to very, very low, double-digit in FCC.

So, we are encouraged by that, and as Luke really emphasized, I think the team is doing an exceptional job dealing with a large Rare Earth dilemma, as you highlighted in your question. And I think there is no company in the industry that does a better job at dealing with inflationary issues than Albermarle. So, we've virtually made that a non-event in terms of working with our customers and working with our product line and executing on a global basis.

And just lastly, as Rare Earth prices go up 15 fold, our customers cutting back on the Catalyst because of pricing?

Well, I think the consumption issue at our customer level is more a miles driven thing, and we saw some softness in that in the second quarter. We are at least optimistic that's improving now. They've attempted to use less Rare Earth Catalyst, but the fact is, in part, due to the Libyan situation, which is very sweet crude, being taken off the market and now it is being filled with heavier and heavier, more sour crudes. It is really becoming increasingly difficult to reduce the Rare Earth content in these Catalysts and get the product slate and yields set that our customers desire.

Thank you.

Kevin McCarthy, Banc of America.

Good morning, this is Alex in for Kevin. I think, John, you mentioned that BFR prices were up about 10% sequentially in the second quarter. What is your outlook for BFR prices for the next couple of quarters?

Yes, we are in the process of implementing these most recent increases that we announced in May, Alex. There's partially a mix effect there, too. But, I think we will continue to see an improvement in overall brominated flame retardant volumes. It could be offset as we continue to watch what kind of inventory levels we need to support the customer base. As Mark said, there is a lot of uncertainty out there. So, there is a lot of puts and takes in our Polymers business, but pricing remains overall, positive.

So, there is some carryover from prior price increases?

Yes, as we execute those to our customer base. That's right.

And, you mentioned softer BFR demand in China in the press release. Could you quantify your current order level for BFRs I guess versus first half level?

Yes, I think as you look at the sequential progression of BFRs in the second half, right now in an absolute wrap of conservatism, we think volumes could be flat to down a little sequentially. But, they would be up, year-over-year, in the third quarter. We are seeing a stronger fourth quarter right now, but it remains -- as Mark said, there is always so much uncertainty out there. So, we'll just keep you informed as the year progresses on what happens in the fourth quarter.

All right, and just a final question if I may, again on BFRs. Do you have visibility into your customers' inventory? You mentioned that you might be reducing their inventories, are they at the point where inventories are low?

Well, yes, personally, the way I look at it I think inventories are low. So, they -- all the CNN type effect we are having, everyone is concerned, there is a heightened level of anxiety about what level of inventories to keep, but things are pretty tight. And, we are continuing to see some level of emergency orders. We had an interesting one come up just this past week from Wal-Mart, who is looking to fill their pipeline in the beanbag chairs. So, we had an emergency order to flame retard the foam for those beanbag chairs for Wal-Mart. But, there's a couple of lessons there; one is you would never want your beanbag chair to catch on fire. (laughter)

The one area that we got some recent reports back of maybe a slight inventory build, is Japan. Where I think they are worried a bit about some further electrical curtailments as they get into the third quarter. So, they maybe just a [scotia] bill there. But generally speaking we are seeing very little inventory build out there on part of the end users.

Great, thank you, gentlemen.

Laurence Alexander, Jefferies & Company.

Can you give a little bit more color on HPC Catalyst trends? What's happening sequentially into Q2 and then how you are looking at the balance of the year?

Yes. Lawrence, HPC, well we were encouraged by the buying trends we saw in the second quarter. And, I think that also partially mitigated FCC volumes as these refiners went through a higher level of turn arounds. We see sequential decline in the third quarter, but it will still be over last year's third quarter. So, we are still seeing double-digit volume increases in HPC, and the most encouraging thing, we highlighted in our earlier comments was that the refiners are doing better, now. And I think that is a good thing for overall trends in HPC and we are pretty confident that the business is going to continue to grow over the next couple of years.

And then, you add in with that, some of the unique opportunities in Brazil that we have with Petrobras and some of the other growth we are seeing in these developing economies. And, we are really very encouraged by that, longer term.

And, in brominated flame retardants, did you reduce inventory levels yourself? I mean so, at the Albermarle level in Q2; or have you done so in Q3, or plan to do so in Q3?

Laurence, this is Luke, on inventory levels, we talked a little bit about it. Most of the increase we have seen in raw materials have flowed through to that inventory level. So, the majority of any increase we have seen in brominated flame retardants or others have been tied to raw material increases. We're watching the inventory levels of brominated flame retardants and all our other products on a weekly basis. You should not have a view that we've got a brominated flame retardant inventory level anywhere like we did in 2008. We've lived through that, and we're working really hard to ensure that we've got the right amount, level of inventory to service our customers, but not so much that we get caught with too much if there is any type of slowdown.

So, just to be clear on that, you're not -- you don't anticipate based on the order trends you're seeing, needing to do a production outage to rebalance inventories?

We do not.

Thank you.

Mike Sison, KeyBanc Capital Markets.

Hey, guys, Mark, congrats on a great run by the way. Going to miss your enthusiasm there and congrats to you Luke, as well. In terms of the second quarter, were bromine operating rates for the derivatives in elemental pretty close to full out?

Yes, Mike, they were pretty close. It was 90% plus.

90% plus, okay. And then, when you think about the second half of the year, Mark sort of mirroring the first half, were you thinking that the operating rates for bromine would stay pretty high?

Yes, that is our expectation.

So, not too much of a sequential pull-down?

No.

Okay, and then, when I take a look at the improvement in earnings for Polymer additives, second quarter, year-over-year, is most of that pricing? Meaning sort of the bromine pricing flowing through and sort of similar question with Fine Chemicals?

Well, a lot of it is pricing, we continue, Mike, as we said, to be encouraged by the overall volume trend in Polymers, is up year-over-year.

Right.

And as I said the trend follows a lot last year, albeit it's a little bit on steroids. So, the pricing momentum as a result of that has certainly really helped. And then, that's mitigated by the concerns about the raw materials in the benzene phenol, BPH chain that we've had to live with and now we have oil going up above $100 a barrel again. So, we've got to continue to be nimble in our handling of that. But, pricing was certainly helpful to the overall improvement of profitability levels, for sure.

Right, and that should be sustainable. Pretty sustainable in third and fourth quarter, with really good visibility, right? Because while pricing is up it sort of flows through.

Yes, you bet, Mike. It's more an issue of mix for us.

Right.

So, if for example tetrabromide volumes go down we're still seeing robust volumes in a lot of the specialties. So, there is usually a positive impact from that.

And last question, HPC backlogs, they seem pretty good heading into the third, fourth and 2012?

Yes, we're getting -- I think, getting a lot of looks, continuing concern about environmental conditions around the globe and, improving conditions in the refiner. So, we see, year-over-year, in the third quarter, we'll be up which is positive but probably down sequentially. And, fourth quarter, we're still keeping an eye on and then it looks like we will start the year in 2012, off very strongly as well.

Okay, great. Thank you.

Robert Koort, Goldman Sachs.

Hi, this is Manaf. I just wanted to follow up on PJ's question and understand some -- looking at margins for the second half of the year in the Catalyst business. You guys look at more of the mid-20%s or should it be higher 20%s going ahead?

Well, I mean, overall for the year, I think we will be in the range of 26%, Manaf and that's all in, including the JVs. So, something plus or minus, a few basis points feels pretty good to us. So, if you look at that, again, we said longer-term our margins are reduced or mitigated by this Rare Earth effect and that's kind of given us a curveball we've had to deal with this year.

Okay. And, the second part was, in your bromine expansion, as far as Arkansas is concerned, is everything up and running now? I mean you are targeting what 10% to 15% incremental capacity? Is everything online right now?

Yes, this is Luke Kissam, the de-bottleneck we talked about in Arkansas is in effect and we are running. There a few other wells we are drilling to maintain that capacity, but, we are at the level that we will be operating at, bromine levels in Magnolia, right now.

And, just one last question if I may, when you look at your doubling of capacity in Dead Sea probably next year sometime. Do you think there is enough demand out there? All the factors that the Chinese supply going down at a much faster rate, and is there a possibility that the supply might start outstripping demand because there's so much incremental capacity coming online? Or do you plan to bring it online more in phases?

Yes, this is Luke, as we've said, we are going to bring that online in phases to meet the demand. With that capital we're putting out there, the limited amount of capital that we are having to do and how cost effective it is to increase that side and our cost position there, we are not in a position that we've got to start it up on day one and run it wide open. We are going to be great stewards of this bromine molecule, and continue to derive the value that we can from that. But, we will watch supply and we'll watch demand but we've also got an obligation to our customers. So, that whenever they need a product, we are there to supply it and that's why we are expanding this capacity at this time. To meet that demand and meet the needs that our customers have.

Thanks, guys. Thanks a lot.

Steve Schwartz, First Analysis.

John, can we go back to Catalyst and just talk about the year-over-year change, again? If you look at your income margin, it was down about 600 basis points. And so, you have for the segment, nice volume growth, year-over-year, but your high-volume product, FCC, was down. So, can you disaggregate? You mentioned the mix effect; we've talked about that in HPC, but can you disaggregate that 600 basis points around raw material cost versus that mix affect? Because it just doesn't seem to make sense to me.

Yes, Steve, I caution you on looking at our quarter-to-quarter margin. We really look at margins annually and over the long-term, to really helped drive and fund our businesses for growth. But, year-over-year, though, HPC volumes were up. Those margins were down and now, again, that was mostly due to mix effect. In HPC, you have a large range of portfolio of different products that have a large variation in the profit that they produce depending on what they are trying to achieve and the cycles that a customer is trying to achieve, the lifecycle. So, the pretty significant difference there.

The other impact, of course, is the year-over-year Rare Earth issue. We've talked about that and that's pretty big. That's longer haul we said 300 basis points, so I think between those two issues, that's pretty much it in terms of year-over-year profit margin. But, last year, remember, second quarter was extraordinary margin for the Catalyst business and what we really highlighted then, was the margin potential that this business has.

Sure, okay. Thank you for that. If we could step out to the consolidated level, now. What were your raw material -- what was your raw material inflation in the quarter? And, are you guys still talking $160 million to $200 million for the year?

Yes, hey, Steve this is Luke Kissam, raw materials were roughly the same in the first quarter we told you about, that called about $160 million. We're roughly seeing about that same level of escalation in anticipation for the full-year and again about half of that was metals.

Okay, so, first quarter, I think you said about $25 million? So, was it up $25 million then? That doesn't seem to make sense.

Yes, Steve, so, in the second quarter, you have some issues about what our production volumes are, so it's not as simple as just raw material inflation. But second quarter, year-over-year is about low $40 million number inflation-wise.

Okay, and then Luke, just to touch back on the Jordan expansion, so you mentioned the different phases in your commentary; you talked about ordering equipment and so forth. Can you just frame up for us, when that phase 1 is going to be producing salable product? And, of the 60,000 to 70,000 metric tons you're adding, how much is phase one, of that?

Phase one, the bromine production is phase one. So, all that 60,000 net tons of bromine would be available in the middle -- at the end of the second, beginning of the third quarter of 2012. But, just because it's available, Steve, the point I'm trying to make is, it's available, but just because it is available doesn't mean we are going to throw it on the marketplace. We are going to have it available to meet the demands of our customers, we're going to be responsible in how we move that product, we do not have to run it flat out from day one.

Okay, and you did -- I think you're planning on building out your derivatives production capacity. So, I am presuming that would be phase two, phase three, when do you expect that capacity will come on?

Some of the derivative capacity will come on at the same time or either a month or two later than the bromine capacity and others will trail it to the early 2013.

Got you. Okay, thanks for taking the questions.

Dmitry Silversteyn, Longbow Research.

I am trying to understand a couple comments that you made. You talked about kind of the reason for downward volumes in the Polymer systems as mineral flame retardants. But then I also thought I heard John talk about mineral flame retardant volumes being up. So, am I mishearing it or are you talking about sequential versus year-over-year, that I missed?

Yes. We're talking sequential versus year-over-year there Dmitry.

Okay. So, sequentially they were off, but year-over-year they were down?

Right.

Okay, that's fine. FCC volumes were up double-digits according to your comments, that's a pretty strong -- I'm sorry FCC pricing was up double-digits. We haven't seen price moves like that probably since before the recession. So, are we kind of back to the momentum that we saw in FCCs prior to 2008? And can you update us, if you can roughly, on what the dollars a ton for FCC is currently? And where you are trying to get it to longer-term?

Yes, well, Dmitry, the overarching impact on that, is the Rare Earth issue. I mean, Rare Earth has gone from $7,000 a ton to now, somewhere between $140,000 and $145,000 a ton.

Right. So, this is just a [fester] of Rare Earths then that's driving pricing?

Absolutely.

Okay, so this is not above and beyond kind of your normal, let's get the reinvestment economics and let's get the pricing up?

Yes, I mean, this has been a matter of necessity. Because it was such a critical, critical issue that the business faced.

Got it.

I think that customers, by and large, have understood that clearly. Rare Earths have been such a large issue globally, the Catalyst industry is just one business impacted by it. There's electronics, there is hybrid automobiles, there is a lot of downstream effects of that. But I think the takeaway is you just need to know that our team is really focused on getting that pass through and we are encouraged by the volume trends that Catalyst cost has not impacted the demand at all, it is more of macroeconomic trends that the impact that. So, but we are encouraged by continuing to get the price needed to cover that's Rare Earths going forward. So, you will continue to see, in addition to the volume effect we described, an improvement in pricing to cover that Rare Earth issue.

Very good. On volumes of FCC being down, you said they're related to miles driven, obviously in this stage you had that several weeks of $4 plus gas that apparently has reduced driving habits a little bit. But globally, given that FCC is a global business for you, what's behind the lower miles driven globally? And, how does that trend into the second half of the year?

Well, hopefully, we haven't seen the report yet on the US for May, but I am hopeful it's beginning to pick up. Globally, we also had more turnarounds. So I think, more customers on the global basis had more HPC related turnarounds which also contributed to the reduction in FCC volumes during that period.

Right, because they've got to shutdown the column. Okay, I got it. And then final question on the printed [rarring] board business or market and the flame retardants that are going into it, you talked about the book-to-bill. You're looking better year-over-year at about 0.99. But, there's a lot of concern about -- as you mentioned, global economic weakness, but also particularly in electronics. The results coming out our mix, the guidance being provided by companies in the electronic space from semiconductors down to consumer electronics, is all over the place. What's behind your business plan for the second half of the year? What kind of expectations for the electronics industry? Are you looking to go through a month of two of inventory correction? Or, do you think that we'll be able to finish the year without significant downside?

That's the big question for this year. Is, there's so much uncertainty, Dmitry, created by all these new and mixed results and mixed reports you hear. So, that's why I think you are hearing us being a little bit cautious, but, right now, as Luke said, we are managing these inventories on a week-by-week basis, getting as much real-time feedback from our customers as we possibly can. We see our inventories still snug and the customer not building inventory. So, we feel very good that we are not going to see any kind of significant correction needed because of customer demand.

Got it.

The only caution I would lay out there is, normally we see a slowdown in December.

Right, right.

So, we'll just try to keep you tuned in on that as we wrap up the third quarter. But, I'm encouraged by a lot of the indicators we are seeing. The book-to-bill ratio is 1, we also got a report on TV production. That's picking up, after a lull in the second quarter and we are directly impacted by that. So, as you said, it's a real mixed bag and we'll just try to keep you tuned in on where we see things.

Very good, thank you, gentlemen.

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Thank you.